Russia’s invasion of Ukraine is ‘incredibly, incredibly inflationary’: Strategist

Heritage Capital President Paul Schatz and Guild CEO Sean Bonner sit down with Yahoo Finance Live to talk about recession indicators like the June CPI data, the Fed's rate hikes, and geopolitical pressures from Russia-Ukraine.

Video Transcript


- All right. There is your closing bell on this Wall Street Wednesday. And markets ending the day to the downside. It has been a wildly fluctuating day. The Dow again was down 4.66 at one point, ends up down 209 points. The S&P and the NASDAQ falling 17 points each.

Let's break down the markets. Sean Bonner Guild CEO, and Paul Schatz, Heritage Capital President. Nice to see you both. Let me start with you Sean, and the terrific analogy for a Navy man. You said, the U.S. economy based on all the data you're seeing, is headed for a Navy landing. What is that, and what does it mean for the economy?

SEAN BONNER: Well, that's true. So we're used to commercial airliners and a lot of them Air Force pilots have these nice, long runways and they can come in nice and easy. But as you can see here on the Navy, we land on aircraft carriers. We've a very short deck. That jet plane has to be slammed out on that deck to catch that arrestor cable. Often it's called a controlled crash. So I think the soft, the soft landing scenario for the Fed is more like a Navy landing, right?

We're going to slam that thing down on the deck because with a 9., 9.1% inflation rate, we're going to have to, to keep raising rates here. But it's going to be, it's going to be a landing, it's going to be a little rough, a little bumpy, but I think everyone at the end of the day is going to be OK. So everyone walks away from a Navy landing usually, but it's a little bit uncomfortable when it's going on.

- Paul, what do you think when you take a look at the risk of recession, the probability that maybe we could see one, especially with inflation at 9.1% the pressure now on the Fed to get much more aggressive. How do you see the next couple of months playing out?

PAUL SCHATZ: Well, if you like volatility and uncertainty, this is clearly your market and your economy. I said coming into the year that there would not be a recession in 2022, I thought we would stave it off until 2023. It's hard to believe even though employment is probably the most lagging indicator, it's still going to take time to work off creating 370 odd thousand new jobs last month to get to a looser labor market. It's not going to happen overnight. It's certainly not going to happen in July and August.

So it's also hard to believe on the other side that inflation rate at 9.1% ends with anything but maybe mild recession. So I think the next couple of months markets on balance the stock market drifts higher trading range, nothing really exciting. We wring out some of the volatility let fundamentals catch up with what we saw on the first half which is down 25% to 35%. I liken it to 1980. It's a super good model.

Volcker came in, rammed down inflation over and over and over again. We had a mild recession in 1982 and a half quarters, a lot of sectors didn't feel it. And this seems like a good model for perhaps early 2023.

- And Sean, I want to ask you about the added pressure, obviously, still the fallout from the Russia-Ukraine invasion. What are you watching there in terms of how you expect that to continue to impact markets going forward, and perhaps something that the Fed should be keeping an eye on.

SEAN BONNER: Yeah, well unfortunately this Russian invasion, Russian aggression in Ukraine is just incredibly, incredibly inflationary. And it affects commodity prices, mostly energy and food. It's been talked about a lot, Ukraine is referred to as the breadbasket of Europe, producing over 10%, 10% of global wheat and 50% of global sunflower oil. And a lot of that's offline now. According to NASA, 22% of Ukrainian farmland is now occupied by Russian forces.

And the other major issue you're looking at is a blockade in the Black Sea. So all these towns you hear about Mykolaiv, down to Odessa, and the Snake Island which is famous for their response to the Russian warship, all that's about control of the Black Sea ports. Because 99% of Ukrainian commodities are exported through the Black Sea. The only other way to get out of the country would be to travel to the West through Poland by rail, and that's just not a viable channel.

So one, we've got the issues of farmland, being able to actually have the harvest and take those harvests, but then how are we going to export them? How's the war going to get there? Because when you take that Ukrainian wheat and soy and sunflower oil offline, it causes major food insecurity issues in other parts of the world, such as the Middle East and Africa. So again, it's really this ripple effect from this big stone being thrown in the pond of a war in Europe that's having consequences and will continue to put pressure on inflation globally and in the US.

- And Paul, put more pressure on the Fed. And Raphael Bostic, Atlanta Fed President, making clear everything is on the table. Are we headed for in two weeks from yesterday, 100 point bases hike?

PAUL SCHATZ: No, I don't think it matters frankly, whether you do 75 or 100. In my view, the economy, we came into the year with the economy begin to weaken, the economy has continued to weaken, jobs will be lost as I said earlier. I think, it's funny, Bostic is at least the most tactical of people on the FLMC. So if they want to go 100, I mean be my guest. It's just going to hasten us into tougher economic times.

And I'll say this, there is absolutely no way, zero chance, when they drag Powell before Congress next, if they're losing 50 to 100,000 jobs a month because the Fed tipped us into recession, there's no way the Fed's going to say we're full steam ahead, fighting inflation. I give it zero chance. You'll have bipartisan, you don't get bipartisan support very often. You'll have bipartisan support and hatred for what the Fed is doing as constituents are calling their congressmen into an election.

So I look for the Fed to pivot later. And let's not also forget, crude oil peaked in March, home heating oil peaked in May, gasoline prices peaked in June, wheat peaked in March too. All commodity prices in the markets. It takes six to nine months for a lot of these commodity prices to filter through the economy. So as I've told people over and over and over again, help is on the way. You just got to be a little patient and sometime between now and the end of the year, you're going to get relief.

- Paul, I know you're saying it doesn't matter whether they do 75 or 100 basis point, but what do you think the market is anticipating. If we do get that 100 point hike, how do you think the market is going to react?

PAUL SCHATZ: Sonia, you knew this a long time too. When have you ever seen a market begging for tighter monetary policy? It flies against everything that we talk about. So I know what people say they want, but really if you hike 100 basis points now you may get a quick move in either direction, but it clearly isn't good long term for the market. So now the stock market, I'm encouraged that the action today was OK. I like the fact that bonds shook off some early weakness.

So the market is pricing in tighter monetary policy. And look, if you look far out in the curve, which I know it's like a coin flip, it's like picking the weather from next week. But we're already looking at rate cuts into next year into 2024. So the Fed wants to hike 100, be my guest. You're just going to, again, you're just going to weaken the economy more at a time when you've got a problem and an election, coming up soon.

- Indeed. Well, that's our market panel. We'll have to leave it there. Guild CEO Sean Bonner and Heritage Capital President Paul Schatz. Thank you both so much.