Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Carol Masser, along
Speaker 1: with Manis Crowny and Katie Greifeld. Join us each day
Speaker 1: for insight from the best in economics, geopolitics, finance and investment.
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Speaker 2: Bcorny's more than double this year on hopes that the
Speaker 2: SEC will approve that holy grail, the spot Bitcoin ETF
Speaker 2: in the coming weeks.
Speaker 3: We're waiting Beta breath.
Speaker 1: We are all waiting, and so is Kathy Wood and
Speaker 1: she joins us on this Thursday. Kathy Wood, of course, founder,
Speaker 1: CEO and CIO of ARC invest. I'm Kathy. Merry Christmas,
Speaker 1: Happy holidays, So great to have you here. Let's start
Speaker 1: there with the news because we do have this story
Speaker 1: on the Bloomberg tell tell us a little bit about
Speaker 1: this overhaul and your thinking when it comes to how
Speaker 1: you are thinking about the investment strategy for you guys,
Speaker 1: specifically when it comes to crypto.
Speaker 4: Sure, and Merry Christmas. Very happy to be here again Carol,
Speaker 4: Katie and Massive. So we're as optimistic about bitcoin as
Speaker 4: we ever have been, but there are a few regulatory
Speaker 4: and tax uncertainties, and we had been waiting for the
Speaker 4: discount between GBTC and NAV to narrow. It was as
Speaker 4: high as fifty percent at one point last year when
Speaker 4: there was great uncertainty around all of the turmoil in
Speaker 4: crypto generally, and now it's a single digit and there
Speaker 4: are now other products out there that we can use
Speaker 4: to gain exposure to bitcoin in this moment, and it's
Speaker 4: just a moment of uncertainty between now we think and
Speaker 4: January January eighth to tenth, somewhere in that range perhaps,
Speaker 4: but well out of an abundance of caution, didn't want
Speaker 4: to take any risk.
Speaker 5: And I mean, let's get a little bit specific here,
Speaker 5: because we're talking about the ARC Next Generation Internet ETF.
Speaker 5: The ticker there is ARC W and I think what
Speaker 5: caught a lot of people's attentions is that you completely
Speaker 5: sold down your remaining stake of the Grayscale Bitcoin Trust.
Speaker 5: Instead on the same day you bought into the pro
Speaker 5: Shares Bitcoin Strategy ETF. Of course, that tracks bitcoin futures,
Speaker 5: it doesn't actually hold the physical bitcoin.
Speaker 6: Can you explain that shuffle? What was the thinking there?
Speaker 7: Sure a couple of things.
Speaker 4: First of all, Biddo with pro shares is already approved.
Speaker 4: There's no regulatory uncertainty having to do with it, so
Speaker 4: we chose to maintain our exposure through biddo for the
Speaker 4: time being. And as I mentioned before, there are some
Speaker 4: tax and regulatory uncertainties still as part of this process.
Speaker 4: We don't know exactly who's going to be approved and
Speaker 4: whether they've met all the criteria that the SEC has
Speaker 4: put before us. We know we have, but we don't
Speaker 4: know if others, including GBTC have We just don't know.
Speaker 4: So again, out of an abundance of caution and gbt's
Speaker 4: discount again it was as much as fifty percent relative
Speaker 4: to NAV. So not only have we enjoyed this year
Speaker 4: the run in bitcoin itself, but we've had the nice
Speaker 4: closing of that discount, so it's been double good news
Speaker 4: for us.
Speaker 1: But you've talked about January tenth, Kathy, I think in
Speaker 1: another report, is that possible, whether it's you or somebody else,
Speaker 1: in terms of the first spot Bitcoin ETF actually getting approval.
Speaker 4: Well, we think the probabilities have gone up because the
Speaker 4: SEC has been highly engaged compared to what was happening before.
Speaker 7: Before it was just denying.
Speaker 4: Approval, denying approval, and we just kept putting our filing
Speaker 4: in again, you know, try, try.
Speaker 7: Try, dogged and determined, and so here we are.
Speaker 4: We think we're first in line, and that's why there
Speaker 4: is this January tenth deadline.
Speaker 7: But we like the idea that the.
Speaker 4: SEC has been so engaged, and it's not just with us,
Speaker 4: it's others as well. We think a number of a
Speaker 4: number of funds could be approved at the same time.
Speaker 4: And they've been asking not only one set of questions,
Speaker 4: but follow up questions, and again that's a very good sign.
Speaker 1: Well, speaking of engaged, Oh go ahead, please, no, no, no, no.
Speaker 4: The last few questions have been very technical and so
Speaker 4: more dirriger and you know, you'd expect them to be
Speaker 4: asking these questions as we head toward an approval. Now
Speaker 4: it's not one certain and so we want to make
Speaker 4: that clear as well. This is the SEC, and we
Speaker 4: never know, you know, what might happen along the way.
Speaker 1: Regulators can be tricky, that's for sure. Hey, listen, you
Speaker 1: mentioned engagement. Let's talk about engagement with your funds overall,
Speaker 1: and especially the ARC Innovation Fund, up seventy two percent
Speaker 1: year to date, easily outperforming some of the major market benchmarks,
Speaker 1: still down sixty five percent from the high back in
Speaker 1: February of twenty twenty one. For you, though, a lot
Speaker 1: of critics, we bring up your name, we bring up ARC,
Speaker 1: and you have a lot of fans, and you have
Speaker 1: a lot of critics. There's a lot of discussion. Does
Speaker 1: it feel though a little bit like a victory lap
Speaker 1: this year?
Speaker 4: Well, you know, we are very happy that a couple
Speaker 4: of things have happened that this idea that interest rates
Speaker 4: we're going to continue moving higher has been proven incorrect.
Speaker 7: And I think even the.
Speaker 4: FED, while there is that small possibility, even the FED
Speaker 4: is now starting to talk about the other side of
Speaker 4: the interest rate movement. So I do believe all we've
Speaker 4: seen so far is a reaction to that macro phenomenon
Speaker 4: or judgment call. We went through our flagship strategy, and
Speaker 4: all of our strategies went through a very difficult time
Speaker 4: from February twenty one through December of twenty two, as
Speaker 4: interest rates, first of all, were presumed to move up
Speaker 4: or forecasts move up, and then when they did move up,
Speaker 4: so it was almost like a double discounting.
Speaker 7: And so we've seen the first.
Speaker 4: Installment of the.
Speaker 7: Correction.
Speaker 4: There to the upside for our funds with this notion,
Speaker 4: and it's again the forecast that interest rates will come down,
Speaker 4: and we would presume that if they do come down
Speaker 4: for the reasons we think they're going to come down,
Speaker 4: the most important one being deflation, then our funds will
Speaker 4: be in good shape because we are very our companies
Speaker 4: thrive on deflation technologically and bold innovation is deflationary.
Speaker 2: So, Kathy, a very good morning too. It's Manus the
Speaker 2: first time we've met on So we're going to move
Speaker 2: to a deflationary environment. We'll come back to the big
Speaker 2: macrocoll in a moment. Just let's square it away before
Speaker 2: I talk to you about the flows in the funds,
Speaker 2: which is how much interest rate cuts do you presume?
Speaker 2: Are you forecasting? Leave the forecast of everybody else's side? Well,
Speaker 2: what do you what do you presume what happen next year?
Speaker 4: Well, we put up a chart in one of our
Speaker 4: in the in the Nose, which is a YouTube video
Speaker 4: that I do every every month Employment Friday, and in
Speaker 4: that chart you will find.
Speaker 7: A ratio.
Speaker 4: It's the metals to gold ratio, so metals price to
Speaker 4: goal price, and there has been an extremely tight correlation
Speaker 4: between that ratio and long term interest rates. In October
Speaker 4: we published it or early November, and what you will
Speaker 4: see is that was a very wide gap that had developed.
Speaker 4: The metals to gold ratio was near its low for
Speaker 4: the past twelve fifteen years, and interest rates were at
Speaker 4: their highs five percent.
Speaker 7: The correlation.
Speaker 4: If you just eyeballed that chart, the correlation suggested that
Speaker 4: rate should go to two percent. Now, maybe they won't
Speaker 4: go all the way to two percent, but we think
Speaker 4: that long term interest rates are way above where they're
Speaker 4: going to end because of deflation.
Speaker 2: Okay, well, let's we'll come back to that and see
Speaker 2: why that we get to the two percent level. I've
Speaker 2: got to ask you about the flows into the funds,
Speaker 2: which is obviously you know, as Kyl just said, you've
Speaker 2: got a bit of a victory lap going on at
Speaker 2: the moment. But this is the first year of outflows.
Speaker 2: Have those outflows stopped. You've had a great performance in
Speaker 2: the back part of this year. Have the outflows stopped
Speaker 2: and has that bleed stopped?
Speaker 4: Yes, Well, we were very gratified at our asset retention
Speaker 4: in twenty one and twenty In fact, we had net
Speaker 4: inflows if you combine both years of more than eighteen
Speaker 4: billion dollars and this year one, what might expect that
Speaker 4: those who average down into the very steep declines that
Speaker 4: we were seeing in twenty two.
Speaker 7: Especially might take some profits.
Speaker 4: So we have had I know, for our flagship strategy,
Speaker 4: it's roughly five hundred million dollars in outflows, maybe for
Speaker 4: all of our strategies one point eight million, so maybe
Speaker 4: ten percent of the inflows that we enjoyed during twenty
Speaker 4: one and twenty two. So again, we're very gratified and
Speaker 4: grateful to our clients for the support that we continue
Speaker 4: to receive.
Speaker 3: So has the iflow stopped.
Speaker 4: We have had days of on balance very recently, yes,
Speaker 4: And I think part of this is many people do
Speaker 4: tax management towards the end of the year, and so
Speaker 4: some of the outflows might have been associated with clients
Speaker 4: who got in at a high cost base and we're
Speaker 4: just harvesting some tax losses.
Speaker 7: But I think we're through that.
Speaker 1: Do you find a little surprising though, Kathy, considering the
Speaker 1: run up or do you I'm curious about the conversations
Speaker 1: you do have with investors considering the year that you're having,
Speaker 1: and then to see those flows, it's got to be
Speaker 1: a little disheartening.
Speaker 7: Yeah, oh no, no, no, no, not at all.
Speaker 4: Actually, we put out a piece for a resolute our
Speaker 4: distributor who and we basically showed them, if you rebalance
Speaker 4: our strategy when there have been big moves one way
Speaker 4: or the other, if you rebalance regularly or based on
Speaker 4: a rule, like when the fund's up fifteen percent relative
Speaker 4: to everything else, take some profits.
Speaker 7: And what it.
Speaker 4: Showed that study showed that if you are disciplined that
Speaker 4: way that over any rolling five year period, it is
Speaker 4: highly likely almost one hundred percent, I'm not quite sure
Speaker 4: if it's quite that high, but that you will beat
Speaker 4: the market, meaning as measured by the Nasdaq or the
Speaker 4: SMP over a rolling five year period. And so a
Speaker 4: lot of our funds are with advisors who are very
Speaker 4: sophisticated and responded somewhat perhaps in this tax management part
Speaker 4: of the year to that message.
Speaker 1: Kathy would founder, CEO and CIO of ARC invest She's
Speaker 1: joining Manis, of course, and Katie and myself here on
Speaker 1: Bloomberg Surveillance Kathy, I feel like we can't talk. We
Speaker 1: have to talk about Tesla. An Elon Muska, I know
Speaker 1: you just had a conversation on Twitter X. This has
Speaker 1: been I think from day one right in terms of
Speaker 1: you starting out that you've had this investment in Tesla,
Speaker 1: and I remember when we first talked and you were
Speaker 1: getting started, you talked about him being the next Thomas
Speaker 1: Edison and how his vehicles would turn the US economy
Speaker 1: upside down. Having said that, there's an evolution and the
Speaker 1: eed world has changed, how are you thinking it's still
Speaker 1: a top holding? How are you thinking about the Teslas
Speaker 1: story right now?
Speaker 4: Well, first of all, Carol, thank you very much for
Speaker 4: letting me interview that time.
Speaker 7: That was nearly ten years ago.
Speaker 4: Arquet is about to celebrate his tenth year anniversary and
Speaker 4: you gave us that opportunity, so thank you. The world
Speaker 4: is evolving, actually, I think even more closely to what
Speaker 4: we expected, because we expected a lot of traditional auto
Speaker 4: manufacturers to see the writing on the wall and rush
Speaker 4: as quickly as they could into scaling big time into
Speaker 4: electric vehicles. And what has happened recently both GM and
Speaker 4: Ford have said we're stepping back. We're not going to
Speaker 4: do this until it's profitable. The problem with that is,
Speaker 4: in order to be profitable, they need to scale.
Speaker 7: That's how this works.
Speaker 4: These are learning curves that they are writing down, and
Speaker 4: those are expressed in cost toclines. So the fact that
Speaker 4: they're pulling back means there's more share for Tesla and
Speaker 4: others who choose to go for it and CAVI.
Speaker 5: I want to keep the conversation going on Elon Musk,
Speaker 5: but I want to bring it to the Arc Venture Fund.
Speaker 5: Of course, it's not an ETF. You invest in private
Speaker 5: companies etc. In there, and you take a look at
Speaker 5: the portfolio. You have SpaceX in there, and you also
Speaker 5: have X formerly known as Twitter. And in July you
Speaker 5: had told the Wall Street Journal that you had written
Speaker 5: down your Twitter steak by forty seven percent. Fill us
Speaker 5: in on the past couple of months. Have you written
Speaker 5: it down further or how has that changed?
Speaker 8: No?
Speaker 4: I think it's still there. You know, we have to
Speaker 4: be very careful. This is an interval fund. It is
Speaker 4: a forty act fund, and we have to mark to
Speaker 4: market every day. The good news is our clients can
Speaker 4: get in and have access to these amazing companies for
Speaker 4: just five hundred dollars and they get quarterly liquidity, so
Speaker 4: that's the good news.
Speaker 7: The markdowns are.
Speaker 4: Simply you know, if we see in the secondary market
Speaker 4: employee stock trading at a steep discount, we have to
Speaker 4: take that into account. If we see others in the
Speaker 4: more traditional asset management work world, like Fidelity and others
Speaker 4: marking their holdings down, we need to take that into
Speaker 4: consideration during our daily mark to market. So it's an
Speaker 4: abundance of caution. We have a five year investment time horizon.
Speaker 7: Do we think that's.
Speaker 4: Where X belongs in terms of valuations? Absolutely not, absolutely not.
Speaker 4: A roughly twenty ish billion dollar valuation for what we
Speaker 4: believe truly will become the everything app think we chat pay.
Speaker 4: Elon started his entrepreneurial career in the payment's industry, and
Speaker 4: he's been thinking about this for a long time. He
Speaker 4: now has money transmitter licenses in more than half of
Speaker 4: all of the states, which we've learned on Twitter spaces
Speaker 4: or on x spaces, i should say the other day
Speaker 4: when we had our interview with him. So that's exciting.
Speaker 7: He's going for it.
Speaker 6: He's going for it. We'll see if that one lands.
Speaker 5: But let's talk a little bit more about the private markets,
Speaker 5: because obviously the private credit market has gotten a lot
Speaker 5: of attention. Right now, you're looking at the private markets
Speaker 5: through this interval fund that you have, when you think
Speaker 5: about the opportunities there on that five year horizon that
Speaker 5: you have, do you see more so in the public
Speaker 5: markets or in the private markets right now?
Speaker 4: Well, now that we've had this very nice run this year,
Speaker 4: we think the answer to that question is in the
Speaker 4: private markets.
Speaker 7: They're close. They're close.
Speaker 4: What's fascinating to us is that the public markets have
Speaker 4: been the private markets for the past three years. As
Speaker 4: our funds were were falling in twenty one, private evaluations
Speaker 4: were going to all time highs along with the Nasdaq.
Speaker 4: They were taking their cues, I suppose from the Nasdaq,
Speaker 4: but real innovation, if you looked at our portfolios, was
Speaker 4: starting to revalue to the downside, and even more so
Speaker 4: in twenty twenty two. We are still seeing major down
Speaker 4: rounds taking place in the private markets. And I'm always
Speaker 4: surprised at this sort of thing because you would think
Speaker 4: that the private markets lead the public markets. That has
Speaker 4: not been the case in the last few years.
Speaker 1: Hey, Kathy, I've got to be honest with you. I
Speaker 1: think whenever we think about Elon Musk brilliant but also erratic.
Speaker 1: And I'm curious how you think about Elon the individuals
Speaker 1: versus Elon the companies he's creating the things he's doing,
Speaker 1: because I think if there is time, any other CEO
Speaker 1: of a major publicly held company would I think it's
Speaker 1: safe to say not be able to get away with
Speaker 1: a lot of what he has done. So help us
Speaker 1: educate us how you make sense of it of someone
Speaker 1: you have followed, talked with for many years.
Speaker 4: Well, first of all, very often we just look at
Speaker 4: what he does, not exactly what he's saying, which can
Speaker 4: often be a distraction, or it can be an advertisement
Speaker 4: for his cars or for X or for SpaceX and
Speaker 4: so forth. But we have a scoring system as we
Speaker 4: are evaluating companies and their founders and their management teams.
Speaker 4: And there are six metrics and one of them is
Speaker 4: mote and barriers to entry.
Speaker 7: And I think Eylon is a.
Speaker 4: Maestro of raising barriers to entry with innovation, which that
Speaker 4: is so much faster than anyone else. Why Because he's
Speaker 4: so first principles physics driven in his analysis of how
Speaker 4: to approach a new idea, A big idea.
Speaker 3: So tell me this then, Kathy.
Speaker 2: I mean, if you look at the cohort of the
Speaker 2: CEOs that you back, Brian Armstrong, does he hit that bar?
Speaker 3: Is he above Elon? Or is he at the money?
Speaker 2: You've got Elon, You've got Brian, You've got Tony Wood
Speaker 2: at Rocco.
Speaker 3: Does anybody come close to Elon?
Speaker 2: Or is Brian Armstrong maybe even at the money with
Speaker 2: Elon or above?
Speaker 4: Well, we don't actually look at the world that way,
Speaker 4: one relative to the other.
Speaker 7: In terms of management teams, we do look.
Speaker 4: From our scoring system at the scores, which include mote management,
Speaker 4: people and culture, execution of valuation that might surprise people,
Speaker 4: and product and service.
Speaker 7: Leadership and thesis risk.
Speaker 4: Those are the six scores, and both well, all three
Speaker 4: of them score very highly. Which one scores the highest.
Speaker 4: They're actually very close to one another.
Speaker 2: To be honest, they're very close to one another. So,
Speaker 2: I mean, obviously Coinbase is one of your key holdings.
Speaker 2: We've talked a little bit about that. The other feature
Speaker 2: that we want to talk about is AI. I'm curious
Speaker 2: to know in open AI the valuations have ranged between
Speaker 2: eighty billion to one hundred billion. Will you take a
Speaker 2: position in open ai. Is that going to be part
Speaker 2: of your holdings as you explore the next development of
Speaker 2: AI and your holdings well.
Speaker 4: In our private portfolios, we are already exposed to Andthropic,
Speaker 4: which has been a major beneficiary of the drama around
Speaker 4: open ai that we all witnessed a few months ago.
Speaker 4: But if you look at GPT four, which is the
Speaker 4: latest large language model that open ai has published, it
Speaker 4: is way above others in terms of performance. So there
Speaker 4: you have it, the pros and the cons. So we
Speaker 4: can't tell you what we're going to do in that portfolio,
Speaker 4: but we are so impressed at how open ai has
Speaker 4: led the industry. We're also impressed, however, at the open
Speaker 4: source models, and we'd like to encourage.
Speaker 7: More of that movement.
Speaker 4: We know that Meta Platforms has with Lamaitu and it's
Speaker 4: working on others, is moving very quickly and making great strides.
Speaker 4: So for much lower cost open sources, free companies can
Speaker 4: get close at GPT four, but close. So we want
Speaker 4: to see the open source movement in the venture fund.
Speaker 4: We also own.
Speaker 1: Kathy Oh sorry, no, no, no, We never have enough
Speaker 1: time with you. Can I ask you really quick question?
Speaker 1: Five seconds? An ATF's coming our way from you guys
Speaker 1: next year.
Speaker 4: Well real quickly, as you may know, we bought a
Speaker 4: company in London.
Speaker 7: Yeah, they have some very interesting funds.
Speaker 1: All right, Gonna leave it there. Like we said, we
Speaker 1: always leave our audience wanting more from you. But we
Speaker 1: so appreciate all the time you gave us. Happy New
Speaker 1: year of course. Kathy Wood, founder CEO CIO of ARC Investigator.
Speaker 1: Let's do what Lara Raim has to say. She's chief
Speaker 1: US economist at FS Investments, joining us on this Thursday. Lara,
Speaker 1: great to have you here with the team. So let's
Speaker 1: go to jobless claims. First of all, is that significant
Speaker 1: in terms of that uptick?
Speaker 9: So this one month of readings is not significant. But
Speaker 9: this indicator, to me is one of my most watched indicators.
Speaker 9: The fact that it's been low really Carol uninterruptedly for
Speaker 9: months and months now to me says that while their
Speaker 9: concerns about you know, the labor market renormalizing or people
Speaker 9: are starting to talk about tracks in the labor market,
Speaker 9: when I look at this indicator, I see companies still
Speaker 9: really eager to hold on to workers. They may be
Speaker 9: taking more time to rehire if somebody's lost. They may be,
Speaker 9: you know, a little more rational about job openings, but
Speaker 9: when it comes to layoffs, companies are very closely guarding
Speaker 9: their workers, and I think that has big implications. It
Speaker 9: has had throughout this last year and going into next
Speaker 9: year means that it's one of the reasons why the
Speaker 9: economy has been a lot stronger than and a lot
Speaker 9: of us expected.
Speaker 1: So the labor hoarding continues. I want to ask you
Speaker 1: about Joemo replacing Fomo, what exactly are we talking about.
Speaker 9: My idea for the coming year is that, you know,
Speaker 9: the business cycle lives and dies around the consumer, and
Speaker 9: the consumer has just been surprising with spending strength throughout
Speaker 9: this expansion that is still a very young expansion. The FOMO,
Speaker 9: you know, we have to now's the time to spend.
Speaker 9: We put it off, we have to go take the trip,
Speaker 9: buy the car, whatever it is. We're going to find
Speaker 9: a way to do it. That is going to be
Speaker 9: replaced by a more moderate sort of Joe Moo joy
Speaker 9: of missing out. It's just a way of saying that
Speaker 9: people may choose to have more staycations, they may start
Speaker 9: to be a little more budget conscious. That's not to
Speaker 9: say that household budgets are in trouble, but we know
Speaker 9: that credit card debt is high now and interest rates
Speaker 9: on credit cards are unlike home mortgages, they're not fixed right,
Speaker 9: they are moving up fast. So it's this idea that
Speaker 9: over the next year, we're still going to have a
Speaker 9: healthy consumer. We have a healthy jobs market. We are
Speaker 9: not going to get the consumer in contraction, but you're
Speaker 9: going to have a consumer that's maybe a little more
Speaker 9: moderate and maybe decides that they can wait a little
Speaker 9: bit or defer some joy instead of taking it all.
Speaker 1: Right now, I think we have a new T shirt
Speaker 1: and hat and a coat.
Speaker 2: Joe needs to make itize weaponized fomo.
Speaker 3: This is our guest the other day.
Speaker 2: By the way, our guests the other day said that
Speaker 2: we all had weaponized. We have weaponized formo. But now
Speaker 2: you've christened you on Joe, mo.
Speaker 3: I love it.
Speaker 2: It's almost like it can be a boy band or
Speaker 2: or a band of a band of many.
Speaker 3: I want to know.
Speaker 7: Catch on by midyear.
Speaker 9: You won't believe it.
Speaker 2: You are in the camp of uncomfortably high inflation in
Speaker 2: twenty twenty four. Now does that just mean we get
Speaker 2: stuck where we are because the disinflation has been really
Speaker 2: quite quite aggressive. One could say, but you say we're
Speaker 2: going to get persistently high inflation, what is that going
Speaker 2: to do?
Speaker 3: Is that going to mar the sort of.
Speaker 2: The clarion call for multi rate cuts of one hundred
Speaker 2: and fifty basis points in the US?
Speaker 9: I think, I think we do get stuck where we are,
Speaker 9: and I would argue that where we is uncomfortably high.
Speaker 9: And I think it does three big things. The first
Speaker 9: one is that it keeps this wet blanket on consumer sentiment.
Speaker 9: You know, we've seen this trend of households spending a lot,
Speaker 9: but also in surveys being very downbeat about the economy.
Speaker 9: I think that gap has to close, and I think
Speaker 9: it closes more towards spending decelerating, and part of that
Speaker 9: is the inflation picture and partly the housing affordability picture too.
Speaker 9: The second thing it does is give the FED less
Speaker 9: room to maneuver. I don't think that, you know, six
Speaker 9: rate hikes in a non recessionary economy is a likely outcome.
Speaker 9: I could see them strategically trying to cut rates, but
Speaker 9: the reality is that with inflation where it is today,
Speaker 9: it's very hard for me to see them just making
Speaker 9: the deep sort of programmatic costs that they do when
Speaker 9: we're seeing a recession. And the third thing it does
Speaker 9: is really challenge fixed income investors. I think everybody looks
Speaker 9: at you know, the two year four and a quarter,
Speaker 9: they think that this is a you know, it is
Speaker 9: a multi decade high, is right? It seems like a
Speaker 9: very good investment. When you think about inflation at four
Speaker 9: percent versus two percent, your real return is much smaller
Speaker 9: than you'd think.
Speaker 5: Should we be talking about the possibility of another rate
Speaker 5: hike here? You mentioned that against this sticky inflation backdrop,
Speaker 5: six rate cuts maybe looks unrealistic. Is there a possibility
Speaker 5: that the Fed has to hike rates again in twenty
Speaker 5: twenty four?
Speaker 9: You know, I was one of the last holdouts saying
Speaker 9: that they would raise rates in the fourth quarter. Obviously
Speaker 9: that didn't happen. I think from here, they're messaging has
Speaker 9: really changed. They've talked about rate cuts being not an if,
Speaker 9: but a when. So the more likely scenario to me
Speaker 9: is if data really surprised the upside, or we get
Speaker 9: you know, inflation data that really harms their you know,
Speaker 9: goals to cut rates, they would instead just hold rates steady. Here,
Speaker 9: I think it's important to harken back to the mid nineties,
Speaker 9: and this is something that I really cover a lot
Speaker 9: in my outlook for next year. Over forty years, we
Speaker 9: do not have a good roadmap for non recessionary rate
Speaker 9: cut scenarios, and the mid nineties is one of the
Speaker 9: only episodes they cut three times over eight months, and
Speaker 9: then they waited almost a year and they raised again.
Speaker 9: So we have to be really, I think careful. We
Speaker 9: just do not have a good roadmap. History is never
Speaker 9: a perfect guide, but in this case, we are really,
Speaker 9: i would say, in much more unchartered territory than markets believe.
Speaker 5: Today, flying blind to some extent. There so clearly a
Speaker 5: communication challenge for the Fed. Let's talk about the balance sheet, though,
Speaker 5: because that's one of the big questions, and Paul did
Speaker 5: get asked about this at this month's meeting. What happens
Speaker 5: to the balance sheet if they do try to do
Speaker 5: those sort of fine tuning rate cut and continue to
Speaker 5: roll off the balance sheet on the you know, from
Speaker 5: the outside looking in, that appears that the Fed is
Speaker 5: working at cross purposes. How are you thinking about the
Speaker 5: balance sheet in relation to their primary tool of interest rates?
Speaker 9: I think you bring up an important point, which is
Speaker 9: again speaks to the unique nature of easing monetary policy.
Speaker 9: When we don't have a recession, it looks really different.
Speaker 9: And I think, first of all, the FED would like
Speaker 9: to get out of the balance sheet manipulation game. I
Speaker 9: don't think it's a place where they've been comfortable, so
Speaker 9: I think, to the best exset that they can, they'd
Speaker 9: like to de emphasize that as a policy tool, and
Speaker 9: I think that's what they're trying to do right now.
Speaker 9: But I also look at the broader treasury landscape, because
Speaker 9: over the coming year we need to roll to almost
Speaker 9: ten trillion nine point seven trillion dollars of treasury debt
Speaker 9: the matures within the next twelve months. Three years ago
Speaker 9: that was only five trillion. So when I look at
Speaker 9: long term interest rates, my expectation is that we will
Speaker 9: continue to hold or this drift up pattern throughout the
Speaker 9: next year, sort of holding the same three fifty to
Speaker 9: five percent range that we held this last year. And
Speaker 9: the reason for that is because you know, we think
Speaker 9: about the YO curve today deeply inverted, but if we
Speaker 9: do get a soft landing.
Speaker 10: That will probably correct at some.
Speaker 7: Point through some rate cuts.
Speaker 9: But also some drift higher and long term interstrates a
Speaker 9: very different outlook.
Speaker 1: Twenty seconds really quickly. Are you rolling out a recession
Speaker 1: for the US next year completely?
Speaker 9: I'm not completely rolling out a recession, Carol. I think
Speaker 9: so many of us tripped on the landmine and now
Speaker 9: feel a little bit shy to come out and talk
Speaker 9: about a recession next year. I think the risks are
Speaker 9: still elevated. We need to look at traditional bank lending,
Speaker 9: We need to look at the lagged defects of higher
Speaker 9: interest rates. My forecast, though, is for slower growth, not
Speaker 9: a recession.
Speaker 1: All right, On that note, we're going to say happy
Speaker 1: New Year, Lara. Always appreciate all the time you give Bloomberg,
Speaker 1: Lara Raim, of course, of FS Investments.
Speaker 2: Mona Maha jan is standing by senior investment strategist over
Speaker 2: Edward Jones.
Speaker 3: A very good morning to you.
Speaker 2: The nasdag's up fifty five percent, The S and P
Speaker 2: is desperately trying to make a new record high. Do
Speaker 2: you think we're going to shift a little bit more
Speaker 2: aggressively into the new year to a full bull mode
Speaker 2: or will there be you know, a bit of pulling
Speaker 2: back Once Pole and the other fed members get into
Speaker 2: jawbony mode in January.
Speaker 8: Good morning, Yes, thanks Manas, And certainly you've brought up
Speaker 8: probably one of the key points that we've been thinking
Speaker 8: about in recent weeks. Now, Look, certainly this has been
Speaker 8: a phenomenal probably eight weeks or so for the S
Speaker 8: and P five hundred, and you have to kind of
Speaker 8: you can't ignore the fact that the nature of this
Speaker 8: rally has shifted a bit. You know, we started the
Speaker 8: year really driven by that Magnificent seven, a large technology trade,
Speaker 8: and over the last few weeks we have seen a
Speaker 8: broadening of participation, whether it's value cyclical parts of the market,
Speaker 8: whether it's small and MidCap parts of the market, whether
Speaker 8: it's bond markets, all of which have played some catch
Speaker 8: up in recent weeks. We think that's a healthy sign. Certainly,
Speaker 8: a lot of ingredients came together to kind of drive
Speaker 8: this rally forward, and that included not only inflation moving lower,
Speaker 8: but a FED that told us they're likely to pivot
Speaker 8: next year, and of course bond markets and bond yields
Speaker 8: that moved substantially lower. Now, to your point, as we
Speaker 8: head into the new year, one we know markets can't
Speaker 8: move up in a straight line. Indefinitely. And two, you know,
Speaker 8: you give the markets an inch. FED talked about three
Speaker 8: rate cuts, they take a mile. Markets are now pricing
Speaker 8: in about six rate cuts for next year. So we
Speaker 8: do think as we head into the new year there
Speaker 8: could be some sparks and bounts of volatility, especially as
Speaker 8: the markets and Fed FED go head to head on this,
Speaker 8: and we do think the FED will push back. Keep
Speaker 8: in mind, the first FED meeting is January thirty first,
Speaker 8: there will be speakers between now and then as well.
Speaker 8: We think they do take that opportunity to push back
Speaker 8: on the six rate cuts that have been priced into
Speaker 8: the market. Our view is we probably still get three
Speaker 8: to four rate cuts next year, but they don't start
Speaker 8: until later in the year, especially as a FED does
Speaker 8: want to see that core inflation number move lower from
Speaker 8: four percent to probably sub three percent.
Speaker 1: A lot can happen in a month before that first
Speaker 1: FED meeting. Having said that, I do undermoona how we've
Speaker 1: been spending so much time this week. It's kind of
Speaker 1: quieted down, but we've been watching very much what's going
Speaker 1: on geopolitically. How does that potentially complicate what the FED
Speaker 1: needs to do here?
Speaker 8: Yeah, you know, look It's been an interesting year in geopolitics,
Speaker 8: and certainly one way that that has manifested is through
Speaker 8: the oil and energy markets. And certainly, when the Israeli
Speaker 8: Gaza conflict first hit, we saw an immediate move higher
Speaker 8: in oil prices, and we've seen since then a real
Speaker 8: cooling in oil and energy. And perhaps part of the
Speaker 8: reason is one that those players alone are not substantial
Speaker 8: oil producers, but two, maybe there was this whole building
Speaker 8: that the conflict would not escalate, and so we did
Speaker 8: see an easing and oil and energy prices now that
Speaker 8: is probably the closest asset class we're watching as geopolitics
Speaker 8: unfolds in twenty twenty four. Our hope is that the
Speaker 8: direction of travel does continue to go towards de escalation
Speaker 8: rather than re escalation, and that would be positive for
Speaker 8: stability in the oil and energy markets. So it's something
Speaker 8: we're watching closely. Certainly the FED, we'll be watching it
Speaker 8: from an inflationary perspective, especially as oil and energy plays
Speaker 8: a key component of headline inflation. But as we think
Speaker 8: about volatility heading into the new year, for those investors
Speaker 8: that hadn't quite participated in this last few weeks, we
Speaker 8: would say any volatility really provides an opportunity for investors
Speaker 8: to get involved and position for potentially a continuation of
Speaker 8: this broadening of market participation.
Speaker 1: Also important to the economy is, of course, what the
Speaker 1: consumer does. Ultimately, we still see a relatively tight labor market.
Speaker 1: Having said that, we got to read on weekly job
Speaker 1: list a little bit of an uptick, certainly today's. But
Speaker 1: we talked with Larra Raim earlier who talked about companies
Speaker 1: still holding on to their workers. They want to do that.
Speaker 1: Can the consumer, as we talked earlier, moving from FOMO
Speaker 1: fear of moving out to JOMO joy of missing out.
Speaker 1: Maybe they've got bills to pay and they're going to
Speaker 1: hold back. Can the consumer continue spending in the new year.
Speaker 8: Yeah, it's a critical question. And I did hear the
Speaker 8: Joemo phrase and I loved it. You know, we we
Speaker 8: also are in the camp that the consumer is facing
Speaker 8: some headwinds heading into the new year. And you know,
Speaker 8: keep in mind we are coming from a very strong
Speaker 8: position of strength from Q three of this year where
Speaker 8: GDP growth was five percent nearly in consumption was four
Speaker 8: percent roughly, and so from that high level, do we
Speaker 8: think there could be a potential for a slowdown. Yes,
Speaker 8: keep in mind for the consumer, excess savings have been
Speaker 8: worked down. We are seeing still elevated interest rates, mortgage rates,
Speaker 8: you know, despite the recent cooling, and of course bank
Speaker 8: lending standards remain tight. Credit card debt, as we know,
Speaker 8: is mo higher, and we're seeing some early signs of
Speaker 8: delinquencies as well. So, all that being said, some challenges
Speaker 8: facing the consumer as we're heading into the new year.
Speaker 8: But we know the US consumer likes to spend and
Speaker 8: does you know, does and can remain resilient in the
Speaker 8: face of some challenges.
Speaker 2: Consumer right to the very end, the last consumer to
Speaker 2: put their credit card away.
Speaker 6: Hard to bet against the US consumer.
Speaker 5: But I want to bring this conversation back to the
Speaker 5: markets because you mentioned participation, and something that we've been
Speaker 5: talking about all week is that six trillion dollars that's
Speaker 5: sitting in money market funds right now, and many a
Speaker 5: bowl case has been built on the idea that basically
Speaker 5: you'll see that cash come out of money market funds
Speaker 5: and venture into risk assets, venture into equities and fixed income.
Speaker 5: Is that your view as well, or maybe a little
Speaker 5: bit of caution around that one.
Speaker 8: Yeah, you know, we do think that part of the
Speaker 8: money that has flown and it's been a tremendous inflow,
Speaker 8: and you mentioned the six trillion dollar figure into CDs
Speaker 8: and money markets. We think some of that money now
Speaker 8: is starting, you know, as CD money comes due, as
Speaker 8: investors are thinking about reinvestment risk, we think there is
Speaker 8: a case to be made that the money that maybe
Speaker 8: would have flown into your CD in money markets will
Speaker 8: now start to flow into more traditional asset classes like
Speaker 8: equities and bonds. And certainly there's a couple of reasons
Speaker 8: for that. One of course, as a FED is potentially
Speaker 8: embarking on a rate cutting path, we will have reinvestment
Speaker 8: risk too. There is an opportunity cost to sitting in cash,
Speaker 8: and hopefully investors are starting to see with the SMP
Speaker 8: up twenty five percent, but even the bond market rallying
Speaker 8: close to five percent in recent weeks gives you a
Speaker 8: run for your money for traditional cash assets. And then thirdly,
Speaker 8: you know, over time, over any thirty year period, we
Speaker 8: have seen historically that cash has been a lot class.
Speaker 8: So sure as we are thinking about our portfolios that
Speaker 8: we're not too overweight cash and cash like instruments, and
Speaker 8: we're strategically you know, allocated so that you can kind
Speaker 8: of meet and exceed long term investment returns. And we
Speaker 8: do think this year in particular will be a great
Speaker 8: one to compliment. You know, we understand the reasoning to
Speaker 8: get into these CDs rates are higher than we've seen
Speaker 8: in recent history, but that could start to be trending
Speaker 8: downwards and good time to start thinking about complementing CD
Speaker 8: money with traditional equities and bonds.
Speaker 6: Well, just to sit with this thought a little bit longer.
Speaker 5: The pushback to that argument, basically that you're going to
Speaker 5: see cash come off the sidelines that we've gotten is
Speaker 5: that you think about that one trillion dollars that's come
Speaker 5: into money market funds just from March, of course, and
Speaker 5: the banking struggles that we had, then maybe that's going
Speaker 5: to be stickier than usual, that it won't be you know,
Speaker 5: this additional fuel that for equity markets and risk assets
Speaker 5: that maybe we've seen in the past. What's you're thinking,
Speaker 5: Does that hold water with you at all?
Speaker 8: Yeah, you know, I do think we are going to
Speaker 8: see a different portfolio construction in the next you know,
Speaker 8: call it five to ten years. Even given that FED
Speaker 8: funds rate are likely not move back to the zero bounds,
Speaker 8: so you're probably looking at a FED funds rate over
Speaker 8: time of three percent, and so in that environment, treasury
Speaker 8: yields are probably somewhere between three and four percent themselves.
Speaker 8: And so this idea that you had to be all
Speaker 8: in inequities or all in in growth even probably doesn't
Speaker 8: hold over the next several years. So we think there's
Speaker 8: better balance between your equity and bond portfolio, and there
Speaker 8: is more room for cash like instruments that are yielding
Speaker 8: attractive values. And so you know we'd say is make
Speaker 8: sure that you are thinking about not only equities, but
Speaker 8: think about investment grade bonds to complement some of that
Speaker 8: money market cash like instruments. So we do think there
Speaker 8: is a place for cash and CDs, but we think
Speaker 8: that it's important to think about investment grade bonds. Not
Speaker 8: only are you locking in some of those longer, better
Speaker 8: yields for a longer period, but you get the potential
Speaker 8: for appreciation if fields continue to move lower as well.
Speaker 8: So just some kind of alternative.
Speaker 2: Just on those investment grade bonds, just briefly here before
Speaker 2: we go, is perhaps an alternative to equity exposure in
Speaker 2: the mag seven if you want to diversify more broadly
Speaker 2: away from MAG seven on the equity side, Can I
Speaker 2: look at the IG bond side off the MAG seven
Speaker 2: as perhaps a slot on the board that the IG
Speaker 2: component makes up.
Speaker 8: Yeah, you know, that is a very interesting call out,
Speaker 8: and I do think that's a way to play it
Speaker 8: as well, if you're thinking about some of the growth
Speaker 8: parts of the market and want to play it from
Speaker 8: the bond perspective that you know, these are the companies
Speaker 8: that are very cash rich, that will probably make good
Speaker 8: on their investment grade bonds, and you know they will
Speaker 8: likely not often need the bond market to raise cash,
Speaker 8: so when they do, it's a great opportunity for investors.
Speaker 8: So we would say, you know, investment grade bonds in
Speaker 8: the Magnificent seven or broadly in the technology space is
Speaker 8: a great way to complement your portfolio as well.
Speaker 3: ownA thank you so much for being with us point.
Speaker 1: Jeff You is senior market strategist of it B and
Speaker 1: Y Mel and we do want to talk about what
Speaker 1: we're seeing when it comes to this global bond market rally. Jeff,
Speaker 1: does it continue into twenty twenty four?
Speaker 11: Well, broadly, looking at the easing cycle, I guess bonds
Speaker 11: will do well. You know, we're seeing that our underlying flows,
Speaker 11: the people are going into duration that has too much
Speaker 11: been priced in too soon. I would say for the
Speaker 11: Fed yes, I would say for the ECB no. So
Speaker 11: going back to your point by Madam Leguard about Chair
Speaker 11: Powell that all pushing it back against easing right now,
Speaker 11: I would just say these pushbacks, some are a bit
Speaker 11: more credible than others.
Speaker 2: So the pushing back Leguard is desperately pushing back. We're
Speaker 2: just showing some treasury yields at the moment. Across the world,
Speaker 2: we have this global bond market rally. So you say
Speaker 2: we're going to get more easing from the ECB than
Speaker 2: the market expects, because right now it's pricing in one
Speaker 2: hundred and seventy five basis points. So what do we
Speaker 2: get and what does that do to duration in Europe?
Speaker 11: I don't think it's about the amount of easing. It's
Speaker 11: more about timing. So they're pushing it back out when
Speaker 11: they are easing. I think market pricing of starting around
Speaker 11: March and or the meeting after that, so the second
Speaker 11: or the third meeting, I think that is a credible view.
Speaker 11: And then we just go from there. That's sticking with
Speaker 11: the ECB. In know, one other thing to look at
Speaker 11: in the context of duration. They announced more QT you know,
Speaker 11: unminding the PEPP starting the second half of next year.
Speaker 11: Will they be in a position to actually execute that
Speaker 11: is the mark at going to be ready for supply
Speaker 11: even though they do want duration right now. So quite
Speaker 11: a few moving parts at this point. So yes, there
Speaker 11: is a duration plan they're heading into next year. But
Speaker 11: just to put things in context, so we saw like
Speaker 11: standard three four standard deviation moves throughout December. It's going
Speaker 11: to be very hard to repeat that heading into January.
Speaker 11: So after a correction, yes, I think flows thin head
Speaker 11: back in. But then the race that you mentioned it
Speaker 11: truly begins, and I do think the FED is going
Speaker 11: to be losing that race in terms of who cuts first.
Speaker 2: Okay, so they're possibly going to have to go first
Speaker 2: and go earlier. Does that say something more malevolent about
Speaker 2: the scale of recession here in the United States of America?
Speaker 2: Thankfully you've studied the PSALM rule. I haven't got the
Speaker 2: depth of quant knowledge, Jeff.
Speaker 7: It does for us.
Speaker 1: Can you quiz manas because that would be a lot
Speaker 1: of fun.
Speaker 2: Actually, it indicates when global recessions. Yes it does look Jeff,
Speaker 2: you're on.
Speaker 3: Nescient in this regard. Just run us through for our viewers.
Speaker 3: What is the sum rule? What does it matter?
Speaker 2: And where is the worst shirt globally recession wise?
Speaker 11: So looking at the strict definition, the three month moving
Speaker 11: average of the three unemployment rates in the US rises
Speaker 11: by zero point five percentage points or more relative to
Speaker 11: the low during the last twelve months, right, So that's
Speaker 11: explicit definition there. So applying it to Europe, you know,
Speaker 11: which is what we're really focused on right now. Oddly enough,
Speaker 11: UK and Sweden really are not doing too well in
Speaker 11: that respect. The UK, I'm quite poorly. But just to
Speaker 11: put things into context, so this rule can also be
Speaker 11: satisfied if the prior employment levels or the an important
Speaker 11: rate was far too low, so the labor market was
Speaker 11: excessively tight, which in fairness that had been in certain
Speaker 11: European economies, then you could have that push up them
Speaker 11: as well. But overall, going back to the hard landing
Speaker 11: soft landing push, I think the US definitely in the
Speaker 11: soft landing camp, but for Europe is a bit mixed
Speaker 11: match right now. Overall, I think we need to focus
Speaker 11: on the fiscal side in Europe, can journey get past
Speaker 11: this constitutional wrangle with regard to the budget, because what
Speaker 11: you don't want is fiscal contraction into a cyclical downturn.
Speaker 11: But that, to be honest, is what Germany is looking
Speaker 11: at right now and they really need.
Speaker 10: To resolve it. All right.
Speaker 5: I hope you guys wrote all that down because there
Speaker 5: is going to be a connected I've.
Speaker 3: Got the print I here with the highlights on it.
Speaker 1: You know, don't on the phone right now.
Speaker 5: We'll awquise each other. But Jeff, let's stay in Europe.
Speaker 5: I want to go back to what you said about
Speaker 5: basically the ECB's credibility because obviously the market is pushing
Speaker 5: rate cuts and just today I thought it was interesting
Speaker 5: you had Government Council member Robert Holsman coming out and
Speaker 5: saying rate cuts in twenty twenty four they aren't guaranteed.
Speaker 5: Of course, he's one of the most hawkish members there.
Speaker 5: But still this pushback that you're seeing from the ECB,
Speaker 5: it's just not landing. What does that say about the
Speaker 5: ECB's credibility here?
Speaker 11: Well, if in facial data keeps on surprising to the downside,
Speaker 11: which it really has been over last them two or
Speaker 11: three prints. Then your credibility is damaged. We saw it
Speaker 11: on the way up, right, Transitory is transitory, transitory all
Speaker 11: the time, and it turns out it wasn't transitory. So
Speaker 11: that's when you use credibility. So the last thing central
Speaker 11: bank is anywhere right now? What is to have lost
Speaker 11: some credibility on the way off and you lose it
Speaker 11: on the way down as well. So this is where
Speaker 11: they need to be reattuned to right now. So I
Speaker 11: just questioned, what is euro dollar doing up here? Yes
Speaker 11: it is a fed story, but can you justify having
Speaker 11: a very strong euro right now with the exports environment
Speaker 11: very weak? Mentioned China being quite weak as well, and
Speaker 11: also we've seen a downturn in the labor market as well.
Speaker 11: You look at job openings in France and Germany, they
Speaker 11: finally started to soften heading into December. So that services
Speaker 11: element in Europe, which and logata that have been holding
Speaker 11: European wages up, that seems to be coming off as well.
Speaker 11: Look at the PMIS, so again it's really difficult to
Speaker 11: justify based on the data the hawkish retric at this point.
Speaker 1: All right, Jeff, So I'm going to go into Japan
Speaker 1: Bank of Japan. Right, We had some comments from the
Speaker 1: governor saying that that the BFJ can reach a judgment
Speaker 1: on policy before complete wage figures from small and medium
Speaker 1: sized figures come out. He did an interview with NHK. So,
Speaker 1: how are you thinking about Japan this policy of negative
Speaker 1: rates that has been in existence for so long. Do
Speaker 1: we start to see some kind of shift in twenty
Speaker 1: twenty four?
Speaker 7: Can they actually do the shift?
Speaker 11: Will absolutely have to shift, and the end is going
Speaker 11: to be very much on part of that equation. We
Speaker 11: do see a material drop in dolly en, so the
Speaker 11: end is going to be one of the best performing
Speaker 11: currencies heading into a next year. And also, let's just
Speaker 11: go back to what they're actually doing, so leaving the
Speaker 11: rectric aside, they're tweaking their bond purchases as well, leaving
Speaker 11: more scope and for yields to go higher. So it
Speaker 11: is happening. They will do it at their own pace.
Speaker 11: Judge it on data, judget on wages, as you mentioned,
Speaker 11: but they know that importing inflation via weakergain that doesn't
Speaker 11: work anymore. It is a problem and it is going
Speaker 11: to be one of the tweaks. Well, the major shifts
Speaker 11: heading into next year, and to be frank, Asia needs
Speaker 11: it as well. So on top of that, if the
Speaker 11: yen is allowed to strengthen, I think it will allow
Speaker 11: a lot of other central banks in Asia to let
Speaker 11: their currencies move a bit more as well, especially on
Speaker 11: the strengthening side, especially those still with a bit more
Speaker 11: inflation to worry about. But now that's going to be
Speaker 11: the central story in a pack of course, on top
Speaker 11: of whatever China does with respect or growth, the.
Speaker 2: Two hours are going to define what happens to the
Speaker 2: dollar recession and rates. Your call is a soft landing,
Speaker 2: and the market has one hundred and fifty hundred and
Speaker 2: sixty basis points of rates cuts. The question I have
Speaker 2: for you then, is soft landing in the United States
Speaker 2: of America? Is that short the dollars sell the dollar
Speaker 2: on the rates at and a risk on narrative? Does
Speaker 2: that define a lower dollar twenty twenty four So on
Speaker 2: a trade.
Speaker 11: Weata basis dollars absolutely peak right, But pick your dollar
Speaker 11: shorts carefully, and there's still plenty of opportunities for dollar
Speaker 11: long So like euro dollar, I think she'd be heading
Speaker 11: back to parity. You know, given what I've just said
Speaker 11: about PCB easing timing cuts and then the Fed's going
Speaker 11: to be later than that. So I certainly will not
Speaker 11: be short the dollar on the euro leg dollar versus Asia.
Speaker 11: Just mentioned, you're probably the dollar's going to soften a
Speaker 11: bit as well. Also on a trade data basis. One
Speaker 11: of the two most important trading partners for the US
Speaker 11: closer to home Canada and Mechs and those are going
Speaker 11: to be very very interesting pairs as well. And I
Speaker 11: do think Latin American carry trades, they run their course.
Speaker 11: Bank of Mexico going to start easing rapes, so the
Speaker 11: dollar can pretty much hold its own maybe against Canadian
Speaker 11: dollar and the Mexican pace. So and that is going
Speaker 11: to be material for US financial conditions as well, especially
Speaker 11: for the exporters.
Speaker 1: Jeff, you're a rock star. Thank you so much, really
Speaker 1: appreciate it. And happy New Year, Jeff, You and b
Speaker 1: and Y Melan joining us. Ellen Wall she follows the
Speaker 1: energy markets, has for a long time. She's senior fellow
Speaker 1: at the Atlantic Council and author of Saudi Inc.
Speaker 12: Ellen.
Speaker 1: Great to have you back here on Bloomberg. So how
Speaker 1: are you kind of adding up some of the tensions
Speaker 1: that are happening in the Middle East. We're talking about
Speaker 1: stockpiles here in the United States. What does it mean
Speaker 1: for the energy markets.
Speaker 12: One of the important things, at least that I'm taking
Speaker 12: in is to kind of pull back and look at
Speaker 12: the larger Middle East geopolitical picture here.
Speaker 10: And if you kind of step back, you'll.
Speaker 12: Notice that there have been apparently one hundred and three
Speaker 12: separate attacks on US troops across the Middle East, even
Speaker 12: in places where at least I wasn't aware we even
Speaker 12: had any troops, and that's a very large number. Then
Speaker 12: that's been since I think October seventeenth, and to me,
Speaker 12: that says that things are kind of bubbling under the surface,
Speaker 12: potentially escalating. And then on top of that, you've got
Speaker 12: iraniant drone attacks on chemical tankers in the Indian Ocean,
Speaker 12: and you've got this Red Sea situation which is just.
Speaker 10: Getting more and more tense by the day.
Speaker 12: Like you said, you've got half of all container shipping
Speaker 12: is avoiding the Red Sea. And then when you look
Speaker 12: at the oil situation and the oil product situation on
Speaker 12: top of that, I think there is a real risk
Speaker 12: for Europe here, not that they won't get the.
Speaker 10: Products and the frude oil they need, but since.
Speaker 12: They're no longer buying from Russia, they're basically either importing
Speaker 12: from the Middle East, so now that a lot of
Speaker 12: that's got to go around Africa, or they're importing products,
Speaker 12: say that are made maybe in India from Russian oil,
Speaker 12: that's also got to go either through the sus Canal
Speaker 12: or around Africa. Now, so we're talking about longer transport times,
Speaker 12: higher costs, higher insurance costs, and just a general higher
Speaker 12: risk And to me, like you said, that sends.
Speaker 10: The idea of inflated prices, though.
Speaker 12: Of course we've got to balance that with these higher stockpiles.
Speaker 2: Well, let's just focus in on the Red Sea. We
Speaker 2: have this coalition and a hefty coalition of defense trying
Speaker 2: to help shippers return there. You flag a concern about
Speaker 2: to what extent will this coalition actually be prepared to
Speaker 2: protect the maritime fleets going in there, because the last
Speaker 2: thing the Coalition of the West wants is a deep escalation,
Speaker 2: So you dite the teeth of this coalition of protection exactly.
Speaker 12: I think that the fact that it's been assembled does
Speaker 12: not necessarily mean that it's going to do anything. I
Speaker 12: think there's been a lot of hype about kind of
Speaker 12: the coming together of this coalition. But to me that
Speaker 12: says too little, too late. Where was this coalition last
Speaker 12: month when container ships and tankers were being attacked, And
Speaker 12: it doesn't seem you know, it's one thing for the
Speaker 12: who this to say, Okay, we're going to attack Israelly
Speaker 12: linked ships. Now they're just basically attacking anyone. A tanker
Speaker 12: that was going from Pakistan to Saudi Arabia was recently
Speaker 12: attacked and had no links to Israel or anyone else.
Speaker 10: So to me, this says that they're going to continue
Speaker 10: to be They're going to continue.
Speaker 12: To step up these attacks and at defensive positions. We've
Speaker 12: got US destroyers in the Red Sea trying to basically
Speaker 12: intercept these attacks as they're happening.
Speaker 10: That may not be enough.
Speaker 12: In fact, it's looking like it's not enough for most
Speaker 12: of the shipping industry.
Speaker 2: And Ellen you lay a very febrile image in my
Speaker 2: mind in terms of what's actually going on, and I
Speaker 2: think we're so physically far away from it. Sometimes we
Speaker 2: don't really understand the level of risk. Why such a
Speaker 2: phlegmatic response from the energy markets in that case? Is
Speaker 2: it just thin volumes? As Carol said, or is it
Speaker 2: now this will pass. We've seen these flashes in the
Speaker 2: pan before. We don't need to worry that much. Why
Speaker 2: such phlegmatic response in the energy.
Speaker 12: Market, That's a really great question, And I think it's
Speaker 12: a combination of the high production levels from the United States.
Speaker 12: There's a sense that this, you know, thirteen plus million
Speaker 12: barrel a day production is just going to offset risk,
Speaker 12: which I think is a bit of an oversight. Then
Speaker 12: you've got you've got the fact that nothing has happened before.
Speaker 12: And then you've got the fact that I think it's
Speaker 12: in the interests of the Biden administration to avoid a
Speaker 12: larger conflagration at all costs. But on the other hand,
Speaker 12: they may not be able to do this, and the
Speaker 12: risk of a conflict, while still low, is not zero
Speaker 12: at this point, and I do believe that that number
Speaker 12: is getting higher the longer that these attacks on international
Speaker 12: shipping are allowed to go on.
Speaker 5: Well, Ellen, given that that is a non zero risk
Speaker 5: in your view, I mean, you think about the war
Speaker 5: premium to borrow phrase from manas that's priced into oil
Speaker 5: right now. Should there be more of a premium priced
Speaker 5: in I do.
Speaker 12: Think that there should be, particularly as we go on
Speaker 12: in the year. We're at a period now of generally
Speaker 12: seasonally low demand. But as we head into say April May,
Speaker 12: when things pick up, do you think that that premium
Speaker 12: unless if this conflict has not been resolved by then,
Speaker 12: you know that premium should definitely be much higher, particularly
Speaker 12: if OPEK plus is going to continue to hold barrels
Speaker 12: off the market.
Speaker 1: How much higher? Ellen give us a quote.
Speaker 10: That's a good question.
Speaker 12: I don't like to predict oil prices, but I wouldn't
Speaker 12: be surprised if it's if it's more than several dollars
Speaker 12: a barrel.
Speaker 10: I do think that it's that.
Speaker 12: This risk is being underestimated now, and I think that
Speaker 12: the fact that that US supply and the fact that
Speaker 12: we know OPEK is holding so much oil off the
Speaker 12: market is kind of negating that geopolitical risk.
Speaker 1: At the moment above eighty she's bushin.
Speaker 10: I'm not going to say no.
Speaker 1: All right, wow, that would be a very different trade
Speaker 1: than We'll change.
Speaker 2: The dynamics for the White House as well, in terms
Speaker 2: of refilling the SPOR can tell you that on the
Speaker 2: price comp Ellen.
Speaker 1: Wall, thank you so much of the Atlantic Council. Subscribe
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