Surveillance: Russia Tensions with Stavridis

read a book on the Black Sea. Admiral Stevidis, of course writing for Bloomberg Opinion. You see him often with NBC and of course the former Supreme Allied Commander of NATO, Admiral Stavidis. Thank you so much for joining us this morning.

Always a pleasure, Tom and Paul. I want to talk about the Black Sea, about how narrow the strait is through Istam Bowl, about a need to build a NATO presence in Romania to the west of Crimea, and specifically the different timelines of the US NATO and a bridge to Crimea called the Crimean Bridge down by the Russians. It just seems to me the Black Sea is so important. Do we need to show the flag now in the Black Sea. Oh absolutely, Tom, And you know good news.

We have four of our absolute top end Aurly Birke class Egist destroyers that are stationed homeported in Rhoda, Spain. That's the opposite end of the Mediterranean. But that's the beauty of a navy. So yeah, but it's a doable commute. And my understanding is, um, those plans are in place to flush them to the eastern Mediterranean, and perhaps more significantly, Tom, for more of that same class of high end missile defense destroyers are underway from Norfolk going to back up

the four destroyers and rode to Spain. That's a pretty considerable flotilla. And yes, we are to be moving some of those ships into the Black Sea. Admiral, as you step back and look at this thing holistically, what do you think, based upon your experience at NATO, what do you think Mr Putin's is really looking for here? It just seems oddly out of time and place to be massing troops and tanks on an eastern European border. Um.

I think Putin's after three things. One is he loves being the center of attention, and he is playing to his population. He's playing to the nations around the Periphry of Russia, so he likes being the center of attention, even in the middle of the Olympics. For example, Number two, he wants to crack the suberenity of Ukraine. He knows he will never be able to completely dominate it, pull it back to the Soviet Union, that's what he wants.

He knows that's not going to happen. But by annexing the Crimea, creating this land bridge, Tom talked about a moment ago he has the ability to um effectively take their sub reignity away. And third, and finally, he wants to divide US. He wants to divide NATO. He would love to see the Germans, for example, not stand quite strongly with US. I think they will, But he wants to divide the NATO alliance. So those are his three objects.

General Austin of course, with his effort in Germany early in his career, and then the Central Command of course, with a real understanding of Putin as the Eurasian dominant leader. I want to go back to how we're gonna say face here, admiralism. I'm sure you've studied at work college is George Anderson, chief of Naval Operations Cuba missile crisis, said to President Kennedy, Mr President, the Navy will not let you down. How does the Secretary of Defense not

let down? Mr? Biden? In the Allies? He will do two fundamental things. One and I see Lloyd Austin, who I know extremely well. He's a contemporary of mine west Point Grad. We won't hold that against him, but I know General indeed, as Secretary Austin, he's doing it today in Brussels. He is being a strong, forceful voice for Alliance unity at number two. On the war fighting side of this thing. We're not going to send troops into Ukraine,

nor should we. But we ought to be flooding the zone with our military, armament, intelligence and cyber and the Secretary of Defense is doing that as well. Your wonderful book two thousand thirty four is about three parties trying to save face. The Cuban missile crisis was to get an exit for Kristcheff to save face. How do we assist this interesting guy from Moscow to save face? Well, he is in every sense a character out of a

Dustoyevsky novel. You can stop reading CIA reports if you want to understand Putin and read Russian literature, which is to say, he has a very dark side. And Tom, you're on the right note. We need to provide a climb down for him if we want to avoid a massive war, a scaled war in southeastern Europe. So here's what I would do. Go to him at the table and say, let's talk about conventional forces, rebalancing them on both sides of the border. Let us put missile defense

on the table. That's something that we have pushed. He would like us to reduce our commitment there. I think we can talk about that. And third, and finally, let's have a conversation about intermediate cruise missiles, intermediate range cruise missiles, which both nations have walked away from an I n F treaty point being that's all very technical sounding, Tom and Paul, But Um, these are things that he understand

as we understand they They create points of negotiations. So we can, as Churchill said, um, talk talk talk, not war war war. I think that's where we want to land here, right and Tom, we have some headlines acrossing the Bloomberg terminal, Biden says, President Biden says probability of invasion is quote very high. Biden says he has no plans to call Putin Admiral. Just wondering here. Um, you know you mentioned one of the key strategic aims of

Putin is to test NATO. It appears to me, and again I'm of an age when I remember when NATO was a real thing, when you were commanding it. It seems like NATO's standing pretty strong, pretty united right here. What is your take. I'm very proud of the Alliance at this moment, and I think the Secretary General, who's a tough minded former Prime Minister of Norway, he sounds like a Viking. He's a serious guy, and with Lloyd Austin standing next to him, the Alliance is hanging together.

Let's be candid here. Watched Germany because Germany's economy is so intertwined because of the potential of nord Stream to complications. But so far, the brand new Chancellor of Germany, Chancellor Schultz, is holding strong with the Biden team and with the Alliance. If you're just joining us, James trevidis with this this morning. We extend our conversation here on Bloomberg Radio across America. We do with futures a negative thirty, the vix point

seven four and headlines continuing to come out. Secretary B. Lincoln scheduled to speak at the United Nations. Here somewhere in the vicinity of the ten o'clock, our emeral stevinus, I, I want to go back to the to do here, and I take it off of Anglo Miracle two thousand and fourteen, the time of crimea, the time where dreams were shattered in the western central Europe over how we

would deal with Russia. And she was heated in comments and said, forget about the nineteenth century, the twentieth century, World War two A we must look forward. What are we looking forward to? Now? First, let's pause and just say Angela Merkel is a remarkable leader of Germany, four time Chancellor of Germany, and as steered detonation through some very complicated times and grew up herself in East Germany with a Russian boot on her throat, so she knows

what she's talking about here. What we look forward to, tom is all the things we've commented on this morning, which is keeping the democracies aligned. And here I don't mean just NATO, adding to that NATO mix of thirty democracies focusing on Australia, on Japan, on South Korea, on India. Over time, we need to create a mass, a critical

mass of democracies who can stand against these authoritarians. And I'll conclude here Tom by saying what we ought to be worrying about in this moment is that convert urgents of Russian and Chinese and are drawing closer together. This

is so important. As we talked to Angela Stent the other day on Bloomberg, surveillance of a return almost to a Yalta structure, which is where China stepped in for so many decades as part of the debate, and that redounds Paul and particularly in terms of Travitis's navy of Black Sea and Ukraine over to the foremost straight. Yeah, I don't know. I'd love to get your views here, just on the China angle. Here. If I'm president, she I've got the Olympics. I want the world's attention on me.

How do you think China is thinking about what's going on in Europe? Does it have you know, skin in the game, or is it just gonna stay outside? It will stay outside, and President G is undoubtedly grumpy about what is occurring in terms of the spotlight swinging almost inexorably back to Vladimir Putin. But President G had his eyes not on the Olympics. His eyes are on the twentie Party Congress late this year, when he will bring forward his candidacy for a third five year term as

the leader of China. So he wants a year of living quietly ahead. He's going to get it. I've got to go back, Admiral, to soldiers and sailors at risk. The Black Sea is so contained anyway, I would suggest most of our listeners have this understanding. There's a narrow straight office table. It's romantic, as I'll get out. Paul and from Russia would love Sean Connery, right, you know,

but that's not the reality. What is the reality, Admiral, of the constraint of an eighteen mile straight The reality is a number of international treaties and conventions that limit the size and tonnage of worships that can pass through it. It is also your point, Tom, highly constrained water space. And when you what American destroyers, Romanian frigates, Bulgarian mind sweepers operating alongside Russian destroyers Ukrainian patrol boats. It is a tight little space in there. And here's what I

worry about. The captains of those ships are young men and women. They're people in their thirties. I was thirty six years old when I took command of an Harleyburg class destroy These are young people, and their crews are even younger, and so the possibility of a discalculation in this sight water space is significant. We ought to worry about that, must We just thank you so much, of course, the book two thousand and thirty four, and we thank them for perspective. Today, let's get to it on radio

and television. We monitor the headlines, particularly from Moscow, eight hours in advance. Let's call it four am. I believe it is four am in a four pm rather in Moscow, long agoing far away. As I talked to David Rubinstein yesterday, there was a small matter of Cuba and a missile crisis. I remember clearly as a child my father saying years on that they hid the newspapers from us. Michael Holland was colding court on the football field hit St. Edwards

in Cleveland during the Cuban missile crisis. Michael, one question on the geo politics of the moment and our combined history. Do you push it aside when you have money at risk? Absolutely not, Tom. I think that all of the things that you've been reporting this morning are part of the

UH battle for investment survival. There's a a recurrence of things that are going on right now, including the comments about Saudi Arabian where they are and what was going on back then we had the Arab oil embargo Saudi Arabia. In the middle of that, prices went up dramatically. I think the concern that a number of people have recently voiced, smart people like Charlie munger Uh are echoing the problems that inflation, which many people who are listening to this

call right now have never experienced. Back in the nineteen fifties, it was one of the worst things that happened to our country because the most vulnerable and the least able to cope with inflation are those who are hurt the most by inflation. If we get it again, it's going to be very ugly. Part of the problem is people haven't experienced it, so people are easily into denial. I believe the Fed Minutes had a two point six percent

forecast for inflation several quarters out. I hope they're right, Michael. Let's talk about the fancy land of the FED forecast, not my words, the words of the former New York FED president built out the least come on this. Probably I'm called the fancy land the dot ploto just north at two percent we're trying to work out, Michael, not the stand of the journey. Most people assume that March the pace of the Germany and the destination. How far do you think this fe is going to have to

push it? Um, My guests and I have great humility when it comes to predicting, Jonathan, as you know, my guess is that it's going to be much more than anyone in February of two thousand twenty two believes. Right now, I think that we we've listened this morning and previously to all of the supply problems, supply chain problems, energy problems. Labor is actually the largest component of the concern that

hyper inflation is caused by. So I think that the fact we don't have a lot of people who are looking for jobs right now, we have a scarcity of labor bespeaks higher inflation. Wage price spiral is a phrase that we used to hear years ago. So this is an important point, Michael, because if the feed is forced to move well more than the market is currently expecting, are you basically saying there is no way for the

Fed to adequately address the inflationary pressures without causing a recession? Uh? Lisa, In a word, yes, Paul Volker came into his position to try to cure the ugly ugliness of inflation he got. He started in August nineteen seventy nine. I wrote it down. Um, inflation peaked in nineteen at four percent. Long treasuries went to fourteen fifteen percent in nineteen one. Um, the we had ten years of I can't believe I'm saying all

these negative things, but I'm just repeating history here. Um. It's these things are possible because they're possible for people who are serious about their own investments. Battle for investments. Your volva will requires to say it's possible. So what would you do if if if you had some certainty that it might happen? So what would you do? What would you What are you doing if you're if you're

seeing this as a likely possibility. Well, one of the things, Lisa, people will will throw up the you know stocks are an inflation headge Well, that's true if you have moderate inflation. When you have a seriously large inflation, which we may or may not have, again, humility rules my comments. Um, I believe that you have a situation where all markets, the tradeable markets are affected negatively. You say, well, what about gold. Take a look at the history of gold,

what about real estate? Take a look at the history of real estate in these periods. When you go back to the nineteen seventies and nineteen eighties and you read the history, you say, all markets are affected. It's only a question of where do you lose the least money. One of the things that the people listening to this forecast or lack of forecast, I should say, would would be wise to think about, is that even though you lose money holding cash, um, you lose less than if

you own long treasuries. Because when you own long treasuries and rates go from where they are now to where they were the years ago in hyper inflation, you lose a ton of money. And you're supposed to be safe in the bond. So bones are a bad place to be. Stocks are are less bad. Michael. We appreciate your time. You are a true market historian, and I always learned something speaking to you, Michael Holland that of Holland and Company. Thank you, sir. I've stated their data dependent. I believe

that's what Kathleen Bustan has written. She's chief US financial economist at Oxford Economics. Kathy, I look at the data, and I even look at the tertiary data Empire this Philadelphia, that seven other industries. You know, I don't know what does the tertiary and secondary data say about the growth first derivative in America? Well, hi time, happy to be

with you. Um So, I think, on one hand, we are seeing some impact from Omicron, but but overall it's it's rather limited when we look at the tertiary or the you know, the headline data. Uh and I say that particularly retail. So UM this week really surprised to the upside that the increase was more than almost more than double the consensus expectations, and and the core number, which feeds into consumer spending is part of GDP, was

quite strong. So bottom line, UM, we thought that GDP would be about flat for the first quarter, largely due to O macron maybe even could turn negative, and now it looks to be solidly positive, probably somewhere between one to two UM. And then that means that going into Q two, things health conditions look better, um, the economy should get back onto a more robust path. So I think, net net, we're looking at it still an economy that's

really quite healthy and demand is really strong. Kathy, let's dig into that a little bit, because actually, if you look at the Atlanta Now GDP NOW index, you actually see the expectations for Q one GDP skyrocketing after yesterday or after the retail sales number that we got yesterday. What in that gave you that kind of confidence? Considering the fact that a lot of people pointed to the inflation adjustments and other adjustments around the edges that would

leave it with a pretty tepid type of feel. Yeah, I mean no doubt that the nominal number is much greater than, you know, faster than than the real But even when we adjust for inflation, which surprised the upside in January, you're still very strong momentum, you know, coming into the start of the year for the consumer. I remember that that was way down by Omicron we start service you know, UM portion of retail sales was quite weak, so we do think services are going to be weak

as part of consumer spending. But the adorables and non durable goods orders were very strong in purchases. And so as we rotate UM back to in person services UM as things you know, health conditions to get better, that should only support consumer spending for the rest of the year. Cathy, we of course done expected to get a foreign policy crystal ball and tell us what's going to happen with Ukraine.

I do wonder though, whether you've developed a fuller understanding of what it would mean various scenarios, what they would mean for the Federal Reserve and mark. It does complicate things when things are already quite complicated. UM. You know, one hand, we worry about the the impact on inflation, oil prices UM, you know, surging higher UM. That's going to affect headline UM and and cordate inflation pressures are

still quite high UM. And then the uncertainty factor, right, how does that affect asset markets and financial conditions overall? And what's the feedback through Europe and the trade channel?

Things like that. Um, it's not the direct impact, of course for us, but to see uncertainty, how do you monitor the Wall Street and Kathy, your whole career has been away from this, which I give you great credibility on the pace of rate hikes, the parlor game of gues estimating out within a green span measured mode, where we're going, what's the level of certitude of that belief or the probability of that outcome? Much less than in the past, although you know there's always great uncertainty when

you're forecasting, um, the rate path. Um. You know, I think at this point what the fit reserve is trying to grapple with is how quickly to get back to neutral? And do they even need to go restrictive? And what is neutral? Um? You know, there's probably a range of the fit reserved think it's around two and a half percent, right, but there's a range around that we would say somewhere around two. It's probably somewhere between you know, one and a half to maybe slightly over two. How quickly do

they need to get back to that? And how much can the financial conditions and the economy handle that? Right? I would say from my perspective. Tom, I was a little weary about this parlor game of five, six, seven rate hikes, but um, I'm also quite interested with how well the financial markets have handled pricing in you know, six or seven rate hikes. So we actually just um decided that that seven is probably a good enough estimate for for this year. And we're actually in the fifty

basis camp for more. Yeah, so we we we just shifted. It's you know, we we looked at the inflation numbers and the January numbers really just um, we're far faster than we thought. So now you're peaking inflation faster. We still think it's going to decelerate through the rest of the year, but the peak is higher. And when we go through our estimates, we get inflation prror inflation above three percent, and we think that's unacceptably high for the Fed.

So we have to hear from power, right, we have to hear from power. We have to hear from Brainerd and Williams. We have it, and that's really going to be the key. Are they leading towards fifty or I would just add one other thing that in our analysis, right, we think that starting with fifty and then pulling back to more traditional twenty five basic point increments is easier for the markets to handle than starting with and say, oh,

now we need to go fifty. That could be more destabilizing. Kathy, You're not alone. You've got company, and thank you for ring the lead. That's our fault for not teasing with that and not starting with that. Let's finish on this, Kathy. I've heard repeatedly over the last couple of days that if they don't deliver what you're talking about, it would amount to an easing of financial conditions. Do you believe so?

And how much of a problem would that be? Well, I think it could, um, you know, disappoint the markets that thinking that the feed is not really worried about their credibility and really fighting inflation as much as they should, so it could backfire would be adverse for the for

market reaction, um in that sense. And it's it's a little hard to say whether financial conditions were necessarily easy, but they wouldn't be going necessarily in a way that the markets would feel comfortable, and I think that we would problem. Listen, they've got the markets thinking fifty, fifty and fifty basis points when we'll take it at this point. Kathy awesome, as always, it's good to catch up with you,

Kathy Boss. It's there of Oxford Economics market if joint is now scenic level, Mattrice straight, do you want to talk about Selene a little bit later? Marvin g Political tensions once again waking up, trying to process, trying to digest various headlines. How do you think cold of this influences a particular Central Bank decision that takes place on much six state? Yeah, I mean, from from defense perspective,

I don't think it's gonna affect it at all. I mean, certainly a war is um an altering event, particularly if it's a significant one. But with the tensions that have been around, um, I think the feed has made it clear that they're playing catch up, and you know, march marches are given in you know, we debate whether it's twenty five or fifty, and whether May and June are

are are equally live at those levels. Do you believe, Marvin, the corporations domestically and frankly globally can adapt to what they've been given. Yeah, yeah, I I do. I mean they have u from a financial engineering perspective. They've been very quick to embrace and ultimately reshape their balance sheets

in a way UM that buys them flexibility. UM. And you know, these are port or for profit organizations that have been nimble UM to change to rapidly changing conditions, both from a global perspective as well as just from the mobility perspective UM. And you've seen that they've been able to to to navigate it. So I I do believe that that's one of the strengths in the equity markets. Well.

Of course, a lot of people have been making this in for a while, even when this wasn't the case, and you do wonder how much it's gotten ahead of things, especially as you've seen the biggest inflows into equity funds versus bond funds so far this court going back to two thousand thirteen. Can that continue, especially when you see the likes of roadblocks and some of these other pandemic

aerostocks absolutely get pummeled and returned to pre pandemic normalcy. Yeah, yeah, I mean it's it's it's this often UM described aspect of asset management and in equity management, that you're looking for the winners, and it's a stock pickers market. I would argue that that's always the market. UM. You know, that's that's what professionals get ultimately paid for. I mean,

we're seeing demand for treasuries. UM. The fact that we've repriced as munch as we have and still have a two percent ten year UM and unfortunately to a certain to be flattening the curve UM shows that that there is a fixed income component component associated with that. UM. I do think, I do think equity markets still have a bit of a cat curtsy. It might not necessarily be US and US growth stocks the way it had been for the last two to five years. UM. There's

there's potential diversification looking for value outside, particularly geographically. But but equity still do have a cat curtsy in this In this discussion, Marvin, are you actually advising people to buy a longer dated bonds right now in the US? I mean, I I actually do. I actually do like

treasuries in here. UM. I think you see from a geo political perspective just how demand for that security is from from a hedging perspective as well as as well as our long term view that we're not going to see yields get back to the pre pandemic neutral rate levels. I think we're dealing with the different type of environment that way moving love. I'm gonna leave it that say thank you for catching out with this man that of

stay straight. Right now, we're gonna do something domestic and we are gonna look at something really interesting, because I was floored when he became the chief executive officer of Automation. Of course, automation hugely visible within the distribution and sale of automobiles and trucks in America. And Michael Manly is not just another CEO. This is someone steeped in the FIA religion, the Chrysler religion. I think, you know, you would even understand, Mike Manly that in my childhood it

was a Renault, not Renault. I mean, I go back that far enough. Just simply let us start away from earning with how you survive this year? Use cars? Wow, new cars not? How's the year been? Well? I think I think if you've really identified it. On the one hand, we've had significant demand, as you know, and we've been able to fulfill that on the used car side and

on the new car side. It's basically working as closely as we can with the O E M S to try and predict what we're actually going to receive in the month, and most of it when it hits the ground is sold, so that's kind of in and out, and the most important thing is to keep our customers informed about when their vehicles are arriving. Frankly, my autoguy, Lisa Bramos, here's fourteen questions. Let me slip one in here.

Are we going to buy electric cars? Is there a real belief here that whether they're a Portia or whatever or not something in the middle or the great desire of a cheap electric car, is America going to buy them? America will buy electric cars, I have no doubt. The important question is over what time frame will they Will they cover the entire industry. I think what we're seeing is a big increase, but as you and I both know, that's a very specific demographic. There's buying them at this

moment in time. And what we need to see happen if there's going to be mass adoption is two things. Frankly, need to have an infrastructure that people are very comfortable with it they can use on a daily basis, and we need to work with the O e m s to drive those prices down so they become much more affordable to the heart of the market, and when they when those two things happen, you're going to see adoption rates rise. But it's not going to be this year.

One thing a lot of people are struggling with is how much is structural and how much it was cyclical. How much of the bump that you got and frankly all auto dealerships, god was because of the tight supplies driving people to no pun intended to buy more vehicles. How much of that will persist and give you that pricing power that's just been extraordinary. So you I'm going to turn to our fourth quarter results because I think if you look at those, you get a partial answer,

and then then I'll expand that. One of the things that I think most organizations have done during the pandemic is really look at their cost base, and we have removed significant cost and that is absolutely structural, because what we've had to do is create efficiency in productivity in a different way, and we're very confident that that will

survive beyond the pandemic. I think the increase that we've seen in terms of after sales revenue with more miles driven as we get out of the pandemic, that naturally, in my view, is going to continue as well use volume. Use volume has been good and will I think be sustained. So we come back to margin, and the big question is new vehicle margin. Who's notwithstanding the fact that new vehicle volume is down, it's been more than compensated for

a big spike in margin. But when I stepped back, what we're doing is actually selling new vehicles around M S r P. I mean, that's what we were supposed to do. So what the pandemic actually did was press a reset button on the balance of infantry. Now the key question is are we going to take the lessons? Are we going to take the advantage of that reset button that's been rest and in conjunction with the O E M, just keep the balance. We need to maintain

good new car pricing. I think you'll see some mitigation in terms of margin on new cars, but I really believe that lesson is now embedded and they will not return in my view back to the two thousand, two thousand seventeen margins. Just to be very clear, So the M S r P that's manufacturers suggested retail price, you think that we are going to head back to a level that is more in tandem with that suggested retail price. How do you then expect to sustain some of the momentum?

And you talk about the efficiencies, but is there also an intention by dealerships to keep supplies tight, to have an order flow, to have something in order to continue maintaining margins to some degree. So when I talk about our volumes alternations volumes last year, only two of the vehicles we sold were above m SRP, So the vast majority of our of our new vehicle invoices were at

or below MSRP. And that's been able to achieve that because of a better balance between supply and demand, and I think with additional inventory coming in with the demand that's there, we should be able to maintain that pricing position because we are talking about a reduction in the significant discounts that were required when all of the industry was sat on a multiple of stock that we have today. So there was a complete imbalance really between that supply

and demand. So we've had this reset button now and inventory levels are low, in fact they're too low, so there's an opportunity I think to build inventory levels up not to where they were before, but continue to keep that balance between supply and demands so that we're selling at M s r P. Michael Manly, thank you so much for joining us. We need to move on to headlines at the moment, but the chief executive officer of our nation in the battles of this pandemic and moving

units to America in trucks encourage. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven to ten m East earned on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg