Trump Warns Iran of New Strikes, Private Credit Concerns

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Zaya Dawood is chief emerging market economist for Bloomberg economics.

Think about an EM mission like what Anna Wong does for the United States in his essay over

the last 24 hours on $160 oil went around the world.

Zaya, let's do first principles first.

The Strait of Malacca, 29% of Seaborn trade, Armoos, shockingly almost as much, 26% of Seaborn

trade.

The Suez Canal, where T. Lawrence was, barely is there.

How large is the Strait of Armoos?

Do we understand the substantial trade that goes through there in oil?

It is large.

And it's large and concentrated.

If you think about it, what it transports?

It transports oil and gas and energy from the Middle East to the rest of the world.

And the rest of the world sends almost everything else of the Middle East needs through that

Strait.

So it is a lot of trade that goes there and is concentrated in a crucial commodity that

is oil and gas.

And the other thing with the Strait of Hormuz, which is different from the Suez Canal,

is not just the size, is it's not alternative.

So most of the oil that's going from Saudi Arabia, from Iraq, from the UAE, of course, through

Hormuz, all the energy that goes from Kuwait, Bahrain, and Qatar, goes through Hormuz.

It's a big shock, 20% of global oil supplies, I can't think of a larger oil shock in recent

history.

If this is not the largest, then it's one of the largest for sure.

Explain the dynamic of a surge to 120 as Bruce Kasmun just models, or to your shock

of 160 out there, and then a quick retreat.

How does that dynamic work out?

So let's start from first principles, right?

We have a shortage of supply.

We lose 20% of global supply.

The question is then what happens to prices?

So even before the war began, we looked at recent episodes of supply outages.

We looked at the academic studies and the typical multiplier that we got was somewhere

between, say, three and five.

So we use four for our multiplier.

You lose 20% of supplies, you get a multiplier of four, that's an 80% increase in prices.

Now a pre-war price of around $60 per barrel, that takes you to $108 per barrel.

So that is our first thing.

And this is where we are now.

There is a lot of intensity in the war that is close to the state of Hormuz.

But it's no longer a question about intensity.

It's now a question about duration.

It's no longer about, you know, are we going to get negative number of ships going through

Hormuz?

It is zero.

Now that's not going to happen.

It's a question of how long will Hormuz be shot?

And that's what our late speech was about.

It's about modeling duration.

What happens if Hormuz is shot for one month, for two months, or three months?

And what was your worst case scenario there in all of that modeling?

Well, obviously, it's shot for three months, so you can get a higher price.

You get a price of around $164 per barrel.

Now, my think was with a huge, you know, one of the largest energy supply shocks, he might

think you might get a higher price as a result of this.

But the model takes into account other things because the economy is at that.

They don't stay static.

So with higher oil prices, people consume less energy and demand comes down.

With higher oil prices, producing more oil and other other energy becomes profitable to

supply increases.

Inventory starts drawing down.

People start taking more risk using that shipping route.

And even if you go outside the model with such high oil price, the world may end and the

waterway may reopen.

Dr. David, a personal question here, and we say good morning to all of our reporters,

our economists, our teams in the greater Middle East, Ethan Bronner in Tel Aviv and

Jumana in Dubai with Zayud, what is the conversation of family and friends in Dubai right now?

Is it one big exit this weekend?

What is the mood and the ground, not so much Bloomberg people, but just in general in Dubai

about getting through the weekend, getting to April?

So I was in Dubai last week.

I came from Dubai to London actually on Monday on a pre-planet trip before the war.

What it felt like in Dubai, the headlines felt worse than real life for sure.

So it felt better than headlines, but it had that COVID feel to it, where you didn't feel

an imminent threat to physical safety, but you didn't know that there was an external

danger out there.

Things were quieter and at some point, because people were moving less, people were working

from home.

At some point, the airport was shut, that had the COVID feel to it.

It didn't feel as dangerous, as I think about now outside, I see the headlines, and it

feels like it's a bit more dangerous, but when I was there, it didn't feel so threatening.

So thank you so much Zayud, with us with Bloomberg economics out of London, and of course,

always out of Dubai.

Stay with us more from Bloomberg Surveillance coming up after this.

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Leslie Vengemery.

She's with the Chicago Council of Global Affairs of Wesleyan, of LSE, and of Columbia

Dr. Vengemery is definitive on conflict.

Leslie, it's a war, not a conflict, isn't it?

Yes, I think it's safe to say it's a war.

We could double down on definitions, but I think anybody looking at the Middle East is looking

at not only a war, but a widening war.

And an asymmetric war, if you look at what Iran is doing and the Persian Gulf and the

straight of Hormuz, not a war that I think President Trump, well, self-admittedly, according

to today's news, hadn't planned for the possibility that Iran might close the straight of Hormuz.

It's kind of, it's sort of difficult to even say the words as it seemed such an obvious

thing, even to people just reading the papers that it was always a disability.

Into the press conference in 18 minutes, the news conference at the Pentagon, the Secretary

of Defense, the chairman of the Joint Chiefs of Staff, how alone is America?

Where are our allies besides the Charles de Gaulle steaming East?

Look, America's European allies are lending their bases for defensive purposes.

America's non-traditional allies in the Gulf are being hit and are under attack.

The new Ayatollah has said that he will go after American interests in the region.

So, America's allies and partners were not asked to come along until after the strikes began.

There was no real process of building a consensus or making the case for war laying out what might

lie ahead. And so now they're scrambling. I think the latest in Europe, of course, is a deep

frustration probably behind closed doors anger that the U.S. is effectively lifting sanctions

on Russia's oil exports. Well, you heard that from the leadership of Germany.

Well, exactly. I think you have to hear that.

Yeah, I'm so grateful to bring that up.

Because I wanted to talk about what all of this means for Putin and for Russia.

We heard yesterday that Russia has been giving Tehran some intelligence. And now, of course,

you know, these sanctions, people, countries can buy sanctioned Russian crude that's already at

sea. What is this doing for Putin's empire?

Well, in the short term, it's certainly helping him. I mean, indirectly and directly,

directly with the sale of oil, for sure, but indirectly in that America has its

focus elsewhere. That's not only helping Russia. That's also helping China. You know,

this isn't, this is an old story, not a new story. When America has its eyes off the prize,

China benefits from the disruption, America's distraction from seeing the West at odds with

itself, if not torn apart, Russia also. So I think for America's European allies, which quite

frankly have gotten very little bandwidth or playtime in this in this war. This is a terrible

turning up the tide. They will be impacted much more by gas than by the U.S. as we know, gas prices.

But it really is, it's coming out of time when they're squeezed at home when, you know,

the war with Ukraine continues. We're not even talking about the war in Ukraine right now.

We're only talking about the Middle East. The rising sun across Lake Michigan,

less of Injumari in Chicago, we will continue that, whether we welcome all of you 15 minutes from

a press conference of the Pentagon. Of course, Michael Bar will be along with the news,

including this horrific clash, crash, I should say, of a flying tanker for the Air Force. Alexis

Christopher's with less of Injumari. Thank you. Leslie, now we're shifting the talk about this war

from intensity to duration. What are you going to be listening for during this press conference

that we're awaiting here at the top of the hour from the Defense Secretary? I have some sort of

plan for what to do about the build up in the Persian Gulf, how to manage the global political

economy, whether they're going to seriously consider escorting ships through the straight-of-war

moose and what conditions would need to be met in order for that to be safe. I think, you know,

more importantly, what is the plan for ending the war under what conditions? And what we really need

a straight talk on the reality that even when the United States ends the war, the war won't be ended.

And so what will the plan be for the period when America is no longer directly striking? But

Iran is certainly likely to continue the war. What conditions might Iran ask from the United

States and from Israel in order to help stabilize the global political economy and flows of ships

through that straight? And what would the US be willing to give? I don't think we're going to hear

very much about that last point, but it is clearly what needs to be discussed.

President Trump seems to be digging in his heels. He's not a man who likes to lose or to admit that

he's losing. So I'm wondering what an exit ramp might even look like because we know many lawmakers

are now calling for an exit to this war, especially in the year with midterm elections.

What might that even look like, Leslie? I think with President Trump, it's, you know, he's

going to be in a quandary. This is not a president that will be in any way, shape, or form,

pleased to see rising oil prices and perpetual instability if there isn't some sort of negotiation.

I think them were likely that he will declare, you know, a success in depleting and diminishing Iran's

ability to project power externally and signal that he's going to end strikes. But maybe not,

you know, very hard to predict what will happen. I doubt that he will get into this question of

Iran's ongoing leverage, even after that moment. Leslie, you and I were inflicted with 850 pages

of Henry Kissinger. You had to read diplomacy just to show up. But of course,

Vengemory did better than me in class, Alex. I don't know if you knew that.

At the back end of that book, Secretary Kissinger talks about the new world order reconsidered.

What does the Vengemory new world order look like when this war ends?

You know, at the moment, we're not moving into another order. We've clearly abandoned the

United States as abandoned many of the norms and the laws for, you know, how we govern. It's

certainly abandoned the principle that you work very closely with a certain set of pre-agreed

allies. We are much more into might makes right into a heavy transactionalism. But I think the

real concern is that we're moving into a period where there isn't an alternative order where

alliances aren't going to be permanent. You're not going to know exactly who your friend or

who your enemy is, where deals are done with a variety of partners, some more seemingly and less

unseemly than others. So unfortunately, we are not seeing our leaders map out an alternative

version. We know that Mark Carney has talked about middle powers. I was just in India at the

Rezina dialogue where, you know, India is talking about as it has been multiple alignments in order

to protect its strategic autonomy and enable it to do what it wishes to do, which is to focus on

development and poverty alleviation. I think many countries across Europe are going to be adopting

a similar strategy. How do you develop multiple alignments with other middle powers on the

economic front? I think on the strategic insecurity front, the West is still going to try to lean

into itself. But when the US behaves like this, that makes it very much harder for its

Western allies to go along. Dr. Benjamin, thank you so much. In Chicago with the Chicago

Council on Global Affairs, stay with us more from Bloomberg surveillance coming up after this.

You're listening to the Bloomberg surveillance podcast. Catch us live week-day afternoons from

seven to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg business app

or watch us live on YouTube. Michael Nirenberg is deeply experienced and multicellable titles and

phrases that were invented three security structures ago, securitized, securitization,

and that. And he joins us this morning. Michael Nirenberg is Chief Executive Officer Chairman

and President of Rhythm Capital. Over cocktail conversation, how do you respond to OMG private

credit? It's a disaster. How do you respond to that? Listen, there's going to be pockets of

private credit that are going to, right now obviously in the news, private credit is negative.

I don't think all private credit is negative to be totally honest. I think there's been some

obviously there's been some headlines with some of the other larger asset managers

that have put up gates. And I think a lot of that has to do with what we've seen the

distribution of private credit into retail. And when you take products that may not be

100% suited for retail and retail wants their money out because the equity markets have turned

over and folks are looking for liquidity. It creates a little bit of what we'll call as a

so-called run on the bank. Michael, you have a resume here that reads, you know, like literally

he could have written a screenplay for margin call. I mean, you have so much experience here

institutionally. What was your response when you first heard about private credit for that

matter of private equity in retail accounts? You know, it's first of all when you look at our

franchise, we don't have, we don't really have private credit going into retail at this point.

And I think what you're going to see and you've heard it from some of the larger banks

such as JP Morgan where folks are going to re-evaluate the distribution of private credit into

the retail accounts. We have some events this morning. My our view and when you look at the private

credit markets, take for example, sculptor, we have a large multi-strat fund where there's a fair

amount of credit in there. It's liquid credit. It's marked. It's marked. When you take some of

the private credit that goes into retail and it's not liquid private credit and folks want their

money out, they're not going to be able to get their money out. And that does what you're seeing

now in the marketplace. You're seeing folks put up the gates. I looked at the market reaction

yesterday and you looked at the treasury market, which, you know, the front end of the treasury

market really sold off pretty dramatically. And it seemed to me that it was really a liquidation

event that you're seeing with a lot of folks in the marketplace. But when I look at private credit,

it's a huge market. We don't look at these large club deals to be quite frank. We look at

our press line business where we do direct lending there. So I think private credit, it has a

bad, it's getting a bad name right now, not all private credit is bad. There's some jargon,

their liquidation event. That's when the kid goes on spring break just so you know, very

true. Michael, you say servicing is the key differentiator. Why do they have such a huge advantage?

Because you could, you could affect an outcome. Take a, take a homeowner, take a mortgage.

If you go out and you take out a mortgage, you know, one of the things we do at our company,

we own one of the largest mortgage servicers in the US with the fourth largest, including all the

large banks. We work with, I did not know that. Yeah. We, we have a, you know, for example,

$850 billion dollars of mortgage servicing rights. We touch 4 million consumers. So what happens?

A mortgage or has an issue. We work with that consumer. You figure out a modification or some kind

of plan to keep them paying. That's a huge advantage versus somebody that's going to go out into

the public markets, buy an asset, let someone else control the service thing. Okay. So you say,

you have options when you're in servicing. Yeah. And you could affect an outcome and you could work

with a homeowner, which I think is extremely important. And we've seen that over the years,

and that's one of the, one of the ways that we actually built, built our business.

It's just, I gotta ask you about mortgage rates then. I mean, because we're starting to tick higher.

Spring buying season has begun, even though the weather doesn't seem to feel like it in New York City.

What, what's, is this really going to be a downer for the housing market? This was supposed to be

the year things bounced back and possibly swing to being a buyer's market there, I say.

Yeah, I, you know, I look at mortgage rates this morning, mortgage rates today or in and

around where we close the end of the year. If you look at the treasury market, the 10 years

been in a range of give or give or take low force to kind of form a quarter where we sit right now.

I think mortgage rates will continue that the administration is doing all they can to bring

mortgage rates lower, whether they're able to achieve that or not. I don't think you can control

such a large market. But I think, you know, we're going to sit here. I think the housing market is,

is okay. You look at our data around the consumer. Right. You know, it's, it's actually in pretty good,

the consumer's in pretty good shape. One more question with great respect and great honor. We

got to go to breaking news and then to Michael Bar here, folks. Michael leader went all over the

zeitgeist right now. Everybody's playing clips of Mr. Irons in margin call. When a grizzled pro like

you sees those clips or when you first saw a margin call, is that even remotely real or was it

just Hollywood? Now listen, margin call, you know, we've seen it during 2020, the COVID period then,

we've sought during the great financial crisis. I think the difference today is folks that have

experienced like ourselves understand how to one navigate navigate the system, but also work with

your large lenders around getting rid of margin calls on the assets that you finance. Where's your

shadow right now? Where's your mystery shadow within the debt system right now? I'm concerned a little

bit about liquidity. I do think when you look at some of the, you know, some of the folks out there,

you saw it like I brought up yesterday's price action in the front end of the treasury market.

Should two year treasury be at three and three quarters when we saw a week,

employment report the week before. I don't think so. I do think that, you know, the, the,

the market's taken out any, not any chance, but the market's taken out that the Fed is not going to

cut rates this year. I don't agree with that. I think Goldman came out as well and said that,

you know, they're, they're still calling from one or two rate cuts. I look at the, I look at

forward rates. I do think we're going to see rates come, come down particularly in the front end.

I think the back end is troubled, right? Because we got to fund this war. We got, you know,

we have this massive deficit and we still have to issue a lot of debt. So I think long rates,

you know, could be a little bit challenged here. We're going to $4.90, $4.89 right now in the 30-year bond,

Michael. Yeah. Yeah. Mayor Berg, don't be a stranger. Love having you and thank you so much.

Rhythm Capital. Stay with us more from Bloomberg's surveillance coming up after this.

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You're listening to the Bloomberg Surveillance podcast. Catch us live weekday after

news from seven to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg

Business app or watch us live on YouTube. This is the perfect guest to frame out

Y equals C plus I plus G plus NX. Kathleen Busch Johnson nails it each and every day.

His chief economist at Nationwide and we're thrilled that she could join us today.

All the secondary stuff, the noise at the back end of March, Kathy, where we try to frame out

our guesstimate of where we are. What does the noise tell you about getting the GDP back to

tuition or 2.X-ish? Can we get there? Well, good morning, Tom. Well, I would argue that we were

there ahead of the reading conflict, having an impact on an energy prices and that filtering

through and being a negative shock to economic activity, at least temporarily.

So when I look at the revised data, the GDP for fourth quarter, if you look at the core GDP number,

it was 2%, and I think about 2%, and we are in peace even for the first quarter to see

real GDP growth overall 3%, and we look at that core 2%, but things change a lot with the conflict.

Looking to second quarter, we just marked down our growth estimate. There we are below 1%.

You're below 1% with this war. Wow, that's the first I've heard that.

Yeah, and I wonder, again, we were talking with our previous guest about the shock and oil being

transitory and this hit to GDP maybe transitory, but I'm wondering would it do enough damage to

possibly push the economy into a moderate recession in the short term?

Well, we do have that in our profile right now. That's in our base case,

and I do think it's a temporary shock assuming that this conflict doesn't go on for months,

you know, that it's rather weeks as we all talk about. So when we, you know,

modeled that growth in the second quarter, we thought we'd be around 2%, we've taken a full

percentage point off. So we're 0.90, be exact. But, you know, the point is, in the second

end of the year, we think growth will rebound, but that's as soon as oil supplies,

energy supplies, commodities, supplies are up and running again, and that's what we have to watch.

Have you interpolated off a barrel of oil where a gallon of gas is going? I believe it's a 362

off-triple A. Let it. But, Kathy, Ms. Johnson, there's modeling being done. Anna Wang and her

team are modeling out 120-ish barrel. And if it's a longer duration out to 160, and then it gives

way, they're very optimistic that it'll come back down. But can you get out over $4 a gallon?

If we have oil prices go up to 120 or more, then I think, yes, you can get to $4 a gallon.

What we're working for within our base cases, that we get to around $375 a gallon. And that would

be the peak right now in the second quarter. But, yes, certainly, I mean, the size of the move

in oil prices and also the duration is really key. And just everything's so fluid right now.

We go to John Tucker, surveillance petroleum correspondent. John 32 gallons in the Hummer H2,

at Kathy's $3.75 is a $120 fill-up. And that's $120. I'm not going to spend buying other stuff.

So. Because you're on tuition island. Let's remember that.

On tuition island. And things are getting rough on tuition island.

No one. It's like, when I go now, even though it's not empty, I still fill up. So I'm hoarding.

You're hoarding. Okay. Alexis Kostoffer is to finish up with Kathleen, Ms. Johnson.

Also, I just want to share with you all what's coming over the Bloomberg right now. European

countries, including France and Italy, have now open talks with Tehran trying to negotiate a deal

to guarantee safe passage for their ships through the strait of Hormuz. I'm wondering how much

this rise in oil and in everyday stuff we use, like going to the gas pump is going to pull back

the consumer in this environment. Because we know that the consumer has really been a pillar

of economic strength for years now. Yeah, no, absolutely. It's a tax on the consumer,

right? It's tax on the economy. Now, it doesn't necessarily become a long-lasting inflationary

impact unless it persists. And it gets embedded in inflation expectations. But I think certainly

the first round impact, it's a tax. And it's going to, just as we discussed, you know,

dealt with joking, it pulls away the available discretionary spending on other items.

And that's why you get to hit to economic growth for the period where we see this elevated,

you know, gasoline prices. And the longer that persists, the longer the hit. I would also add

there's business and consumer confidence that we also model. It's not just the direct impact

of higher energy prices, but how does that affect confidence and business leaders right now?

In certainty, it's still very high so they start to pull back.

Kathy, thank you so much. Kathy and Buzz Johnson, Chief Economist,

Nationwide there. This is the Bloomberg Surveillance Podcast, available on Apple,

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