Surveillance: US Midterm Elections

with you, sir. It's divided government the best now come. As far as your concern, do you have any pushback against that whatsoever? Well, I think divided government means you're not going to get very strong action in terms of things like fiscal policy and in the context of how high are deficit is and how much we've already done. That's a good thing. I think the concern is that if you have a need for action because of the recession or some other crisis, it's gonna be hard to

see government mobilized. Also, you have to worry about brinksmanship, things like death ceiling crisis, government shutdowns. Those are going to come back into the picture. Uh. Clearly, as we moved towards next year to first we blame politicians for inflation?

Can politicians cure high inflation? I think inflation is always an interaction between things happening in the global economy which are not in the hands of politicians, and also what the political economy, not only the central banks do in response to that. Uh. And I think what we could say about the inflation spiked over the last year and a half is it's not primarily a central bank phenomenon,

not primarily a political phenomenon. But how this is going to play out over the next couple of years is largely going to be a response by policy how much

they're committed to bringing it down. Um, we think that inflation and is moving down, and it's going to move down in the core number this week, and I think we'll continue, but it's not going to move down by it by enough to get us back to two percent, and that's going to require the FED and unfortunately probably at some point require a recession in the US to deliver that. Unwine Bruce La, what components are you watching within the inflation prynt to understand the pace of how

much is coming down? Well, I think what we're gonna see is UH really a big dynamic of goods prices moderating. The energy story is going to pop up this month, but it's still on a broad downward trajectory. But I think core goods fall both because supply UH side pressures around the pandemic are starting to ease, as well as the dollar having moved up here. We see import prices falling for five straight months in the US. That's going to be magnified by what's happening in the auto sector,

where prices are coming down. Is also some help coming. I think in healthcare prices in the CPI that's a bit more of a technical issue, but rental shelter price inflation is going to be the fact that that's going to keep things up here and prevent us from getting a more substantial fall in the next number of months. We think we're on track for point for this week. Point three is in the next three or four months. That's a significant step down, but it's not bringing us

back to where we need to be. Bruce. Over the past few weeks, we've been talking extensively about whether it's reopening in China, whether an acceleration than the Chinese economy would be a good thing, very bad thing, right, And from a supply chain perspective, perhaps that would be a good thing for the US economy, and we're broadly because it eases some of those pressures that we're seeing, for

example with the iPhone fourteen right now. But on the flip side, there is this question of bidding up a lot of commodities, and this question of competition, and this question of well does that increase demand so much that the supplies can't keep pace? So how do you even begin to think about this? Well, I think the the the issue about the supply chain in China normalizing and Asian more generally, is a big disinflationary impulse, and that

is built into our forecast. I actually think the big story about China is how much is it's slowing after a reopening bounce in the third quarter. The housing sector is problematic, Uh, there still is COVID problems, you know. So we see China actually slowing quite sharply into year end, probably growing less than five percent, which for China is a relatively weak outcome. So from our point of view, the bigger issue on Chinese is going to be a

negative impulse on global demand. Obviously if it was strong, that would tilt in the other direction on the global inflation scene. Bruce. Over the last twelve months or so, this administration a few times has floated some tram balloons around changing policy over the tariffs on China. The one thing that people agree on down here in Washington, d C. Is a strong tough stance against the Chinese Communist Party. Are you expecting that to change it so all after

these mid terms? Not? Really. There may be some opportunity for a relaxation on tariffs, It's not built into our forecast. If that would happen, it would help a little bit on the inflation scene. I don't think that's going to be the main story on US inflation, and I don't think it's going to be the main story in US policy. Where I think you're correct. I think in tech, I think in other errors we're getting tougher. There's more of a decoupling taking place here and more I think contentious

policy that's going to continue in US China relations. Hey, Bruce, wonderful to hear from you so wise, Bruce. Kassman. There of JP Mulcan asset management right now joining US in Arkansas has been a wonderful support to the show. His name is french Hill. He is the Republican from Arkansas

waiting for election results tonight. I don't know french if I can say widely presumed, but at least I can say in the zeitgeist as a Republican victory, french Hill with the victory tonight be like the shock that we saw in Well, Tom Lasia, Jonathan, great to be with you. You know, I don't think it will be the shock we had in n because Republicans said and charge UH in the House of Representatives for forty years at that point, so we've seen the House flip before in the last decade.

House Republicans are ready UH to lead on trying to control inflation, go back to pre pandemic spending priorities, lead on unleashing American energy and focusing on security, security in our communities, at the border and the challenges that we face around the world. Is the largest superpower? How is your party in majority in the House distracted by former President Trump, who has every right to run again, but distracted by that moment. Well, President Trump is a fighter.

President Trump has strong views and there's no doubt that members of Congress. Uh, many members of Congress follow his views on topics, and so if he weighs in on a topic in the midst of a debate in the House, I don't have any doubt that he would have uh

influence inside the Republican Party. Look, that's the mission of Kevin McCarthy, who I expect to be elected as the Speaker of the House if the Republicans take control tonight, and Kevin will have that responsibility to build a consensus among a majority of Republican members on how to go

forward on these critical issues. French, there's an assumption in markets and beyond, certainly in Europe, that Republicans right now are less excited about continuing some of the aid to Ukraine and want to focus more on reducing inflation domestically on keeping natural gas here in the United States. What's

your view on that. Should there be some sort of restriction on exports if prices do rise beyond a certain amount, Well, we do face a tough winner and energy markets with rising prices, and we don't have supply where we want it. I think the President's proposal of cutting the Strategic Patrol and Reserve by two million barrels down to level was a bad and dangerous policy. And this is exactly why, Lisa, because that strategic petroleum reserve is in case of major

shortage and impact on the US. So I think he's contributed to this enter crisis this winter by the decision in all fairness, So natural gas is a different story, right, and the natural gas exports from the US is really what's in question, because that's really what Europe and Germany in particular really needs right now. So what would your stance be on the threshold to restrict some of that of those exports. Well, I wouldn't restrict exports unless we

rent an absolute energy emergency here, which we have. We need to be smart about and that's why I raised the reserve on the oil side. But look, Europe needs natural gas and Joe Biden has been terrible on producing

natural gas here. He's taken a lot of decisions that have made it very hard to get our inner gendersty back up to pre pandemic production and with a positive outlook, that production will produce a solid internal rate of return in the future, because we need to be having our natural gas here, but we need to be exporting natural gas and this energy crisis to our allies in Europe,

A Congressman, isn't the damage done? And even if we get a Republican Congress from these midtimes, if you're an oil producer right now trying to make multi decade decisions as far as that concerned, isn't this story over? Well? I don't think so, Jonathan. I think we have to be four in all the above energy policy during this transition, whether you're in Europe or the United States or in Asia.

We need to be moving to natural gas from coal, We need to be investing in nuclear, and we need to have our energy companies recognize and governments have to recognize that it takes a hundred million barrel a day

equivalent to run the global industrial economy. And to premature lee cut that back or injure it without the offsetting cleaner alternatives, you're in troub well as an economy, and the Third World will pay the highest price not only from exporting America's inflation, but by these policies that curtail the use of energy in the Third World. Congressman, fantastic to catch up with you, Sa french Hill as a wife,

Thank you, sir. We go to the other side and arguably the most interesting Democrat Party experiment in America, and that is Vermont. I spoke with Senator Lahy a number of weeks ago his wonderful new book out the Path of Senator lay over the decades, and it's been a path shared by his colleague Peter Welch as well, Congressman and of course in a dash for the Senate here on this Tuesday. Uh, let me start with a Vermont tradition, Congressman, will you vote early? Will you vote often? Well, I'll

vote early to vote often. It's a cargo tradition. So just one and done. We'll we'll leave that to Mayor Daily and the rest. I need to talk about the transformation of Vermont and what is unspoken. I remember White River Junction years and years ago, impoverished up the Connecticut River, and it is now bustling. It is a boom economy with an unemployment rate I believe under two percent. What

is the Vermont pixie dust that makes for prosperity? Well, White Rivers where I first came nineteen seventy four, and it was the town you described, and now it's doing extremely well. But you know, I think there's a real civic tradition here where our businesses UH and our government had worked very well together in a partnership, and we've had a commitment to our environment through Republican and Democratic governors.

We've had a commitment to in tough times trying to support people who needed help UH, and then lower taxes when when times were good. So there's I think a very functional government here through Republican and Democratic administrations where there's been UH, social liberalism and economic stewardship UH. And we pay our bills here in Vermont. As time moves on, as Senator Sanders retires, Senator Lady retires, do you suggest a Democratic Party that will move to a national center

away from a more East coast and West coast liberality. Well, you know, let's define that liberality. I think what has worked for us, and I think it is good for the National Democratic Party UH is to have a commitment to the environment and understanding that there's got to be partnerships between government and the private sector in order to

get things done. And frankly, I think that's what you see with the Inflation Reduction Act on the climate change where there's a lot of tax incentives that's going to help create a market dynamic. Uh. And there's a there's a good deal of civic cooperation you're in where people here listen more than they talk, where when we disagree with somebody, we don't assume bad motives. I mean, I actually think the way we do things here in Vermont.

We've got a Republican governor, and we've got a Democratic plus independent of course in Bernie Sanders in the in the Congress, but where that mutual respect is something that we need. Uh. And we certainly don't have election deniers here in the state of Vermont. But congressmen talking about the green transition, there's been so much pushback of late because of the need to invest in fossil fuels in

the near term. How do you dovetail a message that is supportive for the oil and gas that people rely on to heat their homes in a winter that's going to potentially be fraught with very high prices with the idea that you need to invest long term, with the idea that people don't want to spend too much money in the face of inflation. Well, no, you're exactly right. I Mean, the bottom line here is if we're going to get to clean energy, and I think everybody knows

we need to do that. It's got to be affordable. Uh. You know, if a person is going to want to get a truck and they want an off in fifty electric, that ultimately has to be an affordable purchase for them. And that's in order for that to happen. And this has been the case in many other technological transformations. Government policy plays a big role with tax incentives that then

encourage private investment. We saw that with solar, the cost of panels coming way down, but that we are not yet there in some of these how they are areas like the electric vehicles. Uh in so I think the combination of public policy and incentives to make that gradual transition. But in the meantime, you know, if people are going to get through the winter, we've got to make sure that they have affordable eating fuel and that will be

a big issue for us. I think when we return to Washington, Congressman, are you worried about the perception of the Democratic Party is have having gotten too extreme on the left side. Well, it's certainly in the campaign. You know, the campaign reduces things down to kind of an absurd narrow definition. Uh. And in fact, when you look at our record, there has been significant focus on economic development, in jobs and uh. You know, the big challenge we're

facing right now is coming out of COVID. We've got inflation in this country, but we've got inflation around the world. It's even worse than ours, and we've got to take the steps to bring it down. And the choice that we have here, this is what is going to await us tomorrow after we get the verdict of the voters.

We've got history with this Republican Party, particularly in the House, where they're pretty extreme policies, and we'll be hearing a lot of talk about getting government spending under control by reducing social security. Will have a lot of discussion about getting the government spending under control by defaulting on our debt. We've been through that and colleagues of mine in the House are saying that they want to default time the debt unless they get their way on their spending proposals.

So there's a lot of jeopardy here depending on what the outcome of the selection is. Where we start going in the House back to the impeachment's impeachment and Hunter Biden maybe the impeachment of Joe Biden, default time, the debt is the threat government shutdown, and all of that's chaos for the well being of our of our economy. Comblishment, thanks for paying with us today, pay to watch that. Thank the accomlishment. Right now we drive forward the conversation

with a Beltway insider with the Rock Creek crew. Alfia dor Walla joins us. Now they're managing director. Thank you so much for getting up. It's way too early for what I mean. Even on election day, Washington doesn't get up to Oh no, we're we're up. We're financed people, so we're up. It's exciting. Explain election day in Washington. French Hill was in Arkansas as you should be today. Is Washington deserted on election Day? You know? I don't know if it's as exciting as people want to think

Washington is on the election day. Everyone's working from home anyway, especially the government. So I don't know if we are getting a lot of excitement today. And I think markets are, as you said, pricing in a little bit of a split. Um. You know, Congress, and what that means for markets, What are the risks around that for you? From your perspective, is that good or bad? Because we're told overwhelmingly it is good, you know, I mean, you could be in good.

It could be right, less inflationary pressure because you don't have as much fiscal spending. You could see a week or dollar, all of those things could price into markets, and um, you know, be being a little bit more positive. But honestly, I do think that the midterm elections will

just be a small blip in what we see in markets. Unfortunately, everyone's kind of probably sick and tired of hearing this, but it's all about inflation once the longer term consequence of the fisc corresponse probably not being there regardless of

who gets elected into the White House. Even Yeah, no, I mean, I think it's interesting because we don't talk a lot about the Inflation Reduction Act as well, right, and the investment implications of the i r A. We've been looking a lot and doing a lot of research to see what are the different areas that we can actually invest in that are going to get tail winds from some of that IRA money. And there are places and there's pockets of opportunity there. You manage cautious money,

conservative money, if there's a new risk free rate. I mentioned the two year yield where it is. How does that change? And I don't mean it's a direct pension basis, but how does it change the actuarial or return assumption of international money. It's part of the building blocks of your capital market return assumptions, right, And we manage money for endowment's foundations, pensions. They want to have their money there in perpetuity and so having um you know, these

type of rates. In the fixed income market, we are talking so much more about how to manage our fixed income exposure. One of the best trades now is putting your cash in six months. Else, how do you manage your fixed income losses of the last couple of years, everybody's enjoyed that, yeah, you know, I mean sixteen what the US bond market is down about sixteen percent this year, right, Equity markets are down about We've had a very diversified

fixed income exposure. We've also included tips gold floating rate funds. There are a lot of pockets. We've stayed away from high yield, so we've been very short duration as well, which has actually helped us manage our and limit our losses on the downside. One thing we've been trying to work out is whether we operate with the underlying assumption that we're going to have FED funds to say three point five to five for the next couple of years. It's that your basic assumption now. It is our basic

assumption right now. But we are looking very closely right and when the Fed's gonna pause, when they're going to pivot, and that's going to completely change some of the rotation in terms of portfolios and where you want to be putting your money. You might want to be increasing your duration, you might want to be increasing or fixed fixed income exposure. You're gonna want to see where equities are in terms

of valuations across the globe. When do you think you'll see sixty kind of portfolio start to reassert itself in a positive way? I think you know, I mean timeline. I I think you're out at least twelve eighteen months before you start to see any sort of appreciation in the in the sixty type of portfolio. And we're looking for just a diversified portfolio a lot of alternatives today

as well. Where does the diversification come from? Then, if we're basically faced with a positive equity bond correlation for the foresamable future. You talked about diversifying. Where does it come from. So we have the advantage of being able to invest in private markets, right, And as much as we've seen valuations come down in private markets as well, they haven't come down as much in public markets. And there's so much innovation going on, and there are lots

of sectors that are actually less cyclical. I mean, there are less economically sensitive and less cyclical than what we're seeing in tech today. So we're investing in food, we're investing in agg we're investing in climate related areas, all things that we think are going to be ten year or fold investment. Private markets adjusted, Yet when you look at them, if they really adjusted yet, well, private markets

never adjusted. That's the beauty of private markets, right. Okay, nothing doesn't trade, doesn't mean that it doesn't go down in value. Do you think that anyone's going to have to sell and walk in the decline that people are Yeah, that's the point. So if you look at the venture side of things, right, if you look at some of the companies that are most well run, they have twenty four eighteen to twenty four months of runway in terms

of cash. That's not that that could get you through a period where you don't have to go to market very soon. So there's going to be a bifurcation in terms of companies that have been able to manage their balance sheets well and those that haven't, even in the private markets. Got to say it aside that of Rock Cli Croup, Dan, you're going to joins us this morning, Commanding Heights. It is the most optimistic modern treatment of capitalism that is out there. Has the optimism evaporated when

you look at the commanding Heights of America? Have we given up the optimism? I think certainly. We can put it Tom in terms of the balance of confidence in markets, which was very strong, has received and it has shifted. We've seen, you know, in terms of the last four years, really since the financial crisis of two thousand and eight, kind of reassertion of stronger government role across the economy. Lisa and Joe, I want to jump in here with a lot of other questions in a two hour conversation

with you. I'm kidding, folks, we get Dan, You're good for some precious minutes. Are we a two party nation or are we fracturing our historic two party system? Well, I think it's hard to see us not having a two party system, but we probably at this point have a four party system, moderates in the Democrats, moderates and Republicans, and then at the two sides of the party. We need to talk about how we're going to build out

refining capacity in this country. I've heard from Republicans at their fossil fuels and that hopeful that they can change the story. I think a lot of us have our doubts about that. You know better than most, in fact, better than pretty much if when we speak to that, these individuals, these companies make multi decade decisions, and no one's wanting to make that decision right now. Can we

change that story? And I don't think so. I think you'll see some modest you'll see de bottlenecking of refineries and some expansion to some building, but basically, uh, nobody's going to commit, as you say, to a long term investment because you don't know what the regulations will be in three or four years. And in recent years the regulations have really encourage people to shut down refineries. So how has this really changed the political lines? The fault

lines around the world. We thought we talked about how India has refined a lot of oil from Russia and then imported it or exported excuse me, back to Europe. How much is the US Is Europe willing to crack down on those types of partnerships that are getting closer at a time when they need the ultimate product? I think it's going to be very difficult. India was importing less about one pent of its oil from Russia year ago,

now it's twenty three in. The Indian Foreign Minister just a day or so ago in Moscow said that Russias, what do you say, a steady and time tested partner. And of course they're indicating they're not going to go along with a price cap, although Janet Yellen is is going to New Delhi to encourage them to do that. But the Indians, I mean, this is a pretty strong assertion of their long term lationship with Russia. You know.

Liam Donning a calumnist Bloomberg Opinion. It wrote a story about how five dollar gasoline is a big problem for the Democrats, but it's not a big problem for for drivers. Are politicians trying to adopt the case for oil and fossil fuels and policy when really they've got very little control over it at this point. Well, I think that's true. I mean, even you talk about windfall profits, I mean

the companies. I mean, it's really a global market. It's a very big global market, with a hundred million barrels a day. But nevertheless, we do know that gasoline prices have an outsize symbolic impact as well as a real impact in terms of how people vote. When was the last time you saw relations between Riant and Washington as bad as they are right now? Well, I just came back from there. Uh, And I would say it's pretty tense. I think it's been you have to go back a

few years. There's been earlier periods, obviously because Shoki was one period, but right now it was you know, it's just you could feel the palpable tension between the U S and Saudi Arabia. Although a strict GGIC interests they do coincide. Do you think they can reconcile that differences? And if they don't at this point as things stand, one are the consequences. Well, I think that that's a

very good question. I think ultimately this Uh and I got into dialogues about that actually in uh In there. I think that ultimately the strategic interests will coincide, but it's it's a it's a rocky period right now, and obviously the cotton production a month before the U S election was very incendiary. I think the temperature has to be brought down because there are a lot of other

big issues there, including Iran. There is a new map, Dan, but what the new map is is about the tradition, the tradition, the fear of America that's seen in isolationism. What's our isolationism look right now with Ukraine and frankly with attensions. John mentioned so than it did a few years ago because we're really revivified our basic coalitions with Europe and with our Asian partners. So I think that part,

that part is different. We are, you know, with this war is so uncertain and you could still have an accident that could carry it into a much more serious state. Fund a question and is a tough one, so forgive me for asking it. This administration has found it very very difficult to square this circle, to say drill please, and also to say no more drilling. How do they square that circle? Well, I think you've just said it. It's it's a very hard circle to square. It's a

short term we want more oil. Long term we want to get off oil. And it's a very confusing message because of course, if you're an investor, you're putting money in not for just tomorrow, but for the next few years. And so I think that along with the all the battles about E s G is hindering investments. So US production is up, but not as much this year as people would have expected. Lisa, I just think this is a fascinating issue, which just means higher prices longer term, right,

I mean then basically that's what this means. If you reduce prices, if you reduce supplies, the only thing that you can end up doing is basically try to price it out of existence. But that's not political plist and I think you were talking about before. And it's amazing to see that the oil price fluctuates on whether China is on the number of COVID cases in China, because you're missing maybe a million and a half barrels a day of demand from China. If you do that, we'd

have a really tight market here. Elephant and donkey in the room, give us a one year prediction on a girl and a guess or because we run out the clock here, Well, I think we'll look at I think I was just looking at our economic forecast for three if if, if the global economy is weak next year, then that will put some uh price. But I think there's probably a floor around seventy or eighty dollars on a barrel of oil. Dan can see the clock counting up.

It's just hoping that it gets that quick look at the time. Fantastic to see it. Great to have you with a thank you, said Dank and the wonderful Dangan of SMP Global, and of course of so much more. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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