June 25, 2025 • 20 mins
- Matthew Hornbach, Global Head: Macro Strategy at Morgan Stanley
- Amrita Sen, Founder and Director of Research at Energy Aspects
- Jon Lieber, Head: Research at Eurasia Group
- Sheila Kahyaoglu, Managing Director: Equity Research at Jeffries
Matthew Hornbach, Global Head: Macro Strategy at Morgan Stanley, joins for a look at inflation and outlook for the US economy. Amrita Sen, Founder and Director of Research at Energy Aspects, talks about the possibility of an oil spike amid uncertainty surrounding the Israel-Iran conflict. Jon Lieber, Head: Research at Eurasia Group, talks about rising geopolitical risks. Sheila Kahyaoglu, Managing Director: Equity Research at Jeffries, joins to discuss the outlook for the airline industry amid defense spending changes.
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Episode Transcript
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Speaker 1 (00:00):
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 Amrie Hordern. 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 nine
am Eastern. Subscribe to the podcast on Apple, Spotify or
anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business app. This Turns a Crude.
President Trump surprising traders by posting on True Social that
China can continue purchasing oil from Iran, Brent crude coming
off the biggest two data client since twenty twenty two,
and Rediscent of Energy Aspects joined us now for more
and Rita, I want to get to this, this line
that's coming for the president. Can you help me answer this?
When did China stop buying a Runnian crude?
Speaker 1 (01:00):
I think that's a question you might have to ask him.
But basically there's been a lot of confusion since that
statement that, to your point, China hasn't stopped buying Iranian crewed.
China still buying one point five to one point seven
million barrel speer of Iranian crude. There was maximum pressure
under the first Trump administration, which did get exports down
to four hundred thousand, but then since the Biden administration
(01:22):
took office, it's been kind of creeping up. And then
election and high all prices were an issue, so the
administration turned a blind eye. So yesterday when the kind
of tweet came out, everybody was like, Okay, does this
mean sanctions are being lifted?
Speaker 3 (01:35):
You know?
Speaker 1 (01:35):
Anyway, the point being, since then the White House has
clarified this is not a change in sanctions policy. However,
we would also say this does mean that there's not
going to be a tightening in sanctions either. I status
score prevails, China continues to buy about one point five
to one point seven million barrel spade of Iranian all.
Speaker 2 (01:53):
Just built on some of those numbers, Zen rat, what
is that of a share of total Iranian production? The
amount of barrels that are on the market right now already.
Speaker 1 (02:03):
So Iranian production is about three and a half eh
million barrels putting oscillates a bit between three point five
three point seven. All their exports, whatever they are exporting,
goes to China and the rest of it is consumed domestically.
Speaker 4 (02:15):
Which is the reason why this is such a big
potential buyer and why this is such a big deal
for the oil markets in terms of who else would
supply that and what this would mean for the price.
Does this suggest that this is part of the ongoing negotiation,
that the goal is to keep oil prices low and
the bet against that is frankly a fool's earned.
Speaker 1 (02:37):
I would say that's exactly how the market's interpreting it.
You know, when we are talking to our clients, the
general impression is that, look, we know President Trump wants
low oil prices. He's gonna get it in one way
or the other. Right, So if that means that, especially
because we were in the high seventies not that long ago,
that means that we are not gonna see tightening up sanctions,
and I think traders are very much focused on that.
(02:57):
The fact that he wants low oil prices, especially ahead
of the bill, and he has been saying that consistently right,
that he doesn't want prices to go up. Inflation is
a big concern. So that's where I think the market
kind of reality. That's why the market reacted the way
it did in terms of selling it so hard. But
at least since then it's been clarification that sanctions are
still in place. This is China avoiding sanctions in the
(03:18):
US not doing anything about it. But yes, it does
mean that there's more oil in the market than otherwise
would be.
Speaker 3 (03:23):
But from a.
Speaker 4 (03:23):
Trading perspective or MADA doesn't this act as a cautionary
tale to anyone who tries to expect oil prices to
rally in any kind of material way, that there is
a Trump put an essence on that, that there is
a willingness to navigate the geopolitical situation in a way
that brings down oil prices one way or another. So
why would you bet one hundred dollars crued or ninety
(03:44):
dollars accrued, which is the worst case scenario that so
many people are talking about.
Speaker 1 (03:51):
Yeah, no, I completely agree, and I've been surprised that
people have been calling for that. You know, we've never
I mean, I've been with you guys saying that non
seventy and eighty is not going to be sustainable given
where the ballot are and you know, people are looking
towards those bills that we are also predicting from Q
four onwards. I think the challenge, of course, is that
this is not a market you can short either, because
these risks and the geopolitical risks are real. Fundamentally, though
(04:14):
the writer right now remains very very tight. Stocks are
very tight. Cushing just look at that, it's super low.
So this is this is also equally hard to short.
But on a macro level, your point is very valid
that Trump and his policies will somehow make sure that
prices don't run away too quickly. It does mean that
generally there's a bias towards the lower side.
Speaker 2 (04:35):
I'm rat can we just finish up asking you what
the demands side looks like at the moment. I think
economists are really scratching their heads at the moment about
when the economy is, particularly here in the United States,
we're trying to gauge where we are speaking to company executives.
What's your take just looking through the prism of crude oil.
Speaker 1 (04:52):
Yeah, I mean it's not great, but it's not dire either,
And I think we're kind of in between our demand
numbers between seven to eight hundred thousand boules per day
growth year on year. Again, the US is actually doing okay,
Europe is doing very well, China not so much. And
I think that's kind of the spectrum. We don't think
this is a recessionary environment in the sense of what
people were expecting when tariff fears were at its peak.
(05:15):
But it's also not an environment where global growth is
humming along very nicely.
Speaker 2 (05:19):
I'm ready to say advantagy aspects. I'm ready to thank
you joining us. Now have to discuss John Leeber of
the Erasia Group. John, welcome to the program, sir. Before
we get sort of needy with what's handling over in Europe,
I think we want to talk about the president's agenda
(05:40):
and the key deadline still to come July fourth, the
south impost deadline for the tax bill. July ninth, this
south impost deadline for a trade deal with the whole
host of countries. John, where do you think will be
by the time we get to the middle of July.
Speaker 5 (05:55):
You know, this tax deal is coming together and they're
basically done with it. There's a couple of kind of
dotted eyes and cross te's they've got to think about
right now, and of.
Speaker 6 (06:03):
Course there's the House of Representatives, who.
Speaker 5 (06:06):
Isn't going to like the deal that's coming out of
the Senate necessarily, but I think it's going to have
a really hard time voting against this thing. You're going
to have unanimity among the conservatives in the Senate to
pass a bill with deep cuts to Medicaid, the most
impactful cuts that they've done on an entitlement program in decades.
And I think that some of the moderate members are
probably where you're going to have a harder time getting
(06:27):
the votes because of the issue with the salt cap,
which is how the Senate's moved back down to ten
thousand dollars. The House had passed it at forty thousand dollars.
That's going to be an issue you have to work out.
But it you know, Brett, President Trump now out there
true thing that nobody should go home for the fourth
of July holiday until this has passed. If it doesn't
pass next week, it's going to pass shortly thereafter. On
(06:48):
the tariffs, you know that ninety day pause is up
on July ninth, and a lot of countries, you know,
there's a lot of countries are still negotiating their deals.
So I think it's notable that despite the really early
momentum around Japan, India, the UK of course announced something.
Speaker 6 (07:04):
You haven't finalized anything.
Speaker 5 (07:06):
So they're going to have to extend this ninety day deadline,
and they're probably going to do it for most of
the biggest countries.
Speaker 6 (07:12):
But I also think they're going to send a message.
Speaker 5 (07:14):
Here by increasing tariffs on some countries, maybe not back
to Liberation Day levels. Trump still has total discretion here
as to what level he's going to get to. But
some of these tariffs are going up, and only Trump
knows which ones that is. The White House staff doesn't know,
and I think they probably haven't made that determination and
won't for at least a week or two.
Speaker 2 (07:32):
And John, this president doesn't stop, by the looks of things,
He never sleeps. After the next few weeks, what's left
of his agenda? What does he focus on?
Speaker 5 (07:40):
I think that it's going to be crisis response, right, So,
I mean this is going to look a lot like
the first Trump term where they did the tax You
know that they tried and fail on healthcare in the
first half of the year, and then the second half
of his first year was all tax reform. And then
in year two it was kind of just you know,
Trump tweeting about all kinds of subjects that was whatever
was on his mind and responding to what was going
on in the world, and then of course picking a
(08:02):
trade battle with China. He's already picked the trade battles.
He's going to be done with his tax agenda. You know,
there's going to be foreign policy crises that come up
from time to time, like we just saw in Iran
this week.
Speaker 6 (08:12):
But he's not actively pushing much.
Speaker 5 (08:15):
And on the deregulation front, you know, I hear a
lot of people talking about the tailwind coming from deregulation
in the latter half of Trump's term coming up. But
that stuff takes time, and they're going to stop enforcement
across a number of for example, financial regulations basically, but
deregulation itself is a whole process, and if they want
(08:35):
it to stick up in the court, they have to
do it right.
Speaker 6 (08:37):
And doing it right.
Speaker 5 (08:38):
Means going slow, and it means you won't see the
results from the deregulation, if there is any, until possibly
the end of Trump's term or even after, when all
of that, of course, could be reversed potentially by a Democrat.
Speaker 6 (08:50):
John, There's a lot to unpack there.
Speaker 4 (08:51):
I want to talk about crisis response in particular to
foreign policy. It seems like people are taking the recent
developments in the Middle East as providing something of a
roadmap for how President Trump will respond to future international crises.
Speaker 6 (09:05):
What's your take on that.
Speaker 4 (09:06):
What did we learn from the way the President handled
Iran and the attacks by Israel.
Speaker 6 (09:13):
Yeah.
Speaker 5 (09:13):
I think what we learned, and this has been a
pattern throughout Trump's time, is that foreign policy's pretty easy
for him when there's a power imbalance. When there's a
power imbalance and the US can respond with overwhelming force
and has no risk really of being struck back at
Trump will strike. He did it in Iran twice now
with the assassination of Sulimaney and now this unprecedented level
(09:33):
of bombing. But if you look, for example, at Russia,
where there's less of a power imbalance, they have nuclear
arms already, there's nothing really Trump can do to intervene
in that conflict. So I think this is going to
be something that other countries are paying attention to. I'm
sure China is paying attention to what happened in Iran
this week. China's diplomacy and their ambitions have a much
(09:53):
longer timeframe, and they're much less of an active threat
to their neighbors than Iran Wi, So that situation is
obviously very different, of course, But I do think that
I think that Trump is willing to act. He's not
going to commit American troops on the ground that I
think that's a red line for him, but he is
willing to throw American firepower at countries that are irritating
(10:14):
him if he thinks he's going to win without consequences.
Speaker 2 (10:17):
This is kind of a curveball.
Speaker 4 (10:19):
But you talk about we learned something about President Trump's
response based on the mayoral primary election in New York.
What have we learned about the Democratic response to President
Trump's policies, if anything, Has that sort of served as
something of a roadmap?
Speaker 6 (10:34):
Yeah, I don't think so.
Speaker 3 (10:35):
No.
Speaker 5 (10:35):
I mean, New York City, you know, great, most important
city in the country, but it is not representative of
the rest of America. And I don't think that a
socialist mayor in New York City is going to be
a look that the rest of the Democratic Party necessarily
wants to embrace for the midterm elections. I expect the
party's going to try to run from him. However, there
is going to be a backlash against President Trump that
(10:57):
is going to have very is going to have the
left wing in its flavor, and that is going to
be a national story. And you're going to have this
battle inside the Democratic Party for who's most likely to
win in general elections. You know, the social is emerging
from the primary is not going to win in Missouri,
but they can win in New York City. That's not
really a roadmap for the rest of the party.
Speaker 2 (11:18):
Hey, John, I appreciate your thoughts as always, John Labor
of the range of Great John, I guess now is
Sheila Shelda?
Speaker 5 (11:33):
Good to see you.
Speaker 7 (11:34):
It's you.
Speaker 2 (11:34):
The defense spending very much in focus given this headline
as well coming out of the NATO summit, companies like
Ryan mattau German Defense operator that stock is already up
one hundred and seventy seven percent so far this year.
How much of this story is already well priced?
Speaker 7 (11:49):
Well, we focus on the US names, as you know,
John's coach and in terms of what we're seeing as
we're at the Paris are Show last week, it's historically
a commercial aerospace show. But a lot of focus on
defense exposure. European defense companies are trading at fifty times Zebadah.
These multiples are ridiculous, and we're seeing a lot of
focus from US investors into European names, but also undiscovered names.
(12:09):
Whether it's a name like Aero Environment that reported last night,
albeit in our coverage it's an Israeli named thirty percent
Israel exposure, twenty percent US exposure, twenty five percent Europe.
So who has hidden European exposure that could benefit from
some of the NATO spending, which is going to pour
hundreds of billions into additional defense spend.
Speaker 4 (12:28):
Do we have a sense of which region of defense
contractors Europe will be working with disproportionately. Will it be
mostly European defense manufacturers, Will it be the United States?
Will it be elsewhere?
Speaker 6 (12:41):
Does it matter?
Speaker 4 (12:41):
Is this being used as a diplomatic tool or is
this just where they can get them in order to
get their forces up.
Speaker 7 (12:47):
Historically it's been two thirds of European spending has been
flowed back to the US. But companies like ran Mattall
are really emerging investing in their local capacity. In the
last month, we've met with all five defense contractors, and
the common theme is.
Speaker 4 (13:00):
Local for local.
Speaker 7 (13:01):
Yes, we have a facility in Spain, we have a
facility in Poland. So we think about fifty percent of
the NATO spend will come back to the US. And
I actually think over the next five years it'll be
focused on missiles, munitions, replenishing what got lost in Ukraine.
And over the long term, I think what we'll lose
out on is the fighter aircraft, you know, the local
teams France SAB will have local manufacturing of larger equipment
(13:27):
in Europe, and US will still supply missiles air defense,
which is where the US really excels at.
Speaker 4 (13:33):
Yeah, to build on that, there was this feeling and
John you mentioned it it was like watching top Gun
in action over the past couple of weeks in terms
of the B two bombers and what they actually engage
with and how much is that, you know, different countries
around the world saying I want that versus just the
very nuts and bolt of you know, I need another
missile here, I need another thing there. I mean, is
that kind of the sort of more humdrum aspect of
(13:54):
what we're actually talking about here from the European.
Speaker 7 (13:56):
Buildout yeah, I think we have to give the North
or B two bomber minute here because I just I
think it's so amazing and it just happened this weekend
and everybody brushed it off on Monday morning. The last
time it was used was against Yemen in twenty twenty four,
but aside from that, it was used in Libya in
twenty seventeen and twenty eleven before that, so we don't
use these that often. I went to the facility in
(14:17):
Palmdale where Northurope sustains them. I mean, the coding itself
costs hundreds of millions to recode every time, so it's
pretty cool aircraft. We only have twenty of them. We
use seven over the weekend, so I think it also
helps accelerate the Trump agenda, whether it's the next generation
fighter with NGAD which they awarded to Boeing, and pulling
forward things like the B twenty one, which is also
(14:39):
a North of aircraft.
Speaker 2 (14:40):
What about what we have seen sat place in Ukraine
in the war between Ukraine and Russia and their ability
to cause serious damage to air defense of the Russians
were just drones. That seems to be a major development
over the last couple of years, the character of war
has changed, and I wonder if the type of investments,
the kind of things that people invest in in defense
is changing too.
Speaker 7 (15:01):
I think a little bit of both. The Reconciliation Bill,
which is about one hundred and fifty billion, has nine
billion dedicated to drones and other autonomous vehicles. So the
Trump agenda really focuses on accelerating technology and what the
next war will look like, whether it's against China, but
it also pushes forward their agenda. One of the things
I do really appreciate is how the bill really pulls
(15:23):
forward programs that are already accelerating, whether it's like tech
strons Flora program, if we have it, if it's in
the air, why are we waiting for certain milestones to
be reached?
Speaker 2 (15:33):
Shida, important conversation, good to see. As a ways, Thank you,
Silda Holy that of Jeffries on defense, spending a lot
of spending on defense in Europe and again in the
United States. What does it mean for fixed income and
(15:53):
this spawn market? Matt home back at Morgan Stanley joins
us now for more. Matt, Welcome to the program. Sir
was going through the midiear outlook from yourself, the team.
Let's talk about the bond market, caill and the dollar.
Speaker 6 (16:02):
Call.
Speaker 2 (16:03):
With that in mind, what's the new base case for
you and the.
Speaker 6 (16:05):
Team, John, thanks for having me on the show.
Speaker 3 (16:09):
Yeah, we see both of these assets going down.
Speaker 6 (16:15):
The dollar we see going down in price.
Speaker 3 (16:17):
We have the dollar depreciating about ten percent over the
next twelve to eighteen months. And then for treasury yields,
we have treasure yields also falling. We have the tenure
yield ending this year at four percent, and we have
it ending closer to three percent by the end of
twenty twenty six. Now, both of these forecasts, of course,
(16:39):
are related.
Speaker 6 (16:41):
They are driven primarily by.
Speaker 3 (16:44):
A federal reserve, which ends up cutting policy rates much
more aggressively than what markets are currently pricing in. We're
more confident, i would say, on the magnitude and the
direction of those rate cuts as opposed to the exact
of those cuts. As I'm sure you read in the note,
(17:04):
we don't have the FED cutting this year, but we
have the FED cutting a lot next year. That's an
interesting feature of the outlook, but is one that's subject
to change, of course.
Speaker 2 (17:13):
Matt, what are the economic conditions that lead to those
deep cuts in twenty six.
Speaker 6 (17:18):
Yeah.
Speaker 3 (17:19):
So, ultimately, the first is that we get past the
hump on tariffs. Right, tariffs create a temporary inflationary impact.
Our economists have that impact concentrated in the third quarter
of this year, and then by the time we get
to the fourth quarter, those tariff effects are starting to
fade away and you begin to see the weakness and
(17:42):
the labor market really come through. That's ultimately what catalyzes
that discussion on the Fed to begin lowering rates, which
our economics team has happening in the first quarter of
next year.
Speaker 4 (17:54):
Why aren't you worried, Matt, that when the Fed does
lower rates, it won't cause the long end yield to
rise kin to what we saw last year.
Speaker 3 (18:03):
Yeah, well, I think what happened last year Lisa is
the Fed did cut rates, and interest rates did go
down temporarily. But then we went into the US election
and the market, being forward looking, began to speculate on
what was to come after the election, and of course
at that time, investors were thinking about much larger deficits,
(18:25):
more government bonds supply, kind of a better economic outlook
than we think exists at the moment. So it was
a different time, and we're not expecting that to happen again,
at least for another three and a half years, Matt.
Speaker 4 (18:39):
Given the discussions heading into July fourth and then July ninth,
it does seem like the deficits going to deepen in
the United States. Why is that not a threat to
your call to go into duration to buy those ten
year bonds that maybe other people are steering clear of.
Speaker 3 (18:54):
Well, the expectations for the deficit have actually changed quite
a lot, and the primary driver that change is, of course, tariffs.
Coming into this year, most investors didn't expect the Trump
administration to do as much with tariffs as they have done.
And so when we think about what kind of revenue
are these tariffs going to generate? And don't ask us,
(19:15):
you can ask the Congressional Budget Office what it thinks
about the revenues generated by the tariffs that are currently
in place today, And the CBO scored that tariff revenue
around two and a half trillion dollars over ten years.
Presumably some of that's front loaded, So we are seeing
a meaningful increase in revenue that was not expected coming
(19:37):
into the year. That's going to mean that deficit expectations
are actually lower than where they were right around the
time of the election last November.
Speaker 2 (19:46):
Matt, have you got a window in that office? Going
to extend a window? Some daylight?
Speaker 3 (19:51):
I do have some daylight. Good, but really my daylight
comes from the picture of my daughter behind me.
Speaker 2 (19:56):
That's beautiful. Matt homeback of Malken Stanley. Matt, thank you.
This is the Bloomberg Surveillance Podcast, bringing you the best
in markets, economics, a 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 ol
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 Amrie Hordern. 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 nine
am Eastern. Subscribe to the podcast on Apple, Spotify or
anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business app. This Turns a Crude.
President Trump surprising traders by posting on True Social that
China can continue purchasing oil from Iran, Brent crude coming
off the biggest two data client since twenty twenty two,
and Rediscent of Energy Aspects joined us now for more
and Rita, I want to get to this, this line
that's coming for the president. Can you help me answer this?
When did China stop buying a Runnian crude?
Speaker 1 (01:00):
I think that's a question you might have to ask him.
But basically there's been a lot of confusion since that
statement that, to your point, China hasn't stopped buying Iranian crewed.
China still buying one point five to one point seven
million barrel speer of Iranian crude. There was maximum pressure
under the first Trump administration, which did get exports down
to four hundred thousand, but then since the Biden administration
(01:22):
took office, it's been kind of creeping up. And then
election and high all prices were an issue, so the
administration turned a blind eye. So yesterday when the kind
of tweet came out, everybody was like, Okay, does this
mean sanctions are being lifted?
Speaker 3 (01:35):
You know?
Speaker 1 (01:35):
Anyway, the point being, since then the White House has
clarified this is not a change in sanctions policy. However,
we would also say this does mean that there's not
going to be a tightening in sanctions either. I status
score prevails, China continues to buy about one point five
to one point seven million barrel spade of Iranian all.
Speaker 2 (01:53):
Just built on some of those numbers, Zen rat, what
is that of a share of total Iranian production? The
amount of barrels that are on the market right now already.
Speaker 1 (02:03):
So Iranian production is about three and a half eh
million barrels putting oscillates a bit between three point five
three point seven. All their exports, whatever they are exporting,
goes to China and the rest of it is consumed domestically.
Speaker 4 (02:15):
Which is the reason why this is such a big
potential buyer and why this is such a big deal
for the oil markets in terms of who else would
supply that and what this would mean for the price.
Does this suggest that this is part of the ongoing negotiation,
that the goal is to keep oil prices low and
the bet against that is frankly a fool's earned.
Speaker 1 (02:37):
I would say that's exactly how the market's interpreting it.
You know, when we are talking to our clients, the
general impression is that, look, we know President Trump wants
low oil prices. He's gonna get it in one way
or the other. Right, So if that means that, especially
because we were in the high seventies not that long ago,
that means that we are not gonna see tightening up sanctions,
and I think traders are very much focused on that.
(02:57):
The fact that he wants low oil prices, especially ahead
of the bill, and he has been saying that consistently right,
that he doesn't want prices to go up. Inflation is
a big concern. So that's where I think the market
kind of reality. That's why the market reacted the way
it did in terms of selling it so hard. But
at least since then it's been clarification that sanctions are
still in place. This is China avoiding sanctions in the
(03:18):
US not doing anything about it. But yes, it does
mean that there's more oil in the market than otherwise
would be.
Speaker 3 (03:23):
But from a.
Speaker 4 (03:23):
Trading perspective or MADA doesn't this act as a cautionary
tale to anyone who tries to expect oil prices to
rally in any kind of material way, that there is
a Trump put an essence on that, that there is
a willingness to navigate the geopolitical situation in a way
that brings down oil prices one way or another. So
why would you bet one hundred dollars crued or ninety
(03:44):
dollars accrued, which is the worst case scenario that so
many people are talking about.
Speaker 1 (03:51):
Yeah, no, I completely agree, and I've been surprised that
people have been calling for that. You know, we've never
I mean, I've been with you guys saying that non
seventy and eighty is not going to be sustainable given
where the ballot are and you know, people are looking
towards those bills that we are also predicting from Q
four onwards. I think the challenge, of course, is that
this is not a market you can short either, because
these risks and the geopolitical risks are real. Fundamentally, though
(04:14):
the writer right now remains very very tight. Stocks are
very tight. Cushing just look at that, it's super low.
So this is this is also equally hard to short.
But on a macro level, your point is very valid
that Trump and his policies will somehow make sure that
prices don't run away too quickly. It does mean that
generally there's a bias towards the lower side.
Speaker 2 (04:35):
I'm rat can we just finish up asking you what
the demands side looks like at the moment. I think
economists are really scratching their heads at the moment about
when the economy is, particularly here in the United States,
we're trying to gauge where we are speaking to company executives.
What's your take just looking through the prism of crude oil.
Speaker 1 (04:52):
Yeah, I mean it's not great, but it's not dire either,
And I think we're kind of in between our demand
numbers between seven to eight hundred thousand boules per day
growth year on year. Again, the US is actually doing okay,
Europe is doing very well, China not so much. And
I think that's kind of the spectrum. We don't think
this is a recessionary environment in the sense of what
people were expecting when tariff fears were at its peak.
(05:15):
But it's also not an environment where global growth is
humming along very nicely.
Speaker 2 (05:19):
I'm ready to say advantagy aspects. I'm ready to thank
you joining us. Now have to discuss John Leeber of
the Erasia Group. John, welcome to the program, sir. Before
we get sort of needy with what's handling over in Europe,
I think we want to talk about the president's agenda
(05:40):
and the key deadline still to come July fourth, the
south impost deadline for the tax bill. July ninth, this
south impost deadline for a trade deal with the whole
host of countries. John, where do you think will be
by the time we get to the middle of July.
Speaker 5 (05:55):
You know, this tax deal is coming together and they're
basically done with it. There's a couple of kind of
dotted eyes and cross te's they've got to think about
right now, and of.
Speaker 6 (06:03):
Course there's the House of Representatives, who.
Speaker 5 (06:06):
Isn't going to like the deal that's coming out of
the Senate necessarily, but I think it's going to have
a really hard time voting against this thing. You're going
to have unanimity among the conservatives in the Senate to
pass a bill with deep cuts to Medicaid, the most
impactful cuts that they've done on an entitlement program in decades.
And I think that some of the moderate members are
probably where you're going to have a harder time getting
(06:27):
the votes because of the issue with the salt cap,
which is how the Senate's moved back down to ten
thousand dollars. The House had passed it at forty thousand dollars.
That's going to be an issue you have to work out.
But it you know, Brett, President Trump now out there
true thing that nobody should go home for the fourth
of July holiday until this has passed. If it doesn't
pass next week, it's going to pass shortly thereafter. On
(06:48):
the tariffs, you know that ninety day pause is up
on July ninth, and a lot of countries, you know,
there's a lot of countries are still negotiating their deals.
So I think it's notable that despite the really early
momentum around Japan, India, the UK of course announced something.
Speaker 6 (07:04):
You haven't finalized anything.
Speaker 5 (07:06):
So they're going to have to extend this ninety day deadline,
and they're probably going to do it for most of
the biggest countries.
Speaker 6 (07:12):
But I also think they're going to send a message.
Speaker 5 (07:14):
Here by increasing tariffs on some countries, maybe not back
to Liberation Day levels. Trump still has total discretion here
as to what level he's going to get to. But
some of these tariffs are going up, and only Trump
knows which ones that is. The White House staff doesn't know,
and I think they probably haven't made that determination and
won't for at least a week or two.
Speaker 2 (07:32):
And John, this president doesn't stop, by the looks of things,
He never sleeps. After the next few weeks, what's left
of his agenda? What does he focus on?
Speaker 5 (07:40):
I think that it's going to be crisis response, right, So,
I mean this is going to look a lot like
the first Trump term where they did the tax You
know that they tried and fail on healthcare in the
first half of the year, and then the second half
of his first year was all tax reform. And then
in year two it was kind of just you know,
Trump tweeting about all kinds of subjects that was whatever
was on his mind and responding to what was going
on in the world, and then of course picking a
(08:02):
trade battle with China. He's already picked the trade battles.
He's going to be done with his tax agenda. You know,
there's going to be foreign policy crises that come up
from time to time, like we just saw in Iran
this week.
Speaker 6 (08:12):
But he's not actively pushing much.
Speaker 5 (08:15):
And on the deregulation front, you know, I hear a
lot of people talking about the tailwind coming from deregulation
in the latter half of Trump's term coming up. But
that stuff takes time, and they're going to stop enforcement
across a number of for example, financial regulations basically, but
deregulation itself is a whole process, and if they want
(08:35):
it to stick up in the court, they have to
do it right.
Speaker 6 (08:37):
And doing it right.
Speaker 5 (08:38):
Means going slow, and it means you won't see the
results from the deregulation, if there is any, until possibly
the end of Trump's term or even after, when all
of that, of course, could be reversed potentially by a Democrat.
Speaker 6 (08:50):
John, There's a lot to unpack there.
Speaker 4 (08:51):
I want to talk about crisis response in particular to
foreign policy. It seems like people are taking the recent
developments in the Middle East as providing something of a
roadmap for how President Trump will respond to future international crises.
Speaker 6 (09:05):
What's your take on that.
Speaker 4 (09:06):
What did we learn from the way the President handled
Iran and the attacks by Israel.
Speaker 6 (09:13):
Yeah.
Speaker 5 (09:13):
I think what we learned, and this has been a
pattern throughout Trump's time, is that foreign policy's pretty easy
for him when there's a power imbalance. When there's a
power imbalance and the US can respond with overwhelming force
and has no risk really of being struck back at
Trump will strike. He did it in Iran twice now
with the assassination of Sulimaney and now this unprecedented level
(09:33):
of bombing. But if you look, for example, at Russia,
where there's less of a power imbalance, they have nuclear
arms already, there's nothing really Trump can do to intervene
in that conflict. So I think this is going to
be something that other countries are paying attention to. I'm
sure China is paying attention to what happened in Iran
this week. China's diplomacy and their ambitions have a much
(09:53):
longer timeframe, and they're much less of an active threat
to their neighbors than Iran Wi, So that situation is
obviously very different, of course, But I do think that
I think that Trump is willing to act. He's not
going to commit American troops on the ground that I
think that's a red line for him, but he is
willing to throw American firepower at countries that are irritating
(10:14):
him if he thinks he's going to win without consequences.
Speaker 2 (10:17):
This is kind of a curveball.
Speaker 4 (10:19):
But you talk about we learned something about President Trump's
response based on the mayoral primary election in New York.
What have we learned about the Democratic response to President
Trump's policies, if anything, Has that sort of served as
something of a roadmap?
Speaker 6 (10:34):
Yeah, I don't think so.
Speaker 3 (10:35):
No.
Speaker 5 (10:35):
I mean, New York City, you know, great, most important
city in the country, but it is not representative of
the rest of America. And I don't think that a
socialist mayor in New York City is going to be
a look that the rest of the Democratic Party necessarily
wants to embrace for the midterm elections. I expect the
party's going to try to run from him. However, there
is going to be a backlash against President Trump that
(10:57):
is going to have very is going to have the
left wing in its flavor, and that is going to
be a national story. And you're going to have this
battle inside the Democratic Party for who's most likely to
win in general elections. You know, the social is emerging
from the primary is not going to win in Missouri,
but they can win in New York City. That's not
really a roadmap for the rest of the party.
Speaker 2 (11:18):
Hey, John, I appreciate your thoughts as always, John Labor
of the range of Great John, I guess now is
Sheila Shelda?
Speaker 5 (11:33):
Good to see you.
Speaker 7 (11:34):
It's you.
Speaker 2 (11:34):
The defense spending very much in focus given this headline
as well coming out of the NATO summit, companies like
Ryan mattau German Defense operator that stock is already up
one hundred and seventy seven percent so far this year.
How much of this story is already well priced?
Speaker 7 (11:49):
Well, we focus on the US names, as you know,
John's coach and in terms of what we're seeing as
we're at the Paris are Show last week, it's historically
a commercial aerospace show. But a lot of focus on
defense exposure. European defense companies are trading at fifty times Zebadah.
These multiples are ridiculous, and we're seeing a lot of
focus from US investors into European names, but also undiscovered names.
(12:09):
Whether it's a name like Aero Environment that reported last night,
albeit in our coverage it's an Israeli named thirty percent
Israel exposure, twenty percent US exposure, twenty five percent Europe.
So who has hidden European exposure that could benefit from
some of the NATO spending, which is going to pour
hundreds of billions into additional defense spend.
Speaker 4 (12:28):
Do we have a sense of which region of defense
contractors Europe will be working with disproportionately. Will it be
mostly European defense manufacturers, Will it be the United States?
Will it be elsewhere?
Speaker 6 (12:41):
Does it matter?
Speaker 4 (12:41):
Is this being used as a diplomatic tool or is
this just where they can get them in order to
get their forces up.
Speaker 7 (12:47):
Historically it's been two thirds of European spending has been
flowed back to the US. But companies like ran Mattall
are really emerging investing in their local capacity. In the
last month, we've met with all five defense contractors, and
the common theme is.
Speaker 4 (13:00):
Local for local.
Speaker 7 (13:01):
Yes, we have a facility in Spain, we have a
facility in Poland. So we think about fifty percent of
the NATO spend will come back to the US. And
I actually think over the next five years it'll be
focused on missiles, munitions, replenishing what got lost in Ukraine.
And over the long term, I think what we'll lose
out on is the fighter aircraft, you know, the local
teams France SAB will have local manufacturing of larger equipment
(13:27):
in Europe, and US will still supply missiles air defense,
which is where the US really excels at.
Speaker 4 (13:33):
Yeah, to build on that, there was this feeling and
John you mentioned it it was like watching top Gun
in action over the past couple of weeks in terms
of the B two bombers and what they actually engage
with and how much is that, you know, different countries
around the world saying I want that versus just the
very nuts and bolt of you know, I need another
missile here, I need another thing there. I mean, is
that kind of the sort of more humdrum aspect of
(13:54):
what we're actually talking about here from the European.
Speaker 7 (13:56):
Buildout yeah, I think we have to give the North
or B two bomber minute here because I just I
think it's so amazing and it just happened this weekend
and everybody brushed it off on Monday morning. The last
time it was used was against Yemen in twenty twenty four,
but aside from that, it was used in Libya in
twenty seventeen and twenty eleven before that, so we don't
use these that often. I went to the facility in
(14:17):
Palmdale where Northurope sustains them. I mean, the coding itself
costs hundreds of millions to recode every time, so it's
pretty cool aircraft. We only have twenty of them. We
use seven over the weekend, so I think it also
helps accelerate the Trump agenda, whether it's the next generation
fighter with NGAD which they awarded to Boeing, and pulling
forward things like the B twenty one, which is also
(14:39):
a North of aircraft.
Speaker 2 (14:40):
What about what we have seen sat place in Ukraine
in the war between Ukraine and Russia and their ability
to cause serious damage to air defense of the Russians
were just drones. That seems to be a major development
over the last couple of years, the character of war
has changed, and I wonder if the type of investments,
the kind of things that people invest in in defense
is changing too.
Speaker 7 (15:01):
I think a little bit of both. The Reconciliation Bill,
which is about one hundred and fifty billion, has nine
billion dedicated to drones and other autonomous vehicles. So the
Trump agenda really focuses on accelerating technology and what the
next war will look like, whether it's against China, but
it also pushes forward their agenda. One of the things
I do really appreciate is how the bill really pulls
(15:23):
forward programs that are already accelerating, whether it's like tech
strons Flora program, if we have it, if it's in
the air, why are we waiting for certain milestones to
be reached?
Speaker 2 (15:33):
Shida, important conversation, good to see. As a ways, Thank you,
Silda Holy that of Jeffries on defense, spending a lot
of spending on defense in Europe and again in the
United States. What does it mean for fixed income and
(15:53):
this spawn market? Matt home back at Morgan Stanley joins
us now for more. Matt, Welcome to the program. Sir
was going through the midiear outlook from yourself, the team.
Let's talk about the bond market, caill and the dollar.
Speaker 6 (16:02):
Call.
Speaker 2 (16:03):
With that in mind, what's the new base case for
you and the.
Speaker 6 (16:05):
Team, John, thanks for having me on the show.
Speaker 3 (16:09):
Yeah, we see both of these assets going down.
Speaker 6 (16:15):
The dollar we see going down in price.
Speaker 3 (16:17):
We have the dollar depreciating about ten percent over the
next twelve to eighteen months. And then for treasury yields,
we have treasure yields also falling. We have the tenure
yield ending this year at four percent, and we have
it ending closer to three percent by the end of
twenty twenty six. Now, both of these forecasts, of course,
(16:39):
are related.
Speaker 6 (16:41):
They are driven primarily by.
Speaker 3 (16:44):
A federal reserve, which ends up cutting policy rates much
more aggressively than what markets are currently pricing in. We're
more confident, i would say, on the magnitude and the
direction of those rate cuts as opposed to the exact
of those cuts. As I'm sure you read in the note,
(17:04):
we don't have the FED cutting this year, but we
have the FED cutting a lot next year. That's an
interesting feature of the outlook, but is one that's subject
to change, of course.
Speaker 2 (17:13):
Matt, what are the economic conditions that lead to those
deep cuts in twenty six.
Speaker 6 (17:18):
Yeah.
Speaker 3 (17:19):
So, ultimately, the first is that we get past the
hump on tariffs. Right, tariffs create a temporary inflationary impact.
Our economists have that impact concentrated in the third quarter
of this year, and then by the time we get
to the fourth quarter, those tariff effects are starting to
fade away and you begin to see the weakness and
(17:42):
the labor market really come through. That's ultimately what catalyzes
that discussion on the Fed to begin lowering rates, which
our economics team has happening in the first quarter of
next year.
Speaker 4 (17:54):
Why aren't you worried, Matt, that when the Fed does
lower rates, it won't cause the long end yield to
rise kin to what we saw last year.
Speaker 3 (18:03):
Yeah, well, I think what happened last year Lisa is
the Fed did cut rates, and interest rates did go
down temporarily. But then we went into the US election
and the market, being forward looking, began to speculate on
what was to come after the election, and of course
at that time, investors were thinking about much larger deficits,
(18:25):
more government bonds supply, kind of a better economic outlook
than we think exists at the moment. So it was
a different time, and we're not expecting that to happen again,
at least for another three and a half years, Matt.
Speaker 4 (18:39):
Given the discussions heading into July fourth and then July ninth,
it does seem like the deficits going to deepen in
the United States. Why is that not a threat to
your call to go into duration to buy those ten
year bonds that maybe other people are steering clear of.
Speaker 3 (18:54):
Well, the expectations for the deficit have actually changed quite
a lot, and the primary driver that change is, of course, tariffs.
Coming into this year, most investors didn't expect the Trump
administration to do as much with tariffs as they have done.
And so when we think about what kind of revenue
are these tariffs going to generate? And don't ask us,
(19:15):
you can ask the Congressional Budget Office what it thinks
about the revenues generated by the tariffs that are currently
in place today, And the CBO scored that tariff revenue
around two and a half trillion dollars over ten years.
Presumably some of that's front loaded, So we are seeing
a meaningful increase in revenue that was not expected coming
(19:37):
into the year. That's going to mean that deficit expectations
are actually lower than where they were right around the
time of the election last November.
Speaker 2 (19:46):
Matt, have you got a window in that office? Going
to extend a window? Some daylight?
Speaker 3 (19:51):
I do have some daylight. Good, but really my daylight
comes from the picture of my daughter behind me.
Speaker 2 (19:56):
That's beautiful. Matt homeback of Malken Stanley. Matt, thank you.
This is the Bloomberg Surveillance Podcast, bringing you the best
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