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Katy Gopinath was an academic at Harvard. She was known within the racket we all knew that, but found immense acclaim As the former deputy Managing Director of the International Monetary Fund, she brought an academic gravitas to it that was just absolutely wonderful. As they do, they wanted her to stay at IMF, she had to return to Harvard. Professor Gopinath joins us in this time of international turmoil. Geta thank you so much for joining this morning. What
was it like your first day back at Harvard? You go from gorgy Eva in four hundred PhDs telling you what to do with the IMF. What was it like in front of the kids at Harvard the first day?
Hi, Tom, Always I always miss speaking to you, so it's great to kick off with you know this kind of a question that I don't usually get from anybody else.
What was it like I mean, did you Stanley Fisher says that that Samuelson used to throw chuck. What did you do with the dumb students after the fancy people at the IMF.
It's actually been going great.
I am enjoying very much being back at Harvard. And it also helps to be able to be able to speak a little more freely than one does when you're when you're at the IMF. So I'm enjoying this moment a lot. And also I love working with the students and getting back into research and something I did miss well, that's.
Where I wanted to go. The research of say Rudy Dorn back ages and ages or can roll gooff and others? Is there is a cycle to financial upset, a cycle to financial contagion with the private credit percolation, and again a war is tangible. Are we at another inflection point where we see crisis in finance?
The troubles in a with private credit were actually there even without the right current war in Iran, we were seeing signs of distress in terms of loan defaults. I mean, this has always been an incredibly opaque sector and when we worried about where we could see another crisis coming
around the corner. It was about this huge growth and non bank financial institutions that now own over fifty percent of the world's assets, and especially in a private credit private equity hedge funds which are highly leveraged, and valuations that are stretched. So it is a combination that really can get you know, things can get pretty tenuous if we have major shocks of the kind we're looking at right now. And as I said, we've just had the
biggest oil shock in history. And you know, thankfully our economies are not as dependent on oil as it was in the nineteen seventies and therefore we could weather more of it now than we did back then.
But this is a huge, major event to the global economy.
I want to bounce off what you were just saying about the war and its effect on the global economy, because even a long war, would that have a limited consequence for global GDP or will there be longer term damage done?
A lot depends upon how long oil prices stay high. Right, it had come down to around eighty five yesterday and then shot back up to one hundred and now hovering.
Around ninety six.
So you know, coming into twenty twenty six, the assumption was that twenty twenty six would be a year when oil prices would average sixty five dollars a barrel. I think in the best case scenario, we're looking at it averaging now seventy five dollars a barrel, which just from the oil channel shaves off about zero point one two point two percentage point of global growth. But this continues, and I don't think this requires you're not talking necessarily that everything gets sorted out in a week.
But if this.
Continues well past a few weeks, and we're looking at now average for the year hitting eighty five, now that's beginning to shay off like point three percentage point of global growth point four percentage point.
And global inflation starts.
Going up by fifty basis points sixty basis points.
So this needs a solution relatively soon.
Otherwise we're all looking at countries around the world dealing with many countries dealing with statulationary shocks.
What about emerging economies, They would be vulnerable here to persistent high energy prices.
Right, Emerging markets have, especially the ones of course that are importers, I mean other countries who are exporters benefit from the higher oil prices. But the ones that are importers, and these include you know, India, many of the East Asian economies.
Of course, China also is a big importer of energy, though they have.
Big strategic reserves so they're kind of a little more insulated. But yes, so they they tend to be importers. They also are much more energy dependent. Their economic output is much more energy dependent than the rich nations of the world are. And we've also seen the dollar appreciate. So it's a combination of oil prices going up and the dollar appreciating, and that's leading to really scarcity. I mean, we've see rationing in many emerging countries around the world.
It's not just you can simply pass through very high point prices.
An exceptional day for Bloomberg Surveillance. Edward Morse was with us earlier Charles Canter of Newburg or Burman as well in our getic openhaz where there's the when we're International Monetary Fund Deputy Managing Director, Holding Court at Harvard Economics after her sojourn of public service, Gita, I look at where we are and my answer is currency is the
litmus paper of the system. Are there traditional dynamics of foreign exchange in play now or is there a new regime we have to get used to.
I think this episode has told us that the traditional regime sustains. There have been a lot of questions about the dollar's dominance and whether we've seen some sort of financial decision making shifts sufficiently in the world that things are going.
To behave differently.
But what we saw right at the onset of the war, when there was a huge spike and uncertainty, was it the dollar strength and relates to pretty much all other currencies in the world. Capital flows to emerging markets. You didn't see a whole scale reversal, but you saw less of flows going into emerging markets their currency is depreciated.
The US stock market held a better than other countries also because I mean frankly, US being a bigger net energy export and makes it lesser for a slight creation shop with the US than for many other countries in the world.
Doctor Gopenet. I think of my great mentor at LC Megduan Desai, who we lost recently, the work of Ragharajin at Chicago and your work as well, and India is a balance and fullcome point between all these global tensions. Is there a new India now or is it a traditional relationship with India, with China, with Russia and with America.
I think the word is complicated. It's really complicated at this point in time.
What good news is.
That India's economy is growing strongly from internal demand and from internal sources or that's pushing growth, the build out and infrastructure, the digital payment system. There is good growth momentum coming from within India. What they had to do, which I think is actually positive over the last year, is to go out and make more trade deals with other countries. They just did that with the European Union, but they also they did that previously with the UK.
I think that's a good thing.
I think it helps for India to bring its start off right down and they're going to have to keep this up.
It's a complicated world.
It's people are unsure about who their friends are and for how long.
Right now, a second headline coming out of Iran. This is from some form of Iran TV. This is published on the Bloomberg It's not speculation quote. Iran says it began new wave of missile launches on Israel butcher stuff against the headline of about twenty years ago, Brentcurd ninety eight dollars thirty two cents, Alexis Christopherus with Gidy gopinat of Harvard.
So, you know, what about the beneficiaries or the winners? And I guess I hate to use the word winners in war because I don't think there any winners in war. But when you're talking about large net energy exporters outside the Gulf, are they going to be benefiting? And I'm thinking Norway, you know, Russia, of course, Canada.
Yes, certainly, these absolutely, these countries benefit from oil being at one hundred dollars a barrel. That's a huge windfall that you know, it's very helpful. And I would say for Russia right now, this is great because they could really use the money that they're getting from their oil sales. When oil was at sixty five dollars a barrel, it was getting really hard for their economy and you could see the strains.
One hundred dollars a barrel helps them.
Now.
That said, if this now morphs into.
A more broader financial crisis because of growth dropping everywhere, inflation going up, we're already it's kind of clear we're moving into a much more tighter monetary policies stance everywhere in the world relative to what it would have been in the absence of this massive oil price shock. You know that combination is never good for it, for the world as a whole, for pretty much all countries.
Can I do an audible?
Please do?
I'm going to do a terrible time keen audible with geta Gopineth. So we're on stage in Marrakesh and there's like planes flying over. It's a tent. There's like eight hundred, one thousand people in there, and you know, Gita is there. I think I can't remember the details. I think substituting for the managing director because she had to go see the King of Morocco or whatever. In Christine la Guard's there and a bunch of other worthies and I never
got this question into Geita. Gopinez, Oh, we'll do it now. So we're going to do it right now. Get to Gopinath. You came out of Princeton Holding Court at Harvard, Ken Rogoff and BERNANKI did part of your PhD. I want you to explain the impact of the Nobel Laureate Claudia Golden on economics. You and I never got to talk about this. We're going to do it this morning. Tell me what Professor Golden did in labor economics in our bay, behavior in our society that was so important.
Claudia, who won the Nobel Prize for her work recently and was long overdue, basically told brought us, I'm sorry, brought us gender economics, which is to basically point out that there are salient differences between how women and men participate in the labor force, what they get paid, why they get paid differently, the importance of family and child rearing, which has an impact on women, and it's hugely important because for multiple reasons, besides the fact that we all
want to live in a society where you get rewarded for your skills and talents at a fair level. We're in a situation where worldwide fertility rates have come down, and you cannot fix that problem without recognizing that it is tied to how women engage with the labor force and what it takes.
And if if by having a child, you are.
Restricted and that impedes you because you get very little support from your partner to be able to engage in the in work, you know, the incentives to do that get dampened, So you know it's her contributions have been tremendous and Tom, I think we have to keep in mind that for a long time, it was not cool
to be working on you know, gender issues. When I say a long time is when when Claudia was much younger at that time, as an economist, you wanted to be working on you know, monetary policy, macro policy, those were the topics to focus on. So for Claudia to go against the wind and say no, I'm actually going to work about gender and women in the workplace, that was huge, you know, stepping out of line.
And courderse to her for that.
One quick questioning and as we got to go or they ran in the news. But I have to ask, are you letting your students use AI? Is AI a constructive tool in the classroom?
Yes?
Right now I'm teaching a class to PhD students and I think that they should absolutely use AI in a particular way. But at the same time, I want to make sure that they're also developing their own cognitive skills. I think the risk is that we're going to outsource everything to a smarter friend and in the end dot learn anything.
So we have to strike the balance right one.
Hundred percent agree. Thank you so much for that, Professor Gopeneth at Harvard University, or Public Service for India and America noted at the International Monetary Fund. Stay with us more from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoon from seven to ten am Eastern Listen on Apple Karplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
All of the people we speak to on hydrocarbons, including Stuart Wallace's building out Bloomberg's hydrocarbon commodity expertise at Bloomberg News over the decades. All of this has to do with informed, different and nuanced opinion. Francisco Blanche with us the other day from Bank of America. Jeff Curry, I saw wander into Bloomberg, iconic at Goldman Sachs and all. Standing on top of these good people is Edward Moore, Senior Advisor at Hartree at the Council on Foreign Relations.
In his public service to the nation, what is the biggest thing doctor Morris, Americans now including the President, get wrong about the shores of Iran and their military capability to disrupt oil. What's the thing we most get wrong.
So a couple of things that work together, this decentralized decision making, given our billity need to impact internal communications within the government. And then there are a couple of one hundred small sites along the Iranian coast where people have the capacity to interrupt shipping in the golf, whether it's through putting mines in or sending off small drones. And that really makes the job very difficult.
When you help build out Yemen's ability to do hybridcarbons, you've driven many of those roads. I read yesterday as an amateur of three independence class mind sweeper military boats and bearn for the US Army and all of it's US Navy, I should say, And it all sounds like it's going to take days and weeks to get a path through the gulf of our moods. Are you looking at days and weeks or dare I say months to open up the gulf?
Well, that's the uncertainty, and we don't know whether it's days or week, So whether it's months and we don't know whether that months will turn into a kind of permanent damage because there's a regime in place and it look like it's going to roll over overnight. So it is a big uncertainty. I say the probabilities are higher that it's sooner rather than later. But by sooner, I don't mean the end of this month, I mean sometime within the next within the next month.
We know that the IEA is now tapping these reserves, right the member countries agreeing yesterday unanimously to do this. The US is going to kick in one hundred and seventy two million barrels. But you know what, it didn't too much for the oil markets and for the price of oil. Why is that? Why didn't it appease them?
Well, look at what's happening there. They're putting maybe four million barrels a day into the market for a limited number of days, and the world is already seen two things happening. One is that the upwards of sixteen eighteen million barrels a day that was coming through the straight up horm moves is now down to ten, so we're not replacing. And the longer the time waits, the less important that little drop in the bucket.
And it's important to mention it's not that we don't have the oil. We're still flush with oil. We just have nowhere to store the oil. Is that really the problem.
No, the problem is that we have the oil. We have an open market. We allow our oil to be exported to whichever country or a party other than those sanctions that want it. This is true of gasoline and ethane and all of the product line, and it's true of crude oil. So if you are in the need of crude oil, you're going to go to the US
to ask for it and bidding up the price. So although with the largest exporter of crudent product in the world, were the largest producer of that and natural gas, we are beholden to the global market.
Edward Morse with this, folks, Senior advisor, Heartreet Partners. We willcome all of you on YouTube and all of our other ways to listen to us around the world. Subscribe to Bloomberg Podcast. A good conversation here with doctor Morse. Okay, my knowledge of this is I rewatched Lawrence of Arabia three times, read most of Dan Jurgen's surprise. I think most of it Okay, I read Albert Hardi on the Arab people, and that what are they thinking in Riod
right now? The royal family of the Saudis, the royal family had cutter, the Zayads, the mock tombs in Dubai. What are these royal families thinking?
I must intrude in this a little bit to note that Dan Jurgen and I have been very good friends since we were in graduate school, and I had the pleasure of reading the original manuscript to give him. People that was double the size of the printed version. So it took a little bit of ti.
I mean, we used to John Tucker remembers this ed Mortz. We used to walk around with the prize paperback. It was like a girl bag. It was just like to be cool. You didn't read it. What was it like when you first read an absolutely definitive book.
Well, the history that he did was just truly extraordinary. So it became the one place to go if you want to understand where Oyl Markers came from and where they're going.
Okay, but folks, in all my travels over there, you know you do background reading in that. Thank you to the University of Durham and England for definitive work. The first Mercedes dealership in Abu Dhabi. There were no roads. They're driving the Mercedes around on the sands. The tribal structure that Alfred Harani wrote about definitively in one volume Ed Morris and how these royal families are responding to Persia.
Well, they're responding in the longer term in the short run. So you know, people had been saying that nobody in the Gulf wanted the US to do this. That's absolutely untrue. There are significant reports that indicate that members of the royal families of a lot of those countries were encouraging the US to do what it did. So that's one element. They were sitting, you know, quietly and not in front of a microphone, but actually encouraging the US to do
what they were doing. They are different in terms of their str ructure. So we've got two big countries, Saudi Arabia and the UAE, that either have diversified their economies a lot or are in the process of diversifying. And the intriguing thing on the Saudi side is that just in the month of January they gave signals that they were going back and looking at the original twenty thirty plan, and they're finding ways to accelerate the diversification of the economy.
They're doing it by going into critical minerals, mining other things at home, going into AI for the world, and attracting investment from the private sector in a way they never have. So they are happy and unhappy about what's happened over the last month, but they're happy to see the decapitation of the regime, the reduction in the authority and the power of the central government, and they're hopeful about change over time, Doctor Moore.
So I want to go back to something you said earlier in the conversation that there could be permanent damage to the Strait of Hormuz. We see this unprecedented attack on that understruction or the infrastructure of the street. What would that look like?
What would what.
Would permanent damage to the street look like?
Well, by permanent, I meant something going forward, where we already know that the Iranians have restricted lanes of the Gulf were transit. They're allowing a number of sanctioned vessels to go through. They've increased their own exports, but given the number of weapons they have on the coast, given the nature of those weapons to intrude and interrupt transit through the Strait, this is a long term threat. It's not something that's going to be over even if there's a treece.
Good Morning, ninety to nine. F Aupp in Boston jays up there. He's clipping coupons. It's just a municipal bond guy. But he sends in a really smart question. Can you ask doctor Morris what we're going to do with carg Island. This is not it's not like Love Island, but this is a little island right off the coast of Iran, directly east of Kuwait. Have you been there, Dr Morrison? You've been to car guy? Yes, this is great. I mean there's not like a four Seasons or a Marriott
at the end of it, is there? No?
No, My Iran travels really remarkable. I'll never write a memoir. But I was the first American delegation back to Iran after the revolution. And when I was there, I had a classmate from graduate school who was ahead of intelligence in the British Embassy. I had an escorted ride from the US embassy where I was staying to the British Embassy. I was actually co chair of the US Iranian Bilateral
Energy Working Group. And when I was with the British ambassador and my friend, a car was attacked on the street. We had to run out escape and the car was rolled over.
Did you return the fire?
I just got as anonymous as I could in the crowd.
I should write a memo.
Of course. A simplistic idea here is, if we really are at war, why aren't we taking out their immense undersea pipelines and refinery capacity out of this little island east of Kuwait.
Well, you'll note that the Israelis have attacked some of the infrastructure, so that's been a threat that more of the infrastructure could be attacked, and we don't know what the President's going to do between now, would.
You recommend to the president that you take out their major refinery hub.
Well, I think there's a lesson to be learned given that the Iranians have taken out other hubs and other refineries and are now attacking oil field. So you shouldn't do that unless you expect the same in return. The President hasn't done it, of course, because he's not interested in a significantly higher oil price environment. Whether his interest is for the midterm elections this year or something more durable is another question, but he'd really like to see
gasoline prices significantly lower. He now can't brag the gasoline prices are lower than they were Biden because it's out higher than the last year of the Biden administrations.
They're higher than both of his administrations Trump's administry, and they're going.
To be higher yet because there's a lag effect between the fruit price and where the price.
On Brent crude. Can you get it out to one twenty?
I think it's easy to get it out to one twenty. We're in a world of unbelievable volatility in this market.
We have seen witness.
To that in terms of going down and going up. Merban is pricing at one one hundred and Jubaio pricing at one hundred and seventeen, one hundred and eighteen, and that's going to go higher because the longer those crews can't get into global market, the higher the price is going to be. And I think you can reasonably think that on a supply demand basis, unless there's an economic repercussion in which demand collapses, we are more likely than not to see prices above one hundred.
Doctor Morris, help us understand how the US was able to escort ships through the Red Sea with the Hoothies. But they even though Trump has said we're going to do it here, We're going to do it here with the straight they haven't yet Why.
The Houthis didn't have the ability to mine the Red Sea. The hoo thieves were more limited, and the hou thieves were more interested. Remember they're proxy, and they're a proxy that has an independent status within within Yemen itself. So what have we heard from the Houthis lately? You know, they've been unbelievably quiet. The best way to trap them is Al Jazeira does a daily report on what the Houthis are up to. But so far they've done nothing
to interrupt the safety line that the Saudis have. The Saturdays have the Adblu pipeline that is a seven million varladay pipeline now and that includes crude and product that could be interrupted, But the Houthis haven't moved on.
Edward Morris with us, and we continue with doctor Morris. Here's spirited conversation with a gentleman who owns the high ground on our geopolitics of Hydrocarbons has worked for decades. It's City Group at the Council on Foreign Relations and now at her Tree Partners. Alexis christopherus with doctor Morris.
You know, can you just explain for us and connect these dots, because I always thought, well, it's going to take a little while. There is this trickle down effect. If crude oil goes higher, you don't feel it at the gas pump instantaneously. Here I feel like prices really have gone up overnight. What is that about?
That's about what the market could see immediately. We are in a world in which inventories have been replenished to some degree, but they're lower than the five year average, in a world where people in the market by when they think they might be a crisis. So people are filling their cars up more often than they.
Have supporting going on.
A little bit of hoarding. But basically it's the two things. One it's the price of crude is going up, so the cost of all of those products are going up. And the other is for technical reasons, they're going to go up higher at a faster rate and a higher rate percentage wise than the crude. And that has to do with the inability to get the right cruit in the right place to produce the right product. So we're going to see more product inflation today it's only about
half of the increase so far. And where the food has been.
Tell us about for example Indonesia and subsidies to their people on energy, or Egypt in their subsidies to their people on energy. All of that is disrupted. How do those I mean we have getogeb get to Gobineth with us of Harvard here coming up. Is it going to be one big cash ask of the IMF because these countries can't continue their subsidies.
It's going to be a bunch of different asks of the IMF. And these countries, some of them have more protection than you think. So you look at China to begin with, China has lost thirty eight percent in practice, thirty eight percent of his supply almost forty percent comes from the Middle East, and they are really vulnerable to that. Yes, they've got the largest stockpile in the world. And what
have they done. They have banned the export of critical products in order to make sure that they have it at home. Japan is going to be doing the same thing, Korea, the same thing so we're going to be seeing a more critical loss of product because of what's happening in China, India, Indonesia. Egypt's a different question to a significant degree.
Iss.
Egypt's got production of oil, it's got production of net gas, It's got LNG coming from the United States, it's got gas coming from Israel. So it's yeah, they have price controls and their economy is a mess. But I'd say the emerging markets of the world are in deep trouble.
I got twenty seconds. John emails in from New Jersey and says ed Morris is seventy nine in holding.
How do you.
Greet the morning every morning? You're in fabulous condition, in shape. Is it a secret glass of orange juice? What's the Edmore's secret to greet the morning?
And I'm just so excited to see you when i wake up that I look good?
Answer? That does for us, folks, Edward Morris of Heart Tree Partners. We protect the copyright of all of our guests, get his work, his essays, his thoughts through Heart Tree Partners, and of course accounts on foreign relations. As Oh, doctor Morris, thank you so much for coming in stay with us. More from Bloomberg Surveillance coming up after this.
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Joining us now, Stephen Major definitive out of Hong Kong bravery during the past DMIC Global macro Advisor at Tradition. Stephen Major, the leakages from full faith in credit where you spend most of your time. If you're in the full faith in credit government paper, how do you perceive the prism of private credit?
Yeah, and thanks for reminding me about Hong Kong, because it is quite spooky how we have the parallels. Now, I remember talking to you from quarantine. I think, yes, Hong Kong, and now I'm in Dubai and it's got that similar kind of surreal feel. It isn't the quarantine. It's a different kind of political backdrop we have. How can I put it? But it's similarly uncertain. Everyone's waiting on the news, everyone's looking at.
The price now.
Now the question about private credit. Look, I'm not an expert in that area. I'm not going to pretend to be, but at some stage what we are seeing has to start spilling into public credit, and credit spreads are very tight. So I think that for investors who are exposed to credit in general, it's about going up in quality, and it may be going for more defensive kind of sectors, maybe non cyclical or healthcare, whatever it is. So I
think it's definitely very interesting. I mean, I mean, if this war wasn't going on, I guess we would be focusing on the private credit stories that are coming through.
Clearly that is.
A focus for the FED right now. If the Fed's not looking at this, I'd be very surprised. And we're also we're talking about Ai. Don't forget because a few weeks ago that was the main theme.
But anyway, you.
Know, see, I just want to switch gears just for a moment and just ask you what things are like there in Dubai because we see this unprecedented attack now from Iran on some major sites in Dubai. Just what's the feeling like there on the ground.
Yeah, Well, the context will vary from one person to another, and you know it's dangerous to overgeneralize.
I think for family is with children.
Then the priority is to get them to safety. So I think it's a very different context depending on who you are and what your situation and setup is. It definitely is a bit eerie. I think that some people will be more scared than others. For me personally, it looks to me like you've got almost a sudden stop going on because there's not that much activity, right, So you can imagine tourism and real estate construction, all these big sectors that they're all going to be feeling it
a bit. And I guess whenever you have a shock, you get precautionary saving, you get people withdrawing from spending, you know, uncertainty, and you can graft. Uncertainty, by the way, is correlated with the risk of yields going lower in markets, right, So.
I think that this.
Is very special. It's very different to anything I've experience. But the parallels with COVID and the surrealness I think irrelevant here.
So let's stick with Iran for a moment here, Stephen, and you're saying that stagflation is really the risk now, and I'm wondering, are we there right now? This this environment of stagnant growth, high unemployment, high inflation and what's a FED to do with the FED meeting next week?
Yeah, well, Alexis, first of all, thank you for reading the research.
That's very like you assume that I don't Steam manager assumes that I do not read the recalling you out. What are you laughing about over there? John Tucker, mister major, please answer the question from Alexis Christoffers who read your research.
I really don't like using the word stagflation. And I think the previous guest was right because we reach for the nineteen seventies parallels, and it can be very lazy, because again, the economy is very different. The US is an oil producer, the demographics are very different. You've got a much older population, more wealth in a quality which is not something you had in the seventies like this, and you've also got more debt, which I think is a very important backdrop.
So I think it's a bit lazy.
I use the word stacklation in the note because I'm simply saying that the probability looks more like a coin toss fifty to fifty today two or three pictures, two or three weeks ago, it was ten percent or less. Right, The kind of tail risk scenario and that right now it might be a base case.
Steve, I got to get this in for Global Wall Street. If I look at the ten year real yield like a one eighty two, one eighty three, wherever you are, you have a tip point where the ten year yield breaks out of its color and shows an extended higher real yield. Is there a level one ninety two where you're focused on.
Well, yeah, that's another very interesting question, because I was looking at real yields and break evens in this note that I've just written.
And of course the.
Big difference I written now at COVID is that you have some real yield.
So we had.
Negative three hundred in the UK, negative one hundred in the US on those ten years bonds negative because we had a zero bound rates. So with inflation you force a negative real yield. Now today that real yield covers the longer run equilibrium rate, whatever that is. So imagine that the FEDS equilibrium is one to two percent for the real rate. Right then you are getting that for ten years. So it seems to me that the tips the inflation link bonds might be a very good investment in the.
US at the moment.
If you haven't got any, you should buy some. There could be a good diversification versus cash. I'm not saying go all in. It's just that your tips are something that you'd want to add to a portfolio.
Right here, that's just fantasy. You just got a window there into the real world. As Stephen Major's Global Macroadvisor tradition out of Dubai this morning. Thank you, Stephen Major. Stay with us. More from Bloomberg Surveillance coming up after this.
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Charles Canter, senior portfolio manager at Newberger Berman, and I'm going to bring this over to Charles. I don't want to talk to you about the produce section and all foods. I don't want to talk to you about what you're doing in equities, Charles Canter. Folks lived what we read. In the early nineties, a book came out called The Quest for Value, and you had to read it with
a pencil. This is Bennett Stewart, and it was called stern Stewart, and you were how did you get a job at stern Stewart when they were like the biggest, the biggest, the fanciest.
The truth hill the matter is at the time they had two African clients, which was two more than they had in the rest of the world, and that felt like they needed someone with an accent that could talk to the local possesses. And then you know, the principles around that is fundamentally right. And thankfully the business you know, exploded in the US and the rest of the world.
So then your thoughts on the dynamics of steren Stewart, Way did average cost of capital return and invested capital in? What the fancy mag seven guys are doing with forty billion dollar bond offerings. You're the guy to answer the question.
You're very kind. Look, those frameworks are fundamental to have approached my time investing life. I don't know if it's exactly a religion for me, but it certainly helps us frame the conversation and the discussions. Look, I think I think it's fascinating. I set you today and I think most of the Mag seven is down on the year the coll I think concern. Amongst many of them, you highlight,
which is all this capital they spending. Amazon, for example, you know, announced two hundred billion dollars of capital spending and the stock went down ten percent. I could think of no better company on planet Earth. There would be better positions to think through capital allocation and investing as they build out global infrastructure than Amazon. But the market doesn't like it.
For now, rip up the script, do it. Let's go to Whole Foods. We're in section three year. You know Amazon better than anybody I know. You were involved in the Whole Foods transaction. How has that thing worked out for Amazon?
I mean, the irony of that question is we live in a world where everyone's debating how they're going to get AIA build out of the market. Okay, this story about Amazon and books and intermedia was to crush mainStreet, to crush the bricks and mortar, right, and here we are fifteen years after that thought, Amazon bought physical stores
from Whole Foods. And oh, by the way, today in North America, twenty percent of all commerce is done online, which is to suggest eighty percent is still done you know, in the physical landscape. And and it's just a reminds us to say, let's be careful about how weak we think the barriers are to many of the income A businesses.
You misunderstood my question. My question is why when I ordered from Whole food So they always out of one percent.
Milky irony around that transaction, if you want to go back and litigated, is Whole Foods had no technology. It was ante it hadn't integrated a roll up strategy into you know, the organic market. Amazon saw that as an opportunity and it was known as whole paycheck. The minute Amazon bought Whole Foods, no one worried about the price of salmon. Here's the irony. The basket at Whole Foods today is among the highest priced baskets in North America.
It's still significantly more expensive than a basket.
And if you're an Amazon Prime member.
Even if you're and so it was brilliant from that perspective as well.
See how it's going on there them up it's good stuff, and I kept out I didn't mention avocados Axis CHRISTOPHERUSA looks Charles Canter of Newburg Vernment.
I don't want to make it all about Amazon, but I do want to ask this because I started my own neighborhood. So they invested big and physical stores through Whole Food. Is what happened to Amazon Fresh and Amazon ghost stores here because they're closing them.
Not all of the capital is going to work out. And so I mean the definition of convenience has changed a lot. Today conveniences cannot order my one percent milk from my living room. In the old days, could I get my one percent milk, you know, within five minutes of my you know, of my apartment. Look, I think the thing that doesn't get discussed enough, in my opinion, is how remarkable these very large companies are. They have invested enormous amounts of dollars into both R and D
and into capital. In twenty twenty six, these seven companies are going to outspend the entire healthcare sector on R and D by three times. And so that would suggest to you that they're building, you know, lots and lots of optionality into their businesses and the idea that these these businesses are going to win, especially in an environment that is as uncertain as it is today, because they have so much flexibility to invest to both for the future and to deliver from customers.
Charles Canter with US is we have economic data coming out here. Futures deteriorate negative forty eight down futures negative for thirty five. The VIS gives some tension twenty four level out to twenty five point eighty three up one point six to zero points. Claims is showing the glorified job market two hundred and thirteen one thousand, pretty much stasis there as well as a four whe moving average where I see the tension lesson housing and the data
on imports and exports. This is ancient for January shows all sorts of tariff effect. Charles Canter on the tariff flow through into revenue and earning dynamics and free cash flow dynamics.
Look, I think, I think, I think many companies absorbed a lot of the tariff themselves and passed on you know, very little to the customer. And and I think it speaks to the quality you know of the management teams and the scale and flexibility of their businesses that they
can do that, no doubt. You know, input costs on tariff so high than there would you know otherwise be but when you're in a market as competitive as the US market, you don't get the full you know, flow through effects, and the same is going to be true on the energy side, which is is what the market's kind of moniacally focused on today.
What about our upcoming earning season. Do you think we're going to hear the word tariff in a lot of those earnings calls?
No.
I appreciate you bringing up the earning story, because I don't think it gets discussed enough.
Earnings.
We've just finished the first quarter. That's the only data we have for now. Revenues up nine percent, earnings up fourteen percent, seventy five percent of all the companies either beat or maintained, and it will spread mostly in you know,
the technology sector, then of course the industrials. This has been a kind of an earning renaissance over the last five years and it's and it's the strength of those earnings and those cash flows that I think, you know, should give investors comfort as we as we go through the choppiness of war at the margin.
Can you inquire shares in these hyper scale or big tech companies this.
Morning, Yes, as long as your view is longer than a week, a month and a quarter. And I think you know, as you think about the war for example, I think the war and and and investing have a lot of similarities. On the short term, life feels very uncomfortable, very uncertain and unpredictable. And you've seen that today and over the long term, the best businesses, the best capitalized businesses, the best businesses that can allocate capital like the strongest armies, will ultimately win out.
Charles Canter, thank you so much, really really appreciate it.
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