Markets were faced with streams of hawkish rhetoric this week. In Russia, Vladimir Putin ordered the mobilization of reservists and, again, hinted at nuclear options. In Washington, Fed Chair Jerome Powell, again, signaled the Fed would crush inflation at the expense of growth, and delivered another 75 bps hike. Admiral James Stavridis, Jonathan Levin and John Authers join.
Welcome to Bloomberg opinion. I'm Vonnie Quinn. This week, the odds are two and three. will end up with the negotiation starting at some point in the next six to twelve months. Admiral James De Brit us with a military appraisal of Russia's position, seven months and counting into its war on Ukraine. This has Vladimir Putin taunts Kiev and its allies with implicit threats of nuclear escalation and orders the mobilization of as many as three hundred thousand reservists. Also referendums in four regions. First, though, to the F O MC decision. In the United States, another seventy five basis points and fed funds rate increases and more hawkish talk on inflation. Longer term inflation expectations appear to remain well anchored, but that is not grounds for complacency. The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched. Bloomberg Opinions Jonathan Levin and John Author is joining. We've written down a plausible path and it will will be enough. I'm quoting there directly from Fed Chrome Powell, Jonathan Levin. This plausible path, very different from what we saw in the last stop plot. Does it look plausible to you? Yeah, I mean, I think one thing that's sort of interesting to observe is that, you know, J pal is sort of insinuating that this is it, this is plausibility we have for you know, but the pace of the revisions has not slowed down at all. If you just go back in history a little bit, right in December, three fed funds rate was expected to be at one point six. March we bumped it up to two point eight. June we bumped it up to three point eight. September we bumped it up to four point six. As sort of Hawk ish takeaway from all of this, from the trajectory itself, might be the trajectory of the revisions is going to have to probably slow down a little bit until it really feels like we're at the top dance. One pointing out that this is the highest fed funds rates in spurserns collampsed in March, which is kind of hard to believe, but at the same time it's not. In some is John. It's also the fifth rate like this year. What's been what's going on? Well, I think, as you bring in bear sterns, I think there is a fairly real sense that this is our final, at long, long, long, long last exit from the conditions of the global financial crisis. I that something like what is happening now is what I thought was going to happen sometime around about two thousand and ten. But it's amazing how long logic takes to work itself out in the real world. So it's obviously there's been a risk that eventually you'll see rates go up and inflation return, and amazingly it took over a decade before it happened. But now you do see somehow or other we are going to finally get back to something that's more like the world from before the crisis than from after it, if you want to comparison. I mean at this point I just wonder you have a crisis after some pretty bad monetary policy and then various monetary mistakes along the way. You bump along and you only finally jolt out of that crisis after there's been a truly horrible external shock, World War Two and the pandemic. Just wonder whether in another generation's time they'll see that the decade we've just lived through in the thirties as being very similar in financial terms. Well, it's funny that you mentioned that because, Jonathan Levin, do you agree with me that Fed your Powell almost gave a little mini economics lecture at one point during the news conference answering a question when he talked about the fact that if we can get things back to the two percent inflation target, that we could have business cycles that are ten years long at least, because that's what we've been having. You know, feder pell was playing a little bit of a politician here, because he's in a very typical place. The fact of the matter is, if you just look at the rather conservative estimate for where employment is going to have to be, you know this economy is going to have to raise more than a million jobs. Right. That's very difficult to go out and tell the American people. So at the same time he's trying to justify this sort of barbaric process and say, you know, look, this is this is ugly, this is like surgery. Right, we need to go out and do damage to the economy in order to make it better in the long term, and this is this sort of justification that the economic orthodox he keeps coming back to. This may be bad, some people may have a really tough run of it, but in the long run you can't have sustainable business cycles unless you get volatile prices under control. And just for points of comparison, he could have gone the full Andrew Bailey, because the last Bank of England's meeting was about as spectacularly negative as you could possibly imagine a central banker would ever be. Britain was going to go into recession any day now out and stay there for the whole of next year. And I mean he also made which is an awful political Faux Pa. He urged people not to ask for more money, which doesn't go well with the new chancellor saying that he's not going to put any limits on bankers bonuses anymore. But anyway, there was that possibility of really just saying, I'm sorry, guys, call a spade a spade. This is going to hurt far better some pain now than worse pain later. Well, chair Powell didn't do that, Jonathan, and even though the market came away with the idea this was a very hoggish some who I basis point hike, he also wouldn't go so far as to say, look, we are going to have millions more unemployed. We need to have millions more unemployed. He said that the costs. Let me get the exact quote. If our projections are close to right, you will see that the costs in unemployment are meaningful. That's not millions of jobs loss, but in fact that's what it means exactly. I mean, you know, my takeaway is that he took the juring summary of economic projections. A lot of people have said that the Ted was in fantasy land here. What the Fed is doing is it's bumping itself in a pessimistic direction and it now finds itself probably somewhere between Wall Street and Larry Summer's Olivier Blanchard. But I got to say there's still an awfully lot closer to Wall Street than they are to the summer's take, which is essentially that you know, just to get to neutral unemployment rate in this atmosphere you have to be at about five and quite possibly, in order to rain in this inflation, they would say you might have to go to six or seven percent unemployment, and that definitely implies some sort of meaningful recession. So how do we see markets adjust? John Author's we saw the two year yield topping four percent, but the ten year rate declined. Now does that signal that the market is anticipating the Fed will gets booked at some point and freeze increases, or what exactly is that? I mean? The other thing is the thirty year yield declines more so apparently the ten very abstres parts of the yield curve is now inverted. Um that, I have to admit, was one part of what went on that I find initially quite difficult to explain. I think you probably can in terms of just prior expectations. I think the bond market is braced for something was more realistic coming in, and I think the hawkishness from Powell helped convince people that that you'll have not a pivot per se, but enough of an aggressive fed to squelch the economy for quite a while and thereby justify lower longer term yields. Jonathan Evin, what was your interpretation of the moves and the yield curve? Yeah, I gotta agree with John. Very difficult to interpret. But I will make one sort of separate observation, which is that Powell has really gotten rather good, at least comparatively speaking, at manageing financial conditions, and I thought that, you know, one of the better moments. We all knew that he became much more self aware of going into Jackson hole and he knew that he needed to keep interest rates up, probably needed to keep risk assets down, and he seems to have remembered these lessons. There was a great moment when Powell was like yeah, you know, I probably shouldn't answer your same question because he you know, he has become very self conscious about the fact that these dog on markets seemed to rally every time he goes before the microphone at one of these events. Yes, it's one of the things. I've been putting together charts for what I'm going to try writing about it. It is extraordinary how expectations in funds features got almost all the way up to four percent for the end of this year after the May CPI print, which came out in June and which was a real, real shock. There and then the market basically spent the entire summer convince seeing itself that rates wouldn't have to go up that much. So the estimates for where rates will be only four months from now have written by more than a full percentage point since the last fom C, which is bizarre. There's not been that big a change in concition, yes, and and, and there's not been that obvious a change in in messaging. Okay, Jackson hole arguably hawked things up a bit, but I don't think it was so much more hawkish than my interpretation of what PAL said after the previous fo MC. So that there is a hope springs eternal might well be something we should all bear in mind when covering a covering markets. Well, speaking of questions, there was, as there always is, the question of you know, monetary policy operates on a lag and I think our own Michael Mckee asked how will you know, or will you even know, if you've gone too far? And Jonathan, the third chair, did acknowledge, as is obvious, that monetary policy and the moves have been impacting some parts of the economy, interest rates and that of parts of the economy, but it's hard to know at what point it will impact the broader economy and by how much, and so on. Do they have any kind of sense of when that will happen or are they just a little mind. Still, the short answer is they don't know. I mean, as you say, they have great not great. They have reasonable visibility into something like the housing market, but you know the way that the economy is constantly evolving and given the fact that they haven't been in a fight like this for decades, they really have no idea how it's going to affect and with what kind of lag it's going to affect, say, consumer segments of the economy, which we know is extraordinarily important in the United States. So you know, the bottom line is I think they're going off of rules of some are in house economists at a long likes to say that the lag is something like twelve to eighteen months. That's what I tend to go by and I think they're going off of rules of pumb that are no better than the ones we have at our disposal. Well, according to the new SCB headline, inflation won't return to the Fed's price target of two until twenty twenty five. And we're still in two, let's be clear, and that seems beautable to me. And what's quite intriguing also, though, about the dots compared to previous years is if you look at the estimates for where rates are going to be at the end of twenty four and twenty five. They look more like a random scatter plot for a raw shark test than anything. I think there was no more than four governors agreed on any one rate for the end of four and the spread was something like one and a half one and three quarters percentage points. And similarly it's kind of all over the place, right, Jonathan? Yeah, and when you're talking about long term inflation objectives, you're still in the throes of this debate about between two and three. How much does it actually matter? I tend to be in the camp that, as far as the average American it doesn't matter so much. It only sort of matters because the Fed has gone out and made this promise and now it sort of has to keep it lest it lose its credibility for the next inflation. Well, I'm going to get your thoughts on the next increase. Sent basis points and then fifty, Jonathan. Yeah, it seems reasonable at this point. It almost doesn't feel like what happens at the next couple of meetings is that consequential. It's really just all about where are we going? And probably even more importantly, how long are we going to stay there? Yeah, it's just about getting it up there, isn't it? John? Yeah, I think the path for the next few months for policy is very straightforward, barring either, you know, a major geopolitical shock, we've got a picture of Volodomy Zelenski on the TV screens around us at the moment, or a financial crisis, some really major financial accident, which really doesn't look all that likely still. I think it's a question of we know roughly what the route is for the next few months and then so much is about everybody sort of sitting back very tensely in the breach position or whatever to see exactly how fast inflation does come under control, how what happens to the labor market, and very many, number of very intelligent, very decent people have been arguing in good faith in all kinds of directions over that. We will all learn. Nobody knows which way that's going to go, but ultimately the courses sets and we just need to see what actually happens to the economy. You know, it's really all over the place. I mean I noted that, you know, two of the most popular e t f s were like one to three months treasury bills and the prow sharees q q q, which offers a three times leveraged play on the Naz Bak. So you know, with all the cross currents in this market, I don't expect there to be any resolution between. Is this a massive buying opportunity for real, or is this at the moment to run for cover liquidate everything? That's quite a barbell. That really is quite something. Bloomberg opinions. John Authors and Jonathan live in there. Russia's war in Ukraine had some turning points this week, with Ukraine retrieving a swathle of land previously held by Russian forces and Vladimir Putin announcing reserve troop mobilization and referendums and territories of eastern Ukraine. I asked Admiral James De Rita's Bloomberg opinion columnist and NATO's Sixteenth Supreme Allied Commander, also former commander of US Southern Command, to join Admiral Yale Historian Timothy Snyder often says that military history is not covered as much as it should be. So we concentrate on things like strategy or somebody's thinking that they're paramounting conversations about war. So let's start there. What do we know right now about what shape Russia is in militarily, talking hardware, from tanks to drones, battlefield artillery, ammunition and so on. In terms of the systems they need to prosecute the war in Ukraine, they're in very bad shape, and that means manpower, particularly trained soldiers. They've evidently lost around eighty thousand killed or grievously wounded. They've lost thousands of tanks, thousands of armored personnel carriers. Their grown fleet has been destroyed. That's why they're seeking additional help from Iran. So the systems they need to conduct a ground war against a well equipped, high morale ground force like the Ukrainians are very low. Funny, it's important to remember there are other parts of the Russian military they are quite capable and remained so, notably their submarine force, their nuclear forces, their long range bomber forces. None of those have been touched by the Ukrainians, but that forward ground element has been decrimented I'd say at least fifty and that's quite markable at six months of war. Are you suggesting that Russia could somehow change this theater into something different. I think Vladimir Putin today is looking at options to use other longer range systems to attack Ukraine, and that could mean using long range bombers to go after the electric grid or the water supplies. It could mean a massive cyber attack, something we have been watching for but he has not yet chosen to undertake. It could be the use, at the very dark end of the spectrum, of a chemical weapon, which he would no doubt try and false flag attributed it to the United States or Ukraine. But because his ground forces have been so decremented and have failed him, he's looking at other options from a military perspective. How easy would it be for him to mobilize any of those sorts of efforts? Would it just be a question of giving the order? It would be. This is the tragedy of the situation in which the Ukrainians find themselves, which is that effectively they have a massive sanctuary state, that would be Russia, where they are proscribed from attacking Russia. They can't reach into Russia and attack those sites because they don't want to escalate the war and drag NATO into it. So the Ukrainians have a very tough situation in that Russia can operate from sanctuary basis and strike into Ukraine. What would Vladimir Putin have to take into account international relations wise, in order to escalate? He's obviously had conversations with president she recently. You mentioned Iran. He's maybe not getting the support that he would like from both of those countries. Would that matter to him? Increasingly it is mattering to him, and very recently, of course, in Uzbekistan, the meeting of the Shanghai Cooperative Organization and Um the meetings that he had there were tepid at best in terms of the level of support from Russia, Iran in India. Frankly, moody in public really chastise Putin's good to see. So he's got a weak international flank there and on the other side the United States, NATO, Japan, the Pacific democracies are very unified at this point. So Putin has not only the military problems we just spoke about and not only the economic problems, he's got a significant diplomatic shortfall as well. So it seems what you're saying is that a ground war offensive to continue. That would be quite difficult for President Putin, but he does have other options. At the same time, the opinion columnists, Leonid Breshitski talks about Russian apathy, and we're seeing internal descent now as well from many, dozens of municipal leaders. Will that play a part in Putin's decision? So far it will not. He still maintains brutal control over the levers of power. It seems every week I hear about a new Russian oligarch who mysteriously falls out a window of a six more hospital or suddenly goes overboard from his yacht. But those cracks are widening, and it's not just the oligarch Spannia, it's also on his right, and there is a right of Putin in Russia, hard right that's saying, Mr Putin, take the gloves off, and they're sort of advocating for all the kind of escalations you and I just talked about. And then, finally, a woman named Ala Pugasheva, who has been described to me as kind of a combination of Brittany Spears at Taylor Swift, one of the most popular Russian pop music stars, has just come out against the war. There are cracks emerging and Putin is going to have to deal with that as well. We know Ukraine took Marcas much as ten percent of the territory that Russia had seized. It was seen as a major win for Ukraine. But given everything you've just said, can we actually say that Russia is losing the war? Is that something that could change very quickly? I think the Ukrainians conducted a very smart surprise, almost attack, of Blitzkrieg like, and they've taken thirty square miles back. Putin's forces stumbled out of those territories. But I think your fundamental point is the right one, which is, yeah, it's too soon to say who's winning who's losing. At the moment the momentum has shifted and it is clearly on the side of the Ukrainians. But it's going to get harder because Putin's forces are compressing back into smaller territorial areas that they've held since is on. The defense is a better military position. You have to have three times as many troops to over come strong defensive positions. All of that, I think, is going to make it harder in the months ahead for Ukraine to replicate the rather sweeping character of what they've been able to accomplish. We talked a little bit about what Russia has at its disposal militarily. What does Ukraine haven't need militarily, from hardware to all of the other types of artillery that you spoke about? They're very well supplied at this point. But I'll give you three things that I think are on President Zelinski's wish list. One, and at the top of that list, is a long range surface to surface, highly accurate missile called a tacums. It's an acronym and a tacoms is like High Mars, which everyone has learned what the High Mars is. High Mars has a range of about fifty miles. A tacum is high Mars on steroids. It goes two hundred miles. So it would allow the Ukrainians to reach even deeper behind the front lines of Russia and disrupt their logistics, their command and control. That's way up his list. Number two, President Zelinsky would like fighter aircraft. It ideally loved F sixteens from the United States had welcomed MiG twenty nine for Poland. He needs more fighter aircraft. And number three, he would still like additional sea going cruise missiles to take the fight to the black sie fleet. Beyond those three systems, and those are big, important systems, but everything else has been putting the hands of the Ukrainians and they're putting into good use. Would everything you just mentioned be enough to counter if Russia were to mobilize its submarine fleet, for example, as he mentioned earlier? I think that what Putin's next big challenge is, and you mentioned the word, it's mobilization. He is going to have to mobilize troops. That's his biggest shortfall at this point and obviously you can build troops in a factory. You have to mobilize them, draft them, can script them, given uniforms, train them, put them into the fight. That's when your base at home really starts to dislike what's happening, just like occurred for the United States during the war in Vietnam. What brought down the United States is participation that were in many ways was the unpopularity of the draft. Putin knows that that's a big challenge for him coming up. And let's move to a different theater, though one hesitant to use the word theater because the activities may not meet the criteria for that word, and obviously I'm talking about China and Taiwan. It was quite striking to hear it spelled out by the presidents on CBS of sixty minutes that US troops would be involved. So physical troops involved, but when US forces defend the island? Yes, if in fact there was an unprecedented attack. Is that a departure? Admiral, it was read by some as a departure. But, as has happened once or twice over the last year, President Biden makes a fairly general statement like that and then the next day the White House comes out and says there has been no change in US policy. So US policy, Vanni, as you know, is strategic ambiguity, meaning we're not going to define whether or not we're going to be involved militarily in China decides to invade Taiwan. That's been our policy for over fifty years. That hasn't changed. I think the problem is many commentators and analysts look at this as an on and off switch. Either we're going to fight or we're not going to fight. It's more a real stat which is the dimmer that you have in your dining room to bring the lights up or down, and that re is stat. I think what the president was signaling is that Re is stat is ramping up, meaning we're going to provide more advanced equipped, more training, more engagements, more diplomatic visits. He's signaling Beijing that the United States is going to be involved. I don't think he's trying to define exactly what our involvement will be. So any act of military operation would be something like training. It wouldn't actually be fighting. It could be or it might be involved in actual fighting, and that's precisely what we're trying to convey to Beijing. Is that ambiguity, because it complicates Chinese planning, in other words, that China knew that we were not going to be involved in fighting at all. That might change their calculus and make it more aggressive if they have to consider whether we would or wouldn't step into combat roles. That complicates their thinking, that creates deterrence. Hopefully that avoids the conflict. Admiral, you mentioned, or at least I know that you have some ideas about who's to blame for growing nuclear arsenal's. Perhaps this is a good time to elaborate a little bit. I'm not thinking nuclear arsenals are in fact growing globally, and that concerns me a lot. Unfortunately, all of the instability in the world creates incentives for nations that are not nuclear aren't to think about it. So a prime example would be Iran, which doesn't have a nuclear weapon as far as we know right now, but is certainly very close to stepping across that threshold. If they do so, the Saudis will probably think very strongly about stepping across that threshold. Kim Johnn has nuclear weapons. I think over time that causes both Japan and South Korea to think about stepping over that threshold. The point is, instability in the Global System undermines nations confidence in not crossing that nuclear line. That worries me a lot. In today's environment, how approximate would a nuclear option be for somebody like Vladimir Putin, particularly if he thinks that he's going to, quote unquote, lose, which just isn't an option for him. Yeah, this is in the category of we want to avoid, I think, backing Vladimir Putin into a corner. We need to keep open the lines of communication, we need to be open to negotiation, we need to encourage our Ukrainian partners to be open to negotiation, as distasteful as that will be to them in the face of, for example, the horrible human rights violations we've seen by Russian troops. All of that makes this hard, but compared to stumbling into a nuclear conflict, we need to keep those lines of communication open. Would Putin use a new Bonney? I don't think so. I think you would perhaps use a chemical weapon or Weapono mass destruction. But even Putin, I don't think, wants to go down in history as someone who's used nuclear weapon, particularly in a war of choice like he's engaged in. I think it's unlikely. Ultimately, I'm really hope. So this conflict has been going on for seven months now. As you watch and analyzes and get updates day today, how long do you believe this advanced and retreat could carry on for before there's some kind of end point or beginning point for negotiations or something like that? I think the beginning point for negotiations is probably at least six months away, but I don't think it's years away, and the reason is because Putin is running out of resources, as we just discussed, and over on the Ukrainian side, over time the West will become less forthcoming with all of the assistance and all of the cost there will be big forces at work that will move the Russians and the Ukrainians towards some kind of negotiation. You saw that, I think, in Uzbekistan in the messages that Putin was receiving both from President G and Promodi of India. They'll be pressure on both sides to get to a negotiation. I think it's probably minimum six months away, and how long that negotiation might take could be a while, but in my view the odds are two and three. will end up with the negotiation starting at some point in the next six to twelve months. And finally, Admiral, when the world's focus is on one theater, one area or another, obviously markets want to find out if there if there's something that's going to jump out of them out of the blue. Right. So, are there any other areas of the world that we are now not focusing on that you were perhaps worried about? I'll give you to one is Iran. In the Middle East. It appears increasingly unlikely that the Iranians and or the West are willing to re enter the nuclear deal. The J C P O a. If Iran walks away from that deal, look for the Iranians to begin to push up the amplitude of their activities, potentially going after the Saudis, potentially continuing their support in Yemen, in Lebanon, in Syria. Look for more instability in the Middle East. We haven't really been thinking much about the Middle East. We've been focused on Ukraine and Russia and China Taiwan. Watch for the Middle East. And the second thing is not a place. It's cyber and cyber security. I think if Putin continues to fail militarily in a conventional battlefield, may move towards cyber and that could lead to major cyber disruptions, certainly in Ukraine, but perhaps in western Europe and the United States as well. Admiral James, stupidas that does it for this week's Bloomberg opinion. Were also, by the way, available as a podcast on Apple, spotify or your preferred platform. Were produced by Eric Mallow and you can reach us on twitter at Valley Quinn, or email the Equinat Bloomberg dot net. Until next time on Bloomberg opinion. H