June 16, 2025 • 27 mins
- Amanda Lynam, Head: Macro Credit Research at BlackRock
- Aaron David Miller, Senior Fellow for Carnegie Endowment for International Peace
- Ellen Wald, Senior Fellow at the Atlantic Council
- Steven Ricchiuto, Chief US Economist for Mizuho
Amanda Lynam, Head: Macro Credit Research at BlackRock, joins for a discussion on the bond market, corporate credit spreads, and whether bonds are indicating a slowdown in the US economy. Aaron David Miller, Senior Fellow for Carnegie Endowment for International Peace, discusses the latest on the conflict between Israel and Iran and the chances of escalation. Ellen Wald, Senior Fellow at the Atlantic Council, talks about the outlook for energy prices amid conflict in the Middle East. Steven Ricchiuto, Chief US Economist for Mizuho, offers his outlook for inflation, the Fed, and the US economy.
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Episode Transcript
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Speaker 1 (00:02):
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Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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(00:33):
Bloomberg Terminal and the Bloomberg Business app.
Speaker 3 (00:36):
Joining us now is Amanda Liner of a Black Rock.
Speaker 1 (00:39):
Amanda, a difficult time for the Federal Reserved to.
Speaker 3 (00:41):
Be meeting, given that their dueling risks seem to be
their double mandate seems to be very much increasingly in conflict.
Speaker 1 (00:49):
Do you think we're going to learn anything at all
this week?
Speaker 4 (00:50):
Good morning, Thank you for having me. That's the one
thing that we are focused on. I would say the
Summary of Economic projections has the potential to give us
some incremental clarity on their reaction function. We think on
the margin it will reflect a more challenging growth inflation mix.
But keep in mind this is just the median of
all of the different committee members. It's not actually a
cohesive projection from the committee, so we need to kind
(01:11):
of discount that. What we are most focused on is
what would be the scenario analysis the reaction function if
the dual mandate comes into tension. A few months ago
you started see Chair pal Beth Hammock talk about that
being on the radar. I think the incremental news it
has become, as you alluded to, even more challenging with
the geopolitical situation, So that would be the hopefully the
(01:32):
one nugget that we will be looking for is how
would they navigate that backdrop? What would they prioritize. The
SEP already reflects an unemployment rate of four point four
percent for this year, so we know that they are
baking in some weakning in the labor market. How much
weakening would we need to see in order for their
posture to change.
Speaker 3 (01:49):
Earlier this year, there was a feeling that any inflationary
shock from tariffs or trade tensions in general would be
transitory they even use that word, or even short lived.
Speaker 1 (01:57):
Now there's a question of the dual shocks.
Speaker 3 (01:59):
You have the terror for risk, and then you also
have potentially some sort of oil shop that is persistent.
Speaker 1 (02:03):
Even if it's not.
Speaker 3 (02:04):
The closure of the strait of removes, there is this
feeling that there's going to be a higher premium. How
much does that complicate things and create a more sort
of long lasting inflationary impulse.
Speaker 5 (02:14):
I think you nailed it.
Speaker 4 (02:15):
It's not just the inflation data, but inflation expectations. So
even though they're navigating to core PCE, which would exclude energy,
if we do have a rise in oil prices that
is sustained, does that alter inflation expectations for consumers and
could not cause them to react. I would say there's
kind of two fold impacts that we see from this
geopolitical backdrop. Its one, should there be higher U premias
(02:36):
and corporate credit? And then two are there actually sector
specific implications if there are sustained supply chain disruptions. We
haven't seen that yet, hopefully we don't, but those are
really what we're focused on. And then the magnitude and
the duration of that has yet to be seen. Even
when the FED was I would think casually using the
word transitory, when was that back in the March meeting?
It was also CAVEATD with the healthy dose of we're
(02:56):
not quite sure really where this is going. I remember
that meeting very well, and so I think they're even
hesitant to say that they'll be able to look through it.
I think they're just raising the possibility that maybe they
can look through it well.
Speaker 6 (03:07):
To the point of credit markets, again, it's another thing
where we see spreads widen a little bit and then
not really react that much. Where you have seen some
weaknesses in the junkiest part of the market, is the
risk real there? Could you start to see defaults pick
up in that area?
Speaker 4 (03:21):
Sure, So two things I would say, our conversations and
really since early may have focused on two sided risks
exactly as you noted, widening episodes have been short lived,
and actually the common refrain from a lot of investors is, oh,
I wish I would have taken advantage of that. More So,
that's a very real risk, and so we're very focused
on the two sided risks.
Speaker 5 (03:38):
Where we are trading carefully.
Speaker 4 (03:39):
And have been are those kind of left tail pockets
of the market that we're already under pressure before the
economic data deteriated. So, for example, US Triple c's had
interest coverage below one time's already last quarter, it's rebounded
a bit. That was before the economic data deteriated. You
see that in pockets of the leverage level market, you
see it in pockets of private credit. So that's really
(03:59):
where we need to focus is saying, Okay, let's not
be too defensive. There's a real opportunity cost to being
under risked. But at the same time, if a company
was already having trouble growing into its capital structure, or
a sector was already having trouble navigating this environment, nothing
on the horizon's going to make it easier. And so
that's really I think where we are are mindful. I
will add, though the high yield and leverage learned default
(04:21):
rates have been quietly creeping for the past year and
a half and it has not derailed the performance of
the speculative grade parts of the market. So I think
what that's telling you is it's the smallest capital structures
that are defaulting. It's oftentimes repeat defaulters, and that is
by definition priced into the market.
Speaker 6 (04:36):
Well, if we do see I said, that falls in
between that dual mandate and they can't take action and
they can't cut and rates do remain elevated, does that
start to spread well.
Speaker 4 (04:46):
Actually, somewhat counterintuitively, it's probably going to support the yield
base bid for corporate credit, which has been a really
powerful technical force. I would say the yield based buyer
has exhibited some patients on and off, so they're sitting
it out sometimes. But in general, structurally higher interest rates
coupled with okay growth, even below trend growth, that's not
(05:07):
a bad recipe for corporate credit. That would probably bring
some of that yield based demand in off the simelines.
This is also part of the reason why we like
selectively moving down in quality. You were talking about the
volatility and the treasury market. Kind of one of the
understated differences between IG and highyield is high yeld as
a shorter duration market, so you're kind of less exposed
to those swings and treasuries, especially at the long end.
Speaker 3 (05:28):
Just real quickly, here is the private credit market exposed
to for selling based the fact that you're seeing endowments
of universities looking to raise money, not for selling.
Speaker 4 (05:36):
Illiquidity is a feature, not a bug, of private credit.
What I think that is reflective of as a multitude
of factors, and I think it's a positive that actually
folks can make acid allocation shifts over time when they
need to with liquid assets, but it's not a liquid
market by design.
Speaker 3 (05:50):
Amandal Adam of Blackcroc, thank you so much for being
with us as always.
Speaker 1 (06:03):
Right now.
Speaker 3 (06:03):
Aaron David Miller of the Carnegie and Townment for International
Peace joins us erin. I just want to get your
sense of how realistic it is for the calls for
de escalation to actually resonate with either not on Yahoo
or with Iran at.
Speaker 1 (06:18):
A time or both of them seem to be really
digging in.
Speaker 7 (06:20):
Great question, Lucia, thanks for having me.
Speaker 8 (06:22):
I think it's completely unrealistic and detached from the current
reality for three reasons. The Israelis want to destroy as
much of Iran's nuclear program as possible, but they're going
to have a very difficult time doing it, and they
have escalation dominance and their superiority and political superiority. There's
absolutely no pushback from anyone in the region, Europe, from
the United States, from the Trump administration for the Israelis
(06:45):
to stop. As one Israeli general put it, retired, we're
playing soccer with the Iranians, but they have no goalie.
The Iranians having invested five trillion dollars into this nuclear program,
having been embarrassed and humiliated to a degree that is
unprecedented problem in the history of Islamic Republic.
Speaker 7 (07:02):
Are not going to yield on this.
Speaker 8 (07:04):
How deep their ballistic missile inventory is, what twenty twenty
five hundred ballistic missiles. They can keep this up for
some time, and the Americans, I think, are faced.
Speaker 7 (07:15):
Trump administration is faced with a dilemma.
Speaker 8 (07:17):
He does not want to answer this war, but he
cannot stop it. It reminds me of Lennon Johnson's description
in the Vietnam War of a hitchhiker in a Texas hailstorm.
I can't run, I can't hide, and I can't make
it stop. Question for Trump, for all of this, I'm
not sure Trump wants to make it stop.
Speaker 3 (07:35):
Well, that's actually something he's hinted at, this question of
maybe they have to fight it out and just complete it.
From that perspective, what is the ultimate goal though, Erin,
I mean, given the fact that you just said that,
as one general told you, Israel is playing soccer and
Iran has no goalie.
Speaker 9 (07:51):
But what's the ultimate aim?
Speaker 1 (07:52):
Is it regime change?
Speaker 3 (07:54):
How do they achieve something that actually can be sustainable
for the entire region.
Speaker 7 (07:59):
I mean critical question.
Speaker 8 (08:00):
Have you told me on October eighth that eighteen months
into the Israeli Hamas Warren Gaza there will be absolutely
no sign of this conflict debating, I would have said,
you basically are a bad analyst. The fact is the
Prime Minister in Gaza has identified.
Speaker 7 (08:16):
Total victory as a goal. I think what he would
like to do.
Speaker 8 (08:19):
His aspirations would be regime change on one hand, and
number two deploying the United States if he can to
do what the Israelis cannot, which is to destroy four
though and really make a not a dent, but a
major crippling of the Iranian nuclear program, which would set
(08:40):
it back at least at least two years. So I
think right now there's no reason for Ninitaannao to stop.
Speaker 7 (08:48):
Ballistic missiles in Israel are very problematic.
Speaker 8 (08:52):
I mean, the Iranians are launching, maybe ten to fifteen
percent are actually getting through and striking. But you've seen
Ethan reported, you've seen some of the damage. Twenty four
Israelis killed. I think the public will endure this for
quite some time. So right now I see absolutely no
way no off ramp, no possibility.
Speaker 7 (09:12):
And then you, of course raise the.
Speaker 8 (09:14):
Question is what, in fact would a negotiation, other than
cessational hostilities, what would a negotiation between the United States
and Iran produce? Two months of negotiations produced an impast
and I think your writings are in no mood frankly
right now for compromise erin.
Speaker 10 (09:35):
I hear you saying that there is not a likely
off ramp in the near term. But for investors, what
can we watch to look for any signs of de
escalation or escalation from here? You know, what are the
key points that you are looking for?
Speaker 7 (09:53):
Right?
Speaker 8 (09:53):
I mean d escalation I think right now is not
in the cards. I think there's a really good chance
that we'll be in for weeks in It's the escalatory
possibilities that concerned me.
Speaker 7 (10:05):
This is your guys business, not mine. Would concern investors
as well.
Speaker 8 (10:10):
And escalation, I think could occur in one of two ways.
Number One, Iranian ballistic missiles actually end up surging and
you end up.
Speaker 7 (10:19):
With a mass casualty event in Israel.
Speaker 8 (10:22):
Scores hundreds of Israelis are killed or wounded.
Speaker 7 (10:26):
The Trump administration.
Speaker 8 (10:27):
Under those circumstances, Congress are going to be hard pressed,
I think to enter the conflict, and the second path escalation,
or maybe there are three. Second path escalation, would be
a bad decision in the part of the Islamic Republic
to go after American assets, US forces in Iraq, Syria
(10:48):
or obviously forces thirty to thirty five thousand Americans that
are deployed in the Gulf, and they have many short
range ballistic missiles, thousands of them that could produce that.
The third possibility is that the Iranians try some sort
of asymmetrical strategy in which they go after Israeli interests
abroad Jewish interests abroad in a terror attack. I think
(11:12):
that's a back door that would also probably bring in
in the United States. But again we've watched over the
course of the last eighteen months. We've steered clear of
the one thing that investors worry about, the one thing
I would worry about, the one thing the region worries.
Speaker 7 (11:29):
About, and that would be a major regional war.
Speaker 8 (11:31):
We've avoided that this is bringing us. The longer this
goes on, the greater the chances of an escalatory cycle,
an Iranian Saudi conflict and a US conflict, which would
essentially push oil prices, probably well in excess one hundred dollars.
Speaker 3 (11:50):
Aron, just quickly, here one thing that the market keeps
focusing on that could catalyze that kind of regional lord
be shutting down the streets for moves. How realistic is
that given the fact that to anger everybody in the neighborhood,
I mean, the.
Speaker 8 (12:03):
Rinians could probably close it, and the Americans would definitely
open it.
Speaker 7 (12:07):
But again we're talking about a.
Speaker 8 (12:08):
Prolonged delay, filled with uncertainties, all sorts of exit ramps
of an unpleasant nature that is going to make this
extremely unpredictable.
Speaker 3 (12:19):
Aaron David Miller of the Carnegie Endowment for International Piece,
Thank you so much.
Speaker 1 (12:22):
For the insight. Here's eldest the Federal Reserves today meeting
kicking off tomorrow. The f ONEC widely.
Speaker 3 (12:38):
Expected to hold rate steady but update its economic forecast,
giving markets a clue about how officials will handle tariffs,
inflation and more. Joining us now for that potential scenario
analysis is Steve Verstudo of Mizuho.
Speaker 1 (12:50):
Steve, great to see you, Thank you so much for
being here.
Speaker 9 (12:53):
Just before we.
Speaker 3 (12:53):
Get into what the Fed does, I want to bring
you into the debate that Kelsey and I were having earlier.
How important is it that in the risk on Friday
and today you are not seeing bonds full faith and
credit rally.
Speaker 5 (13:06):
I think there's a number of things.
Speaker 11 (13:08):
A people have questioned the dollars reserve currency status, people
have questioned a lot of interesting information about where people
are going from a global perspective in terms of investing
in the United States.
Speaker 5 (13:20):
The reality is we haven't seen much.
Speaker 11 (13:22):
Okay, so yeah, the dollar is down a little bit,
but on a DXY basis, it's still very, very healthy.
Under Joe Biden, we were at ninety on a DXY basis,
and we're talking about ninety seven ninety eight.
Speaker 5 (13:33):
Now, what's the big deal?
Speaker 11 (13:36):
The reality is, when you look at most markets, there's
very little impact of anything. And I think this goes
to the fact that there is no systemic risk in
the economy.
Speaker 5 (13:44):
There is no balance sheet related risk.
Speaker 11 (13:47):
There's excess liquidity, there's excess global savings, and there's a
lot of oil floating around in the world. And I
think when you put all of that together, you can
easily see why Marcus are just sitting there saying, Okay,
we've tried to sell off several times.
Speaker 5 (14:00):
I've tried to rally several times. We've had eight recession calls.
Speaker 11 (14:03):
Since twenty twenty two. None of them have worked. Let's
just get on with life.
Speaker 10 (14:08):
So you're essentially describing a bit of an equilibrium where
everything is just.
Speaker 5 (14:12):
Kind of at this steady state.
Speaker 10 (14:14):
And so that gets me thinking about this concept of
the neutral rate, which the FED estimates in the dot plot,
and they're going to do another.
Speaker 9 (14:22):
Crack at that.
Speaker 10 (14:23):
That neutral rate has been taking higher, It's about fifty
basis points higher over the last year, but the Fed
still thinks that the current level of policy is restrictive.
Speaker 9 (14:33):
What do you think.
Speaker 11 (14:35):
I don't think the current level of policy is restrictive,
having for quite some time, I think the FED rate
cuts last year were a disaster. I think trying to
repeat that again this year would be a bigger mistake.
Speaker 5 (14:45):
I think when you look at a two.
Speaker 11 (14:46):
Percent real greater growth in the economy, an inflation rate
that's running about two two and a half percent, you're
looking at four and a half percent neutral rate from
a nominal FED funds rate perspective, And to me, where
are we right now four and a half percent? I
think we should be ending the year closer to five percent,
because I think inflation will be three percent.
Speaker 5 (15:03):
And I think the only reason why you haven't seen
inflation from tariffs coming.
Speaker 11 (15:08):
Through is because in this environment, while there's negotiations going on,
a lot of CEOs are sitting there saying I'm not
going to be the first one to move to raise
prices because I don't want to lose market share. I
pre inventoried a lot of stuff. I've got time, I've
got opportunity. Let's see how this plays out before I'm
make any decisions.
Speaker 10 (15:25):
Well, we would certainly agree with you in terms of
the inflation assessment. We also took a look at that
and said, yeah, I mean, you're not going to get
negative goods prices on goods prices month over month on
a persistent basis. But I do want to kind of
drill into this idea of goldilocks and how long it
can persist this equilibrium, particularly on the labor market side,
(15:46):
because what caught my eye last week was continuing claims
which continue to rise. Use just those cracks under the surface.
Do you see those as a concern? Is there anything
there for the FED to be worried about claims?
Speaker 11 (15:57):
And continuing claims on a forward moving average or at
exceptionally low levels. When you look at the covered employment there,
even at a lower level, there's no risk whatsoever in
this labor market.
Speaker 5 (16:09):
And I think that's the key.
Speaker 11 (16:10):
I think if you're looking for one market where there's
potentially a movement out of equilibrium, it is the labor market.
But that is only a move towards a tighter labor market. Okay,
once you get this tax cut done, and this tax
cut I think will be bigger than anyone still currently thanks,
I think you don't wind up seeing what a much
tighter labor market and much greater push on inflation. And
(16:30):
therefore I question whether or not the Fed's going to
get the so called two rate cuts out this year.
Speaker 1 (16:34):
So you think that maybe the Fed's not going to cut.
Speaker 5 (16:36):
Is that kind of your call?
Speaker 11 (16:37):
Hour call has been the Fed shouldn't cut whatsoever, And
therefore we believe the Fed won't cut.
Speaker 3 (16:41):
So there's a question here about longer term bonds and
how that really bleeds through at a time when people
have not seen this as a haven, and there's been
a real question about the inflation risk being priced in
or not. And I'm just wondering do you see yields
going higher from here with questions about US assets as
a haven as well as potential that's only exacerbated potentially
(17:03):
by inefficiencies and oil shocks that might come up along
the way.
Speaker 11 (17:06):
I mean, I think we're supposed to get to five
percent on the tenure note.
Speaker 5 (17:10):
I don't think that's a disaster.
Speaker 11 (17:12):
When you look at what's happening in the boj market,
for example, they're having a significant amount of problems.
Speaker 5 (17:17):
There is yields rise in Japan.
Speaker 11 (17:19):
You look at Europe, European rates probably aren't going to
go up because Europe's a mess, and Christine Legard doesn't
think she needs to cut interest rates and she does,
so I think you've got this situation. Well, I'd rather
buy Europe because Europe's more likely to go into deflation
than by the US, where we're likely to have three
percent inflation. So I don't think we have to get
beyond the macro into this geopolitical concern about solvency and
(17:45):
sovereignty and all this other garbage and reserve currency to
explain what's happening in markets. What's happening in markets is
you're reflecting relative interest rate differentials based on relative inflation
differentials and.
Speaker 5 (17:57):
Relative real growth.
Speaker 11 (17:58):
And there's nothing that's mysterious about this.
Speaker 5 (18:01):
It's traditional macroeconomics.
Speaker 10 (18:03):
So we're continuing to work through one big, beautiful bill
that's going on underneath all of these headlines that we've
been dealing with. And I was curious, you know, the
way I think about deficit expansion is there's deficit expansion
and then there's fiscal impulse.
Speaker 5 (18:19):
So some of the improvement or.
Speaker 10 (18:23):
Deterioration in the deficit is a function of just extending
the tax cut was isn't necessarily a fiscal impulse. How
do you differentiate between the two?
Speaker 5 (18:33):
And you mentioned.
Speaker 10 (18:33):
Already that you see the risk is actually to more
fiscal impulse and more deficit expansion from here.
Speaker 5 (18:41):
Yeah, no, I agree with you.
Speaker 11 (18:42):
I mean, if you were just going to extend the
tax cut alone, you would not have a major positive
impulse into the economy. But we're not going to do that.
And I think the interesting thing is all this stuff
is going on, and the bill is working its way
through the system without the political without the news oversight
to it that it would normally deserve to get. And
this is what happened when suddenly the House passed the bill.
Speaker 5 (19:06):
Okay, when it came out of committee.
Speaker 11 (19:08):
In the House, so many people walk up, Oh my god,
it's not just extending, you know, the Trump tax cuts.
And I think, you know, this is part of the
process of how the bill is getting done as quickly
as it is. And I still think their game plan
is to get it done by July fourth and have
it implemented by October one.
Speaker 5 (19:24):
So they could have a full year of real.
Speaker 11 (19:26):
Tax cuts coming through the economy going into the November elections.
Speaker 5 (19:30):
And I think that's the game plan here.
Speaker 11 (19:32):
I think the game plan is teriffts of the diversion
to get the tax cut, tax cuts are the reason
to get the midterm. The midterm is to get to
what they really want to do, which is.
Speaker 5 (19:41):
Drain the swamp.
Speaker 3 (19:41):
Well, this is what we're going to try to focus
on as we parse through all the different risks that
are coming up and dominating the new stever Shudo of
a zooha, thank you so much for being with us.
Back to our top story for market, it's a fourth
(20:02):
day of fighting between Israel and Iran, raising uncertainty for
energy markets. Ellen Walls of the Atlantic Council, writing, if
Israel can take out Iran's ability to produce gasoline, diesel
and provide electricity, the situation becomes significantly more dire. If
the regime cannot maintain control through the use of force,
it will likely fall.
Speaker 1 (20:22):
Ellen joins us.
Speaker 3 (20:23):
Now, Ellen, thank you so much for being with us,
and we are just getting word from the Prime Minister
of Benjamin Natan Yahoo that Israel is on the way
to destroying Iran's nuclear and missile threats. Do you have
a sense, Ellen of what the endgame could possibly be?
Speaker 12 (20:38):
You know, it's interesting because I think for Israel, the
real endgame is just to take out all of the
Iran's ability to threaten them, so the missile sites, the
nuclear sites.
Speaker 9 (20:50):
I don't think that.
Speaker 12 (20:51):
They're really aiming for regime change. I mean, they don't
want to participate in that. I think that there's also
the understanding amongst them and also amongst US policy makers
that what would take its place, and sometimes.
Speaker 9 (21:05):
Uh, the a lack of a regime or a power.
Speaker 12 (21:09):
Vacuum could be even more dangerous. I mean, you know,
there's the IRGC is probably the strongest entity in Iran,
and so if you know the civil government falls, It's
possible the IRGC or what's left of it, would take over,
seeing that they have you know, control of most of
the use of force there, and that could be you know,
(21:29):
potentially a worse situation than they're in now. So I
think there's a very delicate balance here between causing you
a widespread destruction.
Speaker 9 (21:38):
If you're going to take out you know, multiple.
Speaker 12 (21:40):
Fueling stations and you're going to take out multiple refineries,
then you're going to essentially, you know, send around to
the dark ages for a period of time, and things
could really fall apart at.
Speaker 9 (21:53):
The individual and city level.
Speaker 12 (21:56):
So I think that they're they're really, i think, working
more towards taking out the military capabilities as opposed to
trying to say, foment widespread destruction.
Speaker 3 (22:06):
Allen, A lot of people have talked about the idea
of some sort of broadening out of the conflict and
embroiling a greater number of countries in the region in
this war.
Speaker 9 (22:15):
I just wonder, who's Iron's friend.
Speaker 3 (22:17):
Why is there anyone or is there anyone coming to
Iran's defense in any capacity, or are more of the
nations on Israel side, or just frankly don't want to
get involved in any way, shape or form.
Speaker 12 (22:29):
So I think that in terms of say friends, I
think that Iran has potentially has maybe some strategic allies
that could be useful in maybe arguing Iran's case in
a diplomatic situation. So take China for example, China buys
a lot of oil from the Iran.
Speaker 9 (22:48):
Relatively they're Iran's largest customer. But because Iran.
Speaker 12 (22:54):
Buys that oil and they accept Chinese currency, they have
to spend a lot of that Chinese currency on good.
Speaker 9 (23:00):
And services from China.
Speaker 12 (23:01):
So China does a lot of business in Iran, and
China doesn't want to see this situation fall apart. If,
in fact, it gets so dire that there are threats
to Chinese ships or oil tankers that are heading for China,
you know, coming out of the Persian Gulf, and that's
not just Irani and ships that could also be ships
coming from Saudi Arabia, from Krewate, from other oil suppliers,
(23:23):
then China is definitely going to exert the full weight
of its economic might internationally and on Iran and say, okay,
you know you've got to cut a deal.
Speaker 9 (23:32):
This has to end.
Speaker 12 (23:34):
You know, this is not worth threatening our you know,
economic relationship Russia likewise. In fact, we saw Russia saying, now, hey,
we want to We're ready to, you know, facilitate negotiations
and we'll accept all of your uranium Iran, which you know,
is kind of an.
Speaker 9 (23:50):
Interesting offer from Russia.
Speaker 12 (23:52):
But they're definitely, I wouldn't say they're necessarily on Iran's side.
They're not going to come e them in the event
of military catashph but they would definitely be there to
support them.
Speaker 9 (24:04):
In a diplomatic sense. And I also think, you know,
you've got Saudi Arabia.
Speaker 12 (24:08):
The Saudis definitely aren't best friends with the Iranians, but
relations have certainly improved, and I think the fact that
you see them essentially quiet is really almost.
Speaker 9 (24:18):
A sign of not support.
Speaker 12 (24:21):
They definitely would like to They're more than happy for
Israel to take out Iran's nuclear you know, nuclear arsenal
and nuclear reactors, but they don't want to see Iran
completely devastated.
Speaker 9 (24:33):
That's not a good situation for.
Speaker 12 (24:35):
Them, you know, like a power vacuum in the Gulf
is not going to be a good situation for the Saudis,
or for the Amortis, or for anyone else. So if
it gets to that, you are going to see them
standing up, and I think trying to support the regime ellen.
Speaker 6 (24:49):
Whenever conflicts arise in the Middle East, concentration quickly goes
to the strait of horror moose and the likelihood of
it being closed. Is that the right thing to be
concerned about? Or is there a scenario or you get
what's happening in the Red Sea where you get one
a few tankers attacked and that's enough to convince insurance
companies that it is not worth trying to ensure ships
going through the street.
Speaker 9 (25:10):
So it's interesting. I think there are two points there.
Speaker 12 (25:12):
I do think that we're a bit stuck in this
old paradigm from the twentieth century where we all is
in the West need oil from the Persian Gulf, and
we all remember, or at least those of us who
were alive, and then remember the Iran Iraq War, and
there was a tanker war and both sides were Iran
(25:33):
was trying to prevent certain tankers from leaving the Golf,
and certain tankers needed basically US military escorts in order
to get out, and that caused havoc with oil prices.
So I do think the straight up Room is a
very important waterway, But if you look at the traffic
patterns and the way that ships go around there, there
are other ways to traverse the straits that don't involve
(25:57):
going through Iranian waters.
Speaker 9 (25:59):
So if it did threaten the security of ships there,
there are workarounds.
Speaker 12 (26:03):
They're not that easy and would take some time to
work through, but it is absolutely possible. The other issue though,
is that, like you said, that can Ron actually do this.
It's not clear that they could physically that they could
physically close the straights. On the other hand, they could
cause enough trouble that insurance companies are going to raise
(26:25):
their rates through the roof. Now, does that make it
impossible for ships to go No, people will pay, but
oil prices will have to go up. Customers will have
to pay more in order to compensate for that insurance rate.
When you look at the Red Sea, that's a little
bit different because there is an alternative route you can
go around Africa and a lot of you know, large
(26:46):
ships are equipped.
Speaker 5 (26:47):
To do that.
Speaker 12 (26:47):
So, but with the straight Ufore moves and the Persian Gulf,
other than a couple pipelines that are able to get
oil and other products out without going through the streets.
Speaker 9 (26:58):
There really is no other way out.
Speaker 12 (27:00):
So for a rock cut, some Saudi oil, Bachrainy oil,
there's no other way. The UE has a workaround and
so modifications could be made, but there's nothing else they
can do, so they're going to just have to pay
the higher insurance rates.
Speaker 3 (27:16):
Ellen Waalds of the Atlantic Council, thank you so much,
as always for your insights.
Speaker 2 (27:21):
This is the Bloomberg Surveillance Podcast, bringing you the best
in markets, economics, an gio politics. You can watch the
show live on Bloomberg TV weekday mornings from six am
to nine am Eastern. Subscribe to the podcast on Apple, Spotify,
or anywhere else you listen, and as always on the
Bloomberg Terminal and the Bloomberg Business Out
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and am Marie Hortern. Join us each
day for insight from the best in markets, economics, and
geopolitics from our global headquarters in New York City. We
are live on Bloomberg Television weekday mornings from six to
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or anywhere else you listen, and as always on the
(00:33):
Bloomberg Terminal and the Bloomberg Business app.
Speaker 3 (00:36):
Joining us now is Amanda Liner of a Black Rock.
Speaker 1 (00:39):
Amanda, a difficult time for the Federal Reserved to.
Speaker 3 (00:41):
Be meeting, given that their dueling risks seem to be
their double mandate seems to be very much increasingly in conflict.
Speaker 1 (00:49):
Do you think we're going to learn anything at all
this week?
Speaker 4 (00:50):
Good morning, Thank you for having me. That's the one
thing that we are focused on. I would say the
Summary of Economic projections has the potential to give us
some incremental clarity on their reaction function. We think on
the margin it will reflect a more challenging growth inflation mix.
But keep in mind this is just the median of
all of the different committee members. It's not actually a
cohesive projection from the committee, so we need to kind
(01:11):
of discount that. What we are most focused on is
what would be the scenario analysis the reaction function if
the dual mandate comes into tension. A few months ago
you started see Chair pal Beth Hammock talk about that
being on the radar. I think the incremental news it
has become, as you alluded to, even more challenging with
the geopolitical situation, So that would be the hopefully the
(01:32):
one nugget that we will be looking for is how
would they navigate that backdrop? What would they prioritize. The
SEP already reflects an unemployment rate of four point four
percent for this year, so we know that they are
baking in some weakning in the labor market. How much
weakening would we need to see in order for their
posture to change.
Speaker 3 (01:49):
Earlier this year, there was a feeling that any inflationary
shock from tariffs or trade tensions in general would be
transitory they even use that word, or even short lived.
Speaker 1 (01:57):
Now there's a question of the dual shocks.
Speaker 3 (01:59):
You have the terror for risk, and then you also
have potentially some sort of oil shop that is persistent.
Speaker 1 (02:03):
Even if it's not.
Speaker 3 (02:04):
The closure of the strait of removes, there is this
feeling that there's going to be a higher premium. How
much does that complicate things and create a more sort
of long lasting inflationary impulse.
Speaker 5 (02:14):
I think you nailed it.
Speaker 4 (02:15):
It's not just the inflation data, but inflation expectations. So
even though they're navigating to core PCE, which would exclude energy,
if we do have a rise in oil prices that
is sustained, does that alter inflation expectations for consumers and
could not cause them to react. I would say there's
kind of two fold impacts that we see from this
geopolitical backdrop. Its one, should there be higher U premias
(02:36):
and corporate credit? And then two are there actually sector
specific implications if there are sustained supply chain disruptions. We
haven't seen that yet, hopefully we don't, but those are
really what we're focused on. And then the magnitude and
the duration of that has yet to be seen. Even
when the FED was I would think casually using the
word transitory, when was that back in the March meeting?
It was also CAVEATD with the healthy dose of we're
(02:56):
not quite sure really where this is going. I remember
that meeting very well, and so I think they're even
hesitant to say that they'll be able to look through it.
I think they're just raising the possibility that maybe they
can look through it well.
Speaker 6 (03:07):
To the point of credit markets, again, it's another thing
where we see spreads widen a little bit and then
not really react that much. Where you have seen some
weaknesses in the junkiest part of the market, is the
risk real there? Could you start to see defaults pick
up in that area?
Speaker 4 (03:21):
Sure, So two things I would say, our conversations and
really since early may have focused on two sided risks
exactly as you noted, widening episodes have been short lived,
and actually the common refrain from a lot of investors is, oh,
I wish I would have taken advantage of that. More So,
that's a very real risk, and so we're very focused
on the two sided risks.
Speaker 5 (03:38):
Where we are trading carefully.
Speaker 4 (03:39):
And have been are those kind of left tail pockets
of the market that we're already under pressure before the
economic data deteriated. So, for example, US Triple c's had
interest coverage below one time's already last quarter, it's rebounded
a bit. That was before the economic data deteriated. You
see that in pockets of the leverage level market, you
see it in pockets of private credit. So that's really
(03:59):
where we need to focus is saying, Okay, let's not
be too defensive. There's a real opportunity cost to being
under risked. But at the same time, if a company
was already having trouble growing into its capital structure, or
a sector was already having trouble navigating this environment, nothing
on the horizon's going to make it easier. And so
that's really I think where we are are mindful. I
will add, though the high yield and leverage learned default
(04:21):
rates have been quietly creeping for the past year and
a half and it has not derailed the performance of
the speculative grade parts of the market. So I think
what that's telling you is it's the smallest capital structures
that are defaulting. It's oftentimes repeat defaulters, and that is
by definition priced into the market.
Speaker 6 (04:36):
Well, if we do see I said, that falls in
between that dual mandate and they can't take action and
they can't cut and rates do remain elevated, does that
start to spread well.
Speaker 4 (04:46):
Actually, somewhat counterintuitively, it's probably going to support the yield
base bid for corporate credit, which has been a really
powerful technical force. I would say the yield based buyer
has exhibited some patients on and off, so they're sitting
it out sometimes. But in general, structurally higher interest rates
coupled with okay growth, even below trend growth, that's not
(05:07):
a bad recipe for corporate credit. That would probably bring
some of that yield based demand in off the simelines.
This is also part of the reason why we like
selectively moving down in quality. You were talking about the
volatility and the treasury market. Kind of one of the
understated differences between IG and highyield is high yeld as
a shorter duration market, so you're kind of less exposed
to those swings and treasuries, especially at the long end.
Speaker 3 (05:28):
Just real quickly, here is the private credit market exposed
to for selling based the fact that you're seeing endowments
of universities looking to raise money, not for selling.
Speaker 4 (05:36):
Illiquidity is a feature, not a bug, of private credit.
What I think that is reflective of as a multitude
of factors, and I think it's a positive that actually
folks can make acid allocation shifts over time when they
need to with liquid assets, but it's not a liquid
market by design.
Speaker 3 (05:50):
Amandal Adam of Blackcroc, thank you so much for being
with us as always.
Speaker 1 (06:03):
Right now.
Speaker 3 (06:03):
Aaron David Miller of the Carnegie and Townment for International
Peace joins us erin. I just want to get your
sense of how realistic it is for the calls for
de escalation to actually resonate with either not on Yahoo
or with Iran at.
Speaker 1 (06:18):
A time or both of them seem to be really
digging in.
Speaker 7 (06:20):
Great question, Lucia, thanks for having me.
Speaker 8 (06:22):
I think it's completely unrealistic and detached from the current
reality for three reasons. The Israelis want to destroy as
much of Iran's nuclear program as possible, but they're going
to have a very difficult time doing it, and they
have escalation dominance and their superiority and political superiority. There's
absolutely no pushback from anyone in the region, Europe, from
the United States, from the Trump administration for the Israelis
(06:45):
to stop. As one Israeli general put it, retired, we're
playing soccer with the Iranians, but they have no goalie.
The Iranians having invested five trillion dollars into this nuclear program,
having been embarrassed and humiliated to a degree that is
unprecedented problem in the history of Islamic Republic.
Speaker 7 (07:02):
Are not going to yield on this.
Speaker 8 (07:04):
How deep their ballistic missile inventory is, what twenty twenty
five hundred ballistic missiles. They can keep this up for
some time, and the Americans, I think, are faced.
Speaker 7 (07:15):
Trump administration is faced with a dilemma.
Speaker 8 (07:17):
He does not want to answer this war, but he
cannot stop it. It reminds me of Lennon Johnson's description
in the Vietnam War of a hitchhiker in a Texas hailstorm.
I can't run, I can't hide, and I can't make
it stop. Question for Trump, for all of this, I'm
not sure Trump wants to make it stop.
Speaker 3 (07:35):
Well, that's actually something he's hinted at, this question of
maybe they have to fight it out and just complete it.
From that perspective, what is the ultimate goal though, Erin,
I mean, given the fact that you just said that,
as one general told you, Israel is playing soccer and
Iran has no goalie.
Speaker 9 (07:51):
But what's the ultimate aim?
Speaker 1 (07:52):
Is it regime change?
Speaker 3 (07:54):
How do they achieve something that actually can be sustainable
for the entire region.
Speaker 7 (07:59):
I mean critical question.
Speaker 8 (08:00):
Have you told me on October eighth that eighteen months
into the Israeli Hamas Warren Gaza there will be absolutely
no sign of this conflict debating, I would have said,
you basically are a bad analyst. The fact is the
Prime Minister in Gaza has identified.
Speaker 7 (08:16):
Total victory as a goal. I think what he would
like to do.
Speaker 8 (08:19):
His aspirations would be regime change on one hand, and
number two deploying the United States if he can to
do what the Israelis cannot, which is to destroy four
though and really make a not a dent, but a
major crippling of the Iranian nuclear program, which would set
(08:40):
it back at least at least two years. So I
think right now there's no reason for Ninitaannao to stop.
Speaker 7 (08:48):
Ballistic missiles in Israel are very problematic.
Speaker 8 (08:52):
I mean, the Iranians are launching, maybe ten to fifteen
percent are actually getting through and striking. But you've seen
Ethan reported, you've seen some of the damage. Twenty four
Israelis killed. I think the public will endure this for
quite some time. So right now I see absolutely no
way no off ramp, no possibility.
Speaker 7 (09:12):
And then you, of course raise the.
Speaker 8 (09:14):
Question is what, in fact would a negotiation, other than
cessational hostilities, what would a negotiation between the United States
and Iran produce? Two months of negotiations produced an impast
and I think your writings are in no mood frankly
right now for compromise erin.
Speaker 10 (09:35):
I hear you saying that there is not a likely
off ramp in the near term. But for investors, what
can we watch to look for any signs of de
escalation or escalation from here? You know, what are the
key points that you are looking for?
Speaker 7 (09:53):
Right?
Speaker 8 (09:53):
I mean d escalation I think right now is not
in the cards. I think there's a really good chance
that we'll be in for weeks in It's the escalatory
possibilities that concerned me.
Speaker 7 (10:05):
This is your guys business, not mine. Would concern investors
as well.
Speaker 8 (10:10):
And escalation, I think could occur in one of two ways.
Number One, Iranian ballistic missiles actually end up surging and
you end up.
Speaker 7 (10:19):
With a mass casualty event in Israel.
Speaker 8 (10:22):
Scores hundreds of Israelis are killed or wounded.
Speaker 7 (10:26):
The Trump administration.
Speaker 8 (10:27):
Under those circumstances, Congress are going to be hard pressed,
I think to enter the conflict, and the second path escalation,
or maybe there are three. Second path escalation, would be
a bad decision in the part of the Islamic Republic
to go after American assets, US forces in Iraq, Syria
(10:48):
or obviously forces thirty to thirty five thousand Americans that
are deployed in the Gulf, and they have many short
range ballistic missiles, thousands of them that could produce that.
The third possibility is that the Iranians try some sort
of asymmetrical strategy in which they go after Israeli interests
abroad Jewish interests abroad in a terror attack. I think
(11:12):
that's a back door that would also probably bring in
in the United States. But again we've watched over the
course of the last eighteen months. We've steered clear of
the one thing that investors worry about, the one thing
I would worry about, the one thing the region worries.
Speaker 7 (11:29):
About, and that would be a major regional war.
Speaker 8 (11:31):
We've avoided that this is bringing us. The longer this
goes on, the greater the chances of an escalatory cycle,
an Iranian Saudi conflict and a US conflict, which would
essentially push oil prices, probably well in excess one hundred dollars.
Speaker 3 (11:50):
Aron, just quickly, here one thing that the market keeps
focusing on that could catalyze that kind of regional lord
be shutting down the streets for moves. How realistic is
that given the fact that to anger everybody in the neighborhood,
I mean, the.
Speaker 8 (12:03):
Rinians could probably close it, and the Americans would definitely
open it.
Speaker 7 (12:07):
But again we're talking about a.
Speaker 8 (12:08):
Prolonged delay, filled with uncertainties, all sorts of exit ramps
of an unpleasant nature that is going to make this
extremely unpredictable.
Speaker 3 (12:19):
Aaron David Miller of the Carnegie Endowment for International Piece,
Thank you so much.
Speaker 1 (12:22):
For the insight. Here's eldest the Federal Reserves today meeting
kicking off tomorrow. The f ONEC widely.
Speaker 3 (12:38):
Expected to hold rate steady but update its economic forecast,
giving markets a clue about how officials will handle tariffs,
inflation and more. Joining us now for that potential scenario
analysis is Steve Verstudo of Mizuho.
Speaker 1 (12:50):
Steve, great to see you, Thank you so much for
being here.
Speaker 9 (12:53):
Just before we.
Speaker 3 (12:53):
Get into what the Fed does, I want to bring
you into the debate that Kelsey and I were having earlier.
How important is it that in the risk on Friday
and today you are not seeing bonds full faith and
credit rally.
Speaker 5 (13:06):
I think there's a number of things.
Speaker 11 (13:08):
A people have questioned the dollars reserve currency status, people
have questioned a lot of interesting information about where people
are going from a global perspective in terms of investing
in the United States.
Speaker 5 (13:20):
The reality is we haven't seen much.
Speaker 11 (13:22):
Okay, so yeah, the dollar is down a little bit,
but on a DXY basis, it's still very, very healthy.
Under Joe Biden, we were at ninety on a DXY basis,
and we're talking about ninety seven ninety eight.
Speaker 5 (13:33):
Now, what's the big deal?
Speaker 11 (13:36):
The reality is, when you look at most markets, there's
very little impact of anything. And I think this goes
to the fact that there is no systemic risk in
the economy.
Speaker 5 (13:44):
There is no balance sheet related risk.
Speaker 11 (13:47):
There's excess liquidity, there's excess global savings, and there's a
lot of oil floating around in the world. And I
think when you put all of that together, you can
easily see why Marcus are just sitting there saying, Okay,
we've tried to sell off several times.
Speaker 5 (14:00):
I've tried to rally several times. We've had eight recession calls.
Speaker 11 (14:03):
Since twenty twenty two. None of them have worked. Let's
just get on with life.
Speaker 10 (14:08):
So you're essentially describing a bit of an equilibrium where
everything is just.
Speaker 5 (14:12):
Kind of at this steady state.
Speaker 10 (14:14):
And so that gets me thinking about this concept of
the neutral rate, which the FED estimates in the dot plot,
and they're going to do another.
Speaker 9 (14:22):
Crack at that.
Speaker 10 (14:23):
That neutral rate has been taking higher, It's about fifty
basis points higher over the last year, but the Fed
still thinks that the current level of policy is restrictive.
Speaker 9 (14:33):
What do you think.
Speaker 11 (14:35):
I don't think the current level of policy is restrictive,
having for quite some time, I think the FED rate
cuts last year were a disaster. I think trying to
repeat that again this year would be a bigger mistake.
Speaker 5 (14:45):
I think when you look at a two.
Speaker 11 (14:46):
Percent real greater growth in the economy, an inflation rate
that's running about two two and a half percent, you're
looking at four and a half percent neutral rate from
a nominal FED funds rate perspective, And to me, where
are we right now four and a half percent? I
think we should be ending the year closer to five percent,
because I think inflation will be three percent.
Speaker 5 (15:03):
And I think the only reason why you haven't seen
inflation from tariffs coming.
Speaker 11 (15:08):
Through is because in this environment, while there's negotiations going on,
a lot of CEOs are sitting there saying I'm not
going to be the first one to move to raise
prices because I don't want to lose market share. I
pre inventoried a lot of stuff. I've got time, I've
got opportunity. Let's see how this plays out before I'm
make any decisions.
Speaker 10 (15:25):
Well, we would certainly agree with you in terms of
the inflation assessment. We also took a look at that
and said, yeah, I mean, you're not going to get
negative goods prices on goods prices month over month on
a persistent basis. But I do want to kind of
drill into this idea of goldilocks and how long it
can persist this equilibrium, particularly on the labor market side,
(15:46):
because what caught my eye last week was continuing claims
which continue to rise. Use just those cracks under the surface.
Do you see those as a concern? Is there anything
there for the FED to be worried about claims?
Speaker 11 (15:57):
And continuing claims on a forward moving average or at
exceptionally low levels. When you look at the covered employment there,
even at a lower level, there's no risk whatsoever in
this labor market.
Speaker 5 (16:09):
And I think that's the key.
Speaker 11 (16:10):
I think if you're looking for one market where there's
potentially a movement out of equilibrium, it is the labor market.
But that is only a move towards a tighter labor market. Okay,
once you get this tax cut done, and this tax
cut I think will be bigger than anyone still currently thanks,
I think you don't wind up seeing what a much
tighter labor market and much greater push on inflation. And
(16:30):
therefore I question whether or not the Fed's going to
get the so called two rate cuts out this year.
Speaker 1 (16:34):
So you think that maybe the Fed's not going to cut.
Speaker 5 (16:36):
Is that kind of your call?
Speaker 11 (16:37):
Hour call has been the Fed shouldn't cut whatsoever, And
therefore we believe the Fed won't cut.
Speaker 3 (16:41):
So there's a question here about longer term bonds and
how that really bleeds through at a time when people
have not seen this as a haven, and there's been
a real question about the inflation risk being priced in
or not. And I'm just wondering do you see yields
going higher from here with questions about US assets as
a haven as well as potential that's only exacerbated potentially
(17:03):
by inefficiencies and oil shocks that might come up along
the way.
Speaker 11 (17:06):
I mean, I think we're supposed to get to five
percent on the tenure note.
Speaker 5 (17:10):
I don't think that's a disaster.
Speaker 11 (17:12):
When you look at what's happening in the boj market,
for example, they're having a significant amount of problems.
Speaker 5 (17:17):
There is yields rise in Japan.
Speaker 11 (17:19):
You look at Europe, European rates probably aren't going to
go up because Europe's a mess, and Christine Legard doesn't
think she needs to cut interest rates and she does,
so I think you've got this situation. Well, I'd rather
buy Europe because Europe's more likely to go into deflation
than by the US, where we're likely to have three
percent inflation. So I don't think we have to get
beyond the macro into this geopolitical concern about solvency and
(17:45):
sovereignty and all this other garbage and reserve currency to
explain what's happening in markets. What's happening in markets is
you're reflecting relative interest rate differentials based on relative inflation
differentials and.
Speaker 5 (17:57):
Relative real growth.
Speaker 11 (17:58):
And there's nothing that's mysterious about this.
Speaker 5 (18:01):
It's traditional macroeconomics.
Speaker 10 (18:03):
So we're continuing to work through one big, beautiful bill
that's going on underneath all of these headlines that we've
been dealing with. And I was curious, you know, the
way I think about deficit expansion is there's deficit expansion
and then there's fiscal impulse.
Speaker 5 (18:19):
So some of the improvement or.
Speaker 10 (18:23):
Deterioration in the deficit is a function of just extending
the tax cut was isn't necessarily a fiscal impulse. How
do you differentiate between the two?
Speaker 5 (18:33):
And you mentioned.
Speaker 10 (18:33):
Already that you see the risk is actually to more
fiscal impulse and more deficit expansion from here.
Speaker 5 (18:41):
Yeah, no, I agree with you.
Speaker 11 (18:42):
I mean, if you were just going to extend the
tax cut alone, you would not have a major positive
impulse into the economy. But we're not going to do that.
And I think the interesting thing is all this stuff
is going on, and the bill is working its way
through the system without the political without the news oversight
to it that it would normally deserve to get. And
this is what happened when suddenly the House passed the bill.
Speaker 5 (19:06):
Okay, when it came out of committee.
Speaker 11 (19:08):
In the House, so many people walk up, Oh my god,
it's not just extending, you know, the Trump tax cuts.
And I think, you know, this is part of the
process of how the bill is getting done as quickly
as it is. And I still think their game plan
is to get it done by July fourth and have
it implemented by October one.
Speaker 5 (19:24):
So they could have a full year of real.
Speaker 11 (19:26):
Tax cuts coming through the economy going into the November elections.
Speaker 5 (19:30):
And I think that's the game plan here.
Speaker 11 (19:32):
I think the game plan is teriffts of the diversion
to get the tax cut, tax cuts are the reason
to get the midterm. The midterm is to get to
what they really want to do, which is.
Speaker 5 (19:41):
Drain the swamp.
Speaker 3 (19:41):
Well, this is what we're going to try to focus
on as we parse through all the different risks that
are coming up and dominating the new stever Shudo of
a zooha, thank you so much for being with us.
Back to our top story for market, it's a fourth
(20:02):
day of fighting between Israel and Iran, raising uncertainty for
energy markets. Ellen Walls of the Atlantic Council, writing, if
Israel can take out Iran's ability to produce gasoline, diesel
and provide electricity, the situation becomes significantly more dire. If
the regime cannot maintain control through the use of force,
it will likely fall.
Speaker 1 (20:22):
Ellen joins us.
Speaker 3 (20:23):
Now, Ellen, thank you so much for being with us,
and we are just getting word from the Prime Minister
of Benjamin Natan Yahoo that Israel is on the way
to destroying Iran's nuclear and missile threats. Do you have
a sense, Ellen of what the endgame could possibly be?
Speaker 12 (20:38):
You know, it's interesting because I think for Israel, the
real endgame is just to take out all of the
Iran's ability to threaten them, so the missile sites, the
nuclear sites.
Speaker 9 (20:50):
I don't think that.
Speaker 12 (20:51):
They're really aiming for regime change. I mean, they don't
want to participate in that. I think that there's also
the understanding amongst them and also amongst US policy makers
that what would take its place, and sometimes.
Speaker 9 (21:05):
Uh, the a lack of a regime or a power.
Speaker 12 (21:09):
Vacuum could be even more dangerous. I mean, you know,
there's the IRGC is probably the strongest entity in Iran,
and so if you know the civil government falls, It's
possible the IRGC or what's left of it, would take over,
seeing that they have you know, control of most of
the use of force there, and that could be you know,
(21:29):
potentially a worse situation than they're in now. So I
think there's a very delicate balance here between causing you
a widespread destruction.
Speaker 9 (21:38):
If you're going to take out you know, multiple.
Speaker 12 (21:40):
Fueling stations and you're going to take out multiple refineries,
then you're going to essentially, you know, send around to
the dark ages for a period of time, and things
could really fall apart at.
Speaker 9 (21:53):
The individual and city level.
Speaker 12 (21:56):
So I think that they're they're really, i think, working
more towards taking out the military capabilities as opposed to
trying to say, foment widespread destruction.
Speaker 3 (22:06):
Allen, A lot of people have talked about the idea
of some sort of broadening out of the conflict and
embroiling a greater number of countries in the region in
this war.
Speaker 9 (22:15):
I just wonder, who's Iron's friend.
Speaker 3 (22:17):
Why is there anyone or is there anyone coming to
Iran's defense in any capacity, or are more of the
nations on Israel side, or just frankly don't want to
get involved in any way, shape or form.
Speaker 12 (22:29):
So I think that in terms of say friends, I
think that Iran has potentially has maybe some strategic allies
that could be useful in maybe arguing Iran's case in
a diplomatic situation. So take China for example, China buys
a lot of oil from the Iran.
Speaker 9 (22:48):
Relatively they're Iran's largest customer. But because Iran.
Speaker 12 (22:54):
Buys that oil and they accept Chinese currency, they have
to spend a lot of that Chinese currency on good.
Speaker 9 (23:00):
And services from China.
Speaker 12 (23:01):
So China does a lot of business in Iran, and
China doesn't want to see this situation fall apart. If,
in fact, it gets so dire that there are threats
to Chinese ships or oil tankers that are heading for China,
you know, coming out of the Persian Gulf, and that's
not just Irani and ships that could also be ships
coming from Saudi Arabia, from Krewate, from other oil suppliers,
(23:23):
then China is definitely going to exert the full weight
of its economic might internationally and on Iran and say, okay,
you know you've got to cut a deal.
Speaker 9 (23:32):
This has to end.
Speaker 12 (23:34):
You know, this is not worth threatening our you know,
economic relationship Russia likewise. In fact, we saw Russia saying, now, hey,
we want to We're ready to, you know, facilitate negotiations
and we'll accept all of your uranium Iran, which you know,
is kind of an.
Speaker 9 (23:50):
Interesting offer from Russia.
Speaker 12 (23:52):
But they're definitely, I wouldn't say they're necessarily on Iran's side.
They're not going to come e them in the event
of military catashph but they would definitely be there to
support them.
Speaker 9 (24:04):
In a diplomatic sense. And I also think, you know,
you've got Saudi Arabia.
Speaker 12 (24:08):
The Saudis definitely aren't best friends with the Iranians, but
relations have certainly improved, and I think the fact that
you see them essentially quiet is really almost.
Speaker 9 (24:18):
A sign of not support.
Speaker 12 (24:21):
They definitely would like to They're more than happy for
Israel to take out Iran's nuclear you know, nuclear arsenal
and nuclear reactors, but they don't want to see Iran
completely devastated.
Speaker 9 (24:33):
That's not a good situation for.
Speaker 12 (24:35):
Them, you know, like a power vacuum in the Gulf
is not going to be a good situation for the Saudis,
or for the Amortis, or for anyone else. So if
it gets to that, you are going to see them
standing up, and I think trying to support the regime ellen.
Speaker 6 (24:49):
Whenever conflicts arise in the Middle East, concentration quickly goes
to the strait of horror moose and the likelihood of
it being closed. Is that the right thing to be
concerned about? Or is there a scenario or you get
what's happening in the Red Sea where you get one
a few tankers attacked and that's enough to convince insurance
companies that it is not worth trying to ensure ships
going through the street.
Speaker 9 (25:10):
So it's interesting. I think there are two points there.
Speaker 12 (25:12):
I do think that we're a bit stuck in this
old paradigm from the twentieth century where we all is
in the West need oil from the Persian Gulf, and
we all remember, or at least those of us who
were alive, and then remember the Iran Iraq War, and
there was a tanker war and both sides were Iran
(25:33):
was trying to prevent certain tankers from leaving the Golf,
and certain tankers needed basically US military escorts in order
to get out, and that caused havoc with oil prices.
So I do think the straight up Room is a
very important waterway, But if you look at the traffic
patterns and the way that ships go around there, there
are other ways to traverse the straits that don't involve
(25:57):
going through Iranian waters.
Speaker 9 (25:59):
So if it did threaten the security of ships there,
there are workarounds.
Speaker 12 (26:03):
They're not that easy and would take some time to
work through, but it is absolutely possible. The other issue though,
is that, like you said, that can Ron actually do this.
It's not clear that they could physically that they could
physically close the straights. On the other hand, they could
cause enough trouble that insurance companies are going to raise
(26:25):
their rates through the roof. Now, does that make it
impossible for ships to go No, people will pay, but
oil prices will have to go up. Customers will have
to pay more in order to compensate for that insurance rate.
When you look at the Red Sea, that's a little
bit different because there is an alternative route you can
go around Africa and a lot of you know, large
(26:46):
ships are equipped.
Speaker 5 (26:47):
To do that.
Speaker 12 (26:47):
So, but with the straight Ufore moves and the Persian Gulf,
other than a couple pipelines that are able to get
oil and other products out without going through the streets.
Speaker 9 (26:58):
There really is no other way out.
Speaker 12 (27:00):
So for a rock cut, some Saudi oil, Bachrainy oil,
there's no other way. The UE has a workaround and
so modifications could be made, but there's nothing else they
can do, so they're going to just have to pay
the higher insurance rates.
Speaker 3 (27:16):
Ellen Waalds of the Atlantic Council, thank you so much,
as always for your insights.
Speaker 2 (27:21):
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