Ep.68: Is GBP Heading For An "Existential Crisis"?!

Hello and welcome back to the Market Maker Podcast. It's episode 68. We're at the end of every week, but actually it's a, it's a Wednesday because we've got Her Majesty's Jubilee happening in the UK on Thursday and Friday, so a little bit early this week. But as per usual, we're going to cover some of the major kind of topical themes in markets, deconstruct them, make them a little bit more hopefully understandable if you're new to finance or a student busy with exams, I'm sure. I hope they've all been going well, and hopefully we can save you some time rather than scouring through the FT to catch up. Hopefully the next 45 minutes or so— can't promise we'll stick to exactly that amount of time— but we can get you up to speed on what you, what you need to know. Before I begin, I would really appreciate it if you do listen to the episodes through the weeks, then drop us a rating on Spotify. We super appreciate that. Really helps get this out to as many people as possible. But in terms of this episode, we're going to talk about really two main things. Going to talk about why Bank of America think investors should hedge for an existential sterling crisis. Even the Daily Mail grabbed that headline, Piers, this week. I mean, That's some, some punchy, punchy news headlines. But then the other thing we're going to talk about is oil, and we've seen oil actually touch $120 this week, just yesterday. The conflict in Ukraine intensifies, the EU have agreed to pursue a partial ban on Russian oil, and what could this mean for OPEC as well? There's a Wall Street Journal exclusive out overnight that's quite, quite interesting to talk about. But to kick things off Have you seen Top Gun yet?

Ah, I— well, well, the original, yeah.

Top Gun: Maverick?

No, right, no, I have not. Have you seen it?

Yes.

I bet you— I bet— let me guess, you went to the IMAX or something, didn't you? Yeah, you love a bit of IMAX.

It's the only place to see IMAX-made films. Such as Top Gun: Maverick. But I've got a couple of stats.

If you've been like queuing outside for 2 years since they, uh, there's a long way— release date got postponed by 2 years, didn't it?

It was, uh, yeah, it's been a long wait, but the wait is over. And obviously it was, it was the— they dropped it. So a couple of stats for you, stat check on this movie. So they've dropped it on the Memorial Day weekend, of course. So always strategic. Interestingly, I was looking at the breakdown of the demographics.

Hmm.

Now, the biggest, the biggest kind of segment is aged over 35. So it's like the 35 to 45, which you would kind of expect. But actually, it's one of the only films so far in since the kind of post-pandemic reopening, because if you think about it, it's been a lot of Marvel dominated. Yeah, the younger generation. This film, you might think, is all old people given the original was '86, but actually it's a pretty even split across all 5 segments. So young generation are dipping their toes in going, what's this about? Yeah, this granddad flying some fighter jets, but the old people are kind of reliving the original. So actually, uh, the opening launch is the biggest ever for Tom Cruise.

Yeah, that's pretty phenomenal, isn't it? You He's obviously been involved in one or two decent-sized productions. Yeah, though this one tops the lot.

Yeah, $160 million in the opening weekend. Uh, the film cost about $150 million to make.

Nice, so covering costs. Yeah, in the first weekend.

Okay, so first question for you: what was the previous record for opening weekend? Which film? Tom Cruise, do you reckon?

Wow, it's probably got to be one of the Mission: Impossibles.

No, they're up there.

Yeah, they're up there, but not, not the top, or not— no, second. Okay, uh, go on. I don't know.

War of the Worlds.

What? Okay, that was definitely nowhere near my radar. Yeah, I could have been guessing for 5 days and still not got that. Yeah.

Okay, I think the opening run— I think this is determined just a little bit beyond the opening weekend, maybe the first week— it did, I think, $225 mil. But this film's on course for smash $300. So, um, do you know who was the actual actor that they actually wanted to play Maverick in the original?

God, I thought it was back in the mid-'86. Yeah, uh, was it John Travolta?

Correct.

Oh, is that correct? Correct. That was a great—

after John Travolta, they then went to Swayze. Of course.

Yep.

Swayze said no, so then they went to Nicolas Cage.

No.

Then they went to— they went, you know, they're really scraping the barrel now. They went to John Cusack.

And then they thought that would have been one of the worst casting errors in the history of cinema.

Then they thought, you know what, in, in the spirit of the DeLorean, which was relaunched this week, new one, new EV car. I don't know if you check that out.

No, I haven't actually.

Pretty sweet looking actually. Michael J. Fox was then, right?

Yeah, yeah.

But then he said, no, do you know what, no. And then they went Tom Hanks.

No, my God.

And even Tom Hanks went, this script is just not up, not going to cut the mustard. Yeah. So then they decided, you know what, we'll give this kid a shot. And actually it was the biggest grossing film of 1986.

Wow. So he was what, he was like what, 7th or 8th choice?

Yeah, in the running. Yeah.

Had he done— I just remind me, had he done anything before that?

Yeah, he, he had done, uh, Risky Business.

Oh, Risky Business.

Yeah, yeah. But the original budget of the first film was $15 million. Wow. And it did $357 million.

That's, that's good business.

Yeah. And then my final stat, in the, the new film they use F-18s.

Yeah.

Won't spoil, you know, what happens in the film, but in order to hire those jets It cost the producers $11,000 per hour just to hire them.

Yeah.

Yeah. But yeah, should check it out. It's a good film.

That's interesting that the demographics of those going to the cinema are so spread. That's a— that's both a— I mean, that's a victory for the marketing engine behind this film, right? As well as Tom Cruise, because I think he's, you know, even though he's What is he now, late 50s?

Oh yeah, um, I think he is now.

Yeah, he's been around the planet promoting this and he's still got that— I guess he's still got that pull, right? Even for the younger generation.

Um, you know what was one of the interesting stats I saw was an article about gender equality.

Yeah.

And basically every movie that Cruise has been doing through his career he gets older. Yeah, the women stay the same from an age perspective.

Yeah, yeah.

This is the first film where, um, Jennifer Connelly, isn't it, who's played— plays his opposite in this latest film, there's a 9-year gap, right?

Yeah.

Whether this pattern, you know, will stay, I don't know.

But the most important question though, was it any good?

It was amazing, right? Go see it, but you have to see it in the IMAX.

All right. You know, I've never been to the IMAX.

Oh, he's gonna blow your mind. You have to— that— I'm gonna buy— after this podcast, I'm buying you a ticket.

I've lived within like a couple, like 2 or 3 miles of the IMAX for 25 years and I've never been. Anyway.

Right, okay, tick it in your inbox.

Done.

All right, well, let's get down to business and let's talk about the pound. So just to go over what I said earlier, investors should hedge for an existential sterling crisis as the British currency faces struggles usually seen only in the emerging markets. That was according to an FX strategist at Bank of America that kind of caused a lot of headlines here in the UK this week. The report wrote that whilst not wishing to over-exaggerate Sterling's predicament, just reining it in a little bit, as some kind of end-of-day scenario, we are concerned that the increasing politicization of UK policy undermines Sterling in ways that would appear EM-like. The rationale here kind of based around 3 points: a risk to the nation's current account deficit, a deterioration of the relationship with the EU over Northern Ireland, and questions around the central bank's credibility. So maybe we could get a bit of a flavor for those 3 points.

Yeah.

So the risk to the nation's current account deficit. So what is it they're talking about when they talk about these types of things?

Yes, good question. So the current account deficit— I mean, all with the current account of a country, basically all you're looking at is what's the difference between the net inflows of imports relative to the outflows by way of export. And if you— most of the big developed nations run a current account deficit because they import more than than they are exporting. And that's fine. That works great. I mean, it works great because these developed economies— look, so let's step back. There is an issue with a current account deficit from a currency point of view. If all that happened in your currency market, if all that happened was the trade of goods, then Yeah, you've got an issue if you've got a current account deficit, because if you're buying more imports— so when you buy an imported product, obviously the money goes out of the country. You're buying something from a whatever, Chinese producer. So in the end, the money is going out of the country. And obviously, sorry, exports, it's the opposite. You're bringing money into the country from a foreign buyer. So if you're running a deficit and forget everything else, well then in the end, money's going to be flowing out of the country constantly, and there's going to be no money left, and the value of your currency will collapse. The great thing about developed economy is not just about trade in products and services. You've obviously got then the whole kind of financial asset universe, and there's lots of foreign investors that want to invest in UK assets, be it UK company shares or government debt, or you've got people wanting to come in and invest in real estate and all the rest of it. So you get this kind of net off effect. And so it's not an issue. But I guess what this person— I think it was the Bank of America analyst called Sharma, I believe was their name. I'm not sure. Well, anyway, yeah, I mean, that Sharma should be feeling a little bit dirty this morning, I would say, for going there with this ridiculous headline. But I guess what they're saying is there is a potential worst-case scenario, like there is with many things, right? Or most things. But what they're saying is, in combination with— well, so what they're saying is you can have a current account deficit that could widen, so the deficit could grow if the Brexit situation around the Northern Ireland scenario blows up, and if the UK pull out— like, the worst-case scenario on that political front is a trade war with the EU. Now, 40% of UK exports goes to the EU. So that threatens a huge portion of our exports, right? So if that happens, and our exports to the EU— let's say doomsday worst-case scenario— just stop, well, then our current account deficit is going to massively widen. Okay. Now, at the same time, you've obviously got the UK's economy is losing momentum and is almost certainly going to go into a recession. And here you can say, well, all right, isn't that the same for everyone? We've got an inflation problem around the planet. Everyone's concerned that growth is slowing. And that we're going to have recessions. But actually, it's probably the case the UK's outlook right at this point is probably worse, I would say, than the EU's. It's certainly worse than the US's. And so from that point of view, thinking about foreign investment in UK assets, that then kind of is a negative there. And you might see some foreign investors saying, well, you know what, I'm going to sell my Arm shares, and I'm going to bring that money back home. That move of foreign investors pulling out accelerates if they're concerned about the currency's value dropping. Okay, so look, the perfect storm here is that the current account deficit widens, you add in all these other macro and political problems, and what they're worried about is that there's going to be way more sellers of the pound and not many buyers And when you get a real imbalance on each side, relatively on each side of the market, then you get liquidity issues. So if everyone's selling and there are hardly any buyers, well then the value of this thing, the pound, can sharply drop. And this kind of happened back in 2016 when we had that surprise, well, surprise for those who voted remain, surprised that we voted Brexit and the value of the pound collapsed because there was a temporary short-term liquidity problem where everyone was selling and there weren't any buyers. And so I guess that's what Bank of America are kind of pointing towards.

Yeah. I mean, it's— so you're saying that a lot needs to fall into play for this to materialize, and this is more like I mean, I haven't actually seen the note in itself. And I think one important thing to understand when these banks do issue these notes and then how they get broadcasted by the media is that often there's a base case outlook scenario, and then there's outlying what-ifs, of which then I wouldn't be surprised if this was like the footnote what-if, but has created the biggest splash. And therefore—

Yeah, but they did put the footnote as the headline. If that's the case.

Well, they're a sell-side institution after all.

Yes, indeed.

Getting the amount of airplay that they've had out of this, they've really juiced it.

But you've got to go back a little bit because the thing is, what's surprising about the pound's performance is it's like the worst performing major currency this year, and it's particularly really since March. That it kind of broke out to the downside. Now, the thing about it is that the Bank of England were the first kind of major central bank to actually start making a move on trying to contain this inflation issue by raising interest rates. I mean, they raised rates at the end of last year, right? The Fed didn't raise until March. Okay. And normally when you're looking at exchange rates, one of the biggest forces on an exchange rate, the value, the relative value between two different currencies, one of the biggest forces is monetary policy differential. And normally when you're raising rates, that leads to your currency's value going up, right? At least in the short term. So normally the first mover, the Bank of England, would lead to the pound appreciating in value against other currencies whilst other central banks haven't started to hike yet. And obviously the Bank of England have carried on hiking, and rates have gone from basically 0% to 1% now, and we're expecting more hikes. So from the monetary policy point of view, you could argue the Bank of England's one of the more hawkish. So why is the pound devaluing? And I think that comes from, A, something else they pointed to in their note was a decrease in the Bank of England's credibility, meaning that it's become harder to predict and forecast what the Bank of England are going to do. And that's just because they've delivered some mixed confusing messages from one meeting to the next. They seem to kind of flip-flop and change their mind quite a bit. You know, the steady hand of the Mark Carneys of this world, you know, seem long gone. And so it's harder to forecast, so that uncertainty kind of plays into it. But even if the Bank of England carry on hiking, which the market still expects, then I think then you bring into play the economic situation, and I guess traders are worried that even if the Bank of England maintain their first mover on the hawkish front, actually the economy is weaker than others, and so that hawkishness will come back to bite us even harder in the UK. So in the end, ironically, the hawkishness kind of turns into a negative for growth forecasts and therefore negative for the currency's value. And that's what, what, what has kind of brought this kind of downside that we've seen. We have, we have seen, just as this headline comes out, I mean, it has come off the back of actually, when you're looking at things like the, um, the pound against the dollar, we have seen the last 2 or 3 weeks it's actually rallied again. Um, it's still right down around the 125 area, but it rallied from 122 back up to 125. But that's not really That's nothing to do with sterling. That's more to do with the US, I would say, and more to do with the idea that we've just backed away from Powell being uber hawkish with kind of 75 hikes. We've also backed away a little bit from the idea that the Fed are going to be hiking right into the end of the year, I think. So possibly the the hawkishness has slightly softened with regards to the US, and that's led to the dollar having rallied, the dollar pulling back a little bit, which has helped the pound bounce. But I mean, the Bank of America talks— when they start throwing parity into their note, it's like, come on. I mean, Fine, if you want to grab the headlines, if you want to sell your soul to the devil, and if you want to become a tabloid, then fine. That's exactly what you're doing. But I think who's losing credibility here? Not the Bank of England. It's their FX strategist, Sharma. I don't think—

Shots fired. Bang, bang. Sharma, if you're listening.

They were a friend of the pod, but Probably not anymore. But I think, look, base case, yeah, sterling weakness for sure. I think that's a fair assessment. Everyone's thinking that, and I don't think that's wrong. But I think when you're talking about emerging market collapses and parity, I think that gets a little bit outlandish.

Yeah. There was some headlines as well on the political front I saw this morning about conservative MPs are wargaming at the moment on the rebellion against Johnson. But yeah, oh, I feel like we've— that's a broken record, to be quite frank. And, um, these types of noises come and go.

What do you think, Johnson? Um, is he still Prime Minister? By—

well, he's got to get— he's got to make it out, out of the woods for another, what, 2, 3— 2 to 3 years.

But no, I mean, is he still Prime Minister by the end of the year? I.e., will there be some kind of leadership challenge within the Conservative Party?

Yeah, that's what they're talking about at the moment. And reading the article, it's kind of— it's one of those where timing is quite key. And if you fail to basically take him out at that first instance, which they did, um, it's just game over really to try and then pull it around the second time. So yeah, I personally— yes.

You think he will be Prime Minister?

Yep.

Still? Yeah, yeah, yeah. Teflon Boris, I think. Um, I think it's— as you say, if you, if you attempt a coup and it fails, then that's, that's, that kind of ruins your career, right?

Possibly one shot at these things. So But sticking with the central bank rhetoric, before we talk about oil, the other thing that we've had this week is Eurozone inflation came out higher than expected, record high, of course, 8.1% from a year earlier in May. Expectations were for 7.8%. We've had quite a big— you were talking about the flip-flopping of the Bank of England on their communication, the Lagarde in the pivot to becoming hawkish has been the ECB, but now they've gone full board almost, where Lagarde indicated last week quarter-point increases are likely at meetings in July and September. Chief economist Philip Lane kind of ratified that timeline on Monday of this week, calling moves of that size a, quote, benchmark pace in terms of exiting stimulus. And I've just seen one of the hawks, Holzmann, I think it's the Austrian central banker, said that basically record eurozone inflation backs the need for 50 basis point hike. And Deutsche Bank have come out with a note this morning saying the same thing. They're now— they're the first ones to go, if you like, to bump their call up from a 25 to 50 basis point move in the third quarter. Any feelings about their approach to this inflation issue from a timing perspective on the policy side?

Well, the most predictable central bank on the planet where their default position is do as little as possible, as late as possible. I think, all right, that's a bit— and that's because they've got the hardest job, I think, of all central banks because because of the nature of the eurozone and its monetary union, where you've got 19 different countries and they're all very different. When you look at economies like, I don't know, Germany, a powerhouse manufacturer, and then you look at whatever economies like, I don't know, little, let's say Cyprus, right at the opposite end of the spectrum. Well, that's all about, tourism and olive oil production and stuff. And the cultures are very different. It couldn't be more different, right? And yet you've got one central bank that's only got one interest rate that they've got to fit this massive array of different types of economies. So it's incredibly difficult for them. So yeah, they're always last to the party. Inflation, in fairness, probably picked up in in the eurozone slower than in the UK and certainly in the US. So fair enough. But yeah, I mean, I think they should go 50. If I was them, I would, only because everyone else is. So you might as well get these bigger hikes in whilst you can because you know what's coming on the other side. And so you want to have some ammunition to cut rates to kind of stimulate when we're in a recession. So that's my— literally my view. I think they, they may as well do 50 because everyone else— well, everyone else— because the US is. So they can, they can afford to go that bigger clip in my view, so they should do it.

Okay, yeah, I was just thinking about, um, Andrew Bailey and how much— then thinking of communication— how much does he look back And you talked about, you know, the first, first to move, first mover status. And that was definitely the case where I remember when we bailed out the RBSs of the world and things like that, it was actually the UK that was kind of spearheading a lot of that.

That's right.

Um, also starting quantitative easing, the Bank of England were right at the forefront of that. So Do you think Bailey's somewhat impacted with his judgment by his predecessors, where it's like, it's difficult to kind of— you're coming on the coattails. You said a very complimentary wording about Mark Carney there, the steady hand, and then Mervyn King, obviously, during that period, during the GFC. I mean, is it almost like— I wonder in a central banker's mindset how much— it's almost like a trader. Are you judged by the performance of what's happened historically? And you're thinking, how am I going to be remembered? And does that impede your rationality to make these judgments? But I guess, look, this is why boards exist, to spread the load of the decision-making process, right?

Yeah.

It's interesting.

I mean, look, don't get me wrong. I actually think the Bank of England have— I think they've got the strategy right, even though I was actually quite critical of them hiking. In December, I said, "This is too early." I think now in hindsight, I think they were right. I think the Bank of England have played it right from a strategy point of view in terms of what have they done with interest rates. I just think the communication along the way has been pretty shambolic and confusing. And that's what makes it harder to predict what they're going to do next. And what a good central bank should do is make sure that their their forward guidance and their communication is solid and consistent so that it is as predictable as possible what they're going to do next. So I think that's where they failed. I think the Bank of England have hiked. They've gone first again, first mover, and they barely got that right. And I think they should stop hiking first as well. And we'll see whether they make that mistake because we're still pricing in hikes I don't know what it is now. Is it hikes for the next 5 meetings or something ridiculous? But I think they should stop hiking first. And that should be probably in one meeting's time, maybe one more hike max, then I think we need to just stop and just hang on a minute. Let's just pause and take a look at what's going on here. So yeah, their rate decisions have been good. It's just their communication and messaging around it, which I think Bailey has failed at.

Okay, well, let's, um, let's talk oil because there's quite a few different layers to this, um, to discuss, and comes in the context of Russian officials have said their forces are fighting for the complete liberation of Donbas, which broadly geographically refers to the eastern regions of Donetsk and Luhansk, which is where the, the Russian-backed separatists kind of started and had been very forceful in the invasion and continued to do so. And what this has led to then is a couple of things. Firstly, some OPEC members, according to the Wall Street Journal overnight, are said to now be exploring the idea of suspending Russia's participation in the oil production deal. And this comes as Western sanctions and a partial European ban begin to undercut Moscow's ability to pump more, is what OPEC delegates have said for the rationale of having these discussions. So comes obviously yesterday, we had the, the EU agreed to pursue a partial ban on Russian oil. I think this is actually the 6th round of sanctions, in fact, that they've agreed upon on Russia. Um, so perhaps we can talk about that first. Like, what exactly is it that they, they've EU have done, how meaningful is it?

Yeah, so I think, again, on the— like, the optics here look great. I mean, if you're, I guess, anti-Russia, then it looks like this is a really powerful, big stride to really ratchet up the pressure on Putin. And it's, you know, it's a great sign if— well, I was going to say it's a kind of demonstration. It looks like, again, on the top level, it's a demonstration of EU unity. Except once you get past the headlines, I actually don't think this is anything like what the headline suggests in terms of the punch that it's going to carry. So the top line is they've— well, they've done two things. So outside of oil first, actually, they've cut off Sberbank from the SWIFT cross-border payment system. That's Russia's largest bank. So they've finally done that. Possibly should have done it way sooner. But then with regards to oil, then they banned purchases of Russian crude oil and refined petroleum products such as diesel by the end of the year. Okay, so you're not allowed to buy this stuff as of the end of this year, right? So we've got 7 months. However, here's where the unity thing breaks down because Hungary have been screaming and shouting saying, no way, No way, no way. We're not agreeing to this. 65% of our crude comes from Russia. Obviously, they're pally with Putin as well. That's the kind of side political side note, but also they're incredibly dependent on Russian crude. And Hungary is saying, look, if we do this, our economy's in serious trouble. We'll have a massive recession. There'll be more harm to us than to Russia. So we don't agree. And so they trying to be throwing their weight around with their veto. And that's why it's taken so long to get to this point where the EU have actually made a decision on a kind of continent-wide ban on buying Russian crude, right? So fine, banning crude by the end of the year. However, the EU said there would be a temporary exemption for oil delivered through pipelines. Now, they have definitely not given any detail whatsoever on what temporary means. Given that the actual ban on Russian crude doesn't come into force for 7 months. So temporary has to mean more than 7 months, right? Otherwise it would all be packaged in. So temporary definitely means more than 7 months, and Hungary would never agree to it because all their oil gets piped in from Russia. 65% of Hungarian oil is piped from Russia. So I don't know how this resolves. So the point being that, all right, the headline looks great, but in reality, hm, not so much. So really it comes down to seaborne Russian oil being banned as of the end of the year. Now the issue with that is most of the seaborne Russian oil isn't coming to the EU already for but for other reasons, like tankers are already subject to so-called self-sanctioning in parts of the West. This is where tankers don't want to be dealing and shipping Russian oil to the EU for reputational risks. You've got dock workers even that are refusing to unload ships carrying Russian cargoes. You've got Western financiers that are stepping back from writing insurance on these ships. So actually, a lot of the seaborne Russian oil isn't coming to the EU already. Where's it going? India. India are like, well, hey, come on in. What, cheap? What, cheap Russian oil? Yep. We'll have that. Have you seen the cost of Brent? No thanks. We'll buy your Russian oil at like a 25% discount. Happy days. So actually, this ban just on the seaborne stuff And anyway, it's easier, much easier to divert your seaborne oil if you're Russia, much easier to divert it. If they actually banned pipeline oil, that then is like monstrously bad for Putin because you can't divert piped oil, right? You can't just move the pipe. So in the end, Hungary have been the spanner in the works of this. Their position, I can't see it ever moving. Temporary probably means most likely permanent. Yeah, that's my view. You're looking at the oil price, and again, a bit of misreporting, I must say. You're reading some articles in the FT and the main financial press, and they're saying, this is big, and price of oil spiked as a result. Price of oil has not spiked as a result of this. The price of oil has been going up, I mean, over the last, let's say, 3 weeks. And fine, we are nearly back to the peak we initially saw when it did spike when the Russian-Ukraine war started back at the end of Feb. So we're nearly back to those peaks, but it's not, not really for this reason.

Yeah, not forgetting as well on the demand side, China reported its fewest new COVID-19 cases in almost 3 months. This week. They've eased a lot of the, um, the strictest virus controls in the main centers of Shanghai and Beijing. So yeah, there's, there's a, there's a lot to unpick, I guess, when you're trying to read the financial news and tabloids. As you said, the same case with sterling, the conversation we had about Bank of America towards— actually, I guess the, the biggest lesson here is to just question for a moment what it is that you're seeing and what are the underlying reasons behind what drives these decisions. And anytime it involves politics, there is always a hidden agenda or some— something that's, um, it's probably connected in some way. And speaking of that, the other thing then is talking about what this means. So now with this OPEC talk And we talked about this, I think, last podcast, about how the Saudis are backing Russia. And this came in the context of exactly what's just happened this week. Of course, they're kind of tightening the screws, but then the Saudis are playing ball. And that's coming in the timeline of the, the ending of this OPEC agreement that was put in force in kind of spring 2020. So what does it mean then if you, if you boot Russia out the club? Um, that means then, well, the rationale there is that the belief is that Russia is going to find it hard to meet the quotas. So then who actually picks up the tab to pump more oil? Well, Saudi Arabia, of course, uh, and then the UAE. And this then becomes quite interesting when you start then to try and piece together the puzzle of, okay, so what was— where does the president Joe Biden come into this? And lo and behold, he is planning now to visit Riyadh in late June. There's a big kind of summit of these Gulf nations happening. Of course, he's likely— of course, and he's likely to see leaders of other kind of friendly nations, uh, U.S. perspective: Bahrain, Qatar, UAE, as well as the Saudis. Um, yeah, quick, quick kind of, uh, bring up to speed on the general relationship between Saudi Arabia and the US has been one of deterioration, I guess, over time, namely because of a CIA report that came out damning specifically Mohammed bin Salman, MBS as he's known as, for the dealing of a certain journalist about being outspoken about the Saudi government. But since then, things have gone kind of from bad to worse because the relationship status has been— that probably doesn't help that the actual age of these particular individuals is quite wide in an almost father-son age gap.

Father-son?

Granddad-son.

Granddad-grandson.

And in that sense, um, Biden has kind of said, look, I'm not dealing with this child, I'm only dealing with the king. Which is obviously Mohammed bin Salman's father. Whereas then, because of that, MBS has kind of just said, look, I'm not dealing with Biden. However, such as anything to do with politics, when needs must, the change of wind can come quite quickly, I guess.

Yeah.

And obviously, as we all know, Biden's facing an incredibly challenging time right now. His polling is just off the worst it's been, which is just off the worst ever for any US president. And it comes with inflation at a 4-decade high. And it's obviously— we're recording this 1st of June, the midterms are just months away now. So it's crucial that he starts to pivot. And I'll talk about the Fed as well in a moment. But what's interesting here is that he's now kind of dropping that that disdain for dealing with MBS and now pulling him in for different reasons. And there's a couple I saw listed, three kind of key facts. The one is, is that my understanding is, is that the succession will happen. King Salman is fairly old, and MBS has been primed for some time as this kind of international mover to bring Saudi to the, to the new kind of international scene. So he does have to deal with this character going forward, for one. Of course, the US has many different security and financial interests. Maintaining a strategically strong relationship with them is quite key. And then Saudi Arabia is an ally in the common effort to contain Iran's destabilization of that geographic area as well. It's the kind of the more pragmatic conclusion of why Biden needs to like bite his tongue and just go with this, bite his lip and just have these meetings. So yeah, really interesting. I think that all of this is happening, of course, as the US have been requesting continuously to Saudi to pump more oil. This kind of serves that purpose. If OPEC do boot Russia out, Saudis pump more, the Saudis are happy with that. Biden can claim then on the back of strategically, I I think they've got another 2.5 months or so till the OPEC deal runs out. He goes there now.

Yeah.

They then make this decision 2 months later, all in just coming into the main run-in, 2 months then until the midterms. And then secondly to this, of course, he's busy with the— I was reading an article about the art of political deflection. Biden's team have been hard at work because not only trying to pivot, then looking at what they've done in the Middle East to control energy and bring inflation down, but also Biden had quite a rare meeting one-to-one with the Fed Chairman Jerome Powell yesterday where he said, I quote, the central bank has a primary responsibility to control inflation. 'But I promise I won't meddle.' So basically saying, 'It's your fault, but I'm not going to say it. I'm not going to say it's your fault.' Yeah. And so, um, you know, it's classic. Uh, I think it was in the White House shot, sat in the, the statesman's chair in the Thrones. Yeah, they basically just putting Powell to the sword. Um, so it's all begun, the deflection. Um, and not that this is to be unexpected, this is just routine gamesmanship. But yeah, just any thoughts on the, the whole kind of Middle Eastern politics first, and then how he's going to deal with Powell and the Fed?

Well, it's definitely that Middle Eastern politics thing is incredibly complex, incredibly complex. But, um, yeah, I mean Obviously Biden wants the price of oil to drop. Saudi a bit stuck because they're in this OPEC+ agreement, so they can't increase production. So boot Russia out, increase production to cover off Russia's shortfall, bring oil prices down, help the EU, by the way, because I was very critical about the EU, but you can't stop buying oil from one supplier until you found another one, right? And there aren't any others that have got much excess capacity apart from Saudi Arabia, but their hands are tied because they can't produce more because of their OPEC+ agreement, right? So that does play into that EU side as well. But yeah, it's, you know, again, I think again, it's a great more evidence if we need it that Biden is just really weak. I think he's old, he's weak, he's not fit for purpose. You know, he's over in the White House shouting and screaming XYZ about MBS, but you know, when he goes over there, he's going to be all pally and, um, you know, pandering to whatever he wants. And it's just a bit— I think there's just a lack of leadership, and Biden kind of encompasses all of that. I think there's a lack of leadership generally, probably. But he's right up there as one of the worst. And then with the Fed, Powell doesn't care what Biden says. But it's fine. Biden, get your soundbite. Get your shot so you can stick it in the Wall Street Journal. You're trying to do something. Pretending you're in control, but really Powell will do what's right for the economy and he's going to hike 50 points twice for the next two meetings, two 50s, then I reckon we're going to have a little pause.

Okay, so you'd be, you'd be on the much more, um, dovish end of the spectrum then, even though we're talking hiking of rates.

I'm on the dovish end.

Okay.

Yeah.

All right, well, on that, on that call, we'll leave it there and we'll conclude matters for this, this episode. So thank you, Piers, and thank you for listening. As I said earlier, if you did enjoy it, don't forget to leave a rating, we'd really appreciate it, and we will see you back at the normal Friday slot next week. Um, obviously UK bank holiday, so anyone celebrating the Queen's Jubilee, have fun and, uh, yeah, enjoy it, and we'll see you next week.

Yep, see you guys.

Bye. Thanks, Piers.