00:00We kicked off this show with Bob Michael over at J.P. Morgan Investment Management talking about
00:05how the market can live with $100 plus oil for an extended period of time. My question to you
00:12to start this off, can global economies and more importantly, can the governments that have to
00:16shepherd those economies live with that? No, I don't think so. I mean, I think that that just
00:21looks at one side of the ledger, which is that the global economy has become more energy efficient.
00:27Oil expenditures as a share of the GDP has gone down. But I think that what this overlooks is the
00:34fact that the world has never entered any sort of a shock with such elevated debt and deficits.
00:41And what that means is that the governments are quite constrained from supporting the economies
00:48through any stimulus efforts. And this is what the bond markets have already shown to us,
00:53that the reaction of the bond market so far to the oil shock, even if it's fading now a bit.
01:01But the bond market's reaction has been pretty clear, which is that this time bond deals across
01:06the world went up. Normally in geopolitical crises or any crises, bond deals typically go down.
01:13Now, some people say this is happening because inflation is likely to go up in the short term.
01:17Yeah, but long term inflation expectations haven't moved at all during this crisis. They are where
01:24they were in February. And yet we've seen bond deals go up. And those increase in bond deals reflect
01:32this concern, I think, which is that the debt and deficit levels are very high. And if there's any
01:37extensive oil shock or any more war spending or government relief measures to cushion the impact,
01:43that is not going to go down well, because the funding levels of governments are already
01:49very high just now.
01:51So give me a sense here. You wrote a column about this in the Financial Times over the weekend.
01:56And we talk about, I mean, whether you want to use debt to GDP levels. I know there's some other
02:00metrics that might be a little bit more representative, but I was kind of going country by country.
02:03And they are elevated, significantly elevated, even in the more developed economies here.
02:08Does that mean there is no wiggle room if things do really do hit the fan economically?
02:13What would the option be, if at all, for any of these nations?
02:17There's very little option because the governments are going to do what they always do, which is to
02:22try and spend their way out of this. But the problem is that the bond markets could come unhinged
02:28pretty quickly under that scenario. So I think that this is not just true for this crisis, but for any
02:34crisis in the future, which is that take the United States, that the U.S. ran a budget deficit
02:41in 2025 of just under 6% of GDP. That number is likely to be 7% of GDP this
02:48year, given the
02:49additional war spend and a couple of other measures such as the rollback of the tariffs a bit.
02:55So now, during what's largely been a peacetime era, we are running budget deficits of 6% to 7%
03:02of GDP. Imagine if there is a real slowdown in the global economy and the U.S. economy.
03:08And if you get a recession, then the budget deficit could go up to 10% of GDP or so.
03:13So this is a very different scenario than the past. The historical template would be that
03:20during recoveries, you cut down on the budget deficit, you save so that you can spend more
03:26when you actually have a bad time. This time, what we have done is that we have run massive
03:31budget deficits. In fact, peak budget deficits in places like U.S., U.K. and some other places
03:37during an expansion. So I think that this is a very critical difference that people are
03:42overlooking, which is not relevant only for this crisis. But even if this passes, that the next
03:47time we have some sort of a crisis, the ability of governments to do anything is therefore going to
03:52be very limited. Well, I want to talk a little bit about the U.S. economy specifically, because you
03:57think about what else is different in this oil shock versus maybe those of decades past is that
04:02the U.S. is a net exporter at this point, and certainly much has been made of that. And I
04:07wonder
04:07in your view how much that truly does insulate the U.S. economy from some of the shocks that we're
04:13talking about, given that oil still is very much a global asset. Exactly. So you've answered the
04:19question, which is that, yes, that this shock hits the U.S. economy less. That is correct. But
04:26it is a global price that the U.S. is also keying off. So if you get higher oil prices,
04:32that does hit
04:32the consumer. Now, the hit is less compared to the past because the consumer doesn't spend that much of
04:39their expenditures on oil anymore, which is true. But as I said, that the offset is also not there this
04:46time, that the government cannot do much to try and protect the consumer. In Europe, they tried to
04:52do something. In Asia, they tried to do. And the increase we saw in bond yields was even greater in
04:58those countries during the past month or so. So that's the whole point here, which is that there
05:03is very little economic ammunition left for governments to fight any crisis, whether it's an oil
05:09crisis or any other crisis that they have to face in the future. And so therefore, the bond market is
05:15behaving very differently compared to, let's say, the pandemic, when you got a massive collapse in
05:20bond yields. I think that this time, if the crisis rolls on or if there's a new crisis, bond yields
05:26are
05:27likely to increase, not decrease. Very big difference from the past. Well, I mean, to that point, you know,
05:32you think about this crisis. I do wonder who is in the tougher position here to try and protect the
05:37consumer, whether or not that's the government or whether or not that's the Federal Reserve, which,
05:41of course, has to make monetary policy through this environment. Well, the Fed has missed its
05:47inflation target for 60 months in a row. The fact that you have core PCE running at 3 percent now
05:56for
05:57such a sustained point in time really tells me that the Fed has given up on its 2 percent inflation
06:02target. That is now just a talking point. The Fed is not going to achieve its core PCE of 2
06:11percent
06:12inflation. That target is not in sight for many, many months, if not years just now. So we could
06:20end up with an entire decade where the Fed doesn't meet its inflation target. So that just tells you
06:25about how the Fed's reaction function has changed. And it's quite almost like tragic that the Fed says now
06:31that, you know, we are well positioned to act either way. Well, I don't know what they're talking about
06:37because they've missed their inflation target for five years in a row. And there's no sight as to when
06:43they're going to achieve that. So I think that that is quite irresponsible. And the consumer is feeling
06:48that. The number one issue for Americans today is price increases, is affordability. Three percent a year
06:55compounds over time, ending up in a serious loss of purchasing power for people.
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