Surveillance: Sanctions Impact with Kasman

and how you'd process a line like that. There are certain positive developments as far as negotiate is from our side, informed me the President of Russia. Your thoughts on the political side. I'm just gonna keep an open mind here, recognize the wide range of uncertainty, but also recognize how far the conflict has gone so far in terms of sanctions, in terms of the damage to the Russian economy, and I think the damage that will be inflicted on the

global me I don't think that will be reversed. I don't think the sanctions will be reversed very quickly, even if there's good news. So from a macro econ on point of view, which is the world I live in. We are going to feel the effects of this clearly for a while. Dr kesmen, you know I would never front run Michael Faroli, but let's do it. Okay, you've

got a research report coming out tonight, Weekly Prospects. How are you going to adjust g d P. I don't want to get out in front of your clients or Faroli was working with a slide rule, but how are you going to adjust American and global GDP this weekend? Well, I'm not allowed to front run my faecasts either. But what we've been doing as the as a general rule, has been increasing the drag as we've continued to see

more pressure on energy prices. Obviously, the natural gas is is a big factor in Europe, crude oil as a factor elsewhere. Broadly speaking, what we're doing is raising inflation and lowering growth, and we can tinue to move down that path. I would emphasize though that we still have growth for the US this year running above trend. We still have the unemployment rate falling. Uh. These are all

works in progress in terms of understanding the impact. But we've done We've dented our views on the US and the global economy. We haven't derailed our view on a still solid recovery at least. I thought that was very diplomatic. I thought has been handled that well well. Basically, you can expect a downward revision perhaps if you are lowering the growth estimates, and it leads us to the our word, the recession call, and Goldman Sacks put out their note

with their downgrade of their expectation. They said, the US recession chance for the next twelve months, they see it as about twenty percent. Is that consistent with what you're thinking of right now, Bruce? I think somewhere in the range and makes sense to me. I mean, that's just recognizing how much uncertainty is here. But I would emphasize that the US economy has shown already pretty significant resilience

in the face of shocks. The underpinnings are healthy. So I think what these recession probabilities reflect is how certain the potential outcomes are here, not the fragility of the U s economy right now. Although Bruce at ten o'clock am Eastern, we're going to get that University of Michigan sentiment survey. We're expecting it to post a new post twenty eleven low. How significant is that in terms of

consumer spending, and how long this resilience can last. As you know, the Michigan survey has already moved down to sharply, and I think it's telling us something important, which is consumers are worried, and particularly worried about the rise of inflation. What's happening in the conflict is pushing higher prices on energy, higher prices on food. US inflation is going to stay elevated. I think the qualitative signal is important. I don't think

the level of confidence specifically lines up with spending. The key issue here is we're getting hit by a huge resiliency test in terms of household purchasing power, and we do need households to eat into what is a large reservoir of excess savings to make it through this. We do think that's gonna happen, but it's not gonna happen without some pain in terms of US consumption, in US growth overall. Bruce, just quickly, how hard is it going to be for the Europeans to avoid recession over the

next tw half months, Much harder than the US. And I think the question there really is how strong is their commitment to take the pain of cutting off natural gas supply from Russia, and how willing are they to offset some of that drag with fistal supports. Right now, we're thinking Europe is going to be flirting with quarters of growth close to zero uh. And I think we do need to see a significant fistful response here, cushioning the blow to keep the European recovery going. Hey, Bruce,

awesome as always, Bruce Kasman and JAKP. Morgan right now on the attitude of America towards war and towards the moment of this fractious two thousand and twenty two, Mohammed units joined US editor in chief Gallop Gallup as a poem organization. They've never done work for this party or that party. They were seminal in the thirties of saying no FDR will win versus alf Landon and they moved on there to measuring America's tone. I want to know,

Mohammed on the death of the American liberal order. We've got a reaffirmation of war in Europe. Not the Liberal Party or the left of the Democrats, but the sense of a liberal order coming out of World War two. The end of the Cold War. How have you pulled that in recent days? I'll tell you Tom, there couldn't have been a better time to come out of the field.

With our last survey, we do something called the World Affair Survey, where we ask Americans basically what role should America playing the world and what threats We came out of the field literally on the eve of the invasion Ukraine, and before any troops or tanks actually crossed the border. Americans were pretty focused on this issue, more than we usually see. And I can point to many metrics. First of all, just the favorability of Russia has hit an

all time negative high of eighty five percent. So when you think about China as a focus in the United States, it's only seventy favorability. Russia has now outdone that. For context, in two thousand and three, Russia had a sixty three percent favorable rating with the American public. When we ask Americans about who's the greatest enemy facing the United States, not the party think China comes on top at forty nine. Russia actually came out right under them at thirty two.

UM we asked about a series of critical threats to the vital interests of the United States. We saw an uptake in Americans concern with the military power of Russia increasing. Fifteen percent of Americans described that because of time. I want to be sure because Lisa and John want to get in here, or how isolationist are we right now? We're not that isolationists. I would argue that when you look at the recent polls of the last week, the public is actually far ahead of leadership both here and

in Europe. UM. Every decision the Biden administration has made has been supported by public opinion prior to it being taken. So the notion that Americans are isolationists they're checking out,

is not in any way supported by data. And we see a huge difference between now in twenty fifteen when there was a war in Ukraine between Russia, UM and Ukraine, and Americans were not nearly a styled in her focused on but Mohammed, how much are they concerned also about the inflationary backdrop and does that contribute to a concern about their own well being versus this feeling of injustice

it's going on with Ukraine. Lisa, you nailed it. Before the invasion, Seventy nine percent of Americans said that inflation is likely to go a lot in the next six months. That was a record high that we haven't seen in decades here it so you can only imagine now that

oil prices have exploded, that concern is only going to skyrocket. Um. I do though, caution against thinking that because of that financial impact, Americans are going to kind of shy away, because the decisions the Biden administration have taken, like no longer importing rushing gas and a lot of talk about oil prices and gas prices don't seem to have scared Americans away from the focus on the importance of this conflict for US vital interests. Mohammed, what are you looking

for to determine a shift in that? Because we were just talking with Bruce Kasmin of JP Morgan about the resiliency of the American consumer about despite some of the concern of inflation, the concern of yet another crisis in a crisis riddle riddled area era, that people are going out and spending, people are still living. What are you looking at for the sentiment to shift to indicate perhaps

a deterioration in that? Well, are econ on a confidence index measure which you basically ask Americans, how are the economy doing for you right now and in the future. In the foreseeable future remains in a negative. It's been improving, but inflation has really been dragging down American's perceptions of

the economy. So we're starting at a net negative. Um. If I would look to something, obviously we're gonna look to see how much that now dips, now that prices have gone through the roof, not only on gas, butt on goods as well. UM. So that is the critical question. But we shouldn't assume that because inflation is hitting Americans far that they somehow are willing to compromise or switch it out for no longer being involved in supporting Ukraine MOhm.

With this new line that the administration is using around the inflation story, the Peuton gas hike, is that resonating? Do they still believe that it's Biden's felt is a shifting untold? What is your rate on that? One thing that we've known, Jonathan from this, at least at this point of the Biden administration is they have failed at their number one objective, which is too minimize the partisanship

in American public opinion. My answer to your question is essentially, people that's a poor President Biden will buy that line. But all the people that don't support President Biden, we're complaining about gas prices long before this situation erupted. So I think, unfortunately, Party I D is still gonna drive primarily how people react to president by its presentation of the facts. Right to catcha Mohammed as wise, Mohammed Tunis

at Gallab. We're looking at Ukraine, the war. Some of the news is just flat out grimm and it folds over to the repricing. In the Bloomberg world, the repricing is most critical on the bye side where the assets are held, and that includes Columbia, thread Needle. Ed Al Hosseini joins US now their senior interest rate strategies, and we're not talking price and yield today, we're talking markdowns the ft. With the article on black Rock with a huge number given their scale, do you presume that we

will see markdowns on fixed income in the coming days. Yeah. I think investors broadly are crystallizing their losses on Russia holdings, and I think the good news so far is that we've not seen spillover effects, particularly demand for liquidity demand for cash more broadly, So we're seeing margin calls in in the you know, grand scheme of things, but they're not really triggering a massive run in the in the

asset management system overall. Explain the pressure and I look at f R A O I S, which is one of the thermometers here the short term system, and it's rain. It's elevated, but range bounded is not broken out to a worst statistic. Explain the pressure on the bye side to reprice troubled debt. Does that come from guys like you do? You call up the managers and say, look,

you gotta re price this. How does that happen? So to the fraud I asked in terms of dollar demands, I mean bills, notes and bonds that are gonna be marked down. Where does the pressure come from to mark them down? Ultimately the asset owners? Right, I think this by and large, if you look at Russian assets, there's a collective decision here in terms of asset owners saying we do not want exposure to to this risk, regardless of how it unfolds in the short term. So there's

a broad movement out of Russian debt and equities. UH in the investment world. There's a broad movement of companies out of Russia as well, so we're seeing exposure to physical assets in Russia getting written down um and altogether that means we're taking the slice of Russia that's in the financial system out of the equation. Edwards, there is an issue right now with respect to an exogenist shock. At what point ed do we shift into something that

looks like a growth scare? And I wonder at what point they are the recession talks that we have been hearing sort of perkly up through yield curve discussions start to become that much louder. Yeah, I think I think we're kind of there right now at your conversation. The consensus view on US growth is starting to weaken. If you look at the Fed's expectations, the FED has a print of about four two grow. That's like they get

marked down a little bit next next week. But by and large, I think the good news is we're starting for a position of relative strength in terms of corporate balance sheets, household balance sheets, UM, the labor market coming into into this year, so we have some buffers to eat through before the risk of recession UH becomes real, But I think that turning point usually happens when things are good. So unemployment, so four percent, the yield curve

almost inverted. This is when you start talking about things starting to get worse. And right now I'm looking at the interest rate expectations for the rest of the year, and we're still pricing in six or even seven rate hikes by your end, at least when it comes to Fed funds futures. Do you think that the rest of the complex of bonds and frankly everything else has factored in seven rate hikes. I think we've done a pretty

good job. Yeah, And I think, especially if you look at the credit space, the move wider in credit spreads, spreads, investment great high yield. You know, we're about at fifteen month wides now. Most of that move has not been because the underlying fundamental story has deteriorated. It's been because of the interest rate volatility. So I think we've done a decent job of pricing that in at the stage. So do you think right now that yields in the long end are basically going to stay where they are

around two percent? Or do you think that as we contemplate this, I don't want to call it stagflationary, but this sort of unfortunately high inflation rate impacting growth for a longer period of time that we could go significantly higher. The biggest question in debt markets is will the Fed have to raise fet funds above two And if we have to rice that, how quickly do we need to price that in? At the moment we're priced for the fat to get two percent by the other next year

and kind of stay there. That's a relatively low level. It's not a level that's really squeezing the economy from it from a growth at an inflation perspective, If we have to go there, that's a rapid repricing. I think that creates him downside for risk and that very likely inverts the curve very quickly, potentially as early as the second half of this year. We gotta run. We've gotta

leave it there. Thank you, BUDDYSA White and who send me that of Columbia thread NATO right now, Lisa Bramonts and I are absolutely thrilled to present to you as we've talked to General KIMMITTT, General Hodges, Animal Safrida's and of course a wonderful angelis Stonard Brookings, Myra Rodriguez Vobry areas managing principle of m R. V associates who is beyond esteem in the study of Russia. Her shingle is from Harvard of long ago, Mare, Uh Goldman and others. Myra.

What does our audience need to know right now about the loneliness, the a loneness of Vladimir Putin? You know, this is a man who for a very very long time has been planning this tragic invasion. And for anybody who's been observing this, sadly, you know, we're not we're not surprised, and you know, I don't actually know how alone he is. I don't think so, because he actually has a lot, a lot of supporters. Uh. He has had support for decade amongst many many Russians, not just

at the upper echelons of the Kremlin. And he also has still a lot of supporters in the former Soviet Union. I know, right now we're obviously very focused on Ukraine, but he has a lot of supporters in Central Asia, and he has done this invasion because he really thought he could get away with it. What is the media getting wrong in our analysis right now? Is the global onslaught of analysis of the military, the humanitarian crisis and such. What does it ring true to the analysis right now?

I think there is a lot of truth in what the media is saying. However, I think that unfortunately, what my biggest fear is going to happen is that with time there will be a level of weariness and there will be the next big story and it could be coming out of Asia or the Middle East or who knows. Right, there's always that unfrictability, and I worry that people are going to be weary and tired, and that's what Vladimir

Putin is also counting on. I think that the media also needs to focus on the fact that the not only is there, of course, the tragic loss of life in Ukraine, there will be decades of incredible dislocation in that country from the psychological effects as well of being at war. From a market's perspective, obviously a lot less important than the human tool, but the markets are also going to feel the volatility for for time to come.

We're seeing a lot of action and medals. Of course, we're seeing action uh In in the spreads, but this is there's going to be a contagion effect in emerging markets, A contagion effect and emerging markets, we've been trying to game out at the potential contagion effect for big banks. We've seen that certainly in the price action in European institutions.

How do you assess the potential risk at a time where it's not just the operations in Russia with the likes of Goldman, Sachs and JP Morgan exiting the region, but also all of the instruments tied to it, and then all of the instruments tied to the commodities that are significantly affected. How are you going about giving your fed experience gaming that out. Yeah, that's a great point, and I'm glad that you're reminding you of viewers of it.

From a credit perspective, American banks have very very little risks with Russia. If you look at Goldman Sacks announcement that it's pulling out, you know, less than one percent of our its entire assets are in Russia. JP Morgan I happen to be working JP Morgan when it was first getting into Russian markets back in the in the mid nineties, tremendously exciting period. But the assets as a percent of all of the over trillion dollar asset based

for JP Morgan is very little. So from a credit perspective, the risk is low. The market risk, however, is much higher. You have all kinds of commodity linked bonds, you have securitizations that are also based on Russian assets, You have foreign exchange portfolios, and then you have, of course the fact that you have all kinds of countries like Street Lanka, the former uh f SU, you know, the former Soviet

Union countries. You have some in Latin America that are very interconnected to exports and imports with Russia, not to mention Africa of course, So that's really where I worry that some of that spillover is going to happen more from a market risk perspective rather than a counterparty a credit risk perspective. Are there specific banks Myra that you're keeping your eye on in terms of this risk expressing itself in a more concentrated fashion. Yes, I think definitely Socitation,

Moral and UNI Credit from Italy. Those two banks are much much more supposed to Russia from a credit perspective, and so then of course there's also the market risk perspective. Of course, City Bank, Goldman socks JP Morgan. Because they are the largest trading houses, You're still going to see some volatility in their trading portfolios. And it's not just going to be Russia on Ukraine. It's going to be all of the enormous emerging market portfolios that they trade. Mayra,

thank you so much. Too short of visit, will do it again very soon. Mayro Rodriguez Va Derris, thank you so much for the m r V. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern 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 In. This is Bloomberg