MAGGIE LAKE: Hello, welcome to the Real Vision Daily Briefing. It's Monday, March 14th, 2022. I'm Maggie Lake. And here with me today is Josh Lipsky, director at the Atlantic Council. And Daniel Lacalle, a chief economist at Tressis. Gentlemen, welcome.

DANIEL LACALLE: Thank you very much. Thank you for having me.

MAGGIE LAKE: Yeah, thanks for being here. We continue to see the Russian invasion of Ukraine, up ending global markets. We saw some volatility today, perhaps not as bad as we saw in the previous week, but at one point, stocks, bonds, oil, gold, all moving lower, although it looks like as we close out the US session for equities, they're trying to come back to just about breakeven. We also interestingly saw really heavy selling rather in Chinese tech shares that knock the Hang Seng down really sharply.

I think it's a great place to start just getting an assessment from both of you and Josh. Part of what hurt the Asian shares were reports that Russia asked China for military health unconfirmed reports. There's been some back and forth on that. Today, we learned President Biden is considering a trip to Europe. On the surface, this does not appear to be a situation that is de-escalating. What's your assessment of where we are?

JOSH LIPSKY: I would agree there are no signs right now of de-escalation. There were some rumblings over the weekend about talks, but all that seems to unfortunately have faded away. You're right. China's as much the big story this week as Russia, one, because of the report about the ask for Chinese military assistance and two, because of the lockdowns that now will be happening in Shenzhen and other cities in China.

All of this is weighing on sentiment, the idea, and this is why I think we're seeing oil come back down a little that demand might suffer. And we can talk about the supply chain implications and inflation, but just from an oil demand perspective, are we going back to March 2020, now two years later, and this idea of a COVID lockdown situation in the second largest economy?

You have that crisis in China, and then you have the G7 basically isolating the 11th largest economy in the world, Russia, and all the implications of freezing their foreign reserve assets, shutting off exports and imports, what that means for supply chains in the global economy. So, two global economic shocks now back to back. And I think we are entering to unprecedented territory, just as the Fed convenes and starts a rate hiking regime, something we haven't seen a long time here in the US.

MAGGIE LAKE: Yet, Daniel, is really the confluence of all this, isn't it that's rolling? It's the shocks on top of what was already a really challenging macro environment. How were you thinking through all of this?

DANIEL LACALLE: Yes, I completely agree. I think that the problem is that all of this is happening in the middle of a slowdown. We are putting everything under the umbrella of the Ukraine invasion. However, we need to remember that the developed economies were already showing worrying signs of a slowdown. The Chinese economy is trying to digest what is an inevitable slowdown as well coming from the burst of an enormous housing bubble. On top of it, you have the crackdown on the most important sectors.

All of this means weakening of the global economy. The Ukraine invasion, particularly the extremely severe sanctions that have been imposed, are going to create ripple effects, particularly on the Eurozone. I think that it's inevitable now that we will see dramatic slowdown in the European economy, which is essential for so many things happening also globally, like the recovery of Latin America, which was also lagging behind.

A lot of challenges that we need to add to a complex monetary environment in which on the one hand, you have inflationary pressures. On the other hand, you see central banks being a little bit prudish about the normalization ratio. Great, because the situation can become very volatile as we're seeing in global markets.

MAGGIE LAKE: Let's dig in on that. And Daniel, just let me ask you a follow up on that, because two really important questions there, both with Europe and China. Let's start with China, though. How vulnerable is China and the Chinese economy? Especially when we're looking at the cost of energy rocketing up food supplies. This was one of the really scary scenarios that started to play out.

Some of these projections that certainly we were hearing here from people trying to talk about, if you take the Ukraine supply and the Russia supply of say wheat out of the system, how worried are you about the Chinese economy? And what could that lead to in terms of policy decisions on the part of China, given those headlines we've seen with Russia coming to them for aid? Talked to me about that, about that line.

DANIEL LACALLE: I am worried about the Chinese economy, because China had a tremendously attractive opportunity to change the growth model a few years ago, and politically decided to abandon it, because it preferred to continue down the path of massive white elephants and the housing bubble, which is bursting all over the country. In a country in which the housing market we're in which real estate is about directly and indirectly about 20%, 23% of the of the GDP of the country, you cannot offset it with anything else, even less.

If you add on top of it, very severe crackdowns on corporates that are essential to deliver some growth elsewhere. If you put all of that together in an economy that requires almost 10 units of debt to generate one unit of GDP, and its dependency on the US dollar, we always forget about China. How scarce it is in terms of its demand for US dollars. All of that put together, you see commodities rising. You have a surprisingly low figure of producer prices in China. We can debate whether that is believable or not.

But what we can certainly see is that the inflationary pressures in China are stronger than what the official data suggests, and that the economy cannot offset the bursting of a real estate bubble of the size of the one that China has with other sectors. I think that that is likely to drive a weakening obviously, of the global economy because of the importance of China in terms of both, the exports to the rest of the world, and its impact on the global growth.

MAGGIE LAKE: Does that create a situation where Putin is a liability, a greater liability, because of what this is doing to the global economy, the uncertainty around the war? Or does it make China more reliant on Russia than we might otherwise believe? We always think China's in the driver's seat.

DANIEL LACALLE: In my opinion, I think that first, China is not so much in the driver's seat. If it was in the driver's seat, they would not have been a Ukraine invasion, in my opinion. I think also that it is not that easy to move the essential commodities that are used in Europe, that are used in developed economies, move them to China. It takes billions of dollars of infrastructure and changes in the supply chain in order to move the gas from the West to the East. And so, it's not easy.

I think that the Ukraine invasion is putting a tremendous amount of pressure on supply chains, because we're ultimately talking about two countries, Ukraine and Russia, that are essential for cereals, that are essential for aluminum, that are essential for palladium that is critical as well for so many different activities, as well as natural gas and oil. The situation for Russia, obviously, is dramatic.

The estimates right now that the Russian economy is suffering a level of inflation that is close to 20%. It is looking at a collapse of GDP of around 8% to 12% for 2022. And the decision of many countries to try to isolate it further from the inputs that many of the developed economies take from Russia is obviously going to significantly hurt Russia even further, but it is also putting strains on the supply chains, and it's inflationary all over the world.

MAGGIE LAKE: Yeah. Josh, I want you to weigh in here. Do you also share these concerns about China? Again, it's interesting because when you're state control that gives them in some ways flexibility to move all sorts of leverage in their economy that maybe other countries don't. But in this case, is it enough? How wounded will they be, or how stressed will they be based on what we're seeing in terms of the destabilization of the-- as you pointed out before supply chains already under pressure?

JOSH LIPSKY: Well, I agree with Daniel. The way to think about this is that people are saying that China will be some lifeline for Russia militarily economically. China has their own problems that we've just been discussing. And so, they did not need this. They did not need Russia's invasion of Ukraine and all the pressure that puts on them economically and geopolitically. We have Jake Sullivan from the White House, meeting with his counterpart now in Italy today. This is not the problem they were looking for, given all the domestic issues they have going on.

And the way you know that, you'll hear a lot of political rhetoric out of China supporting Russia, but look at the banks, look at the financial system, look at the way that they support or don't support Russia, they will continue trading with Russia. There's a deep trading relationship between China and Russia. There's a swap line between the central banks. There are FX reserves that China holds for Russia. But they will not go out of their way. They will be cautious on sanctions.

China's always cautious on Western sanctions. They will not want to get on the wrong side of that. The way to think about it is because of all the issues China has domestically, from their property sector, they're slow down, and otherwise, they will play it both ways. And they will do as little as they possibly can economically to support Russia in the situation. But they also won't pull the rug out from Russia at the same time.

MAGGIE LAKE: Yeah. Well, always watch the money rather than to follow-- the political rhetoric is a good piece of advice when you're looking at this situation and certainly, looking at Washington. Josh, do you think that-- we know Zelensky is going to give an address to Congress before-- there's been a lot of rhetoric and vocal support for Ukraine, do you think that there's a push on the part of Americans talking to their European allies in terms of maybe going after third parties doing business with Russia? You had Senator Toomey on making the rounds today saying there's more we can do.

JOSH LIPSKY: Well, there is more we can do. We've talked about this at the Atlantic Council. There are more sanctions options. But we also have to step back and think what we have done. This is historic and unprecedented. For the G7, they basically brought down the heaviest financial hammer they could think of in terms of sanctioning the central bank and wiping out somewhere close to $350 billion of foreign exchange reserves from Russia's account. That's equivalent to the size of Austria's entire GDP.

That was switched off from the bank account overnight, and Russia's economy is in crisis. They are going to default on some of their payments in the coming weeks. I really believe that. Daniel said 8% to 12% GDP contraction, it could be worse. It could be closer to 20% potentially in 2022. We don't know. It's evolving so rapidly, it's very hard to say. But I think 8% to 12% is even modestly conservative at this point.

They could be facing a historic GDP contraction within the Russian economy. Yes, there's more that can be done there, secondary sanctions. There are more oligarchs who can be sanctioned. The screws can be tightened further from both the US and the Europeans. Of course, there's oil and gas still from Europe that we can talk about. But let's also recognize that a lot has been done in a relatively short amount of time that surprised me, and I think surprised many observers.

MAGGIE LAKE: Yeah. And Daniel, is certainly creating risks for the economy. The further they go, the more we need to worry about the knock on consequences for that. We have a question from Ralph from the RV site, how much trouble are European banks in with Russia losses and other headwinds? That's not to mention any margin calls that may come up, counterparty risk if you're looking at failures.

DANIEL LACALLE: Yes, absolutely. There are significant consequences. We cannot bring them down. I concurred with Josh, was he mentioned before, that the impact on the Russian economy might be significantly higher than what the current estimates are showing. In terms of the financial sector, very similar. The financial sector in Europe has about $80 billion of exposure to Russia, that seems very small. It is actually very small relative to the size of the asset base of the European banks, which is north of $3 trillion.

However, the problem is that, let's remember 80 billion was also the exposure to Greece, and it created significant turmoil. We need to be aware of the ramifications of all of this. So far, it's very difficult to know because it's not just the exposure to Russian banks, it is also the exposure to long term take or pay contracts with Russian energy providers, particularly Gazprom. In the case of Italy, Germany, those are important. There are significant liabilities also on the side of some of the companies.

Overall, the size of the exposure is relatively limited in terms of the financial sector, but we cannot say that just because it's a relatively small compared to the total asset base, that that it will not generate challenges. I think that the ECB acknowledges that as well, because it has immediately implemented a number of backstops in order to prevent liquidity constraints. We need to see as it goes along. The impact on the European economy is going to be significant. We cannot say that it's going to be small.

We know from the past that sanctions have an impact on the European economies, particularly from north to south. But as Josh was mentioning before, these sanctions are completely different. This is a completely new environment. These are significantly more severe. These are the most aggressive sanctions we have seen in recent history, no, in history. Therefore, the impact and the secondary impact on the European economy is going to be coming in three ways. First, obviously, a significantly lower amount of exports to the rest of the world.

The second, a very high increase in imports, which obviously will deduct from the component of the external sector on GDP. And third is the ramifications of the slowdown of the economy in general, which goes from north to south, and therefore, the exports of the Southern European countries to Germany or France, which are critical will also come down. So, there's almost a domino effect that will significantly hurt the European economy. It can go into stagnation and stockflation, actually more quickly than what we would imagine.

MAGGIE LAKE: This, of course, comes when central banks were prepared to enter a different regime. We heard the ECB sounding more hawkish than many thought. We have a Fed meeting this week, the Bank of England meeting this week, Stephen Van Meter and Peter Boockvar had an interesting conversation this week about the central bank, about the fed on the platform, I'd like to share a clip for that. Let's have a listen.

PETER BOOCKVAR: I've been saying for weeks that strictly from a market perspective, and an economic perspective that we should fear more Jay Powell than Vladimir Putin. Now Putin, of course, has made Powell's job that much more difficult but it's Powell and what he does with interest rates, and what Lagarde does and what Andrew Bailey does in the UK that is probably more relevant for markets and the economy.

And I'm going to throw a question to you because I get asked this as being a critic of the Fed for a long time, I always get the question, well, okay, Smart Aleck, if you were head of the Fed, what would you do here? I'm going to ask you, Steve, if you were head of the Fed, what would you do here in light of this macro situation?

STEVEN VAN METRE: That's a tough question because that's the job, Peter, I would not want. I don't know about you, but I wouldn't want to be there. I think the Fed has no choice to hike. I don't think they want to. I think if I'm head of the Fed, I think I have no choice here. And the way I look at it is the Fed's got everything they want going forward. You've got high CPI. We just got the JOLTS report today.

The number is, is it north of 11 million still? I forget the actual number. And you start to look at this from an economic perspective and the Fed has to hike. Now, we know Powell doesn't really want to. He's been around long enough. He's seen, hey, if you pull back on QE and we really slammed the brakes on this thing quick that the economy needs time to do digest this, and just looking at the equity market alone since the Fed put the brakes on should give us cause for warning.

MAGGIE LAKE: That full interview is available on realvision.com across all Tiers today. Daniel, they're in a tough spot but the markets priced against seven rate hikes, I think it is at last check for this year. Does it seem the Fed can do that against this geopolitical backdrop that we're talking about?

DANIEL LACALLE: Well, the Fed is caught between a rock and a hard place, isn't it? On the one hand, inflationary pressures are very strong. All the data points that would recommend hikes there. At the same time, do you have market turmoil which is very important for the Fed a lot more than what many would imagine and what they actually should be worried about? And there's obviously the Ukraine crisis.

We have to remember that in 2018, they made a complete U-turn based on geopolitical concerns that were nothing compared with what we're seeing today. If I was actually quite skeptical that they would go for seven grade hikes before [?] skeptical today. I think that at the same time, I heard a common saying that markets should be more concerned about Powell than Putin, no, they shouldn't. No, they shouldn't.

Even if we believe the seven rate hikes that were announced, the interest rates in the United States would continue to be negative in real terms for a very prolonged period of time. We should definitely be significantly more scared about the Ukraine invasion, because what we're seeing the ripple effects on the global economy are much larger than a rate hike.

MAGGIE LAKE: Yeah, absolutely. Josh, I think we saw that play out, didn't we? We mentioned briefly what happened in nickel last week. There are reports that European energy firms are asking for help support, maybe to cover their margin spikes. Is there a fragility in the global economy that central banks need to