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Zayad Wood is Chief Emerging market Economists for Bloomberg Economics. Think about an em mission like what analog does for the United States. In his essay, over the last twenty four hours on one hundred and sixty dollars, oil went around the world. Say, let's do first principles. First, the Strait of Malacca twenty nine percent of seaborn trade Urmus Shockingly almost as much twenty six percent of seaborn trade. The sue Us Canal where t Laurarance was barely is there.
How large is the Strait of Hormus? Do we understand the substantial trade that goes through there? In oil?
It is large, and it's larges its concentrated. If you think about it, what it transports. It transports aill in gas and energy from the Middle East to the rest of the world, and the rest of the world sends almost everything else of the Middle East needs through that strait, So it is a lot of trade that goes there and is concentrated in a crucial commodity that is ail in gas. And the other thing with the strait of hormones, which is different than sus Canalis, not just the size,
this is not alternative. So most of the oil that's going from Saudi Arabia, from Iraq, from the UAE goes through Hormus. All the energy that goes from Kuwait, Bahrain and Katar goes through Hormus. It's a big shock, twenty percent of global oil supplies. I can't think of a larger oil shock in recent history. If this is not the largest, then it's one of the largest for sure.
Explain that dyne of a searge to one twenty as Bruce Kasmn just models, or to your shock of one sixty out there and then a quick retreat. How does that dynamic work out?
So let's start from first principles. Right, we have a shortage of supply, we lose twenty percent of global supply. The question is then what happens to prices. So even before the war began, we looked at recent episodes of supply outages. We looked at the academic studies and the typical multiplier that we got was somewhere between say three and five. So we use four for our multiplier. You use twenty percent of supplies, you get a multiplier of four.
That's an eighty percent increase in prices from a pre war price of around sixty dollars per barrel. That takes you two hundred and eight dollars per barrel. So that is our first thing, and this is where we are now. There is a lot of intensity in the war that is closing the straight of formless. But it's no longer a question about intensity. It's now a question about duration. It's no longer about you know, are we going to get negative number of ships going through homeless It is zero.
Now that's not going to happen. It's a question of how long will Hormess be shot. And that's what our latest piece was about. It's about modeling duration. What happens if Hormus is shut for one month, for two months or three months.
And what was your worst case scenario there in all of that modeling.
Well, obviously it's shut for three months, so you get a higher price. So you get a price of around one hundred and sixty four dollars per barrel. Now you might think with a huge, you know, one of the largest energy supply shocks, you might think you might get a higher price as a result of this, But the model takes into account of other things. Because economies adapt, they don't stay static. So with higher oil prices, people
consume less energy and demand comes down. With higher oil prices, producing more oil and other energy becomes profitable to supply increases, Inventory starts drowing down, people start taking more risk use in that shipping route. And even if you go outside the model such hot old price, the war may end and the waterway may reopen.
Doctor David.
A personal question here, and we say good morning to all of our reporters. Our economists are teams in the Greater Middle East, Ethan Browner in Tel Aviv and Jumana in Dubai with Zayoud. What is the conversation a family and friends in Dubai right now? Is it one big exit this weekend? What is the mood and the ground Not so much bloomberg people, but just in general in Dubai about getting through the weekend, getting the April.
So I was in Dubai last week. I came from Dubai to London actually on Monday, on a pre plan trip before the war. What it felt like in Dubai. It felt the headlines felt worse than real life for sure, so it felt better than headlines, but it had that COVID feel to it, where you didn't feel an imminent threat to physical safety, but you didn't know that there was an extern danger out there. Things work quieter, and at some point because people were moving less, people were
working from home. At some point the airport was shot. That had the COVID feel to it. It didn't feel as dangerous as I think back. Now i'm outside, I see the headlines and it feels like it's a bit more dangerous. But when I was there, it didn't feel so threatening.
So thank you so much. Saying with us with Bloomberg Economics out of London and of course always out of Dubai. Stay with us. More from Bloomberg Surveillance coming up after this.
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Leslie vin Ja Murray. She's with the Chicago Council of Global Affairs, of Wesleyan, of LS and of Columbia. Doctor ven Jam Murray is definitive on conflict, Leslie. It's a war, not a conflict, isn't it.
Yes, I think it's safe to say it's a war. You know, we could double down on definitions, but I think anybody looking at the Middle East is looking at not only a war, but a widening war and an asymmetric war if you look at what Iran is doing and the Persian Gulf and the Strait of Hormuz. Not a war that I think President Trump well self admittedly, you know, according to today's news, hadn't planned for the
possibility that Iran might close the Strait of Hormuz. It's it's kind of it's sort of difficult to even.
Say the words.
Does it seem such an obvious thing even to people just reading the papers that it was always stability.
Into the press conference in eighteen minutes, the news conference at the Pentagon, the Secretary of Defense, a chairman of the Joint Chiefs of Staff. How alone is America? Where are our l eyes. Besides the Charles de Gaulle steaming East.
Look, America's you know, European allies are lending their bases for defensive purposes. America's non treaty allies in the in the Gulf are being hit and are under attack. The new Iatolas has said that he will go after American interests in the region. So America's allies and partners were not asked to come along until after the strikes began. There was no real process of building a consensus or making the case for war, laying out what might lie ahead,
and so now they're scrambling. I think the latest in Europe, of course, is a deep frustration, probably behind closed doors, anger that the US is effectively, you know, lifting sanctions on Russia's oil exports.
Well we heard that from the leadership in Germany.
Well exactly, exactly.
Yeah, I'm so great to bring that up, Leslie. Yeah, because I wanted to talk about what all of this means for Putin and for Russia. We heard yesterday that Russia has been giving Tehran some intelligence. And now, of course, you know these sanctions, people countries can buy sanctioned Russian crew that's already at Sea. What is this doing for Putin's empire. Well, in the short term, it's certainly helping him.
I mean indirectly and directly, directly with the sale of oil, for sure, but indirectly in that America has its focus elsewhere. That's not only helping Russia, that's also helping China. You know, this isn't this is an old story, not a news story.
When America has its eyes off the prize, China benefits from the disruption, from America's distraction from seeing the West at odds with itself, if not torn apart Russia also, so I think for America's European allies, which quite frankly have gotten very little bandwidth or playtime in this war, this is a terrible turning up the tide. They will be impacted much more by gas than by the US, as we know a gas prices, but it really is it's coming out of time when they're squeezed at home,
when you know, the war with Ukraine continues. So we're not even talking about the war in Ukraine right now, We're only talking about the Middle East.
The rising sun across Lake Michigan, leslie Ven Jamine in Chicago. We will continue, whether we welcome all of you fifteen minutes from a press conference of the Pentagon. Of course Michael Barro will be along with the news, including this horrific clash crash I should say, of a flying tanker for the Air Force Alexis CHRISTOPHERUS with Leslievingerburry.
Thank you, Leslie. Now we're shifting the talk about this war from intensity to duration. What are you going to be listening for during this press conference that we're awaiting here at the top of the hour from the Defense Secretary.
I have some sort of plan for what to do about the build up and the Persian Gulf, of how to manage the global political economy, whether they're going to seriously consider escorting ships through the Strait of Hormues, and what conditions would need to be met in order for that to be safe. I think you know, more importantly, what is the plan for ending the war under what conditions?
And what we really need to straight talk on the reality that even when the United States ends the war, the war won't be ended, and so what will the plan be for the period when America is no longer directly striking but Iran is certainly likely to continue the war. What conditions might Iran ask from the United States and from Israel in order to help stabilize the global political economy and flows of ships through that strait, and what would the US be willing to give.
I don't think we're going to hear.
Very much about that last point, but it is clearly what needs to be discussed.
President Trump seems to be digging in his heels. He's not a man who likes to lose or to admit that he's losing. So I'm wondering what an exit ramp might even look like, because we know many lawmakers are now calling for an exit to this war, especially in the year with midterm elections, What might that even look like? Leslie.
I think with President Trump, it's, you know, he's going to be in a quandary. This is not a president that will be in any way, shape or form please to see rising oil prices and perpetual instability. If there isn't some sort of negotiation, I think them more likely that he will declare, you know, a success in depleting and diminishing Iran's ability to project power externally and signal that he's going to end strikes, but maybe not you know,
very hard to predict what will happen. I doubt that he will get into this question of Iran's ongoing leverage.
Even after that moment, Leslie.
You and I were inflicted with the eight hundred and fifty pages of Henry Kissinger. You had to read Diplomacy just to show up with the course. Venjaminy did better than me in class, Alexis, I don't know if you do that. At the back end of that book, Secretary Kissinger talks about the new World Order reconsidered. What does the new world order look like when this war ends?
You know, at the moment, we're not moving into another order. We've clearly abandoned. The United States has abandoned many of the norms and the laws for you know, how we govern. It's certainly abandoned the principle that you work very closely with a certain set of pre agreed We are much more into might makes right, into a heavy transactionalism. But I think the real concern is that we're moving into a period where there isn't an alternative order, where alliances
aren't going to be permanent. You're not going to know exactly who your friend or who your enemy is where deals are done with a variety of partners, some more seemly and less unseemly than others. So unfortunately we are not seeing our leaders map out an alternative version. We
know that Mark Karney has talked about middle powers. I was just in India at the Razina Dialogue, where you know, India is talking about, as it has been, multiple alignments in order to protect its strategic autonomy and enable it to do what it wishes to do, which is to focus on development and poverty alleviation. I think many countries across Europe are going to be adopting a similar, similar strategy. How do you I develop multiple alignments with other Middle
powers on the economic front. I think on the strategic consecurity front, the West is still going to try to lean into itself, but when the US behaves like this, that makes it very much harder for its Western allies to go along.
Doctor Vinja, Mary, thank you so much in Chicago with the Chicago Council on Global Affairs. Stay with us. More from Bloomberg Surveillance coming up after this.
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Michael Durremberger's deeply experienced in multi syllable titles and phrases that we're invented three security structures, Ago, securitized, securitization and that, and he joins us this morning Michael uh in Nierrenburger's chief executive officer, chairman and president of Rhythm Capital over cocktail conversation, how do you respond to OMG private credit? It's a disaster.
How do you respond to this? I, you know, listen, there's going to be pockets of private credit that are that are going to you know, right now. Obviously in the news private credit is negative. I don't think all
private credit is negative, to be totally honest. I think there's been some obviously there's been some headlines with some of the other larger asset managers that have put up gates, and I think a lot of that has to do with what we what we've seen the distribution of private credit into retail and when you take products that may not be one hundred percent suited for retail and retail wants their money out because equity markets have turned over
and folks are looking for liquidity. It creates a little bit of what what we'll call it is a so called run on the bank.
Michael, you have a resume here that you know, like literally he could have written the screenplay for Margin Call.
I mean, you have so much experience here institutionally. What was your response when you first heard about private credit for that matter of private equity and retail accounts?
You know, it's first of all, when you look at our franchise, we don't have we don't really have private credit going into retail at this point. And I think where you're going to see and you've heard it from some of the larger banks UH such as JP Morgan, where folks are going to reevaluate the distribution of private credit into the retail.
From you von steinas this morning my art.
Our view, and when you when you look at the private credit markets, take take for example, to take for example Sculptor, we have a large multistrat fund where there's a fair amount of credit in there. It's liquid credit, it's marked, it's marked. When you take some of the private credit that goes into retail, and it's not liquid private credit, and folks want their money out there not going to be able to get their money out and that that's what you're seeing now in the marketplace. You're
seeing folks put up the gates. I looked at the market reaction yesterday, and you looked at the treasury market, which you know, the front end of the treasury market really sold off pretty dramatically, and it seemed to me that it was really a liquidation event that you're seeing with a lot of a lot of folks in the marketplace. But when I look at private credit, you know, it's
a huge market. You know, we don't look at these large club deals to be quite frank, you know, we look at our prestline business where we do direct lending there. So you know, I think private credit it has a bad it's getting a bad name right now. Not all private credits band is whatever.
There's some jargon liquidation event. That's when the kid goes on spring Bright.
Just so you know, very Michael, you say servicing is the key differentiator. Why do they have such a huge advantage.
Because you could you could affect an outcome, take take a homeowner, take a mortgage. If you go out and you take out a mortgage. You know, one of the things we do at our company, we own one of the largest mortgage servicers in the US, were the fourth largest, including all the large banks we work with it.
I did not know that.
Yeah, we have a you know, for example, eight hundred and fifty billion dollars and mortgage servicing rights. We touch four million consumers. So what happens a mortgage or has an issue, we work with that consumer. You figure out a modification or some kind of plan to keep them paying. That's a huge advantage versus somebody that's going to go out into the public markets buy an asset, let someone else control the service thing.
So you say you have options when you're in servicing.
Yeah, and you could affect an outcome and you could work with a homeowner, which I think is extremely important. And we've seen that over the years and that's one of the one of the ways that we actually built built our business.
Just I got to ask you about mortgage rates then, I mean, because we're starting to tick higher. Spring buying season has begun, even though the weather doesn't feel like it in New York City, What is this really going to be a downer for the housing market. This was supposed to be the year things bounced back and possibly swing to being a buyer's market.
Dare I say, yeah, you know, I looked at mortgage rates this morning, mortgage rates today or in and around where we close the end of the year. If you look at the treasury market, the ten year has been in a range of give it a take a low force to kind of four and a quarter. Where we sit right now. I think mortgage rates will continue that the administration is doing all they can to bring mortgage rates lower. Whether they're able to achieve that or not.
I don't think you can control such a large market, but I think, you know, we're going to sit here. I think the housing market is okay. You look at our data around the consumer right you know it's actually in pretty good The consumers in pretty good shape.
One more question, with great respect and great honor, we're going to go to Breaking News and then to Michael Barr here, folks, micro leader. When all over the zeitgeist right now, everybody's playing clips of mister Irons and margin Call. When a grizzled pro like you sees those clips, or when you first saw margin call, is that even remotely real or was it just Hollywood?
Now listen, margin call. You know, we've seen it during twenty twenty, the COVID period. Then we've saw it during the Great Financial Crisis. I think the difference today is folks that have experienced, like ourselves, understand how to one navigate the navigate the system, but also work with your large lenders around getting rid of margin calls on the assets that you financed.
Where's your shadow right now? Where's your mystery shadow within the depth system right now?
I'm concerned a little bit about liquidity. I do think when you look at some of the you know, some of the folks out there, you sorry, Like I brought up yesterday's price action in the front end of the treasury market. Yeah, should to your treasury be at three and three quarters when we when we saw we got
employment report before. I don't. I don't think so. I do think that, you know, the the market's taken out any not any chance, but the market's taken out that the Fed is not going to cut rates this year. I don't agree with that. I think Goldman came out as well and said that you know, they're still calling from one or two rate cuts I look at the I look at forward rates. I do think we're going to see rates come come down, particularly in the front end.
I think the back end is troubled, right because we got to fund this war, we got you know, we have this massive deficit which we still have to issue a lot of debt. So I think long rates, you know, could be a little bit challenged.
Here we're in a four ninety eighty nine right now, in a thirty year bond. Michael Darrenburg, don't be a stranger. Love having you, and thank you so much. Rhythm Capital Stay with us. More from Bloomberg Surveillance coming up after this.
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This is the perfect guest to frame out why equals C plus I plus G plus NX. Kathleen bus Johnsion nails it each and every day as chief economist at Nationwide, and we're thrilled that she could join us today. All the secondary stuff, the noise at the back end of March. Kathy where we try to frame out our guestimate of where we are. What does the noise tell you about getting the GDP back to tuish or two point xish?
Can we get there?
Well?
Good morning time.
Well, I would argue that we were there ahead of the Aridian conflict, having an impact on energy prices in that filtering through and being a negative shock to economic activity, at least temporarily. So when I look at the revised data the GDP for fourth quarter, if you look at the core GDP number, it was you know, two percent, and I think you know about two percent, and we are on pace even for the first quarter to see real GDP growth.
Overall three percent.
And if we look at that core two percent, right, So, but but things change a lot with the conflict, and that you know, looking to second quarter, we just marked.
Down our growth estimate. There we are below one percent.
You're below one percent with this war. Wow, that's the first I've heard that.
Yeah, that's that's and I wonder, I mean again, we were talking with our previous guest about you know, the shock and oil being transitory, and this hit to GDP maybe transitory, but I'm wondering what it would do enough damage to possibly push the economy into a moderate recession in the short term.
Well, we don't have that inner profile right now. That's that's in our.
Base case, and I do think it's a temporary shock, assuming right that this conflict doesn't go on for months.
You know that it's rather weeks, as we all talk about.
So when we model that growth in the second quarter we thought would be around two percent, we've taken a full percentage.
Point off, so we're zero point ninety be exact.
But you know the point is in the second half of the year, we think growth will rebound. But that assumes oil supplies, energy supplies, commodity supplies are up and running again.
And that's what we have to watch.
Have you interpolated off a barrel of oil where a gallon of gas is going I believe it's a three sixty two off triple A let it, But Kathy bus johnsick. There's modeling being done. Analog and our team are modeling out one twenty ish barrel and if it's a longer duration out to one sixty and then it gives way. They're very optimistic that it'll come back down, But can you get out over four dollars a gallon.
If we.
Have oil prices go up to one hundred and twenty or more than I think, yes, you can get to four dollars a gallon. What we're working for with in our base case is that we get to around three seventy five a gallon, and that would be the peak right now in the second quarter. But yeah, certainly, I mean the size of the move and oil prices and also the duration is.
Really key, and just everything so fluid.
Right now, we go to John Tucker, Surveillance Petroleum Correspondent, John thirty two gallons in the hommer age two at Kathy's three dollars seventy five cents is one hundred and twenty dollars fill up.
And that's one hundred and twenty dollars.
I'm not going to spend buying other stuff.
So because you're on you're on Tuition Island, on Tuition Island, and things are getting rough on Tuition Island and no reason.
It's like when I go now, even though it's not empty, I still feel love.
So I'm hoarding. You're hoarding, okay, Alexis Christopher is to finish up with Miss Johnson.
Also, I just want to share with you all what's coming over the bloomberg right now. European countries including France and Italy have now open talks with Tehran trying to negotiate a deal to guarantee safe passage for their ships
through the Strait of Hormuz. I'm wondering how much this rise in oil and every day stuff we use, like going to the gas pump is going to pull back the consumer in this environment, because we know that the consumer has really been a pillar of economic strength for years now.
Yeah.
No, absolutely, it's a tax on the consumer, right, it's hots on the economy. It doesn't necessarily become a long lasting inflationary impact unless it persists and it gets embedded in inflation expectations.
But I think certainly the first.
Round impact its attacks and it's going to just as we discussed, you know, Dell was joking, it pulls away for the available discretionary spending on other items, and that's why you get to hit to economic growth for the period where we see this elevated gasoline prices, and the longer that persists, the longer the hit. I would also add, there's business and consumer confidence that we also model It's not just the direct impact of higher energy prices, but
how does that affect confidence and business leaders? Right now, Uncertainty is still very high, so they start to pull back.
Kathy, Thank you so much, Kathleen Bus John Sick chief economists nationwide.
There.
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