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Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you.

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Speaker 1: Along with my co host Lisa Brahmas. Each day we

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Speaker 1: bring you the most noteworthy and useful interviews for you

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Speaker 1: and your money, whether at the grocery store or the

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Speaker 1: trading floor. Find a Bloomberg penl podcast on Apple podcast

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Speaker 1: or wherever you listen to podcasts, as well as at

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Speaker 1: Bloomberg dot com. Well, it's been a busy, busy morning

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Speaker 1: in the Fed repo market, lots of uncertainty. Let's get

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Speaker 1: some certainty around what is going on. We welcome my

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Speaker 1: next guest, Ira Jersey, chief rates strategist for Bloomberg Intelligence.

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Speaker 1: Thanks so much for joining us and just give us

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Speaker 1: a sense of what is going on in the federal

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Speaker 1: repo market and why it's important. Yeah, so so. Basically,

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Speaker 1: the repurchase agreement market is really the plumbing that makes

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Speaker 1: the entire financial system work. Um where anyone who buys

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Speaker 1: a treasury bond can potentially fund those transactions through the

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Speaker 1: repo market. But um, But and sometimes repo markets get tight,

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Speaker 1: which means that it's hard to UM to basically fund

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Speaker 1: your treasury positions. Now, usually that happens at the end

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Speaker 1: of quarters or the end of end of the year

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Speaker 1: when banks and dealers have to contract their balance sheets.

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Speaker 1: But on the last two days, you've just seen repo

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Speaker 1: rates spike to you know, seven eight nine in some

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Speaker 1: cases there's been trades up that high. So the Fed

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Speaker 1: actually did the first repo operation that they've done in

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Speaker 1: twelve years this morning because they're worried about repo rates

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Speaker 1: being so high and it being very hard to fund

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Speaker 1: the treasury treasury holdings. So why would they do this now?

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Speaker 1: Why would they try to arrange a test before they

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Speaker 1: knew they could conduct the test, Because we've seen headlines

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Speaker 1: in quick succession this morning they're gonna conduct a repo test.

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Speaker 1: They're not going to because there's a problem. No, now

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Speaker 1: they will. This does not give confidence to the market. Well,

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Speaker 1: I think that they they've been doing small scale tests

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Speaker 1: um periodically, almost every month UM. But the small scale

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Speaker 1: tests are a little bit different than when you're talking

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Speaker 1: about doing a five billion dollar operation as opposed to

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Speaker 1: you know, a couple of hundred millions so UM. So

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Speaker 1: I think it may not have been like you know,

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Speaker 1: we'll find out over time. I suspect it might not

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Speaker 1: have been technical necessarily on the Fed's end, but more

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Speaker 1: technical on the dealer end, because you know some dealers,

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Speaker 1: you know, we haven't done these operations in any kind

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Speaker 1: of size for for a long period of time. So

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Speaker 1: so once those were out of the way, they did

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Speaker 1: do the operation. It just closed a couple of minutes ago,

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Speaker 1: and they did fifty three billion dollars of of of

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Speaker 1: repo with dealers, and you know, that was less than

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Speaker 1: what they thought maybe they had to. So so it

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Speaker 1: seems like we're right at this cusp of what Chairman

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Speaker 1: Powell calls the steep part of the demand curve for

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Speaker 1: reserves and and for bank balance sheets. And because because

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Speaker 1: if if really, you know, the interest rates are so

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Speaker 1: high like se and you only need forty billion dollars

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Speaker 1: to kind of alleviate that, then you're kind of where

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Speaker 1: reserves need to be. So one of the things I

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Speaker 1: think that this could mean is that when as the

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Speaker 1: FED meets the next two days and we get the

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Speaker 1: announcement tomorrow, that the FED could talk about doing a

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Speaker 1: full allotment um REPO facility. I've talked about it with

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Speaker 1: you guys before, and I don't know why the Feds

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Speaker 1: dragging their feet, but really, now I think it's just

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Speaker 1: shows that it would be good for them to have

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Speaker 1: a standing facility instead of having to do these you know,

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Speaker 1: overnight operations again and again like they did this morning.

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Speaker 1: So I were given since that this timing was unusual,

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Speaker 1: i e. In the middle of the months, just suggest

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Speaker 1: that maybe the FED is losing control a little bit

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Speaker 1: of raps. Well, that's what some people are saying, and

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Speaker 1: I think the answer is no. I think there was

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Speaker 1: there was some unusual things. So we just put out

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Speaker 1: a piece actually about twenty minutes ago, talking about just

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Speaker 1: this thing. One is that normally during mid September you

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Speaker 1: get very high tax receipts and what that what happens

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Speaker 1: is is that those tax receipts end up on the

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Speaker 1: Fed's balance sheet and bank reserves fall. So that would

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Speaker 1: make UH funding markets tighter, which is what you'd expect.

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Speaker 1: But normally during that same period of time, treasury bill

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Speaker 1: supply goes down because September is usually a surplus month,

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Speaker 1: so that the budget deficit is actually is is negative.

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Speaker 1: This treasury takes in more cash than than than they expand,

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Speaker 1: so um so t build balances go down. This time

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Speaker 1: they will be thanks to the debt ceiling. T build

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Speaker 1: balances continue to go up, so the amount of T

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Speaker 1: bill's outstanding is rising. At the same time you have

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Speaker 1: less reserves in the system. So there's kind of this

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Speaker 1: indigestion that's going on, and it will be relieved, I

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Speaker 1: think in a couple of days. But it's very worrying

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Speaker 1: that we're at this point where you know, basically forty

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Speaker 1: or fifty billion dollars means you know, four or five

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Speaker 1: six on interest rates in the funding market. So that's

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Speaker 1: something that the FED needs to really worry about. So

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Speaker 1: I think the FED at this point needs to be

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Speaker 1: the lender of first resort as opposed to the lender

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Speaker 1: of last resort for for funding markets. So just to

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Speaker 1: sort of take this from a ten thousand foot level

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Speaker 1: to sort of emphasize the importance of these funding markets.

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Speaker 1: I mean, you said that this is really the plumbing

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Speaker 1: of the financial system. What could be the consequence if

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Speaker 1: these sort of kinks weren't worked out and these high, uh,

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Speaker 1: these high spikes in rates and overnight rates persist. Well,

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Speaker 1: it means that you wind up with a with a

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Speaker 1: funding crisis. I mean, you're talking about a Bear Stearns

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Speaker 1: Lehman Brothers kind of situation is the worst case scenario.

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Speaker 1: Um So, extrapolate out what what happens, well, if you so,

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Speaker 1: what happens is because because if you have a balance sheet,

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Speaker 1: let's say you have a balance sheet of of a

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Speaker 1: hundred billion dollars and you're funding that with overnight repo.

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Speaker 1: Then if the next day you can't fund because you know,

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Speaker 1: no one's willing to lend you money, um at a

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Speaker 1: at any kind of price that makes any sense, then

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Speaker 1: ultimately you either default or you have to sell all

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Speaker 1: of those securities. So the price of those securities would

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Speaker 1: go down very quickly and very significantly. And that's you

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Speaker 1: know that, that's how financial crisis starts, is that a

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Speaker 1: financial institution can't fund itself. And um so that's the

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Speaker 1: reason why during the crisis, the Federal Reserve had to

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Speaker 1: come up with all these facilities to allow different kinds

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Speaker 1: of financial entities to fund themselves. So this is this

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Speaker 1: is a worry. I don't think it's this is anywhere

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Speaker 1: near you know, two thousand seven kind of problems yet.

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Speaker 1: But at the same time, you know, this is the

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Speaker 1: kind of you know, foreshadowing and canary that needs to

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Speaker 1: be worked out to ensure that you can get funding

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Speaker 1: at least for good assets, right, because you're talking about

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Speaker 1: in here, we're talking about treasury collateral. Right. We're not

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Speaker 1: talking about corporates, or we're not talking about loans and

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Speaker 1: risky assets. We're talking about treasuries. And if you can't

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Speaker 1: fund treasuries, you're not gonna be able to find anything

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Speaker 1: else either. I ret a Treasy with the interview of

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Speaker 1: the day, our Jersey chief US interest rates transist for

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Speaker 1: Bloomberg Intelligence. US home builder sentiment rises to an eleventh

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Speaker 1: month high as sales gain. The question is is that

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Speaker 1: sentiment warranted. We welcome our next guest, Doug Duncan, Fannie May,

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Speaker 1: Senior Vice president, Chief Economists. So, Doug, US home builders

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Speaker 1: feeling pretty good about the housing market. It should they be. Uh, Yeah,

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Speaker 1: they are, and they should be. Rates are down and

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Speaker 1: in our surveys of consumers, consumers attitude about housing is up.

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Speaker 1: So those two things are going to meet. And at

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Speaker 1: the margin, uh, you'll see some more homes built and

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Speaker 1: sold through the through the builder world that decline in rates.

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Speaker 1: At the if you're looking at getting a mortgage to

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Speaker 1: buy the house that that builder is building than a

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Speaker 1: decline in rates means a monthly payment falls, so there's

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Speaker 1: a few more people that can qualify for that at

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Speaker 1: the margin. But the bigger issue here is still affordability, right,

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Speaker 1: and this is what we've seen is just slow down

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Speaker 1: in in the housing market. And I want you to

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Speaker 1: sort of clarify for me the obstacles for home builders

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Speaker 1: building housing for this sort of middle or lower entry

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Speaker 1: level tier of home buyers. Yeah, typically the first time

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Speaker 1: home buyer is buying an existing home that someone else

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Speaker 1: is selling and then moving up to a new home

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Speaker 1: they're buying from a builder. So the builders traditionally have

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Speaker 1: built for the move up buyer. It's been hard for

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Speaker 1: them to move to the entry level, which is where

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Speaker 1: the demand is. And the problem is that boomers are

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Speaker 1: not moving, and nor are the gen xers moving, and

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Speaker 1: that's where the existing home supply comes from. That supplies

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Speaker 1: at thirty year lows and it's not the sweet spot

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Speaker 1: for builders to build too. So you still have a

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Speaker 1: problem at the end at the entry level. So where

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Speaker 1: are so are the gen xers and millennials Are they

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Speaker 1: buying homes if their supply they are absolutely they're driving

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Speaker 1: the rand curve that started in about two thousand and fifteen.

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Speaker 1: We actually track people as they age, as opposed to

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Speaker 1: going in and looking in the census data at thirty

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Speaker 1: year olds today versus five years ago. We actually watched

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Speaker 1: the year old to turn to two thousand fifteen, the

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Speaker 1: driver the demand curve became that younger age group and

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Speaker 1: that they've been building. So there were still there was

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Speaker 1: concerns that they would just stay in their parents basement.

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Speaker 1: But that's not true. It's like every it's like every

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Speaker 1: other generation. Are surveys of them starting in June of

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Speaker 1: two thousand ten plus said they eventually want to own

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Speaker 1: a home. There is one difference between them and previous generations.

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Speaker 1: If you ask them to rank home ownership against say

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Speaker 1: five or six other things, ten years ago, it would

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Speaker 1: have ranked probably third. Today it might rank six. So

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Speaker 1: asked in isolation, would you eventually want to own a home?

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Speaker 1: Will say yes. But if you ask compared to doing

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Speaker 1: things that are enriching or fun or things like that,

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Speaker 1: take put housing in a little bit different position for

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Speaker 1: this age group. Can you can you speak a little

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Speaker 1: bit about the shift from rural areas or suburban areas

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Speaker 1: to urban areas because for a while everyone was talking

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Speaker 1: about how this was the move that was unstoppable and

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Speaker 1: the younger people flooding into the cities, uh for going

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Speaker 1: extra space for an apartment in a central location. But

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Speaker 1: recently there's been a number of reports about sort of

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Speaker 1: a reversal of that. How how much traction is that game.

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Speaker 1: That's true if you go back to the original stages

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Speaker 1: of this expansion. So we're coming out of the recession.

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Speaker 1: This was the most urban core centric job growth of

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Speaker 1: any post War War two expansion. So part of the

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Speaker 1: stories of about the millennials not wanting to buy a

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Speaker 1: house had actually to do where they were, where they

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Speaker 1: could get a job. And we tried making loans to

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Speaker 1: people that didn't have jobs and it didn't work out

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Speaker 1: that well. So they got that right, so they said,

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Speaker 1: and they told us in the survey, is the first

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Speaker 1: thing we have to have his job. Then we're gonna

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Speaker 1: want it to have a growing income. Then we're going

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Speaker 1: to get a credit and shape. Then maybe we'll get

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Speaker 1: radically absolutely all new thinking. So uh so they were

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Speaker 1: being very rational. But once they had the job, the

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Speaker 1: question was could they afford a house in that area

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Speaker 1: and in the urban core, you can't build single family

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Speaker 1: detached affordable houses. What's happened since then is the geography

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Speaker 1: of job growth has spread out across the country into

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Speaker 1: areas where the race of land and the availability of

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Speaker 1: labor and other materials is much more affordable. That's what

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Speaker 1: opened the door for the millennials to start driving the

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Speaker 1: demand curve in in the two thousand and fifteen time period.

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Speaker 1: How are some of the younger demos dealing with the

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Speaker 1: student debt? We know this is an increasingly big issue

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Speaker 1: for younger demographics, and is that impacting their ability to

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Speaker 1: buy a home and get credit. It is a challenge,

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Speaker 1: and particularly so for those people who took on student

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Speaker 1: that but did not get the terminal degree, because the

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Speaker 1: expectation is with the terminal degree, you will have a

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Speaker 1: higher growth income path, which will both defease that student

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Speaker 1: that but also then get you into into home ownership

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Speaker 1: if you didn't get the degree. Those folks actually have

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Speaker 1: a lower first time homewership rate than people who have

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Speaker 1: only a high school education. A little bit of the

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Speaker 1: sub story there is there's a bunch of people that

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Speaker 1: went into the military and got training in the military,

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Speaker 1: didn't go to college and take on student that they're

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Speaker 1: back in the civilian world in jobs. That makes sense.

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Speaker 1: So just give us an overview, please, of where we're

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Speaker 1: seeing the fastest housing price growth and where we're seeing

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Speaker 1: potentially the biggest declines in the United States. And an

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Speaker 1: easy way to look at that is to take the

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Speaker 1: case Shiller twenty metro area index. And if you do

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Speaker 1: that and divide each market by high, medium, and low

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Speaker 1: price houses and then look at the pace of price

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Speaker 1: change in each of those brackets. In every market of

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Speaker 1: those twenty, the bottom tier is appreciating fastest. So that's

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Speaker 1: that's the evidence of the entry level. So it would

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Speaker 1: be Seattle, it would be San Jose, it would be

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Speaker 1: you know, the major markets. That's a twenty major market survey, Chicago,

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Speaker 1: New York, all of that. In every market, it's the

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Speaker 1: entry level where prices appreciating most rapidly. Actually, the upper

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Speaker 1: tier in a number of those major metro markets is

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Speaker 1: now falling or at least flat. Are there any markets

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Speaker 1: I'm thinking back to the housing crisis and some of

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Speaker 1: the markets that really jumped out and just really just

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Speaker 1: rolled over a big time. You know, the Vegas is

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Speaker 1: of the world, of Miami's the Phoenix is um. Are

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Speaker 1: we seeing any markets out there that it just look boy,

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Speaker 1: this is overheated. Um, that's going to be in some

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Speaker 1: of the coastal places. I think the last time I

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Speaker 1: and I think what you're seeing is in those markets,

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Speaker 1: businesses are now starting to relocate because the wage rates

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Speaker 1: they can afford to pay to their employees will not

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Speaker 1: cover the housing costs in those areas. So you've seen

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Speaker 1: some jobs moved from that area to Salt Lake, or

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Speaker 1: to Chicago even or to Indianapolis places like that. So

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Speaker 1: you're seeing the migration of the jobs because the cost

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Speaker 1: of housing is so is so great. Thank you so

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Speaker 1: much for being with us. Great to be here. It's

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Speaker 1: always a pleasure to have you here. Dug Duncan as Fenny,

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Speaker 1: my senior vice president and chief economist, talking about a

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Speaker 1: really important issue, which is the housing market in the

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Speaker 1: United States. It really hasn't accelerated in the past few years,

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Speaker 1: and some people have pointed to weakness there as a

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Speaker 1: sign of some sort of downturn. But now we're seeing

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Speaker 1: signs of optimism as those benchmark rates go even lower.

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Speaker 1: So people are looking at this is more of an

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Speaker 1: affordability issue right now, it's just focus to oil since

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Speaker 1: that really has been front and center all week after

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Speaker 1: the attacks on Saudi Arabian production joining us. We are

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Speaker 1: so lucky to have Ellen Walled. She is a Bloomberg

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Speaker 1: opinion columnist. She also is an Atlantic Council Global Energy

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Speaker 1: Center nonresidency and your fellow and transversal consulting president. She's

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Speaker 1: written books. She's a wonderful, wonderful contributor. Thank you so

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Speaker 1: much for being here. So first of all, we're hearing

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Speaker 1: this morning the news that Saudi Arabia expects to get

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Speaker 1: se his production up and running in short order. Do

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Speaker 1: you buy it? I do? I do buy it, And

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Speaker 1: here's here's why. First of all, they're a RAMPO is

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Speaker 1: a company that has great resiliency UH and built into

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Speaker 1: its system. I know that the opcake plan has a

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Speaker 1: lot of specialized parts, and people were talking about how

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Speaker 1: long it's going to take to get those parts and

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Speaker 1: repair it. But this is a company that loses millions

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Speaker 1: of dollars for every hour that output is down. So

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Speaker 1: I think we can expect that they have contingency plans,

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Speaker 1: They have parts ready yes, full repairs are going to

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Speaker 1: take time, but they will be able to get output

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Speaker 1: back up by working around things, by increasing output from

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Speaker 1: other fields. This is a company that has a great

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Speaker 1: deal of spare capacity and by accessing storage, so I'm

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Speaker 1: not surprised to hear at all that they expect for

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Speaker 1: output to return. However, we are going to get a

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Speaker 1: update from the new Saudi Oil minister, Prince Ablozi has

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Speaker 1: been Salmon, and I would expect that he may deliver

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Speaker 1: a more sobering account of the damage and the repairs.

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Speaker 1: So Ellen, I know the investigations obviously very very early stages.

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Speaker 1: Is there any sense of how this happened? Don't they

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Speaker 1: have defenses against this? Um? Seems like this was a

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Speaker 1: pretty big attack. Yeah, and they're still finding there's still

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Speaker 1: finding out exactly what causes. Was it drones, was it

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Speaker 1: cruise missiles? Was it a combination of this? And I

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Speaker 1: do think that there are going to be questions that

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Speaker 1: need to be answered, and security plans are going to

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Speaker 1: be need to be made more clear, particularly as a

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Speaker 1: RAMCO moves towards its I p O. People are going

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Speaker 1: to want to know are these facilities safe and what

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Speaker 1: plans do you have to defend them as opposed to

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Speaker 1: what do you have in place to repair I'm looking

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Speaker 1: right now at uh some CB news being reported by

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Speaker 1: CBS that John Tucker just shared with US that seems

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Speaker 1: to claim the US has identified exact locations from Iran

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Speaker 1: where the missile is stemmed from. And I'm just wondering

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Speaker 1: what the implications are for tensions in the Middle East.

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Speaker 1: I mean, which talk about that sort of as a

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Speaker 1: you know, escalation scenario, But doesn't this seem more likely

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Speaker 1: than perhaps some people are letting on. So it's interesting

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Speaker 1: because things were definitely escalating over the weekend and then

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Speaker 1: had uh, the u S coming out and saying, we've

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Speaker 1: identified this the culprit as Iran, but you had Saudi

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Speaker 1: Arabia actually taking a step back and saying, hey, we

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Speaker 1: we believe that the parts came from Iran, but we're

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Speaker 1: not We're stopping short of identifying Iran as the exact culprit.

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Speaker 1: And I think that that was a move to kind

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Speaker 1: of try to bring in international intervention, say let's let's

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Speaker 1: put this in the u n's hands. And I think

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Speaker 1: that's part that the reason for that is because MBS

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Speaker 1: knows that getting into a direct confrontation with Iran is

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Speaker 1: bad business for him. So it's interesting. The timing of

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Speaker 1: this is amazing given the pending I p O of

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Speaker 1: a Ramco. So what's the thinking out there? Was this

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Speaker 1: coincidence or is this something you know? Maybe you stay

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Speaker 1: it's sponsored. It seems just tremendously odd to me. The

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Speaker 1: timing could not be ignored, and you're not the first

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Speaker 1: person to come up with this, this idea and to wonder,

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Speaker 1: to wonder whether there is some relationship between it, and

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Speaker 1: in fact, we have heard reports that a Ramco and

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Speaker 1: Saudi officials are rethinking at least the timing of the

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Speaker 1: i p O, which according to reports, was supposed to

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Speaker 1: be as soon as November. They wanted to list on

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Speaker 1: the Saudi Stock Exchange. But look at what happened to

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Speaker 1: the Saudi Stock Exchange during this attack. It tanked, It

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Speaker 1: dropped I think three percent on Sunday before they kind

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Speaker 1: of lifted it up or helped helped helped it, help

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Speaker 1: keep it from falling. Further, imagine if one percent of

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Speaker 1: a Ramco shares had been listed on the Saudi Stock

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Speaker 1: Exchange at the time of this attack, they would have

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Speaker 1: been hard pressed to prevent the entire exchange from crashing.

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Speaker 1: So it does seem like a prudent idea to perhaps

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Speaker 1: rethink these plans and definitely rethink the timing and how

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Speaker 1: do they put this as a risk factor in their perspectives. Well,

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Speaker 1: the risk the risk factors for the prospectives section just

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Speaker 1: got a lot larger um pre subject to drone attacks

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Speaker 1: by unknown attackers. The thing is that those those of

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Speaker 1: us who are familiar with a RAMCO understand that this

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Speaker 1: was these were risks, and have been familiar with a

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Speaker 1: lot of the risks to various oil facilities. In fact,

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Speaker 1: the US State Department actually did an assessment in the

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Speaker 1: late nineties of a ramco's vulnerabilities to terrorist attacks. Of course,

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Speaker 1: we didn't have drones back then, but they concluded that

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Speaker 1: because everything is very spread out, it would be very

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Speaker 1: difficult for a coordinated attack to really take out oil collection. Okay, well,

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Speaker 1: what's a new risk for the I Pioty extent? It

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Speaker 1: wasn't there. Ellen Wall, thanks so much for joining US

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Speaker 1: Atlantic Council Global Energy Center Non Residents Senior Fellow and

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Speaker 1: transversal consulting president on a RAMCO. Appreciate you coming in

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Speaker 1: in our Bloomberg Interactive Broker Studio very helpful on this news.

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Speaker 1: Thanks for listening to the Bloomberg P and L podcast.

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Speaker 1: You can subscribe in sen to interviews at Apple Podcasts

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Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney. I'm

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Speaker 1: on Twitter at pt Sweeney. I'm Lisa abram Woyit's I'm

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Speaker 1: on Twitter at Lisa abram woits one before the podcast.

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Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio