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Speaker 3: The inflation fight is an over, speaking of CBS over
Speaker 3: the weekend, joining a chorus of Fed officials pushing back
Speaker 3: on ray cut speculation in the wake of Jpow's dubvish outlook,
Speaker 3: Former New York Fed President Bill Dudley, calling POW's comments
Speaker 3: a gamble warning quote. There's plenty that can go wrong.
Speaker 3: Power has repeatedly emphasized that the Fed must finish the job.
Speaker 3: Yet the more weight he puts on cutting rates to
Speaker 3: avoid a recession, the greater the risk of falling and
Speaker 3: failing to control inflation of markets getting a big, unpleasant
Speaker 3: surprise one way or another. Twenty twenty four promises be
Speaker 3: an interesting year. Thanks for tearing that up, Bill. Let's
Speaker 3: start the conversation there, just why do you think that
Speaker 3: is so risky? And what on earth happened at the
Speaker 3: news conference last week? We spoke immediately afterwards. You've had
Speaker 3: an extra week. What was that, Bill?
Speaker 4: I think he's been very pleased with how the economy
Speaker 4: has performed to be pretty stridy growth. Yet the inflation
Speaker 4: rate has come down, so the prospects of the soft
Speaker 4: landing have gone up.
Speaker 5: I think that's all really good and positive.
Speaker 4: What I don't understand is why you'd want to add
Speaker 4: fuels of the fire and cause financial conditions to ease substantially,
Speaker 4: which is whether he provoked last week. The stocks are
Speaker 4: up quite a bit, bonnials are down, financial conditions are
Speaker 4: much more accommodative. The Goldman Sachs Financial Conditions Index, for example,
Speaker 4: it is by a four percentage point at a time
Speaker 4: that the economy has been growing, and above trempe ss.
Speaker 5: To me, I'm worry the defense is not going to
Speaker 5: finish the job. He's behaving a little bit more like
Speaker 5: Arthur Burn than he is like Paul Bunker.
Speaker 3: Bill, let's build on that just a touch more. Do
Speaker 3: you think he's seduced by the prospect of net and
Speaker 3: the soft landing. Do you think that's what sucked him
Speaker 3: in a little bit.
Speaker 4: Well, I think that's certainly what he's trying to achieve,
Speaker 4: and if I was in issues, I would do the same.
Speaker 4: I think there's there of a contest going on right
Speaker 4: now between how to think about monitary policy. Is policy
Speaker 4: really tight because real rates are high and inflation's coming down,
Speaker 4: or is policy not so tight because financial condition that
Speaker 4: needs significantly and that's providing support to the economy. If
Speaker 4: we look at the Atlanta Fed GDP now has for
Speaker 4: the fourth quarter, it's now tracking two point six percent
Speaker 4: after a five point two percent growth right in the
Speaker 4: third quarter. So it's not really clear that the economy
Speaker 4: needs a lot more accommodation to support itself.
Speaker 2: Bill, do you think the Fed jer J. Powell understood
Speaker 2: what he was going to do to markets?
Speaker 5: I think that he certainly.
Speaker 4: I hope he understood that he was coming across with
Speaker 4: a very optimistic sort of framework for markets to that
Speaker 4: I digest.
Speaker 5: I think that's true.
Speaker 4: As Austin Golsby said a little a little bit earlier,
Speaker 4: that this is a forecast, and so if the forecast
Speaker 4: doesn't materialize and the FED rate cuts that are the
Speaker 4: promise won't materialize, either, so the market may be get
Speaker 4: a little bit ahead of itself. This is how Powell
Speaker 4: thinks the world is going to evolve. Paul thinks the
Speaker 4: Fed is going to be cutting rates in twenty twenty four.
Speaker 4: But it's possible that the economy could be firmer for longer,
Speaker 4: inflation could be more stubborn in the rate cuts might
Speaker 4: not actually turn out to materialize.
Speaker 2: The reason why I ask that is because feedcher Powell
Speaker 2: had an opportunity to push back against the financial conditions
Speaker 2: and the easing that we have seen. He had a
Speaker 2: chance to say this is problematic and moves counter to
Speaker 2: our goal.
Speaker 1: Of bringing inflation down. He didn't.
Speaker 2: And you're saying financial conditions still matter. So why do
Speaker 2: they still matter? Is it becoming inflationary or at least
Speaker 2: not necessarily restrictive in a way that's problematic for the
Speaker 2: Fed to see financial conditions easing as much as you've
Speaker 2: pointed out they have.
Speaker 4: Well, the big problem here is that if financial conditions
Speaker 4: ease a lot, that provides impetus to economic growth. If
Speaker 4: the economy grows faster, the labor markets tighter, wage inflation's higher,
Speaker 4: and then it's harder to actually achieve your two percent
Speaker 4: inflation objective. So the question is does the economy need
Speaker 4: more fuel? Does the economy need to grow faster? I
Speaker 4: would say probably no. Labor markets already very very tight.
Speaker 4: Wage inflation is Paul has acknowledged, is above a level
Speaker 4: consistent with two percent inflation. So I'm not sure why
Speaker 4: you'd want to put more fuel on the fire.
Speaker 3: But do you think we've learned enough about the cycle
Speaker 3: so far though to draw conclusions about the contribution of
Speaker 3: the labor market to overall price pressure and just discount
Speaker 3: it and say it's not as important as we thought
Speaker 3: it was.
Speaker 6: Well, I think it's.
Speaker 5: True that there's a big labor force supply benefit that
Speaker 5: you got. Last year. A lot of people rejoined the
Speaker 5: labor force, so the Fed got sorry, had had skicking
Speaker 5: to do.
Speaker 4: They had pretty sturdy growth, but it didn't generate inflation
Speaker 4: pressure because the labor force expanded to accommodate that growth. Now,
Speaker 4: the question is is that going to continue in twenty
Speaker 4: twenty four. That's a really important question in the eco
Speaker 4: gal Look, I'm going to continue to see that kind
Speaker 4: of rapid labor force growth that accommodates pyerial gains of
Speaker 4: one hundred and fifty one hundred and seventy two hundred
Speaker 4: thousand a month.
Speaker 3: Do you see reason to believe that it won.
Speaker 4: I think that that there's some reason to believe that
Speaker 4: some of the labor force pers we saw last year
Speaker 4: was a catchup, right. Basically, you opened up immigrat again,
Speaker 4: so you had a surge of immigration of legal immigration
Speaker 4: into the US last year. Worked from home allowed working
Speaker 4: age women to re enter the layer force. But whether
Speaker 4: that trend is going to continue at that pace, I
Speaker 4: would be a bit skeptical about that.
Speaker 2: There seems to be an acceptance or reacceptance of the
Speaker 2: concept of transitory at fedchair among the FED officials, particularly
Speaker 2: FED Shair J.
Speaker 1: Powell. Are you pushing back on that?
Speaker 2: Are you saying it's still too early to say that
Speaker 2: there's still stickier aspects to inflation that they're discounting.
Speaker 5: I think a lot of the inflation pressure clearly was transitory.
Speaker 4: A lot of the upper pressure you saw on goods
Speaker 4: prices was just to the pandemic and people increasing their
Speaker 4: demand for goods temporarily during that shutdown period. Now we've
Speaker 4: opened up the economy, the demand for goods falls, and
Speaker 4: so that all.
Speaker 5: That price pressure goes away.
Speaker 4: I think the problem on inflation is really more about
Speaker 4: pressure on resources in the labor market. The libor market
Speaker 4: is still very very tight, Wage inflation is still too high,
Speaker 4: and if the economy grows at above trend pace in
Speaker 4: twenty twenty four, all that pressure on is going to
Speaker 4: increase rather than diminished. So the real question I have
Speaker 4: in my mind is monetary policy as tight as the
Speaker 4: FED thinks it is. And I think the fact that
Speaker 4: the FED is pivoted in this way by easing financial
Speaker 4: conditions that makes monetary policy less restrictive rather more restrictive
Speaker 4: going forward.
Speaker 2: Some people have speculated that the FED wants to cut
Speaker 2: rates in the first half of the year and avoid
Speaker 2: making any moves whatsoever the second half because of the
Speaker 2: presidential election.
Speaker 1: Do you buy into that?
Speaker 5: No, I don't buy into it.
Speaker 4: I think at the end of the day, the FED
Speaker 4: accident completely a political matter, because they understand that if
Speaker 4: they start timing rate cuts or rate increases with the
Speaker 4: political cycle, that politicizes the FED and puts them in
Speaker 4: the middle of the whole debate. So the best thing
Speaker 4: the FED can do is they totally ignore the political
Speaker 4: cycle and do what they think is best to achieve
Speaker 4: their dual man date objectives.
Speaker 3: Let's just sit on the comments we've heard so far.
Speaker 3: We've had clarifying remarks from New York Fed President John Williams,
Speaker 3: year old Saint Bill, clarifying remarks from Gilsby over the weekend,
Speaker 3: from Mesta this morning and the Financial Times Bill. How
Speaker 3: does that work? These speeches, these interviews are scheduled well
Speaker 3: ahead of time as we know. Is there someone on
Speaker 3: the committee the Border government has that sends out a
Speaker 3: message to for one and says, let's all get on
Speaker 3: the same page. I need you to say x y C.
Speaker 6: Bill.
Speaker 3: Does that ever happen?
Speaker 5: So the answer is yes and no.
Speaker 4: Yes, John Williams, when John Wayns speaks, you have to
Speaker 4: believe that that's been carefully choreographed with the Board of
Speaker 4: Governors and Jay Paul. When other Fed presidents speak, No,
Speaker 4: that's not choreographed. That's them operating on their own. So
Speaker 4: Paul speaks, you want to pay Paul's speech, You want
Speaker 4: pay attention to John Wayne' speech. You want to pay
Speaker 4: attention because they're part of the Troyka, the core group
Speaker 4: that sets monitor policy for the FED.
Speaker 5: So I think, look, I think I think people are
Speaker 5: pushing back a little bit.
Speaker 4: I think the market is sort of running away from
Speaker 4: them when when the story isn't really completed yet, I
Speaker 4: mean Paul's Paul's remarks last week. We're all about how
Speaker 4: he thinks things are going to evolve. We have to
Speaker 4: see if they actually evolved in that way to provide
Speaker 4: the motivation for rate cuts.
Speaker 3: Hi, Bill, I appreciate the update, great pace of morning.
Speaker 3: Enjoyed the raid. Bill down be there of Bloomberg opinion
Speaker 3: on the gamble. He thinks this federal Reserve is taken
Speaker 3: with the grand pivot that was seemingly unofficially announced. I'm
Speaker 3: really placed to say that. Revisiting a surround a table
Speaker 3: at Prayer Misra portfolio manager at JP Morgan Asset Management
Speaker 3: more than Prayer. We were talking last week on Wednesday,
Speaker 3: going into that news conference with chairman pound pushback, I
Speaker 3: was with you. Surely we were going to get pushed
Speaker 3: back from the chairman. We didn't get any Your point,
Speaker 3: I think is an important one, and we dusting off
Speaker 3: the twenty nineteen playbook. And for those that might have forgotten,
Speaker 3: what is the twenty nineteen playbook?
Speaker 7: So in twenty nineteen, what the Fed did was try to,
Speaker 7: you know, cut rates. They cut rates seventy five basis points,
Speaker 7: really trying to extend the cycle. I think this is
Speaker 7: the power Fed. This is the Fed that says once
Speaker 7: they get the green light from inflation. What did surprise
Speaker 7: me was how quickly they convinced that inflation is actually
Speaker 7: going to head all the way back down to two percent.
Speaker 7: They're trying to get that soft landing. They're really really
Speaker 7: trying to get that, and if that means that they
Speaker 7: can normalize policy, that they can get real rates I
Speaker 7: think closer to one percent, one and a quarter. They
Speaker 7: think they can actually extend the cycle, that we don't
Speaker 7: get that recession. I think it's a little, you know,
Speaker 7: a little bit of a risky move here, because what
Speaker 7: if inflation does tall but if you're at two and
Speaker 7: a half, that's not that far from two. Now, whether
Speaker 7: it will work or not, I think that's the trade
Speaker 7: for six months out right now we're in immaculate disinflation.
Speaker 7: We're seeing growth slow down but not to recession levels,
Speaker 7: and they're hoping that by these preemptive rate cuts that
Speaker 7: they can actually you know, get that. Yeah, that's soft landing.
Speaker 3: Language matters, you didn't say easing, you said normalize. What's
Speaker 3: the difference.
Speaker 7: There's a big difference to not every rate cut is
Speaker 7: essentially created equal. I think the Fed right now, the
Speaker 7: market's hearing the Fed is cutting to the Fed is easing.
Speaker 7: I think what they're trying to do is get rates
Speaker 7: to some sort of neutral level. We don't know what
Speaker 7: neutral is now. We'll be debating our star for the
Speaker 7: next year. You know what's that level at which point
Speaker 7: policy is essentially accommodative. We're very far from accommodative. In fact,
Speaker 7: Japao said that last week. He said, we're well within
Speaker 7: restrictive territory. Normalizing, in my mind, is getting rates to
Speaker 7: you know, feed funds two seventy five, three percent, something
Speaker 7: in that range. Easy would be. Well, you know, below that,
Speaker 7: we're talking one percent two percent. The market right now
Speaker 7: is pricing in normalizing. So when I hear that too
Speaker 7: much is getting priced in, No, we're pricing in inflation
Speaker 7: getting back down close to two percent two two and
Speaker 7: a half, and you know growth in that one percent
Speaker 7: range two seventy five or three percent fed funds is normalizing.
Speaker 7: I actually think we still don't price in this chance.
Speaker 7: So the FED may have to cut well through that
Speaker 7: because they're trying to extend the cycle. But what if
Speaker 7: the damage has already been done? What if the lags
Speaker 7: kick in. I think there's a chance that the Fed
Speaker 7: may have to cut, you know, well south of that
Speaker 7: three percent level, which the market is not pricing in,
Speaker 7: which is why I think there's more room for rates
Speaker 7: to decline.
Speaker 2: Why do you think there are so many Fed officials
Speaker 2: lining up to push back, and we heard from Fedshair
Speaker 2: Japowell if it is consistent in with what they hope
Speaker 2: to do.
Speaker 7: I think they're really trying to prevent getting bullied by
Speaker 7: the market to cut all the way down to zero
Speaker 7: a one percent. Whether that will work or not, I
Speaker 7: think the market's saying it's not.
Speaker 1: Even bullying them to that degree.
Speaker 2: They're only billing them one hundred and fifty basis points exactly.
Speaker 7: But what if the growth data does start to slow down?
Speaker 7: Then I think the market might say, well, you're going
Speaker 7: all the way down to zero, and I think the
Speaker 7: Fed is saying, well, there's a very different bar. There's
Speaker 7: a different bar to normalizing, We've we've reached that bar,
Speaker 7: and then there's a different bar to actually take rates
Speaker 7: into accommodative territory. It's a very nuanced message, but it's
Speaker 7: very hard for the market to actually make that, for
Speaker 7: the for the FED to make that point, and secondly
Speaker 7: for the market to hear it. So I think the
Speaker 7: trade for today is the Fed's going to ease. They're
Speaker 7: trying to get that soft landing until we see data
Speaker 7: that it's not working. It's risk on.
Speaker 1: Well, here's my issue.
Speaker 2: There was a time when we thought that the easing
Speaker 2: and financial conditions mattered, that it actually would have some
Speaker 2: sort of stimulative effect on the economy and potentially on inflation.
Speaker 1: FED shir J.
Speaker 2: Powell had the opportunity, he had a soft path respond
Speaker 2: to that.
Speaker 1: To basically lean into that message.
Speaker 2: He did not do we take a message from that
Speaker 2: if they don't care about the easing and financial conditions,
Speaker 2: or do we take a lesson from all of the.
Speaker 1: Other Feed officials that are trying to say it still
Speaker 1: does matter.
Speaker 7: So I think financial conditions are always context dependent, meaning
Speaker 7: you know, financial conditions have yeast, but so has inflation.
Speaker 7: Inflations come back down. Look at three month moving averages.
Speaker 7: We're running, you know, south of two and a half percent,
Speaker 7: and the growth data is weakening. I mean, even if
Speaker 7: you look at payrolls, which is the strongest part of
Speaker 7: the economy, if I strip out a few sectors, it's
Speaker 7: actually looking pretty weak. The consumer is levering up, and
Speaker 7: you know, we are seeing essentially a pickup in default.
Speaker 7: So I think if the household sector is starting to weaken,
Speaker 7: the FED looks at easy in financial conditions and says,
Speaker 7: actually it's appropriate. So I don't think they push back now.
Speaker 7: If we see a reacceleration and growth, absolutely, the Fed's
Speaker 7: going to push back. If we see inflation stalling out,
Speaker 7: I think they'll say not so fast. But for now,
Speaker 7: if growth has slowing down, I think financial conditions matter
Speaker 7: a lot less.
Speaker 3: Let's go through the levels two year right now, for
Speaker 3: forty two tenure at the moment three ninety thirty years,
Speaker 3: just about four percent. How much space is there for
Speaker 3: you to the fall from here given everything you've just
Speaker 3: told us.
Speaker 7: I mean, it is going to depend on the data.
Speaker 7: My views. Things are slowing, and even though financial conditions
Speaker 7: are easying, the Fed's talking about rate cuts, it's hard
Speaker 7: for that to have an impact on the economy that quickly.
Speaker 7: So I think this zero to five or seven year
Speaker 7: part of the curve can absolutely decline a lot more.
Speaker 7: We should price in at any point a ten to
Speaker 7: fifteen percent chance of a recession. You start to put
Speaker 7: that in and then you're looking at the ten year
Speaker 7: or the five year closer to three percent. So I
Speaker 7: think there is room for it to decline. May not
Speaker 7: be a straight line. We've come a pretty long way,
Speaker 7: very quickly. Two months ago we were at five percent
Speaker 7: on tens. We're talking about, you know, the supply narrative,
Speaker 7: so it's moved a long way. I think it can consolidate,
Speaker 7: but I don't think we're getting much of a backup,
Speaker 7: so I would use any backup as an opportunity to buy.
Speaker 7: I think we can have a pretty flat gurve around
Speaker 7: three percent, and for the next few months.
Speaker 3: Let's talk about the shack of the curve on place
Speaker 3: you went there. You've alluded to this. Just why is
Speaker 3: this curve still at negative fifty one two year versus
Speaker 3: ten yere Why don't we get in that classic end
Speaker 3: of cycle boast state to come through what's happening?
Speaker 7: I think that's you know, do your question earlier around
Speaker 7: normalization versus easing. I think the market that's the part
Speaker 7: of the market that understands. So this FED is not
Speaker 7: talking about easing all the way down to zero, the
Speaker 7: curve will really steepen. I think when we see signs
Speaker 7: that were in front of a heart that a hard
Speaker 7: landing is in front of us. If we're still in
Speaker 7: a soft landing, I think we have a very flat curve.
Speaker 7: There should be some term premium there. But here's my
Speaker 7: pushback to term premium. There's six trillion sitting in money
Speaker 7: market funds. It's felt cash has felt good, right, I'm
Speaker 7: earning more If the FED hike's more well, I'll earn
Speaker 7: more well. Now, actually think about reinvestment risks. As the
Speaker 7: FED starts to cut rates, those rates are not going
Speaker 7: to stay that high. Money is going to move out.
Speaker 7: And it's not obvious to me that all moves to
Speaker 7: stocks when real rates are close to two percent? What
Speaker 7: bonds start to look very attractive as well?
Speaker 3: You said things with slowing Can we finish there? What
Speaker 3: is guiding you? Where are you looking across your dashboard
Speaker 3: right now, looking at various economic indicators? What's guiding your
Speaker 3: assessment of why this economy is going? Because I've looked
Speaker 3: at a range forward looking indicators for a while now,
Speaker 3: I've been signaling slow down and then Q three happened,
Speaker 3: So what are you looking at right?
Speaker 7: So you know, I think Q three part of why
Speaker 7: Q three happened or that strength and the data was
Speaker 7: real income surging, inflation decline, but wages was still high.
Speaker 7: Well that's starting to decline because if you look at
Speaker 7: wage growth. So what I'm looking at is I'm basically
Speaker 7: looking at the household sector. So I'm looking at small
Speaker 7: business hiring. That sentiment seems to be slowing, you know,
Speaker 7: And I'm looking at the consumer. So at the margin
Speaker 7: you've seen cracks. We still don't know if the cracks
Speaker 7: will be systemic enough and can the FED this preemptive
Speaker 7: easing actually prevent the cracks from deepening. But there are
Speaker 7: cracks in terms of the consumer you know, leverage in
Speaker 7: terms of consumer deforce delinquencies, so there's signs of trouble.
Speaker 7: I think it still too early to say is this
Speaker 7: hard landing, but we should put in some probability of
Speaker 7: a hard landing there.
Speaker 3: It's good to say, you always So it's pretty much
Speaker 3: for the JP Morgan acid matter. Let's get straight to
Speaker 3: the conversation. J Philoscy is found lonely oh year constructive
Speaker 3: on the equity market. Now he's got a company, tons
Speaker 3: of company. The founder and principal at TPW Advice we
Speaker 3: joined us now, Jay, it's wonderful to catch up with you, sir.
Speaker 3: How good does that external validation feel for you this morning?
Speaker 8: Well, it's been makes up for a warm, wet and
Speaker 8: windy Monday.
Speaker 6: Morning in New York City, that's for sure.
Speaker 8: So now it's you know, as you guys have been
Speaker 8: talking about you and Lisa and others, markets of rallied
Speaker 8: the rally right in your face. It's been very difficult
Speaker 8: to stand aside.
Speaker 6: It's a classic. As we talked about your end rally.
Speaker 8: You have a gate a calendar end of the year,
Speaker 8: you're under performing, because you have cash, you have to participate.
Speaker 8: And I read something infintwit over the week where it
Speaker 8: was like pain levels ten out of ten, right, So
Speaker 8: there's a lot of pressure on people to perform in
Speaker 8: this period and so there's a big chase going on
Speaker 8: and as you see it's continuing now into week eight.
Speaker 3: Jay, you weren't bullish for the sake of being bullish.
Speaker 3: So let's talk about your framework, the process you've been
Speaker 3: calling for this return to macro stability away from what
Speaker 3: we've been experiencing over the previous twelve, eighteen, twenty four months. Jay,
Speaker 3: why are you still so convinced by that? And why
Speaker 3: is that the big outlook for you next year?
Speaker 8: Yeah, I would say John, it's actually been three years, right,
Speaker 8: We've been in three years since COVID of you know,
Speaker 8: lots of volatility, you know, the inflation's fight, the central
Speaker 8: bank response, all these things have manifested.
Speaker 6: We've had conflict, we've had climate issues.
Speaker 8: So it's been a period the last three years of macrovolatility,
Speaker 8: and my view is that we're now exiting that period
Speaker 8: and we're entering a period of macro stability. All that
Speaker 8: stuff is in the background. It's all been in the past.
Speaker 8: It's been priced in, it's been discounted, and going forward,
Speaker 8: I think the outlook is pretty pretty positive. The FED
Speaker 8: is done, we're moving from a rate height cycle to
Speaker 8: a rate cutting cycle. We have economies that are doing
Speaker 8: reasonably well. The US is growing this quarter two and
Speaker 8: a half percent, probably going to grow two and a
Speaker 8: half percent of the year next year consensus is one
Speaker 8: and a half. It's quite likely that that's going to
Speaker 8: be revised up, as you've talked about people revising up
Speaker 8: their targets.
Speaker 6: Europe is bottoming.
Speaker 8: People love to bash Europe, but European equities have also
Speaker 8: been up seven.
Speaker 6: Weeks in a row.
Speaker 8: And then you have China, you know, struggling to get
Speaker 8: going on the traction front, but still growing.
Speaker 6: At five percent per annum.
Speaker 8: So I think the negative outlook on things is just misplaced.
Speaker 8: It's been revealed to be placed by the market reaction.
Speaker 8: Market knows better than any one of us what is
Speaker 8: going to happen, and that's why it's forward looking, and
Speaker 8: that's why you in turn have to be forward looking.
Speaker 8: And so when we did our twenty our twenty four outlook,
Speaker 8: we had four macro surprises. One of them the first
Speaker 8: one was lower than expected inflation sooner than expected. That's
Speaker 8: already playing out and the market is reacting to that.
Speaker 8: Another one is a return to macro stability and the
Speaker 8: unlock that it can present in terms of all that
Speaker 8: money well over at trillion dollars that when into money
Speaker 8: market funds can now start to come out. And that's
Speaker 8: why I think, well, the market is surely going to
Speaker 8: take a pause and surely going to pull back, and
Speaker 8: that's all good, natural and healthy. There's so much money
Speaker 8: that needs to participate that I think that macro stability,
Speaker 8: the unlock of all that money that went into money
Speaker 8: market funds, provides a nice cushion so that I don't
Speaker 8: think you have to worry about a big down draft
Speaker 8: in twenty twenty four.
Speaker 2: You've been enthusiastic about non US stocks for quite a while,
Speaker 2: including European banks. You were early to this party as well.
Speaker 2: Now we are seeing that broadening out. How much more
Speaker 2: conviction do you have now than say, six months ago,
Speaker 2: that that can continue.
Speaker 8: Yeah, no, great question, Lisa. And look, our view, our
Speaker 8: framework has been very simple. We believe in keeping things simple.
Speaker 8: Lower inflation leads to lower rates, leads through a weaker dollar,
Speaker 8: leads to better out performance outside the US and good
Speaker 8: performance for commodities. Our Friday Musings last week was titled
Speaker 8: get Real, and the case we made was to.
Speaker 6: Get real means get real assets.
Speaker 8: And so we're really constructive on emerging markets, both debt, inequity.
Speaker 6: They've been the.
Speaker 8: Huge laggard, no one owns them, completely under priced, completely dismissed.
Speaker 8: We see big opportunities in em around the regionalization of
Speaker 8: supply chains. This fits right, John, you talk about framework.
Speaker 8: Our framework is the tripolar world, regional deepening in Asia,
Speaker 8: Europe and the Americans. And we're finally starting to see
Speaker 8: the opportunity to invest in that pieces with emerging markets
Speaker 8: Mexico and the Americas, Poland in Europe, Vietnam in Asia,
Speaker 8: beneficiaries of the regionalization process. And then just to finish
Speaker 8: on commodities, commodities are one thing that haven't participated and
Speaker 8: yet what is a big beneficiary of a weaker dollar
Speaker 8: in lower interest rates commodities And so that's the opportunity
Speaker 8: as we see it right here. If you want to
Speaker 8: buy something now, you buy commodities. You buy oil, you
Speaker 8: buy copper, you buy gold miners, you buy agg We're
Speaker 8: exposed across the spectrum. So our two big bets for
Speaker 8: next year emerging markets in commodities.
Speaker 2: Just real quick, can you take a page from Dalio's
Speaker 2: book and say cash is trash?
Speaker 8: At this point, you know, cash is definitely a lagger,
Speaker 8: and that's what I said six months ago when everyone
Speaker 8: loved it. It's going to be a lagger. So yes, cash,
Speaker 8: you make four percent. Equities are up twenty percent. I
Speaker 8: would rather have the twenty percent, And so that's what's
Speaker 8: going to take money out of the money market fund
Speaker 8: and put it into risk assets as we return to
Speaker 8: macro stability in twenty four in twenty five.
Speaker 3: In my view, very wise, Jay, because when people do
Speaker 3: call it trash, typically bad things happen. That was the
Speaker 3: right way Leason to answer that question.
Speaker 1: All Right, there we go. That's called diploma diplomacy.
Speaker 2: Although I will say that his note, I just have
Speaker 2: to read the way that it began.
Speaker 1: Wow.
Speaker 2: One has to admit that external validation, especially from a
Speaker 2: well respected source like.
Speaker 1: The FED, sure feels good.
Speaker 2: This is someone who is definitely taking a victory lap
Speaker 2: after a really stellar year.
Speaker 3: As well deserved. Jay enjoyed the Christmas holiday. It's going
Speaker 3: to catch up Jack Peloski, the of TPW on the Nightist.
Speaker 3: Let's talk about the other the war between Israel and Hamas.
Speaker 3: Eliot Akiman joins us now the US Marine Corps veteran
Speaker 3: and former White House fellow. Elliott, you've got experience of this.
Speaker 3: It's valuable to us to lean on it. So thank
Speaker 3: you for joining us again. The door to door combat
Speaker 3: that we're seeing take place in Gaza, the fock of war,
Speaker 3: so to speak, and the tragic loss of life, both
Speaker 3: civilian loss of life and what we saw in the
Speaker 3: last few days hostages losing their lives as well. Elliot,
Speaker 3: can you talk to us about the nature of combat
Speaker 3: right now and how on earth these things happen?
Speaker 9: Well, the one thing I think is worth emphasizing is
Speaker 9: it's very difficult to overstate how chaotic this type of
Speaker 9: urban combat is, how difficult it is in certain situations
Speaker 9: to know exactly what's going on. So obviously, you know,
Speaker 9: this incident where these three hostages were killed is a tragedy.
Speaker 9: You know, it's important to us to just bear in
Speaker 9: mind the context and which happening in which these Israeli
Speaker 9: soldiers that have been fighting for weeks house to house,
Speaker 9: room to room in Gaza. You know, I fought in
Speaker 9: the Fallujah battle in two thousand and four, and oftentimes,
Speaker 9: you know, it can be difficult in the heat of
Speaker 9: the moment to know, you know, who's a friend, who's
Speaker 9: a foe, even when someone would be appear to be surrendering.
Speaker 9: I actually have a friend of mine, Dan Malcolm. I
Speaker 9: wear a bracelet for him, one of his bracelet for
Speaker 9: twenty years, and he was on a rooftop in about
Speaker 9: thirty minutes before he was shot dead by a sniper.
Speaker 9: A group of individuals who we thought were civilians looked
Speaker 9: like they were trying to surrender. In fact, they weren't civilians.
Speaker 9: They were insurgeons posing as civilians. They were trying to
Speaker 9: surrender so they could figure out where our positions were. Now,
Speaker 9: this doesn't excuse what happened in Israel, but I hope
Speaker 9: it just gives a little bit of a context for
Speaker 9: the types of conditions these soldiers are dealing with.
Speaker 3: As you know, Elliot, in the court of public opinion,
Speaker 3: accidents don't seem to mean anything. It's the loss of
Speaker 3: life that is important. There is pressure building to end
Speaker 3: this war and quickly, And what we often hear about
Speaker 3: is time. How much longer can it go on for?
Speaker 3: I think you draw a really important distinction between time
Speaker 3: based policy and condition based strategy on the ground. Why
Speaker 3: is that so important, particularly for this conflict and for
Speaker 3: where this administration in America stands on it.
Speaker 9: Well, I think we've seen in the past that this
Speaker 9: administration has got in itself in trouble when it's leaned
Speaker 9: on times based conditions. And I'm speaking specifically of Afghanistan.
Speaker 9: You know, when we pulled up on a calendar that
Speaker 9: of not making sense on the ground. And I think
Speaker 9: in the case of Israel, you know, the objective of
Speaker 9: the Israeli government, as they've stated, is the destruction of Hamas.
Speaker 9: If you pull out before that job is done, you know,
Speaker 9: it's basically analogous of you know, if you had cancer,
Speaker 9: finishing your chemotherapy when you've only got ninety five percent
Speaker 9: of the cancer, it's going to metastasize and grow again.
Speaker 9: So in my old business to military business, we are
Speaker 9: to say, which is, you don't want a gentle surgeon
Speaker 9: when you will go in to get these jobs done.
Speaker 9: You've got to get the whole job done, and you
Speaker 9: don't necessarily want to do it gently because you can
Speaker 9: wind up causing more damage than if you just get
Speaker 9: it done decisively. So, and I'd also just point out
Speaker 9: it's sort of strange to see this juxtaposition of needing
Speaker 9: the speed and needing this finish and demanding that it
Speaker 9: be finished within days and weeks in Israel, while seeing
Speaker 9: sort of a willingness to allow the war in Ukraine
Speaker 9: to kind of just drag in year over year over year.
Speaker 9: So I think it's important to also keep those two
Speaker 9: in our minds.
Speaker 1: Is Lloyd Austin a gentle surgeon.
Speaker 9: I don't think Lloyd Austin visionlessly is a gentle surgeon.
Speaker 9: But I think what the administration is calling for by
Speaker 9: saying let's just finish this in this pressure campaign is
Speaker 9: basically asking Israel to engage in gentle surgery. I don't
Speaker 9: think Israel is going to. Frankly, I think there is
Speaker 9: a level of result there that we can't completely appreciate
Speaker 9: in the United States. But I think there is a
Speaker 9: danger there that if they were to in this fight
Speaker 9: right now, when it's mostly done but not all the
Speaker 9: way done, that this would just wind up being an
Speaker 9: even worse conflic because they're going to start fighting it again,
Speaker 9: you know, months or years down down the road.
Speaker 2: One of the best voices we could talk to because
Speaker 2: you can appreciate what it is in a region like
Speaker 2: that that is engaged in hand to hand combat and
Speaker 2: that has been going on for a while. The civilians,
Speaker 2: and this is sort of one of the big fears
Speaker 2: is that the humanitarian crisis is getting incredibly difficult to
Speaker 2: deal with and you cannot get aid in if there
Speaker 2: is active combat. Is there any corollary to this moment
Speaker 2: where there could be some way of assisting civilians while
Speaker 2: continuing the campaign that you see as well continuing?
Speaker 9: I mean this gets down to the particulars on the ground.
Speaker 9: You know, what areas are safe. Are there areas that
Speaker 9: the Israelis feel they've sufficiently cleared out of Hamas fighters
Speaker 9: so they could allow civilians to come back into those
Speaker 9: areas and get aid to them. And you know, hopefully
Speaker 9: we can start to maybe see something like that where
Speaker 9: Israel has areas that they feel they can control. But
Speaker 9: you know, again, you know, they shouldn't be forced to
Speaker 9: do that before they're ready to do it, at the
Speaker 9: risk of having to go fight this fight all over again.
Speaker 9: Because Hamas is a determined adversary. You know, we've seen that,
Speaker 9: We've seen now the images of these tunnels that are
Speaker 9: wide enough to drive cars through. You know, Hamas is
Speaker 9: determined to destroy Israel, and Israel, I think appropriately is
Speaker 9: determined to defend itself and make sure that that can
Speaker 9: never happen.
Speaker 3: If you look at financial markets, it's as if nothing's
Speaker 3: really happening. I think there is a belief from investors
Speaker 3: that this conflict will remain contained, and yet there are
Speaker 3: some cracks in that theory when you start to see
Speaker 3: attacks come from houthy militants on foreign shipping companies, and
Speaker 3: foreign shipping companies start to think about pausing the use
Speaker 3: of the Suez Canal. I just wonder, Elia, how convinced
Speaker 3: you are that this particular conflict will be contained to
Speaker 3: where it's playing out right now.
Speaker 9: You know, it's less that I'm convinced that the conflict
Speaker 9: will in all cases be contained, and we've seen that
Speaker 9: it hasn't actually been contained where we've seen attacks on
Speaker 9: US troops in Syria and Iraq from Ranian militants. But
Speaker 9: I think what probably gives individuals confidence and gives me
Speaker 9: confidence is that if it starts to really overflow into
Speaker 9: areas that are problematic, the United States and as allies
Speaker 9: have the capacity to quickly contain the conflict.
Speaker 5: That the US Navy.
Speaker 9: Goes up against some vessels from houthy rebel groups, the
Speaker 9: US Navy is going to win, but you know, we
Speaker 9: don't want it to get to that point. And I think,
Speaker 9: in addition, what's going on Israel, the US Department of
Speaker 9: Defense and the Biden administration is very very closely watching
Speaker 9: these other events in the region.
Speaker 2: Just quickly, Elliott, how much does it changed the game
Speaker 2: that this is essentially the first war that's been live streamed.
Speaker 9: Well, I think the game is so much as tactical decisions.
Speaker 9: Things that happen, you know, on the ground are immediately
Speaker 9: projected out to the entire world and have strategic implications.
Speaker 9: And we saw that recently with the deaths of these
Speaker 9: three hostages. And you know we've seen that, but not
Speaker 9: only in Israel. I mean, well have seen the Ukraine
Speaker 9: as a war that has been a social media war,
Speaker 9: as was Afghanistan. And so really in the last handfull
Speaker 9: of years of political capitalist of war has changed because
Speaker 9: as you just put, you know, these wars are live
Speaker 9: stream the runover social media and we all experience them.
Speaker 3: Edie, thank you for the update. We appreciate it as always.
Speaker 3: Elia Akman then leading on his leading on his personal
Speaker 3: experience and in Irock.
Speaker 10: And now Sweare.
Speaker 2: Kevin book has been covering this trying to understand the implications.
Speaker 2: And I'm so pleased to say joins us now co
Speaker 2: founder of Clear Food You Energy partner is Kevin can
Speaker 2: we just start by trying to understand how important this
Speaker 2: red Seat passage really is for shipping.
Speaker 10: Thanks good Martie, thanks for having me.
Speaker 11: It's eight percent of global energy, about nine percent of
Speaker 11: global oil and petroleum products. So an enormous amount of
Speaker 11: energy that goes into the world goes through the Red Sea.
Speaker 2: So what is the potential consequence if these attacks do continue?
Speaker 2: How much more time is required to ship things in
Speaker 2: alternate routs, how much more energy will be used?
Speaker 1: Oil will be used for those shipping routes.
Speaker 11: Is relatively insignificant compared to the supply impact.
Speaker 10: There's two aspects to this.
Speaker 11: The first is the additional latency introduced by going through
Speaker 11: the Suez Canal and then around Africa, and that depending
Speaker 11: on the speed of the ships moving, and they do
Speaker 11: move somewhere between ten and fourteen knots, you could have
Speaker 11: anywhere from between ten days to two weeks even a
Speaker 11: little longer. The second is capacity constraints on the Suez
Speaker 11: Canal itself, and to some degree, the number of ships
Speaker 11: that move through is one aspect of it.
Speaker 10: They're also the size of the ships that move through.
Speaker 11: The Suez Max tanker size is so called because it's
Speaker 11: the maximum size tanker you can move through the Suez Canal,
Speaker 11: and obviously the limitations in fleet capacity can introduce additional
Speaker 11: pinch on supply.
Speaker 2: Right now, crude treated on the n IMAX is up
Speaker 2: two point three percent.
Speaker 1: Is this sort of appropriate in your view?
Speaker 2: Do you think that we should see an even bigger
Speaker 2: pop and oil price is just simply because of the
Speaker 2: supply constraints that could come from prolonged shipping passages.
Speaker 11: Well, yeah, we thought it was significant when we wrote
Speaker 11: about it a week ago, and we noted how audit
Speaker 11: was that the market wasn't yet pricing it in. As
Speaker 11: for the magnitude of the increase to date, I mean,
Speaker 11: obviously the numbers I gave you would be staggering. If
Speaker 11: that amount of supply was disabled, we would see double
Speaker 11: digit moves in the oil price on a dollar for
Speaker 11: barrel basis. But a lot of this depends on really
Speaker 11: the decisions that actors make, and there's a lot of
Speaker 11: players in this. Questions about whether or not the Saudias,
Speaker 11: for example, will continue to ship through the Red Sea,
Speaker 11: and whether or not they believe they're at risk of attacks,
Speaker 11: the risk tolerances of other players, and for that matter,
Speaker 11: the evolution of the task force that the US government
Speaker 11: is working right now actively to stand up with other
Speaker 11: players in the region emulating a similar task force in
Speaker 11: the strait of hormones. Last variable, not to make this
Speaker 11: more complicated, is the question whether or not the Eisenhower
Speaker 11: carrier strike group, which moved into position potentially to strike
Speaker 11: the Huthis, risks a different kind of escalation that could
Speaker 11: produce reprisals in other parts of the region.
Speaker 2: Given all of those variables, what's the appropriate price for oil?
Speaker 11: Well, we thought we saw pressure to the upside a
Speaker 11: week ago, we're seeing it now.
Speaker 10: We think there's a room for more.
Speaker 1: At this point.
Speaker 2: What kind of response would be de escalatory versus escalatory?
Speaker 1: Right, there's this.
Speaker 2: Group that you said is trying to come together to
Speaker 2: come up with a way to deter Hoo they militants.
Speaker 2: What are you looking for as a response that could
Speaker 2: relieve some of the pressure on oil versus the opposite.
Speaker 10: Well, it really depends on the root cause of the problem.
Speaker 6: Here.
Speaker 11: The Huthi seem to be doing some It's fundamentally and
Speaker 11: conceptually similar to US secondary sanctions. Initially, they started targeting
Speaker 11: anything with nexus to Israel and Israeli ownership or management
Speaker 11: of the shipping company or the tanker, or for that matter,
Speaker 11: just cargo's going into or out of Israel. They've cast
Speaker 11: the net even more broadly. Now a stand down, some
Speaker 11: sort of accommodation that they have a narrower focus. That
Speaker 11: kind of thing might potentially take some pressure off the
Speaker 11: Maritime Task Force to the degree that it can provide
Speaker 11: security for tankers in the region. Might not eliminate the
Speaker 11: risk premium, but it could potentially keep it from rising.
Speaker 2: At this point, a lot of people are discounting a
Speaker 2: lot of the geopolitics, simply saying the US pumping record
Speaker 2: amounts of shale gasoline prices on average in the United
Speaker 2: States are basically three dollars on average, and you can
Speaker 2: see that across the nation. How much does US production
Speaker 2: offset a lot of the potential geopolitical headwinds that could
Speaker 2: cause prices to rise.
Speaker 10: Well, so there's.
Speaker 11: Two things that are really offsetting, and one is, of
Speaker 11: course the prolific production here in Guyana and on Brazil.
Speaker 11: You're seeing non OPEC production surgeon and that has buffered prices.
Speaker 11: And of course we can't overlook demand weakness in China.
Speaker 11: But the other side of that is that the supply
Speaker 11: cushion that you get from spare capacity from OPEC producers
Speaker 11: is usually something else that can come to the rescue.
Speaker 11: But in this case, that supply cushion is less available
Speaker 11: because part of that supply could potentially come out through
Speaker 11: some of the very same choke points.
Speaker 10: That we're discussing today.
Speaker 11: So for that reason, I think we may see more
Speaker 11: risk showing up in price perceptions as we go forward.
Speaker 10: But yeah, we've been sleeping.
Speaker 11: Through some very serious potential supply risks for some time,
Speaker 11: very reassured by production.
Speaker 2: Well, this is the reason why some people are wondering
Speaker 2: what did they get wrong? How much do you think
Speaker 2: is that the demand side is offset by the increase
Speaker 2: in electric vehicle use and other alternative sources of energy.
Speaker 11: Well, so, so every million electric vehicles on US roads,
Speaker 11: where we drive more with less efficient cars than other
Speaker 11: parts of the world, is only about thirty thousand barrels
Speaker 11: per day of demand destruction. So we're selling more than
Speaker 11: a million a year. That's not really showing up that much.
Speaker 11: You see the bigger numbers posting in China, and now
Speaker 11: you're getting bigger displacements, but still that's not changing the
Speaker 11: demand picture.
Speaker 10: Demand is going ahead, at least in the near term.
Speaker 11: There are a lot of folks who would say that
Speaker 11: maybe the predictions of a plateau or even a peak
Speaker 11: this decade or even premature. So with that in mind,
Speaker 11: I think we shouldn't discount that there's an immense appetite
Speaker 11: for crude oil out there still and liquids generally, and
Speaker 11: with that, supply risks still very much matter.
Speaker 2: To put this all together, people have been talking about
Speaker 2: ranges heading into twenty twenty four, ranges that oil could
Speaker 2: move within, given the need to both not loose money
Speaker 2: on product producing oil in the US and also the
Speaker 2: desire for Saudi Arabia to make a certain amount per barrel,
Speaker 2: what is that range? Given the risks and give in
Speaker 2: the supplies that we've seen from the US.
Speaker 11: Well, the idea that there's sort of a natural eight
Speaker 11: handle floor established by fiscal break evens or other mathematical
Speaker 11: computations has a little bit, you know, of I think
Speaker 11: hopefulness to it. There's two active wars going on right
Speaker 11: now in energy producing and consuming areas, with risks potentially
Speaker 11: in Venezuela as well, although they currently seem to have
Speaker 11: abated with.
Speaker 10: That in mind. I think it's a bit odd to look.
Speaker 11: Only at supply demand balances and assume that the world
Speaker 11: as it is today will be how it is in
Speaker 11: the coming year. But if you do look at that,
Speaker 11: you see supply outstripping demand in the first half of
Speaker 11: the year. Our latest look by College Jack Brusau looked
Speaker 11: ahead at it and it looks like there's still weakness,
Speaker 11: and with OPEC plus clamping down, the incremental clamp down
Speaker 11: isn't necessarily enough to stem it in the near term.
Speaker 10: But this is where geopolitics comes in, and.
Speaker 11: Always it's important to remember there's an alignment of incentives
Speaker 11: here for Iran and for the other folks who are
Speaker 11: aligned with Iran.
Speaker 10: The idea of a higher oil price because of geopolitical
Speaker 10: risk isn't a bad thing. It's a tailwind.
Speaker 2: Kevin Book of Clearview Energy. Thank you so much for
Speaker 2: being with us. Subscribe to the Bloomberg Surveillance podcast on Apple,
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Speaker 2: Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg