Trade Wars Not the Biggest 2018 Risk, Purves Says

does it not at all? I mean, it is a it's a curious uh think of for for Trump to be offering up if he wants to, you know, reduce the trade war uh clouds and have them paid from the horizon. Uh. I think just you know, given how sensitive that that company has been from a national security

point of view. UM. But certainly you know, when you when when you see you know, manum is going to be uh uh you know, hanging out with the Vice Premier of China and all that, it does look like, you know, sort of a budding romance, if you will, UM between these two countries. And that's obviously very you know that that's one less worry factor for the markets.

We all saw the tweet from the President of the United States, Presidency of China and I are working together to give massive Chinese phone company ZTE away to get back into business fast. Too many jobs in China lost. Commerce Department has been instructed to get it done. Still

trying to work out what gets it done means. As you say, Michael, this is a company that has been a national security issue that the Republicans themselves were quite firm with President Obama and his administration for not doing enough around this company, and now it seems like it's

a a bargaining chip at a broader issue, right. Uh, you know, it's it's uh, you know, weaving its specific corporate situations into foreign policies always is always a tricky path there, but but this one especially so given you know, it will be interesting to see how how the more mainstream Republicans you know, react to that, let alone the Democrats waking up this morning to kind of strip out the nuances of z T and what's happening with various

companies and how transactional this seems to be. You'd have to say, Michael, if this was your key risk for twent and the idea that a trade war was going to one fall between China and the United States. These headlines are somewhat bullish, on't they. Yeah, yeah, yeah, as as we're talking about it's it's it's one less sort

of risk to U to worry about. I I personally was never looked at the trade wars as being um and I'm not sure anyone really did as being you know, um, the the most dominant or or most palpable risk for the markets this year. Certainly obviously something to be monitoring there.

But you know, I think in the back of a lot of people's minds, people thought it would be a lot of a lot of bark and probably a lot less bite as you got in down into the granular details and and but you know, with this news breaking up with the weekend, it certainly seems um, perhaps even a less so. Yes, Michael Purvis with us with Weeden is well, Michael, I literally named vix charts Purvous charts.

You are a great student of the vix. What is the distinctive feature of a VIX twenty two to thirteen this time around? Is it correlated to equities? That's the spot The present vix versus future vixes. What's the pro nuance in this move? I think what's really defined the vix UH over the last several weeks um is how it has been behaving relative to the other vixes TOM. In other words, there's a VIX for the Russell two thousand, the small caps, there's a VIX for eurostocks. There's the

VIX right, there's always the Pharaoh vix UH. There there's also you know a bunch of alatility metrics across assets. There's a VIX for the nd X, which is really kind of tracks the UH, much more sensitive to the the big tech companies. And what I find fascinating right now is that if you look at typically the VIX trades at a discount to most of these other vixes, But if you look at it recently, it's actually trading. It's been trading at a pretty consistent premium, or at

least at very historical levels relatively the other ones. The one, the one other VIX that it's not trading at a premium two is the what's called the v X and or the VIX for the nd X. And what that is telling me is that this you know, higher NIX range is really not about It's really not about you know,

um interest rates, uh, you know, spiraling ever higher. Um. It's really about what happened, um, you know back with this this Facebook uh Cambridge analytical scandal several weeks back, and whether the markets were going to re rate Facebook and its peers and Fang and for the matter in tech lower there. And that's why, you know, the two big outperformers from the ballside have been the VIX and

this and this and this VIX for the NDA. I think that's what you're seeing is is that those clouds are fading and that's allowing the VIX to you know. So this is a really interesting point. So we had the VOLE blow up of February where these short volatility products completely failed and a lot of people said, we're moving into a regime of higher volatility. We couldn't possibly go back to because what was going to happen to the world was gonna end. We couldn't possibly go back

to the VOLE levels of seventeen. But if the question is, and the premise, your premise right now is that this was a text story, then I'll ask the question again,

can we go back to the lower volatility range. I think I think it is a look, two thousand seventeen was distinguished by having the lowest realized volatility on in decades um uh and and and and more vixed nine prints than any other year in the in the in the vix's history, we even had a few ticks below nine and le January getting back to those levels I think is a real push if for nowhere the reason that we do have higher interest rates, and you can't

be dismissed of higher interest rates in the volatility story. I just think that what's dominant right now is the tech the tech situation there. But um uh, you know, if we could we see twelves and thirteens, absolutely, and I mean we we are the christ on Friday and and and so, could we see a lot more of this sort of let's call it, you know, eleven twelve

to fifteen rather than sort of fifteen to twenty going forward? Yeah, I mean I think that's really a function of whether that ultimately, whether that tech dip gets bought that the the you know, if if I've been arguing time that that so goes tech uh particularly fang so goes the the SPX and so goes the vix. It's incredibly it's

it's become absolutely integrated into overall US equity story. As a strategy standpoint, where do you make up oil seventies six sixty brand up to seventy thirty nine in two cups of coffee this morning? Obviously, the backdrop here out on the social feed, in the various news agencies is what's going on in Gaza. I've got seven Palestinians killed, Nine Palestinians killed according to CNN International, Reuters has ten. Even in folks, I'm very unsure what that number is.

That's just what we're seeing within the feed right now. There's geo political risk out there. Do you have a point in your head where a certain Brent price or West Texas Intermediate price gets Michael Purvis's attention. Well, I think the move that we're we've all been looking for, and even if some of this Middle East headlines were not there, uh, particularly you know, the Gaza headlines, I think people sort of feel that there's enough momentum right now.

Take out seventy that paint that paints a path towards eighty pretty well. I know there's a lot of calls out there for a hundred And I'm not an oil expert by any stretch, but I would say that that, um, I think, you know, getting above eight on w T I does seem like that's a lot of work to do. You're gonna need something more than just some Gaza headlines and iron um to get there. There's a lot of technical resistance at the eighty dollar level there. But but look,

you know, I mean it's still striking. Is that we're talking about, you know, seventy crude? Right? I mean he would have guessed, you know, six months ago, nine months ago, very few people are out there on that. You know, twenty six dollars was not that long ago. This is great. Courier dude showed up today. Michael Purvis showed up. Did you ride a bicycle and in the ring? I did? I bike as much as I can. You like, live two blocks away, so it's it's the fastest way to

get around. Thank you, Michael, Chief global strategist and head of Equity Derivatives to Package and I got to get over near the Hilt Motel. We're gonna do a couple of themes here. Isaac Wiltanski with us with a compass point really did dive into just sort of the news

flow of the week. Isaac um. A really really strong supporter of my work well over a decade has been Richard Clarada, who is going to be upfront and the beauty contest tomorrow morning for the Senate Banking Committee to replace Stanley Fisher as the PhD type is Vice Chairman of the Fed. Dr Clarata, folks I've always associated with Columbia University, has written definitive work on dynamics stochastic general

equilibrium theory. There'll be a quiz at the end of this UH section as well, Isaac, Isaac, so we don't do DSGE theory on a Monday morning. Who is Richard Clarida and why will you lean forward during his testimony tomorrow?

I think Richard Clarida is going to be c as UH the center of economic hat on the Federal Reserve Board under President Donald Trump, and one of the viewpoints here in d C has been that Chairman Powell is more of a has more markets experience and not as much economic background, and so the Trump white House was clearly and I think undeniably looking for someone to sit in that vice chairman's role that number two spots, who has written papers like the one that you just discussed,

and who can delve deeply with the staff there on economic theory. And so I think the hearing tomorrow, which will actually include um both Richard Clarada and Michelle Bowman, who is also nominated to the board. She's nominated for a spot that's reserved for someone with community banking expertise.

I think that the focus is going to be on Mr Clarada because he is seen as one of these pillars of economic thought for the for the Powell Federal Reserve, Isaaca, I have to say, out of all the things that we've wasted our time talking about since November twenty sixteen, the Federal Reserve under this administration is one of them.

I lost count of how many economists were worried about the replacements filling the seats on the Federal Reserve that would be nominated by this administration when actually looking back on it, they've been really mainstream candidates. This administrations has filled the empty seats at the Federal Reserve with some with some fantastic names, nothing controversial about it. I think you hit the nail on the head there. Look this this Federal Reserve Board, at least the members that we

have so far are centrists and pragmatists. Now, part of that is the realization that it is hard to get someone through the Senate. Still, the average length of confirming someone for those individuals who are lucky enough to be confirmed, is about eighty or so days right now in the U. S. Senate. And that's the longest at least out of that I've counted out of the past five administrations. So it takes a considerable amount time. And so part of that is

is the realities of the Senate. But I think part of it is the Trump administration's acceptance of the importance of the economy within their broader storyline. And you can't mess around with the frind if the economy is going to be part of your your political storyline, if you're

just joining us. I Boltansky with his compass point out of Ohio, Wesley and a really good feeling for the nitte gritte of Washington, d C Isaac, John Swann, er uh, Mike Allen, I can't remember who wrote it, talked about the exhaustion and the few members of the Trump team on trade that's not only China, China, China, like we haven't the headlines this morning, but also NAFTA as well. How thinly staffed is the Trump trade team. I think it's something that I've noticed over the past few months.

When you walk around own some of these buildings, whether it's a Commerce department or the Treasury or any of the other major agency, you see that there are a lot of empty offices, and that has a toll. And the US, especially on trade, is facing battles on a number of fronts, and these battles take up hundreds and thousands of pages of paper. Yeah, I mean you did interrupt, but just because of time. How does Canada in Mexico

adapt to the facts we have an exhausted NAFTA team. Well, I think the positive here is the deadline, albeit a somewhat squishy deadline on May seventeenth to get a NAPTA deal announcement. Look, deadlines are are able to catalyze action in DC more so than anything else. So yes, the NAFTA team is tired, but I think speaker Ryan say, it's setting a quasi deadline of May seventeenth for a deal announcement. NAFTA it's going to catalyze movement here decay,

and this of course needs to happen. The deadlines need to be hit in and thereabouts because the midterms are coming up, Isaac, so they need to deal before that. I want you to help sort of translate something for me. The president's waiting. The following presidency of China and I are working together to give massive Chinese phone company z t E a way to get back into business fast. Too many jobs in China lost. Commerce Department has been instructed to get it done. Z t E. ISAAC was

a national security issue for good reasons. A blockade was put on it. What does it mean when the President turns around and says, I've instructed the Commerce Department to get it done? What happens next? I think? I think there's only one takeaway that you can have from the President's tweeting that and that policy reversal. It's at the president c z T is a bargaining chip in the broader negotiation between China and the EU. Okay, Isaac, you're expert on this. Can that happen? I don't have any

answer on this Monday morning. Granted, its news overnight is essentially and over the weekend, can you use a sanctioned international offender as a quote bargaining chip unquote. You know, there's a saying that a law is only as strong as the most recent congress, meaning that Congress can change anything that a previous congress is done. A administrative action

is largely as strong as the most recent administration. And so yes, I think that the President as of last night, with that tweet, made it clear that ZTE is on the table and it's going to be part of a negotiation between China and US as as trade talks continue. So trade sulks resumed this week. The top Chinese economic advisor to president she coming over to Washington, d c. Isaac's attentions actually easing. Is that's what you're seeing and what to what extent can we get a deal? And

what does that deal look like. I think that both sides realize that it is in their own best interest to step back from the cliff, which is part of the reason that I think they will step back from the cliff. The more bargaining ships that we put on the table, and it's clear that the President view z t E as a bargaining ship, the more of those that we have on the table, the easier it is to craft a space saving deal that will at least get us back to the trade the tont that we

had only a few months ago. Isaac wouldn't find a question if we could. We're following Gaza, the news out of Gaza, folks, I want to be very careful about the news flow there. Michael Barr in New York and our other team across the nation will have updates on that within minutes. But Isaac, the movement of the embassy to Jerusalem, we had Michael Arnod of Israel on our our head of all of our Israel and Palestinian coverage. He was great. How does this play in the Beltway?

How does the move of this embassy play in your Washington Beltway? You know, it's difficult to tell at the moment, especially given the headlines that we're seeing cross and and I want to be careful as well, but I can tell you those policy experts that that I follow generally view this is more of a symbolic move than a substantive move. But as we know, in foreign affairs, symbolism matters, and so um I think at the moment, everyone is just watching to see what happens more so than anything else.

Isaac Boltansky thinking so much, great update? Why why Range? Why did I'll get it out? John three to one? Why did Ranging update? Very much? With compass point as well, Stephen Roschuto with us, it was wonderful to have on. We're trying to slice in dice well the American consumer, he is with miserable UH securities. UH. Their chief US economists as well, like US, will start with inflation because that's where President mr was as well. It's certainly not

runaway inflation. Is it really higher inflation? Well, I think you've seen general upward drift and inflation. The question is what's been the driving factor. I think the driving factor was a sixteen month slide in the dollar that eliminated some of the global deflationary pressures from dampening domestic price pressures. And now I think the dollars turn corner and I think the upward movement and the dollar will tend to moderate the inflation environment again, and I think that's gonna

be the big surprise for people. My question, Steve on a Monday, is there's a certitude about three or four rate increases and all my radar go up. When I use the word, everybody's just certain they've got this all figured out. We know it is a real risk factor. I mean I was one of the first ones who moved from two to four rate hikes, and to be honest with you, I did it with the hope that would eventually be the first one to move back from four. Uh.

And I continue to look for the data. And that's why I think the retail sales numbers and the housing numbers that we're gonna have out this week are very, very critical in that environment. And I think dovetailing on the backdrop of what we saw from benond inflation readings last week, I think those factors could come in to suggest that four may not be necessary. But for right now, it's still our forecast. But we're looking for evidence that we think will come through allows us to move it

back and step back from a four. Right hya that's back on targets. Steve On They why do they need to back off? Well, the question is how far do you need to go before you cause something to go wrong? Um, the curve is flattening rather dramatically, and if you go back and look at the last three long business cycles the FED, and they've been long business cycles because inflation didn't manifest themselves, manifests itself. And this time through it's

exactly the same environment. And each time that they continued to push the front end of the curve up, they got into an environment where there was some kind of financial hiccup which was unnecessary. And I think this is one of the reasons why they should learn from the lessons of three out of three, which is a very very abnormal process in an economy to have three times

in a row the same thing developed. And I'm afraid that if they continue to push for the four over time, that we'll get to a curve that will be so flat that it will cause a financial hiccup to a car. Do you think in the curve is artificial or it's something to actually pay attention to? And from what I've heard, so fine, you don't think it's official so artificial, So why isn't it? I don't think it's artificial because the ft is unwinding, there's been a big uptick in supply.

A number of things that should have pushed the long end of the curve up haven't. There's a global grab for yield. There's a global glab grab for duration. We saw the announcement over the weekend of the large UK pension fund that's opted to move out into US treasuries to grab the yield. Environment. On one of your own stories, I saw recently that you had a one ninety yield on Australian bonds zero precent real yields. I think that's

the environment that's grabbing it. Step Shot so with us this warning, Mr shootos with a missoo where he is their chief US economist of of all things UH. Here to help us learn more about what is going on in the Middle East currently is Jonathan ferzigera Bloomberg Middle East politics reporter. And Jonathan, I wonder if you could just give us a little bit of a history lesson to understand how we got to this situation and why the location of the US embassy in Jerusalem is such

a contentious issue. Sure, Jerusalem has resonances for billions of people around the world. Is a Jewish, Christian, Muslim, It is the site of some of the holiest places for all the fates um in. Now we're going back around seventy years and the Israel has established the idea was that Jerusalem was going to be a capital for both Israel Jewish state and the Palestinian state. That didn't happen.

UH Israel UM and the Arab nations around it went into a war Israel one, it established the capital, and virtually nobody, no other state in the world, very few UH recognized it as a capital. So now seven years later Trump has done that. Okay, But but Jonnath, let me just break in and understand, because there there was obviously many combatants in that war of n and Jordan's was involved in a way that shaped the future of Jerusalem,

did it not? Okay? So Jordan's int eight wound up as the occupying power U over Jerusalem and the West Bank that's half of Jerusalem, East Jerusalem, so the city was split. It was split until nineteen sixty seven Jordan's had control of it, and then in the nineteen sixty seven more the sixty war, UH Israel captured East Jerusalem and the West Bank and they've been in charge since they've been next the city. And again that hasn't been

recognized by most countries. And at that time, just to be clear, at that time, in the Old City, because there's the new City. In the Old City of Jerusalem. There was a Jewish quarter in the Old City and there were expulsions there as well. Yeah, the old city was plundered. Uh. The old city is walled. It has uh three of the Holy of Sites in Islam and Judaism and Christianity. Um. And so there was a Jewish section and those Jews were expelled in night. They came

back in sixty seven. Justin how unified is Israel behind Mr net Yahoo and behind these moments this morning, I think Israel is very deeply split. Um. It tilts towards Ntan Yahoo. Uh. He uh gives his really a sense that he's fighting, that he's standing up. But especially now with the violence in in Gaza. Um, it's not going down really well. And Israelis are worried to that point. And I mean it's with great respect for all in the midst and I mean folks, the real time midst

of these protests. Is there a limit? Is there a hurdle where this protest begins to have residence with the people of Israel or is it is We've had in this three or four reports this morning. A distraction fifty miles away which sounds almost cruel. Well, I don't think it's a distraction. I think that as the deaths all amounts and it is very quick today, UM, people are digesting this and it will I mean your tomorrow's front

pages or the internet. Right now is a mix between the glory of the the U. S. Embassy and the bloodshed in in Gaza. So it's it's a pretty cloudy picture, Jonathan. What has been the reaction of the Palestinian Authority based in the West Bank in Ramala. So as soon as UH President Trump announced the move and the recognition of Jerusalem and Israel's capital, This was in December, the Palestinian said that they were pulling out of the peace process

or whatever peace process were started to form under under Trump. UM. Since then, they've been somewhat removed from the confrontations in Gaza. UM and the West Bank has been, you know, comparatively tranquil. And this would because of Palestinian politics and the split between the Palestina Authority and the West Bank and Gaza

Strip which is controlled by Hamas. What's the economic situation in Gaza, It's desperate, Uh, it is been awful for the last ten years of the highest unemployment UM and food poverty and uh, it's just it's it's bleak um and it's gotten worse UM. Partly, I mean a lot of this derived from the fact that Gaza is surrounded by by fences, is locked in by Israel and Egypt in the south. UM, so the question of trade UM

is almost off the often map. I want to thank you very much for joining us Jonathan Bloomberg Middle East politics reporter, giving us details about the United States opening it's a Jerusalem embassy and also dozens killed, a dozen stead in as Gaza as confrontations over this US embassy move on the border between Gaza and you know, and Israel. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.