Surveillance: U.S. to Ban Russian Oil

other stuff. We're thrilled she could join us on short notice this morning. Tim night, you're in Toledo at CLFS hot Requetted Factory. You're in a factory in Toledo, Ohio where they take all this stuff we're talking about and they actually make stuff. What are the people in Toledo in that factory think of the commodity cycle we're in

right now? Well, thank you for having me. Good morning. Um. The fact is that the situation and Russie Ukrainian invasion is critical for raw materials across our coverage, and in particular when we look at the steel industry, the big impact is the complete squeeze on raw materials, and so this facility actually in Toledo, Ohio is a is a real hedge for cliffs which we cover UM in enabling them to buffer themselves against this super squeeze in pig iron.

Russia and Ukraine comprised two thirds of the of the US pig iron imports, and so this is the nice offset made in the USA to that import situation. Could you substitute in your world if there's a given raw material from Russia? Is it easy to substitute Chile as one example? No, No, it's really not UM and I think you know, of course, it depends on the commodity, right.

I can't make a blanket statement. But if you look at Palladium, which we don't cover, but you can see it's twenty Russia and like I mentioned with figure and it's two thirds UM Ukraine and Russia, and the alternative is Brazil, and they certainly can't compensate for that lost production.

And you think about a mind, you know, it's really not a switch that you flip, right, and even if it were, you know, you take even if you did have capacity, you would take you know, easily three six twelve months to restart many of these many production facilities

are off for a reason because it's antipated technology. They don't have the electricity or the labor, and it's it's hard for producers to decide to make that decision anyway, because they don't know how long this is gonna last, and it's an economic, very big economic decision to them. Tim now were prepared for some sort of announcement from

President Biden about bands on imports of Russian crude. What would the consequences be to the medals market if there was a similar ban on aluminum, on ten on some of these other medals that really are significantly imported from Russia to the United States. Look, um, you know, the aluminum market is a global market. The America's are net short aluminum. But um, you know, already the market until a couple until this morning, I guess, was pricing in

a pretty big shortfall. So it's hard to figure exactly what happens. But net net, I mean, Russia is about six of the aluminum market. That one in particular we think is very affected because it's not only the direct Russia production Ukraine production, but also the impact indirectly on higher power prices in Europe. So that's why I think is one of the commodities that's most squeezed right now. But you also look at anything with a lot of energy in put. You look at zinc, zinc refineries, prices

are up. Russia is a huge producers of nickel. I think you can see what's happened with nicol recently. It's it's a phenomenal emiens. There's a little scary if you need it right well, but exactly that's where I was going to go. The financialization of the commodities market. You're talking about the on the ground, getting the metal out of the ground and giving it to people who need

it for products, etcetera. And yet we're dealing with something that's highly financialized, highly leveraged, and you're seeing massive disruptions. How much are the moves that we're seeing in some of the pricing due to that and not necessarily the true shortfalls or a gauge of supply and demand in the physical market physically, these these products are short when we're talking about anything trade on the elemy. Prior to these disruptions, the markets were already very tight. Now that said,

if if this situation will resolve tomorrow. Hypothetically, of course, you know, the commodities would would definitely retreat in the case of nicol for example. But there's been actual physical disruptions of aluminum production in Ukraine about a large facility and refinery there, So it's a little bit of both. But yeah, there's no quick production fixed, and in some cases there have been you know, irreparable you know, damage done to ports and infrastructure that are going to have

longer lasting effects. Ten forty five East, we will hear from the President of the United States on holding Russia accountable ten forty five East, and will we hear from the President of the United States on holding Russia accountable. As we reported this morning, according to people from the day with the mats out that the President is set to band us impults of Russian crude as soon as today. So somewhere here from the President should be hidden from

the President in the next couple of as. I'm bringing up Brent Crude here to see if we have enough lift up or one level. Yes, we come up nicely. One, not up through one yet. That's my key level. I'm Brent Crude, Jim. I'm fascinated within the hyper detail of your note and your visits that there's always that great mystery of China and their inventories of medals. In the years that I've done this, it's always a great mystery.

Do you have any understanding of what the true story is of China's inventory of these raw materials or finished products. I can't say that I've figured out China, and definitely not that angle either, but I would say that, um, you know, it definitely depends on the commodity. But if we're talking about some of these base medals, you know China is not a natural producer of them. If you're talking about aluminum and steal, yes, they are under the

market and could amp up if they needed to. But if they'd have to have the raw materials, and that's where the squeezes. It's an iron art's and cool, it's in alumina and box site, and that's where it's a cost problem, maybe not a scarcity problem. If they do decide to ramp up. Can we have a technological application given this crisis where we are more efficient with our medals finishing our medals product I think of new core

years ago and what new core rought. Can we have another technological leap in your world if it's so expensive again, look these you know. I think this will be a wake up call to the markets to say, look, do we really want to see a commodity that's so dependent on Russia, Ukraine or on any given region. Right. And I think that over time there'll be more and more initiatives to develop technologies and alternatives. However, we're not talking

about you know, months or quarters. We're talking about several years. And I think by the end of the decade you'll you'll see again more alternatives to to um, you know, raw materials, and you're seeing already efforts to mine um off the ocean floor, which could supplement nickel, for example, which is particularly scarce. Jim, all morning, we've been talking about how long the conflict will last and what the longer term ramifications will be on the economy as well

as on some of these specific markets. Can you give us a sense of how difficult it is to turn off some of these inputs in terms of where we import some of these products and then turn them back on. I mean, how long do you expect some of these disruptions to last, regardless of how long the conflict persists. Yeah, that's a that's a great point, I think. I mean,

if we're talking about the infrastructure. I'm not an expert in the conditions of the rails and the ports, but from our understanding, you know those have been damaged and so that would have to be repaired. Um I heard that half of the rails at operating out of Ukraine. We're not operable, but then half are, so that would just be a bottleneck obviously. And then in terms of whether it's a mine or whether it's an operating facility.

You know um an alumina refinery in um Ukraine, that's one point seven five million tons of significant producer globally. When you shut that down, it doesn't you know, you can't flip a switch and we start that. Plus you need to have material on the ground to run it and have a power supply, so that could take you know, at best, you know, months to restart. And then if you have a steel mill orderly shut down, it could be quick to restart and if you have a mind,

you know, you could restart it. But again it depends on having the people, the power, the materials on the ground. I think the bigger question is what's the state of the country when you know things are resolved and how quickly they can try to produce again. So far it seems like there's actually still um shipments of oil and shipments of iron ore and met coal even asked of last week. So you know, I think it'll just be slow moving at first. When things are referred, it's him

to thank you, it's him to town. As that of a wolf research. Victoria Fernandez joins the chief market strategist at cross Mark just to get the lay of the land, to try to figure out what you do, Victoria, what have you not done in the last thirteen days. Well, actually, Tom, we've been doing what we had been doing in the thirteen days before that. We've been in the market. We've

been trimming names that have been higher. We've been going in and buying names that have taken a hit and have come back, and they've been on our shopping list and whether that's going to be value names, it's a few tech names. We've been in the market trying to be opportunistic and trade some of these um these names

that are there in order to build our portfolio. Obviously, our outlook is a little more cautious than where we were before, so we could be a little more choosy on the names that we have, but we still think there's some buying opportunities here. Have you focused more on America because we were not making a joke about it, But the reality is is in ways we go buy international by e M, by this, by that, And yet it seems over the recent years we all come back

to mother America in the big caps of America. Is that what we're gonna do here in the next year. I think you're gonna see that, Tom. And it's interesting because, as you know, Bob doll our c i O, one of his predictions at the beginning of this year was that we might see international stocks finally outperform US domestic stocks. And now we have to look at that and say, because of where we stand with the Russia Ukraine issue, are we going to see that happen? And now I'm

not so sure. There's been a big shift in that European economic recovery, and we have to wonder is that going to be long lasting? You talked about duration of inflation. The duration of this incursion is really going to weigh on the economics of both Europe and the US, and that could shift where people are investing. Right now, we're

focusing more at the US Victoria. We were talking earlier with Margie Patel and she was talking about her optimism that this conflict would resolve itself relatively quickly and that there will be buying opportunities. I do wonder, though, what the longer term ramifications are for the volatility that we're seeing in the commodity space, the incredible surge in oil prices, and frankly, the lack of dependability in basic staples like

wheat and corn. Yeah, I mean luckily, so when we talk about the dray shot of this, the longer it goes on, obviously the larger the ramifications are, and that's going to be to investor sentiment. I mean, you look at consumer confidence numbers over the last week, the daily numbers. Surprisingly they've moved a little bit higher. Normally they're highly correlated with gas prices, so it's a little surprising. But the longer this goes on, it's gonna hit investor sentiment.

It's obviously going to hit inflation for the longer term instead of maybe the spike that we were expecting. It's gonna affect currencies. I mean we saw how the euro swissy went under parody this week, so you're gonna affect the currencies. And then obviously we're talking about that European economic recovery. As COVID retreated, that's going to be affected

as well. So there are longer lasting effects. The longer this goes on, the question is does China step in and pick up enough of the slack from what the West in Europe is not going to do with Russia she kind of buffer the situation a little bit and allow Putin to continue. Victoria, thank you as always, or Fernanders there a cross mark global investments. Yea, we get a domestic perspective now. She's been more than patient in this hour in joining us. Diane Swuk, chief economist at

Grant Thornton. Diane, I'm absolutely fascinated in all of your

commitment to our Fed Day coverage as well. What kind of Fed Day do you expect that we'll see given this historic news slow Well, the timing just couldn't come at a worse time, as it's adding fuelton already well kindled inflation fire for the Federal Reserve, and we've seen certainly J. Powell's commitment to still raise rates by a quarter point at the March meeting, and I think it's really important to understand that we risk seeing a much

more entrenched inflation, not exactly the same as the nineteen seventies, but your eerie resemblance. And in his Cuss testimony to Congress, he made a point of saying, we are looking at the nineteen seventies as a benchmark to avoid, not to repeat. Well, that means that the Federal Reserve has to actually combat a lot of the demand side of this inflation, even as we're seeing the supply shocks pile through from Russia. You and I have lived the measured of Alan Greenspan

with this warr in Ukraine. Can the Fed and their well meaning economists, Can they just get away from measured and say, look, we're gonna act, We're gonna raise rates, but it's a one off. I think they have to be very cognizant of saying they're not going to allow inflation to get out of the out of control any further.

They're already behind the curve. This puts some in a very bad position, and I think one of the hard things for the Federal Reserve is the tight rope that J. Paul is going to be walking between wanting to raise rates and stem inflationary pressures and stop inflation from becoming a recession with stay inflation without tipping financial markets into a larger credit market seizure that would do the job for the FED be much harder to recover from, and that's a very fine tight rope to walk at this

stage of the game. Diane. There's also the question of the economic bleed through of higher gas prices as they do reach the highest at least a nominal basis on record, what is the consequence for the average American family, Given the gas prices are now north of four dollars a gallon, but we've done calculations last year it was almost a thousand dollars per household, the record increase on a nominal basis that we saw in prices at the pump coming

out of the pandemic. Now this adds another eight hundred and fifty nine dollars per household, and that wipes out much of the excess savings in the lower certainly quartile of household that they were able to hold. And that's at a time when they're also those households at the bottom also getting released slammed. That's at the same time that they're much more vulnerable to the rising rents and escalating rents that we're seeing out there and all the

other aspects of inflation. It really is a very different sort of inequality issue that we're facing because also those who can work from home have the ability to hedge against and blunt the blow of higher commute costs, when those who have to work in person in lower wage jobs cannot blunt that blow of higher commute costs, and

that's all compounding the inflationary impact on them. So do you think that, Diane, potentially we could avoid returning to some sort of recessionary environment and response to the oil shock, and yet see a massive increase in inequality or do you think that both could occur. Do you think that this could actually be a shock that changes the trajectory in a more meaningful way. Unfortunately, I think the risk is that it changes in a much more meaningful way.

Going into this crisis, we were looking at sort of the fog of war and what kinds of sort of decision rules and scenarios out there, and unfortunately, our resilience through this as an economy as a double edged sword, because it sort of suggests that of FED can't afford not to raise rates at the same time that we're hitting demand with higher energy prices, and the two colliding means that we likely will need to see a slowdown

that actually bleeds into unemployment to derail the inflationary pressures we see in our best case scenarios. Right now, we're looking at an almost stall out of growth in the second half of the year that is not technically a recession, but not enough to hold the unemployment rate down after it falls further in the first half of this year.

That is not a great scenario to have, and that's without the additional supply chain bottlenecks that you were talking about earlier, which I think are very important because again they had insult to injury and an already bad inflation scenario, and they continue to contribute to shortages out there. Dan, What would holding rates where they are do, What would actually a more devish approach from the FED actually accomplish

in this market and frankly, in this economy. My concern is that holding rates at their instant level right now, given the kind of momentum we've already seen, is that we would see a more entrenched inflation already seen. Expectations on inflation have risen, they will rise more, and that

means expectations for people pushing it onto employers. I've talked to many employers who are now getting complaints by their workers that did not get as bigger raises as the entry level workers got, and they're not keeping up with inflation. That's how it's a different way of getting to the nineties seventies. But I think it's an important thing to be thinking about, is that you risk a much more entrenched, longer lived, stagflationary environment, and the FED can't afford that either.

That is the American observation of the day. Diane Swonk, thank you so much. With Grant Thornton, there we stopped and pause now and we do with truly and I mean this with all sincerity. One of the original founders of a woman's place in the securities business, and it is m Malletti who long ago Lisa was it a shop called Strong, and through various permutations, is now with all spring and she is one of the nation's great value managers. M Letty, good morning, Good morning, Tom, and Lisa,

thanks for having me on. I want to talk about in your research note you say women investors have the edge. Pray tell well, I think both you and Lisa really know and appreciate the dangers of group think and so um to get out of that in our industry, we have to get out of the box and have a collection of people who are diverse, who come from different backgrounds, different places that can bring a different perspective, right, And I do think and believe that females bring different perspectives

into this business than males. Okay, maybe maybe no better than one another, but together collectively it is better. So and dovetail that into the moment that we're in right now. Where is the group think right now at a time when people don't know what to think? Mm hmm, Well, I think the group think right now is there's a lot of uncertainty. We don't have a lot of answers, and how do you make calm decisions at times where there's a lot of emotion controlling the market, right, and

a lot of different opinions about what's going on? But what I'm focused on, what our investment teams are. Just get back to the basics, follow your investment process and let that be the guide. And certainly you take inputs from all professionals in a lot of different areas, a lot of expertise, but you bring that together through the investment process. So are we going all Greek medicine here and say, first, do no harm? Is that the basic idea? I think the basic idea is, Look, the market was

surprised by this. Most investors were surprised by this. The natural trigger um for most people, I think is to say I don't want anything to do with any area of the market that can be impacted by Russia, including any emerging market. And I think you know, that's where we have to pause and say, is that really the right way to think when you're allocating capital or do we just have to look at this more holistically and say,

this event definitely has caused change. Let's look at the changes, but not have a quick trigger on, you know, changing allocations dramatically. So what's your sort of contrarian idea of the day in terms of what you are actually doing or not doing with your money? The other people I'm moving in the opposite direction from you know. So I think there's a couple of areas in the market that, um, you know, you don't have to get all out of equities,

you can. I think the small cap space is very interesting. It is trading at a historically low or a history gap relative large cap in terms of evaluation perspective, and you know it's closed a little bit recently, but there's more room to go to go there. There's also less impact from some of these global issues on the smaller companies. I think healthcare is interesting, right, we're talking about all

the industries that are impacted. Health Care is an area that underperformed last year that has the ability I think this year as people are looking for areas where there's more stability to really outperform. So those are the types of things that we're looking at. There's difference between going out and actively buying and convincing yourself not to sell, and those are two important points right now at a time when so many people are contemplating cash. Are you

doing more of the former or the latter. It's a combination, Lisa, honestly, right, I think what you want to do as an investor is really make sure you own the best companies that are best positioned. So sometimes that does include making some trade off selling a name that you thought was better positioned. But given the external things have changed, and so you're

looking at the world a little bit differently. But most of these decisions are on the margin, they're not felt everything in this area and move everything into that area. Is revenue growth a substitute for value analysis down the income statement? And of course I'm speaking about high profit, high cash flow, big text, of course, trading at fifty multiples. But but but can you fold revenue growth into a traditional offspring value strategy? Absolutely, and I do think it's

become increasingly important. Tom. You know, years ago, you know, when I was really starting in the business, thirty years ago, you were looking at the value space a little bit differently. You didn't have some of the secular changes that we have going on today. Things in our economy are moving really rapidly, and so I think that revenue growth is

an indicator of competitive advantage. Right, It's not the It's not the only metric to look at, you know, so again, if you're if you're a growth investors, you still shouldn't be looking at just that metric. But it is important to know that you are focused on companies that are not going to zero or declining dramatically in value. M Letty, thank you so much for the all Spring greatly appreciated. All Spring Global Investments head of all of their active equity.

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, meaning this is Bloomer