Surveillance: Russian Oil with Moniz

to do in Bloomberg Surveillance. Through all of this in economics, finance, and investment in these unsettling times is peaked speak to people who are authoritative on military thinking of the generals, the admirals we've spoken to, and now on the nuclear debate and of course all of that having to to fears of Chernobyl and the other nuclear plants across Ukraine. Ernest Monnez is our gentleman. He is the former US Energy Secretary, but hugely associated with his decades of work

at the Massachusetts Institute of Technology. We're thrilled the Dr Monis could join us this morning. I want to cut to the chase. How far out of line is Mr putin with the Geneva comic conventions going back to the nineteenth century Prisoner of Wars and all that, but with the Geneva and Hague conventions that dealt directly with weaponry. How out of line is Mr Putin? Well, Putin's statements about threatening the use of nuclear weapons are in fact way out of line, as you say, Tom, Uh and uh,

actually quite quite reckless. Uh. It is interesting that, uh, some of the Kremlin spokesman have been trying to dial that back to what is the stated Russian policy. But clearly there's a lot of ambiguity, a lot of uncertainty as to what the Russian military would like to do. Uh if they are in fact bogged down in Ukraine, as they clearly are in various parts of the country. So uh, it's a it's a real setback in terms

of this uh nuclear saber rattling. Uh. And let's just hope that they are not planning to use a a tactical nuclear weapon in Ukraine. Take us away from our amateur Hollywood stereotypes of the guy with a little black bag walking near President Biden and we all look at it and know he's in charge of our nuclear capabilities. Does Mr Putin have a guy walking around behind him with a little black bag with a red button on it. Well,

that's that's called the football right. Uh. Yeah. The fact is that UH putin UH, just like the U. S President has the sole authority UH to to launch nuclear weapons. UH. In the past, when our presidents in the United States have had some um emotional distress, UH, there have been attempts by others in the administration to UH dampen that authority.

But the reality is, UH, we have sol authority, and we, by the way, feel very strongly that this soul authority should be really curtailed except in the most urgent situation where you have no time for for consultation. Ernest. Given the situation that we have and the imminent threat that a lot of people feel from Russia, how important is it for the world's remove Russia really from the oil equation?

In other words, what do you think the US ought to be doing to allow Germany to become independent from Russian gas? Well, oil and gas are a little bit different, Lisa. In terms of oil, the Russians are clearly having trouble now getting buyers um. Uh. Even so, even though we are not sanctioning, there is a kind of a customer sanction going on, and that is affecting the ability of Russia to get oil onto the market. Uh. They are taking a big, big discount thirty dollars a barrel, for example,

on on their oil. But to be honest, I think in the longer run, UH. And I don't mean years, I mean a month or so. I think the oil markets will basically recover in terms of supply side. Again in Russia will take a big discount. Now, gas is very different. Um. With gas you don't have the same kind of global market. UH. With cargoes easy to move around to different places. Uh. You have in this case of Europe obviously a lot of pipeline gas which goes

from A to B and that's it. Uh. And now, of course, with the the unrest, and even before the unrest, UH, the the that is the invasion of Ukraine by by Russia. Gas prices in Europe and in Asia we're going awfully high. To give you a scale. In the United States, we're still talking about say four dollars five dollars, which is high for US. But in Europe they hit fifty sixty

dollars per million B to you extraordinary. I spoke with a friend in the UK recently who said his gas bill for heating has gone up by a factor of four, and it's been a big concern I know for policymakers across the continent. I want to go back to what you were saying, where you think that the demand and the supply frankly will come back online when it comes to crude not gas. Do you think supply will recover within about a month? What goes into that? Is this

the idea that sanctions will be lifted. Is it that the US can increase production, Is it reliance on OPEC plus Well, I think it's a little bit of all of that. But but a major part in my calculation is that I think with the very very large discounts Frankly, Russia will begin to find customers taking that that oil kind of will increase. It's it's imports. India is very

interested in in a big discount, etcetera. In addition, I think we are making some headway, uh in terms of re establishing our relationship with the Saudis and the m rates. They may push OPEC to slightly at least somewhat more

increase the pace. And of course, in the United States, I think that the president meeting with oil and gas company heads and with the heads of major financial institutions is very important because you know, the financial institutions have been pressuring the oil and gas producers to focus more

on returning cash to their investors rather than expanding supply. Well, right now we have a supply emergency of in a certain sense, and I think it's time to uh to do a little jawboning, if you like, and to uh and have the financial and oil and gas executives come together uh and recognize we do need some increase in in in supply. Ernest. Do you think the Jennifer Granholm is doing a good job as your replacement for many

years ago. Yeah, Well, she's I think emphasized quite correctly UH and very strongly that we now need to start looking together at the climate UH and the energy security imperatives. And I think expanding that conversation out of the silos where someone to talk about climate, some about security, some about geopolitics, some about infrastructure. We need to have some about of course environmental justice, social equity very important when

energy prices are going up, UH. And what we need is a coherent discussion across all of those areas UH. And they are in many ways inergistic when you go to low carbon UH electricity supply for example. That helps energy security. On the other hand, it's a bumpy road, and you know, we're gonna have to have some trade offs as we optimize all of our objectives. Her money, I want to go back to our stereotypes. You mentioned silos, and that reminds me of and doctor Strange love. We

all have frameworks of nuclear power. Maybe it's the tragedy of Japan, maybe it's something else. If Mr Putin has narrow short term smaller nuclear weapons, what do they actually do well? First of all, um, uh, the so called tactical nuclear weapons, we should not think of them as really small. We might be talking say five kilotons of explosive yield as a metric or a standard. Uh. Hiroshima was fifteen, but Oklahoma City a chemical explosion was two tons,

So we're talking five kilotons. If that would dropped in a city, UH, it would do enormous damage and kill a lot of people. UH. So the question is would the Russians follow a doctrine which is debated about whether a small ish nuclear weapon dropped in a place that did not do too much damage relative to say a city, UH, would that lead to de escalation of a conflict or escalation. We think that the circumstances are would would determine that

in ways that are very difficult to calculate. So our our concern is that if this were to happen, UM, the situation could be got out of control through miscalculation, through blunder and misunderstanding bad data, UH, very very quickly, leading to a much larger nuclear conflagration obviously, very very bad for everybody, very bad for for for and stibilization clearly.

So it's very important in our view that UH that nuclear weapons continue to be unused and to be focused fundamentally on on the deterrence value UH in terms of not being the victim of a nuclear attack. And it's thoughtful stuff, deeply thoughtful stuff this morning, Thank you. And it's Monsta, the former US Energy secretary. He's been dead on about rising inflation and our need to adapt and adjust and be a new short essay which says simply, let's go. The only way is to slow things down

with perspective on this. Nora Abani Robini Macro associates way too long, Uh. Nora on the course the boombos dot Com co CEO associated for years with giving us wisdom norill do you buy the idea that the only action that will bring down in inflation is to dampen economic growth and increase unemployment. Yeah, I have that same view. I mean, inflation right now is at the level we're not seen in decades break evens as suggested, the inflation

expectation are also rising. There at the beginning of a race wide sparrel and and the other thing that happens is that, on top of everything else, a tighter monetary policy would slow down economic growth. But now we're facing with a negative supply shock is coming from the Rasian invasion of Ukraine that increases commodity prices, also slows down road through global supply chain, so that tradeoff becomes even worse before you put monetary policy into the picture because

it staclationary shock. It's a negative supply shop implies lower growth and higher inflation, everything else equal. And then then if you're doing them, if you don't in terms of monetary policy to care about inflation and anchor inflation expectation,

have to type the sooner and or. But that implies that the growth slow down, if maybe even a growth recession, it is more severe and things that you care about growth, and then you normalize too slowly, you're the risk of the anchory inflation expectations, so that policy tradeoff becomes even more severe. You wrote an article recently that I thought was really insightful. Basically, it's the new stagflation policy proof.

Where does policy fit in to the next year two years when a lot of people say recession is nearly inevitable as we try to come out of this period. Well, again, you have wide range of sets of policies. Your monetary policy, r fiscal policy. You have sanctioned policy, you have regulatory policy. You could introduce price wage controls or indexation of wages to prices like we did in the seventies. The trouble is that you have a bunch of policy tools, but

you have also a bunch of very contradictory goals. Your goals are to have price stability and push down inflation is mouth significantly higher. But you also have a mandate about maximum employment that goes against right now, given an enable to suppy shock against that target, you want to

keep interest rates low, long term rates. That's actually a formal mandate of the Fed, and of course higher rates that are tighten financial condition, and then you want sanctions to punish Russia and that are other people from doing mistaken things. So all these things imply that reaching an optimal policy equilitiment is very hard because suppose that you want to have more sanctions and you want to have you know, more physical stimulus, sanctions to punish Russia and

stimulus to try to support the economic activity. Both sanctions and the physical stimulus increase demand and increasing inflationary pressure at the time where monetary policy is trying to instead achieve lower inflation. So there's almost a contradiction between the various policies. So what do you see neural as a like the outcome of this as we do get this argument of whether soft landing is possible, Um, I think it's gonna be very very hard for the FED to

achieve a soft landing. Historically you have to tighten more than otherwise when inflation is this high. I think that the dot plot of the FED is not released. Giving the FED funds that they run one point at the end of the year where core PC is going to be more like three too, means that monetary past is not gonna be tight enough. And then you have two choices.

Either you're really tight and monetary policy because you're still behind the curved bullet, right, you need to policy rate the three percent by the end of this year, which case you cause a recession or you wimp out because you're worried about growth and you're worth about the debt trap private and public. That is so I then when

you raise rates, then you destroy the debt markets. And whether you wimpot because of worries about growth or about debt markets that are connected and therefore you end up not doing as much and the answering inflation expectations. So you have to choose within session or the on putting infreshion expectation. You cannot have a snor real quickly. Here. I love to end this with you because it's always

so constructive. You and I were in a bar once at Davos and we were talking about four standard deviation moves as being a shock. German inflation is seven plus standard deviations. Italy reporting tomorrow looks like it's six plus standard deviation move over the long term disinflationary trend of Italy. What does the society do with that? Well, as you point out, you're already very standard deviation away semi black swan events on things like inflation, not just in US

but also in Europe. Of course, we've had also these major geopolitical shop is the war, and it's just the symptom of a much broader geopolitical depression. I think the next few years, China and its effective allies Russia, Iran, North Korea going to challenge the US and the West. So I think that they war in Ukraine is only the first salvo of this Cold war two point oh. I mean, the question is not whether it's going to be in Cold War or whether eventually war within the

West and China and so on. So we had in a very difficult situation where extreme things are happening, and like you know, on the eve of World War One, financial market about market did not pricing at all that is covered of a major war, and then stuff happened. So not only we have major events that are radically different, like a quantum leap, but we don't have the policy nor I'll tell you what we're gonna do here. We're

gonna continue on radio. We're gonna bring this conversation over to myself and past suite, and Dr Rubini will do that here and a bit. Let's get to at Megan Green joint his Global Chief Economist COAL Institute would work at Harvard Kennedy School as well. Megan, I want to go to your wheelhouse, which is a transatlantic dynamic. You and I studied theories and textbooks. Those theories don't work anymore, given uncertainty and the algebra Boll this the epsilon on

the right hand side of the equation. Given all this uncertainty, what's a new central bank transatlantic theory? Yeah, I mean we're looking at massive policy monetary policy divergence between the Fed and the ECB UM, and that's gonna be difficult to sustain. I mean, the EU inflation print is is pretty shocking, and headline inflation you're and you're just under ten percent. Of course, you've got to strip out a bunch of commodity and energy costs to see what's underlying.

But the e c B is committed to winding down. It's it's on purchasing program first before it starts higging rates um. So it won't manage to get rates up until the end of this year at best. In the US. Meanwhile, economists are kind of trying to out hawk one another with a number of rate hikes they can call for for the US, And so the US is going much more aggressively than the e c B is. Um. We know in general, rold that that monetary policy divergence is

impossible to maintain over a period of time. So if the feed is hiking aggressively, uh, you know, either it's going to have to back off or other major central banks are going to have to catch up. And insofar as inflication way higher than the ECB wants it to be, I think the CB is going to become much more hawkish now as well. Let's go on Mundel on you this morning. You know you studied your Robert Mundel the degree of Columbia. I mean, currency is the release valve here?

Does that hold given these unique onset of uncertainties. I think it does hold. I mean, if the FETE is hiking much more aggressively than other major central banks, I think the dollar will appreciate um and that could cause diservances across emerging markets, of course, because all of these dollar bonds are going to be more expensive to service trade, which has been invoiced in US dollars will become much

more expensive, so that's bad for imp orders. Um there is talk off the back of the conflict between Russian and Ukraine of the dollar system shifting. I don't buy it for starters, and even if it were to you, it's going to take years and years. So I think we can expect the dollar to appreciate and that could be problematic for other parts of the world, particularly emerging market. So, Megan, you have to weigh in on the big question of the day, the does the yield curve matter or does

the yield curve not matter? We have a lot of people coming out, including the FED, saying you're looking at the wrong thing, and other people saying the time that you say this time is different is the time you end up with egg on your face. Where do you stand. I don't really think it matters that much for starters. The two tends, you know, inverted for twenty three seconds, which is not long enough to really provide signal. Now, the yield curve inversion is way more effective than any economists,

including me, in terms of calling recessions. So there is that, but the sample size isn't huge. I think we need to look at the shorter end of the yield curve um in order to get more of a signal. And don't forget the U. S. Government has been borrowing a ton to pay for things like the pandemic response, and so that will push the short end up without making

any commentary on expectations about growth. And the FED is has wound up its bond buying program, and so you know that that could push the short the long end down. And so you know, I think these are bigger factors than the idea that investors expect a recession to come. That being said, it's going to be really difficult for the FED to high rates aggressively, which the FED itself

expects to then have no perceptible impact on unemployment. And we know from the some rule that if unemployment goes a weighted average of unemployment goes up, UH, then it's it's a much better predictor of recessions and the yield curve is and I think we'll see that happen. So I'm not so worried about the yield curve, but I do think there are other signals um that could be coming down the pike. Because the FED hikes aggressively. That

suggests we will be pitched and making it. Are you already seeing signs that the consumer is losing appetite to absorb price increases to a place where you start to wonder about how much momentum is there in frankly household balance sheets. Absolutely, you know, this income squeeze from higher energy costs is real, on top of you know, elevated inflation already, I think everybody is feeling it in the US, um it's perceptible, and so that is weighing on spending.

On top of that. We know that stimulus payments um provided a cushion for many households, but low income households in particular have probably just about burned through that entire cushion by the end of this month, and so they're facing this double whammy of no more cushion and much

higher prices. And of course they have the highest marginal propensity to consume, so they're spending the biggest proportion of their income anyhow um and so that will lay on consumption too, And of course consumption is the biggest driver growth in the US, like every other developed economy. So we were always expecting a slowdown this year energy price because we're already expected to be elevated even before the rush of Ukraine crisis. This is it's just worse than

we had expected, but a slowdown was inevitable. The question is does the Fed hikes so aggressively now that a recession hits, rather than just to slow down when we were growing we above potential coming into this year, there's a lot of room to slow down. What you said moments ago, though, I think the answer to that question is buried in it. You mentioned the sam rule, So

let's talk about that. Unemployments already sub for We've got people thinking it can go lower on Friday, given the starting point of this tight news cycle, and given what unemployment is right now. Bill Duntley, the former New York Fed president, came out earlier this week. It essentially said a hard landing is all but inevitable. Would you go

with that? Yeah? Like I said, I think the Fed's forecast that it will get that many rate hikes off and there won't be much, and it will affect infletion, but it won't affect unemployment much and it won't affect growth much just doesn't add up. I mean, I do think that unemployment will probably rise as the FED hikes, and so I do think that's a brill indicator in a better recession than coming. Mecan Green, thank you of

the Crawl Institute, Thank you very much. Eleven day winning streak on Apple, what a run, the longest winning streak since two thousand and three. Sacha joins us now chief Strategists of Principal Global Investors SEEMA. Can then we just start there, what do you make of this rallying big tech, uber tech in the face of what's happening in the bond market. Well, I look, I think a little bit is frond of that short covering, but I think that

there is still that fundamental story. So let's say you were are worried about the growth outlook, and you think that potentially, although there is some uppard movement in bonds, probably still a little bit further to go, it's probably near its top. Then that structural story of sort of a strong balance sheet supposed to cash flow does play pretty well for megacat Tech. So from our perspective, you know, although we've done down our risk in yours ecuties, our

preference is still on that megac text space. Because of that fundamental story Seema John Maggie the arch textbook of the nineteen forties, where we came up with the language of trend, intermediate trend, long term trend, whatever trend you want to use. Are we in a bear market and this is an intermediate bull trend within a bear market? I think it's it's quite the bare market. But I would say that the risk, you know, what is the upside for equities from here? I don't think it's that much.

Maybe for the SPI can eke out not the five tempercent games, but the downside risks are so great at the moment. Not only is of course the geo political crisis going on, which can shift at any moment. I think it's very difficult to predict that how that's going to go. But then you have the FED hikes which are moving very very sharp before and you have very high inflation, which means that consumers are going to start

feeling a bit of a struggle, if not already. Um So for us, it's the time to daral down risk, even if it's not necessarily a bear market. The risks are just too great at the moment, So just to go a little bit existential What does it mean to be risky at a time when cash is a depreciating asset? And this is why I was talking about Apple or some of these have in stocks being stacked, equity considered risk. How much do you buy into that kind of argument?

I think there's a lot in that. You know, at the moment you look at cash and well, you know inflation is going to eat most of that away very quickly. So we're still looking for those inflation hedges within that risk matrix UM. And there are parts and segments such as maybacaptech which do look relatively safe. Of course, there are a lot of challenges are if you continue to see moving one wheels up higher. But I think from our perspective that inflation hedge where you're going to go

it's still the commodity space UM. But you do have to thinking up in that way of that relative trade UM and where else is it beyond cash? Because inflation doesn't look good for that is the date in my diary, Seema JP Morgan earnings. The attention is going to switch pretty quickly. Is the outlook getting better for earnings or is it getting worse? I think for the time being, I think you want um, I think we have to avoid getting too negative back you one. The economic data

numbers is still pretty robust. I do think that as you get into the second half of the year that you start to see some of that slowdown coming through. UM. So you know, we're gonna be looking out cause for margins. You know, where are the pressure points coming through. But I do think that Q one could still be a relatively robust number. It's when you get into the second half that some of those concerns start to come to the surface. Sema. Thank you San of Principal Club and investors.

Looking ahead to wear next season. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and I'm 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 Bloomer