The Duran Podcast - Diesel Shortages, Ukraine Debt, and a Fed Rate Hike w/ Ray Zucaro

Episode Date: September 18, 2026

Diesel Shortages, Ukraine Debt, and a Fed Rate Hike w/ Ray Zucaro

All right, Alexander, we are here with Ray Zookaro once again on the Duran. Ray, welcome to the show. Where can people follow your work? You know, I post my market thoughts on TwitterX at at Ray Zucero. The firm's website is wwwrbx-am.com, and we just launched a new fun vehicle for the European market with variety capital out of the UK. All right, those links are in the description box down below and as a pinned comment as well. Alexander Ray, let's talk about what's happening in the world.

Well, indeed, and so much is happening in the world. I actually read an article in the Financial Times just a few hours ago in which somebody was complaining that there's too much news in the world at the moment, which is quite an interesting way to put this. But we have now a deepening crisis in the Middle East. We've talked with Ray in the past about the effects of the closure of the Strait of Hormuz. Now that's widening. Saudi Arabia is not exporting oil.

There's fuel shortages in France. Diesel prices in the United States are rising. Crude oil prices are rising. We've had the new Lindsay Graham Act now just coming into force, which we don't know. I don't know whether that's actually going to change anything. I think probably not, by the way, but we'll see what Ray has to say about that. But all of this is cumulatively having its effect. Inflation is going up.

The Federal Reserve Board has now raised interest rates. So I think this does point more and more towards a recession outcome, even though when I read what the Federal Reserve Board said, when they justified that the decision. They said that everything in the economy is well. Growth is good. Productivity is good. Everything is stable. Everything is well.

It's just that this inflation is rather higher than it needs to be. So that's why we've decided to put interest rates up. I don't get that sense at all. But maybe I'm wrong. Ray, take us through all of this. Gentlemen, thank you again for having me on. My concern with what the Fed did by raising rates is there are trying to address a supply shock by using an interest trade policy, right?

And just not to get super technical, but we're having inflationary pressures because a lot of it stems from the Middle East, right? Whether it be oil, gas and all the derivatives, whether it be fertilizers and heliums that come from the Middle East, we're seeing a global price increase and a global rate increase. Across all developed markets, you're seeing higher rates. Ironically, not in China, though, right? So you're starting to see a breakdown of what I consider the developed world versus the emerging world. You know, I started off in emerging markets 30 years ago.

And, you know, you had emerging market issuers, whether it be at the sovereign level or at the corporate level, you know, they had a large debt to GDP and a lot of short-term debt. I look at the U.S.'s situation today with 130 percent debt to GDP. and the majority of it is short term. By the Fed raising rates yesterday, they effectively are costing themselves an extra $25 to $30 billion of annual interest cost, and the stock of debt that they need to roll over the next 12 months is $11 trillion. So even if they maintain a short duration of the debt, you can keep it not issuing on the 10-and-30-year portion just to roll it over, the cost is going to go up.

You've seen a very active treasury where usually you expect it in the Fed, but you've seen a very active treasury trying to maintain lower rates in the longer end of the treasuries by using, you know, frankly, small, ill-equipped buybacks to keep rates lower. But you're not addressing the fundamental problem of supply shock. And frankly, on the fiscal side, the U.S. is just spending like a drunken sailor in a Thailand port after nine months of deployment. It reminds me of what you said last time we spoke that the interventions to support the yen were not addressing the underlying problems with the yen. But this is perhaps on an even bigger or rather a more urgent scale because we have this crisis in the Middle East. But it ultimately, it's a geopolitical, it's a political crisis.

It's a war crisis. It's a situation of conflict between the United States and Iran and between the Saudis and the Houthis and people of that nature. And a political crisis needs a political solution, not ultimately a monetary one. I mean, that seems to me obvious. You are exactly right. And you asked me earlier about my view in the economy. You know, I know the Fed likes to say, you know, we're at maximum employment. But even according to the St. Louis Fed, what you've actually seen is a lot of people dropping out of the workplace, right?

And you look at housing starts and housing permits, the outside of, again, this one narrow sector of the economy, the AI sector, things don't look great. And it was interesting. I saw an interview yesterday where they said, we recently saw a pickup, I'm sorry, pickup in retail sales. But the portfolio manager mentioned, yeah, because people are looking. forward and they're seeing more inflation in the future. So they're bringing purchases now because they're expecting a higher price in the future. And as you know, interest rates and inflation is very dependent on people's expectations. So it's starting to be pulled into the psychology, the mentality of people that are buying, I'm going to buy two today because

if I wait six months, it's going to be that much more expensive. Do you think the supply shot that we were talking about in March is now beginning to happen in a much more serious way. We now have fuel shortages in France. We're definitely seeing prices of the filling stations in Britain rise. I've been here only a short time at the United States, but I'm hearing people talk about that as well. Somebody said that he was driving through an agricultural region of the United States and this diesel was at $7. Yeah. So in other places I believe it's higher still. That that and that on top of the higher prices, we have actual physical shortages. And of course, the way in most economies that you ration shortages is by raising prices. I mean, that's so the one

ultimately leads to the other. But are we in that, are we now starting to see that supply shock play out? The reserves apparently are diminished. There's warnings of the oil industry to the White House that this is, that it's diminished as well. I mean, is that, is that what you sense? Yeah. So with the higher price, you're seeing demand destruction, right? And if you're the Fed chairman and you only look at the headline inflation numbers, I can understand why they chose to raise rates because inflation numbers per headline are high. Exactly to your point, Alexander, that this is a political crisis. So if I were a Fed voting member, I would let the market satisfy itself by, you know, with higher

prices, you're going to have demand destruction and less demand going forward. Let the market settle itself out of it. My concern now by raising rates is the economy is naturally going to slow down, and now you just slam the brakes on, right? So you're almost bringing that recessionary impact that much closer. I again don't see how we don't have a recession sometime in the next 12 to 18 months because of these shocks, right? Yeah.

Can I just quickly ask about Europe, and then we can go and discuss the events in a specific European country? But can I ask about what you think the situation in Europe is becoming now? Because I was in Germany recently. I was in Europe recently. I got the sense that the economy in Europe is definitely going down and probably faster. And of course, in Britain also. I do think the European zone is particularly impacted, right?

you know, that all your viewers are well aware of, the lack of supply coming from Russia, right? The Middle East, you know, whether it be LNG or liquids that had been supplied from the Middle East, we're trying to address some of that, right? So now that we have the East-West pipeline of Saudi Arabia, offline I've seen, you know, a few days to six weeks, whatever, five to seven million barrels of production

that Saudi Arabia had been getting through the Red Sea is now being curtailed, right? I think the Americas, for the most part, is self-sufficient, you know, at the margin, yes, but Europe, I think, is particularly in a bad position, right? So, you know, I, again, I'm a portfolio manager and I look at winners and losers, and the repercussions of the Saudi Arabia, obviously are detrimental for Saudi Arabia, the country of itself, but also the countries around it that have been reliant upon Saudi Arabia, like a Bahrain, right, more political potential instability.

And interestingly, Pakistan, right, who stepped in when the United Arab Emirates recalled their loan a few months back? Saudi Arabia stepped in and provided the $3 billion of funding. We're almost at a situation today where Saudi Arabia is not getting, I don't want to say zero revenue, but certainly it's curtailed, right? And a country with a high spend and a high lavish and interest costs, they're not going to be able to provide money to friends and family, going forward. So I think, again, that trickled down. So I think, again, from a portfolio perspective, the negatives are the peripherals. And particularly Pakistan, I think, is an interesting one that is not getting enough attention from a portfolio manager perspective. Let's continue with Europe, because of course, one of the things that's happening in Europe,

which is never talked about in quite that way, people talk about a future war in Europe, but we actually have an ongoing war in Europe. Ukraine is a country geographically in Europe, and it is very interconnected now. It's become very interconnected in all kinds of ways with Europe, with European institutions, with European governments, and even to some extent,

that perhaps not to an enormous extent, with the rest of the European economy. Now, I have been following the news from Ukraine over the last few weeks. And it seems to me that we are looking at a very grim situation. The Black Sea ports are closed. Maritime trade has effectively stopped. The Russians are now attacking the transport system.

They're attacking the trains and the locomotives. They recently attacked the train, the train systems that link Kiev with Ukraine's western border, attracted a lot of attention. And was, I thought, very misreported, by the way, in the West. It was made to seem as if this was an attack on certain Western individuals, not actually an attack on the railway system as such, which is what this is absolutely a part of.

And of course, other parts of the economy are suffering, the agricultural sector, the industry sectors, and all of these things. Now, one of the things about these events is that it is triggering what must be an economic crisis in Ukraine itself. We hear about an enormous increase in the budget deficit in Ukraine. We see a big rise in the level of Ukrainian debt. Ukrainian debt to GDP has now passed 100% the ratio. And there's no way that Ukraine itself can service it. And there's more demands from Ukraine for additional funding from Europe. Now, all of this looks cumulatively, very bad.

And yet it doesn't seem to be seen around. the world, or at least in the West, as an economic situation. The economics of it never seem to really impact or get discussed at all. What are your thoughts about this? Look, again, I look at the world from a portfolio manager perspective, right? I assess risk. I have to look out and protect my clients and allocate capital and avoid potential downtress, The Ukrainian budget that just came out themselves project a deficit of 35% or 15% of GDP, and internal documents express the need for $33 billion of external funding, and they only have $21 billion so far, right?

So, you know, it's interesting that, you know, typically financial reporting is, it's more accurate, right? You know, you look at the Wall Street Journal, the Financial Times. When they talk about numbers and financial metrics, they're oftentimes a little bit more truthful from the political side. What I do think is interesting now that, you know, you guys have reported quite a sensibly on the recent newspaper, the recent news articles out of the spectator and writers addressing what. what's really going on on the ground in Ukraine. Back on September 2nd, so before both of these articles came out, an up-and-coming firm that I have been following really well,

a group called Marix out of London, their strategists put out a research piece on Ukraine, noting that with the closure of the Odessa port, that he projected that could, again, have a potential impact of as far as a contraction of as much as 18, percent of the GDP of the country, exactly to the points you mentioned, Alexander, the inability to export, particularly on the agricultural side, but also in other some of the other commodities. And I can tell you, I was shocked with the amount of negative feedback and press and vitriol

that he received for just trying to be honest about the numbers, right? You know, we can be, you know, you can have a view politically and morally have a view, but as a portfolio manager, I'm trying to assess what is the real. risk, right? So I've been very shocked. And I do think it's interesting, a name that Alex often brings up here. Let me try and share my screen. One, let's see here, one of the largest holders of Ukrainian sovereign debt. Let's see here if I could shape. You know, it's a name that number one holder is a name that Alex often, you know, often brings up Black Rock, right? By a fact, by an interesting factor, much larger than the next largest holder. So you look at the actual

bond price of Ukraine debt over the last month? It's relatively unchanged, right? And my point is, I would employ investors to ask their portfolio managers, are you looking at the true facts on the ground? Are you looking at the true economic situation? What is the real debt to GDP? Is there any prospect of actual recovery on this debt? Right. And I wonder that, you know, again, the large holder there is maintaining prices to give the image of stability. So, again, I try to assess risk and look out what's best for my clients. And I don't think the risk reward in Ukraine really compensates, you know, holding the debt at this point and prospects going forward.

You know, I very much share Matt Vogel, the analyst who wrote this piece at Barracks. I very much share his pessimistic view. but I would even go further because, you know, again, I'm looking at the reality, and I don't think 18% contraction is enough. I see the population demographics. I see the energy cost. I see the retail fuel issues. I think you could have a much larger contraction. So what is the real debt to GDP of Ukraine? I think 120 is optimistic if you really look at the numbers. And with the debt trade, where it is, I don't think you're being compensated for that. I think it is extremely concerning if people in markets are not being provided for the

correct data and that the politics have now become so dominant that economic data is being suppressed because it makes uncomfortable reading for some people. I mean, that goes totally contrary to the whole concept of a market economy. If you're going to have a market economy at all, you must provide people with an honest opinion about the data that is there. I mean, people can have different opinions. People can disagree. People can say, well, this is wrong for this and that and the other reason. But people coming along and abusing and saying that this is wrong, I mean, that is just because

they don't like it. That is dangerous, I would say. I agree. They're doing their investors. And at the end of the day, I got a portfolio manager has a fiduciary duty to protect their clients, not to give an image of something right or virtuous of your opinion. You have to look out of a fiduciary obligation to protect your investors. I think another interesting, I got a quote this morning from a friend of mine who's actually based in Cyprus, who does shipping, who's been involved in shipping.

I asked him for a quote this morning from Basra, Iraq to China. He quoted me this morning for a VLCC, a very large crude carrier, which has a roughly about 950,000 barrels of capacity. He quoted me this morning $32 million of transport, excluding insurance. And so the logical question is, what was that cost before the conflict? He said about $3 million, right? So we're seeing almost a tenfold increase in transport. And you're seeing that, again, it goes back to our earlier conversation about the Fed. You're seeing that higher transport costs bleed into other areas,

whether it be J.B. Hunt in the U.S., a large logistical, and I've even seen problems with smaller iron ore producers out of of Brazil, they're having to compete against these higher traffic, higher cost transcripts for iron ore to China. So these inflationary pressures, again, I don't think raising the rate, the Fed funds for 25 basis is going to solve the global inflationary problem. The root course goes back to the Middle East, whether Trump likes it or not, for the better of the economy. Even if the world has to pay a dollar or two for barrels going through, compared to the above

100 we're paying today, that's ultimately ego aside, that's ultimately better for the society and the economy. If we have higher interest rates with inflation that is still going to be high, or at least inflationary pressures that are going to be strong, then you're going to have pressure on people because credit is becoming more expensive, even at the same time as they're having to absorb the higher prices. I mean, again, I'm not an economist, but to me that sounds like you're going to make the depression deeper, or rather, sorry, no, it's not called it depression, the recession, the recession deeper.

Look, I mean, you know, obviously housing is a very important global stock of wealth, right? Mortgage rates now in the US, or I got a quote this morning, of a 7.25%, right? And what I also think is an interesting fact is a lot of people that took out refinanced loans during the COVID period that had a five-year fixed rate that transitions into a floating rate mortgage. Some of those mortgages are getting ready to reset. So you go from artificially low rates to today's market rate of materially higher. Exactly to your point, Alexander, you have outside of one narrow sector of the economy, a lot of people from food inflation, to fuel inflation, to insurance inflation, are being pinched. So now you have a higher interest cost, whether it be credit card debt, mortgage rates,

you know, any type of revolving credit facility got repriced yesterday. So it's just adding to that financial burden of the consumer. Again, going back to that, I don't see how this does not cause a recession sometime in the near future. I don't like to use the D word either. Depression is a little bit dramatic, but I see some of these. imbalances and let's just say there is a cavern wall in the SPR that breaks down and then suddenly we go to that 150 oil number, not only that could push us into a much more painful recession. Yeah. What effect is this going to have on the stock market? We've had recently a whole set of

comments from the AI companies about, you know, might it might be an idea? to slow down AI, that they're suddenly having all of these concerns, which I have to say if I'm very surprising coming from them. It did make me wonder whether perhaps they're becoming a bit nervous about the situation that they are in themselves, whether this vast flow of money that's coming to them is now perhaps suddenly going to switch off. And maybe that they're trying to slow things down because they want them all. orderly slow down than the one that might come. That was just my thought.

I mean, I may be completely wrong here. But tell me what your thoughts about this. A little bit different of a view there. I almost do that when you have these companies asking for regulation, they're also effectively trying to create barriers to entry, right? One of the cost pressures that you're seeing from these large language models, some of these Chinese models, whether coming out of Alibaba or Q-Wen is another one, they're really putting a lot of pressure.

So by asking for this industry asking for regulation, you're trying to create barriers to entry. Like, oh, you're not allowed to use these other models and you only can use these designated sets that are U.S. produced, you know, that rent seeking behavior, you know, limiting competition so this few U.S. companies get a higher price. Unfortunately, from a, from a portfolio manager economic point you do,

I think that's more as a better explanation for me, then suddenly becoming altruistic in looking out for humanity's well-being. I do think from a borrowing point of view, AI has, you know, you see a lot of what are considered investment-grade AI borrowers. You're borrowing a lot. You look at year over year, it's gone up materially,

and that's causing a crowding out at that upper investment grade, you know, it does a disservice for other investment-grade borrowers, including a lot of governments, right? So I think the AI is a sector that's interesting because while they're rated investment grade, you're starting to see yields that look more like high yield. So again, portfolio managers are trying to assess what is the true risk, and they're pricing it as opposed to the rating agencies, what they're assessing. And, you know, if you put our 2007-2008 hats back on, you know, mispricing of risk

by reading agencies let us down a very difficult path at the time. Absolutely. What you've just described, by the way, sounds like some people in the AI world are trying to create a cartel. Is that, is that unfair? In the minds of what I was saying. Yes. Gosh.

So we are looking at very complex times. Can I just quickly come back to Ukraine? And this is my last question. It's a small economy. I mean, the amount of debt it's carrying, I mean, it may be huge for Ukraine. I mean, there are many problems there, but relative to the level, you know, the total amount of debt in the world, it's minuscule. If there is a collapse in Ukraine, which there could be, what would the wider economic impact of that be? Would the global economy just shrugging shoulders?

I don't think it'll be truly impactful for the global economy. I can tell you, again, from a portfolio manager of focusing on emerging markets, Ukraine typically shows up as one of the highest holdings of my peer group. And I worry from an asset class, if you do see that kind of violent repricing to what is reality, that it could put investors, you know, I had. I had risk priced at X and then suddenly it's X minus some percentage, right? So I worry that it could cause a longer term doubt or concerns about the asset class as not being transparent. That's why, again, I have investors always, you know, what are the portfolio managers to the fire?

Okay, what is the real risk here? And are we truly being compensated for it? Globally, I do think if you see that kind of collapse, I think, from a not so much, much on the financial, but on the geopolitical, whether it be what is NATO really worth and all the, I think there's more of a political issues more so than a financial issue. It certainly wouldn't be helpful, Ralph. I can tell you. No, I'm sure it wouldn't. Well, Ray, I think this has been a very, very interesting program altogether, and I think we've learned an awful lot, at least I have. Can I just say thank you? And can we definitely do another program like this again soon?

because I think things are going to start moving very fast from now. And we'll see whether European central banks follow where the Fed is led. So far, the British Central Bank, the Bank of England, did not. They've kept rates steady. We'll see. We'll see where they continue to do that. It's interesting. The growth rates yesterday.

So you have a sort of a, again, the developed world versus the emerging world, or you're at different economic portions of the economic cycle. So I think it's a very interesting, very interesting time for what I do in my day job, if you will. We live in interesting times, Ray. Thank you very much indeed. Thank you. Thank you, gentlemen. Thank you.

Thank you, Ray. Where can people follow your work before you go? At TwitterX, at Ray Zuccaro, the RVX-am.com. And again, I just launched a European Usit's fund with variety capital out of the UK. Right. Those links are down below. Thank you, Ray.