The Fall

Published Aug 25, 2022, 10:33 AM

It's all about what the fall will bring. For market participants, Jackson Hole might provide a clue - Jonathan Levin joins on the Fed's glide-path. Leonid Bershidsky discusses the evolution of Russia's war in Ukraine and how Russians who have left, or want to leave, should proceed. Andreas Kluth joins from Berlin on Germany's energy conundrum: should the country delay nuclear exit a fourth time? Should it ration usage in a war economy pose?

Welcome to Bloomberg Opinion. I'm Vonnie Quinn this week. Right now, it doesn't look like anyone has the initiative. Neither side is strong enough to push the other, and so in this salemate situation you need some extraordinary slate of hand to the clear victory. Leonin Burschitski on six months of Russia's war on Ukraine, as the U. S And Germany are among countries preparing to send more aid, ammunition and weaponry before Wednesday's Independence day. Later in Germany, we need to declare essentially a war economy, and I think it will come down to rationally and Asclute from Berlin on Germany's energy emergency. First, though, all market attention is directed this weekend towards Jackson Hole and the annual Kansas City FED Symposium, the opportunity for Fed Cherry J. Powell to address markets between July's f OMC meeting and September's meeting. We're with Bloomberg Opinions Jonathan Livin, So, Jonathan, the Fed Cherry's speech from Jackson Hole continues the pandemic trend, although it breaks from pre pandemic norms. Interestingly, well, I think it reflects the time that we're in, right, I mean, never in recent economic history, at least since the nineties I think, has the monetary policy narrative been as important as it is right now. This is the driver, right, the evolution of inflation and what the Federal Reserve is going to do about it is going to be the driver for global markets in the next twelve months. So you can understand the heightened interest. History shows that nobody has ever particularly hawkish in Jackson Hole. You know, I looked at the history. I'm working on a project and going through market reactions for the last ten Jackson Hole speeches, and the biggest market sell off came in. You know, the market was off two point six percent on the day, and it wasn't even the said that did it. It was Trump because you often remember that Trump came in and stole the show with the China trade war talk. So there seems to be a historical pattern where FED chairs for whatever reason, seemed to tiptoe around this event. So that this fire and brimstone idea I think is off space. As you point out as well, FED fund futures have gone from pricing in a December peak around three and a quarter percent to pricing in a March peak around three and three quarters percent, with Cotson not until the later part of three. Does that seem reasonable? John Taylor of the Taylor Rule Of course, Stanford told us this week he sees the terminal rate at five percent. I say five percent as where we should name. And that is not high by historical standard, that's for sure. Remember what it was in the seven Will it be enough March peak of three and three quarters percent? Yeah, I think that the market pricing is totally within the realm of possibility right now. And I was not there maybe three months ago, certainly not certainly not six months ago. But this feels plausible. You can disagree a little bit to the upside, you can disagree a little bit to the downside. You know, the house view of Bloomberg Economics is at the terminal rate needs to go to five percent. I think that, you know, our economist Dan A. Long has some really interesting rationale. They're talking about the labor market. But this at least fuels sort of plausible as sort of a consensus or average of the distribution of views. So I do want to point something you said in your column about summertime about how Summer's fling wasn't a real thing. Say that to the people that made in the SMP from its June low, assuming they timed the market right, I mean, I get what you're trying to say, but should market participants act like this was just an aberration? Yeah? I mean, you know, my view was not to say, uh, you know, the markets have to sell off for the markets need to continue from here. But I thought that, you know, people really shouldn't be looking at the price action and saying, well, this indicates the direction going forward because it was based on nothing essentially fund fundamentally, you know, not changed. You know, I think people took heart in the fact that earning season wasn't bad. But I've always been of the view that the FED has a slow moving wrecking ball, and if things are going to get really bad for earnings, it was going to take several quarters. Retail sales are very much holding up, and I think the reason is you have this slow moving effect, right. You know, first people need to need to start working through their savings, then they move on to more consumer credit, and only after that option is exhausted. Do you really see sort of retail sales and these things start to dry up. So that's a lot of runway, and it's conceivable that we may not see those impacts until maybe even you know, one Q and we are seeing effects and housing and rent and so on. I mean, obviously for other reasons too, but we're definitely seeing a dampening in housing activity. Yeah, that's for sure. I hate to be all gloom and doom, but my nightmare scenario is just one in which the fragility of the housing market combines with the fragility of the labor market and they start to sort of feed on one another in a very toxic way. You know, in both cases. There are both cases, right, you know. I mean the housing market in terms of prices at least is sustained by this low inventory situation and people really don't want to sell. But that situation could change very very quickly. You know, people sadly start losing their job. Yeah, exactly, Jonathan. Does the market of confidence in fed chapale It look for a moment they're back a few months that that confidence might be a little bit fragile, But ever since July twenty seven, that feels like the market has confidence again. Yeah, I mean, if you look at where inflation expectations are, whether it's swaps or some of these surveys, it's certainly indicates a confidence, maybe an overconfidence, that this FED is going to get the job done. It's either that or the market still believes in the transitory story, which you know, I don't know what to say about that, Bloomberg Opinions. Jonathan Livin. Indonesia's president told Bloomberg recently he's invited Russia's Vladimir Putin and China's Cheese Jinping to the Group of twenty summit in Bali in November. That poses questions, does President Biden attend in person? Does Ukraine's Voladimir Zelenski then get an invitation? Here's former Defense Secretary Leon Panetta. Every meeting like this of the G twining, it's both a challenge and an opportunity. The permutations of possible encounters raise the questions what happens in a post war world? And how do we even get to that point. We're joined from Berlin by Bloomberg Opinions Leonid Breschitski. So, Leonid, what's the post end game? If there ever is some kind of armistice? Or treaty. One analyst Lawrence Freedman and The Guardian this week, saying the Kremlin's current theory is that the energy crisis will undermine support in Europe for Ukraine, and that might allow Putin to declare some kind of face saving victory. But in any event, what do post war diplomatic relations look like? Well, I mean there's the sense of the list that Russia is somehow isolated, but the West is only a minority of both countries and global population, and so a lot of countries are willing to talk to Puttin, and some of them are even Natal members, like Turkey. You know, there's in't yet, There's China, there's Indonesia, there's Vietnam, there's African nations that have not done anything to support this Western effort to isolate Russia. So like reintegration, I don't think Putting in his group of chronies feels there's a need to reintegrate into anything Western, maybe except maybe some supply change. Yeah, it's a very Western view of things to pose the question that way. I guess you do have to wonder, though, how this ends. Do you see protracted war? Do you see Vladimir Putin trying to declare some kind of victory. At some point does he run out of resources? Well, the plan is changing every couple of weeks. The most recent plan was apparently to try to integrate the captured Ukrainian territories directly into Russia by holding these fake referendums in which they would vote quote unquote to during Russia. And the putitive date for these referendums was supposed to be September eleventh, when a bunch of regional elections are going to be held in Russia. But it doesn't look like there's going to be much to integrate by September eleven, because the invasion has kind of stalled, and that has been really very little movement of the front line in the last five six weeks. And so if that plan still exists, it's getting delayed. But obviously, because the military part of this so called special operation is obviously going deadly and not going to plan for the Kremlin, they need a scheme and invent ways in which they can declare victory. I don't think they've come up with even a relatively credible plan yet for what to do in a situation where they can no longer advance and where the Ukrainians could have the initiative if they had the sheer combat power to go on a counter offensive. So right now it doesn't look like anyone has the initiative. Neither side is strong enough to push the other, and so in this stalemate situation you need some extraordinary slate of hand to declare victory. Is that how you see it ending? Or do you see some kind of third party mediating to find some kind of truth? I mean, in that situation, Putin couldn't say denazified Ukraine or taken Ukraine back into the arms of the Russian territories. But will it come to that. I don't think I negotiated solution is possible in any foreseeable future, mainly because the Ukrainians don't feel they can negotiate while putting holds of their territory almost and you know, if I were them, I wouldn't negotiate even And they clearly see that Russia's ability to win more territory is limited and that Russia doesn't really have the troops that it needs to advance. So the Ukrainians, they're hoping that they're going to mobilize more reserves that they're going to train them, going to get more weapons from the West, and perhaps sees the initiative and fight successfully through the fall. So in that sense, obviously, for Putting, it's too early to seek a negotiated solution too, because he appears to have hopes for further advancement. So I don't think there's going to be any sort of deal when anyone is capable of mediating between these two parties. So this conflict is going to be resolved militarily one way or the other. Speaking of which, the idea of conscription will have to come up at some point if Putin keeps losing troops or if Putin wants to escalate this again somehow. Is there any appetite for conscription in Russia? Would it be a successful drive? Well, yes, you're right, conscription would need to come up. And like the Russian nationalists, the ultra nationalists who are the only enthusiastic supporters of the war in Russia, have been saying since the first days that to win this war, Russia would need to mobilize. And they know what they're talking about because they have been actually fighting Ukrainians for these last eight years, and they know what they're upper gainst. But I don't think there's an appetite for anything like general mobilization or conscription, because if there was appetite for that, we would see much more active support on the part of the general population, including in big cities, which so far have been spared most of the military losses. The troops that are fighting in Ukraine are mainly drawn from poor rural areas, small towns. They're not from Bosco or St. Petersburg or Ekaterinburg or No Sabersk or any of these big cities where it appears it's been extremely hard to find volunteers, even with promises of large amounts of cash. So if a general mobilization or conscription is announced, there's going to be certainly mass draft dodging and probably increased emigration. And then you know, you already see even contract troops, professional troops refusing to fight with the kind of equipment they're given and under the under the conditions that they're in. So that is going to be even more of a mass phenomenon with the draft based army. So Leonard, there is debate raging right now about Russians being granted visas to travel outside Russia. It's obviously more approximate in Europe, but pressure is building for a Pan EU ban on visas for Russian citizens. Is that wise? The first question to ask would be is it likely? And I think it isn't because the countries that are advocating wholesale ban on Russian's entering are a very specific group that have been either subjugated or colonized or whatever words you want to use by Russia in the twentieth century, and so obviously what Russia has done in Ukraine fits too close to home for these particular countries, the Baltics, Poland, the Czech Republic, Finland, and their reaction is perfectly understandable. They don't really want to see any Russians, especially Prussian holiday makers, while Russia is waging this war in Ukraine. The rest of Europe, which does not have this kind of tragic past, doesn't really have those unhealed wounds inflicted by Russia and Russians, some of which actually all Russia at that, like Germany Germans. Many of them are still grateful for the Soviet unions or Russia's part in freeing them from the Nazis. So it's unlikely that you'll see Germany or France or Italy or for that matter of Hungary, and you know, voting for a blanket with the band for Russians. Well, and of course it's important to have descent outside of Russia as well, to have voices free to express disagreement with what the president Vladimir Putin is doing. How easy is it to get out of Russia if you're so inclined right now, Well, that is sort of the other half of the equation. I'd rather think we Russians, whether we are in Europe or in Russia or elsewhere, should not really be making as much noise about this whole visiband situation as we have been. It is extremely easy to get out of Russia if you're not trying to go to any of the group of countries that expressly do not want us. There's dozens of countries in the world that allow Russians visit free entry, all of Latin America, a lot of Asian nations, a bunch of countries, and Russia's immediate neighborhood former Soviet republics Kazakhstan, a media Georgia. There's even European country Serbia, that allows visit free entry to Russians. There's plenty of places you can go even if you don't have all that much money for like travel. If you want to fly to any destination within the you you're going to have to take a very circuitous route because Russian planes have been banned from the U. But there are countries much closer where you don't have to go around the entire U air space and spend thousands of dollars on a twelve or fifteen hour journey. There are places that are within to three hours flight that will take you if you need to run. The other point is that people may not be willing to go without their belongings, or may not be able to go without their belongings, and also may not want to leave home. Do we have any idea of how many people are in Russia that know what's going on and that are staying in Russia but are very against the situation. Well, I'd say most Russians know what's going on, and I doubt that the majority really supports the war to the extent that they're willing to do anything in its support, whether to go fight or to give up money, or to go out and demonstrate and support of the so called special military operation. Active support, I would guess is a tiny timing minority is capable of active support. And so the reason Russians are seeing kind of passively supporting Busin is because Russia is a fascist dictatorship and people are scared to speak out and to protest against what Putting is doing. It's very natural. A lot of people are afraid for their families and you know, their property, their lives, their safety, so they look like they support it without actually doing anything active to help Putin's war. Leon and Brishitski in Berlin. European natural gas futures have been skyrocketing with no respite in sight now, as European authorities warn of a possible total shutdown of Russia supplies. I spoke with Bloomer Opinions and ask foot for a view. From Berlin. Storage is at a fill level of two weeks ahead of schedule. But what does that fact signal about Germany's energy capacity at this point? The first of all, money, it shows you quite little. At the moment. What's happened is that Russia, Vladimir Putin has throttled the gas flowing through the main pipeline from Russia to Germany, which is called North Stream one to bout of its normal capacity at this stage. And you know, there's gas coming from other places like Norway and stuff, and they're trying to organize liquid natural gas to replace what's missing from Russia. But they're going to have this problem, and so what they're trying now is to use whatever they have to fill those storage tanks that you mentioned to be ready for whatever Vladimir Putin does next. Okay, so Vladimir Putin plays along, then Germany and other countries like Austria will be fine. If not, it'll get really tight. And Germany is just now in the middle of a debate on how to pass on those higher costs to consumers and how to compensate poor people for that and stuff. And this is of course a dependency the situation that the Germans almost deliberately naively got themselves into over the course of about twenty years. And we'll speak more about that, but first, if stories got would that be enough to get Germany through the winter, I think is more of a notional amount. I think that that's never happened before. I think. But they're ahead of target right now, and even ahead of where they would be at this time of year in other years. So that's not the problem. I mean, that's supposed to help while the normal gas flows continue. So if they use just what's in the st orange, they could get through three months, which isn't great. Now the government has asked people to reduce energy consumption, by it's not a mandate. I was speaking with Liam Denning on this and he was pointing out that it almost needs to be war rhetoric. It almost needs to be a mandate that people reduce their energy consumption. Will people comply? Well? The actually comes from the European Union, probably at the behest of Germany, because Germany wanted all European EU countries to save, and countries like Spain in particular that hang on, what does that have to do with us. You made the wrong decisions with pipelines in the past, We made the right decisions with l n G in the past. If we save gas, we can't even pipe it to Germany. There's no point in US taking shorter showers. So there was a big debate within Europe and in Germany. We need to declare essentially a war economy, and I think it will come down to rationally. That would be the third of three steps. Were in step two right now of an emergency plan that the Economics and Energy Minister named Robert Hobbeck could invoke. Okay, so it may come to that, But the savings is mainly going to fall on industry, the big chemical plans like B A, SF and and they're in preparations to save as much as they can. And then consumers will also, of course, and you'll hear a lot of talk about taking shorter showers, shorter showers with cold or water, you know, do that anyway? That right now is that we're in the middle of a eaight wave. People are diving in their lakes. Actually the summer atmosphere as a sunk in yet really you know so, and a lot then depends on how bitter and cold the winter gets. By the way, a lot of people and that includes me. I rent my home. I don't even know. I have a utility that warms our home, but I don't even know if gas is part of it. And it felt paid this new levee or not. A lot of people don't know. Some people do, of course. Fascinating. The other thing that I noticed this week is that Germany wants in Dutch as the Netherlands has plenty. As you point out in one of your columns, Europe's largest gas field is in growing in. But there's a simple matter of earthquakes which happened when the Netherlands tries to get the gas out of the gas field. Is that an option at all? Is is the Netherlands considering it. I moved here from California, so I know earthquakes, and these are smaller earthquakes. These are there's no fault line. But if you pump these chemicals underground, then you fracture rock and you cause smaller earthquakes. And that's been going on for many, many years, and therefore the Dutch have decided. There has been a long campaign to exit the production of that gas field. They were hoping to phase that out this year, just as the Germans who are hoping to phase out nuclear power this year and then later to phase out coal power. And so the Germans are now asking the Dutch to please not phase that out, but pump it and send it over. And there's a couple of technical problems. The quality of the gas is different than what the grid is ready for in Germany. But that's what they want, of course, and the Dutch is saying, well, okay, we've got this gas field. You're right, but you guys next door, you're hyperventilating. The Germans are famous for this about phasing out your nuclear power plans, and why don't you do that first or at the same time, at least so we can explain to our motors who are upset about earthquakes that we have to do this to show solidarity with you. But it's hard to do that if you insist, unlike other Europeans, to shut off the last three nuclear power plants in your electricity grid this year, by the end of this year. Right, So this problem is producing a whole lot of neighbor league problems as well, sort of not in my backyard and why me and not you? And so on. You mentioned nuclear you the great column recently on nuclear as well. Germany is trying to exit at three times, as trying a fourth time now, but it's still accounts for twelve percent of electricity at least last year. How strong is the argument for not exiting a moment, even though obviously nuclear is a huge flash point, the argument for not exiting it is very good. And always has been. The French get most of their electricity from nuclear and want to invest more in it. Cutting edge countries like Finland they used everything. You're renewables, of course, but for them nuclear is always part of the mix because you want a resilient grid and you want new nuclear technology that is safe, and they also found ways to deal with nuclear waste. So the arguments are very good. They've never got a fair hearing in Germany because Germany, interestingly, also Costria next door and Luxembourg very similar cultures culturally and psychologically. For an entire generation, they've been on a rampage against nuclear power, and in particular one party, the Green Party, came out of the counterculture but also out of these marches and demonstrations in the seventies eighties, and they're in power. They're one of the three parties in the coalition. For them, been a long religious war. I mean they've switched off almost twenty already and it's about three are remaining. Can you stretch that a little bit into next spring or summer, because every little bit helps. I think they're going to put up a good fight and then probably end up doing that because that's easy to do. The bigger debate is why don't we rethink the whole exit, Why don't we keep them running permanently? Why don't we restart old ones? Why don't we build new, better ones in future? Because we have this problem that we're no longer going to get gas from Russia, you know, and I mean the Germans have been saying they're notorious for this. No to everything, no to fracking, no to coal, no to nuclear, no to you know, they're saying no to everything. I mean, the attentions are good, but you know, the reality of it is different. The intentions are a lot of NIMBYism to locally Germans even saying no to win mills, you know, turbines if it happens to be near their house, you know, so you can't just say no. The irony that has finally sunk in is that they're now starting coal fired electricity plans to make up the shortfall, and that of course is for the climate the worst. Nuclear has disadvantages, but it admits no carbon dioxide and coal is the dirtiest. Well, they're not going to just put up wind turbines and deal with Vladimir Putin and climate change that way. Well, and as you've pointed out, even keeping the nuclear reactor is going would probably save only about four percent of the country's overall gas consumption, so on its own it wouldn't be that much of a help anyway. Plus, younger generations perhaps don't appreciate the terror of the nuclear era and what it means to people to have nuclear in their country. I don't know. I think what's interesting culturally is that the Germans are so much more scared about nuclear technology and radiationally than anybody else in the world. The last exit after several U turns, was after Fukushima, and even the Japanese have not fully exited nuclear technology. You have a little bizarre's twist in the Ukraine War, which is the background of our whole conversation money, which is that one of the big risks is about Europe's largest nuclear power plant, which the Russians have taken, which Ukrainian engineers are still running, and where they're shooting at each other and we're all trying to get into it to make sure that it's safe. Another Chernobyl this debate, we might have to have another podcast, you and I because the psychology could change again. It's hard to postulate with counterfactuals. But what would Angel America have done? What must you be thinking at us? We don't know. She's given one interview since she left office in December, and that didn't satisfy me. I've often been a fan. I generally like her. She's intelligent, she's the opposite of vain and all that. But her legacy is being re examined and will I think start look worse worse because she's not to blame. She oversaw country and coalitions of people who agreed on these big errors. The biggest error was the wrong policy toward Russia and Putin. First of all, Okay, all of Germany's eastern partners in the European Union, which should be its closest partners, Stonia, Latville, Lithuania, Poland, they've all been saying all these years, don't build these pipelines. Don't put so much faith in Vladimir Putin. He's dangerous. And Germany said, no, no, no, you're wrong, We're going to do this, and they deliberately made dependency almost a policy. Okay, that was not her doing. It was more of the Social Democrats and they're in power now, but they were her junior partners. But she went along with that, and in that interview that I mentioned, she claimed that she knew all along how dangerous Putin was. So then the question is why didn't you explain that to Germans earlier Boomberg Opinions and I asclude that does it for this week. Do get in touch though. I'm at Vonnie Quinn on Twitter or email v Quinn at Bloomberg dot net. We're produced by Eric mollow Till next time on Bloomberg Opinion. H

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