Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg terminal. Um I demanded
Speaker 1: after Friday Znight Guys, where she was the focus of
Speaker 1: attention in the markets Friday afternoon, Lori Kelvacina joins US
Speaker 1: head of US Equity Strategy at RBC Capital Markets. What's
Speaker 1: so extraordinary about the Kelvasina view, Lorie, what's the distinction
Speaker 1: that got global wall streets attention this weekend? You tell me, Tom,
Speaker 1: I mean I try to keep a cool head in
Speaker 1: in topsy turvy markets, whether it's to the upside or
Speaker 1: to the downside. Um But look, I will tell you
Speaker 1: I think we were at a crossroads. Back in mid May.
Speaker 1: We wrote a piece titled that saying that if the
Speaker 1: market kind of broke below the thirty thirty fifty type
Speaker 1: level exited growth stick air territory, that we'd be pricing
Speaker 1: in a full recession. We bounced back and we're right now,
Speaker 1: right back at that crossroads, UM, and I think it's
Speaker 1: very interesting the market did not break hundred on Friday, UM,
Speaker 1: that May nineteenth low actually ended up holding. I also
Speaker 1: thought it was interesting, frankly, UM, that the small cap space,
Speaker 1: while it did get hit as hard as the SMP
Speaker 1: five hundred, it didn't get hit materially worse on Friday.
Speaker 1: That's important because we had seen that positioning had already
Speaker 1: been washed out in the futures market. There the peak
Speaker 1: and small cap came last March versus large UM. And
Speaker 1: you know, I think we can start to sort of
Speaker 1: look for areas of the market now that have been
Speaker 1: de risked, even though there may be more risk in
Speaker 1: the aggregate. We have focused and we did this to
Speaker 1: great credit to our team Thursday and Friday. On the
Speaker 1: five year out five year view of Inflation from the
Speaker 1: University of Michigan survey, Laura, you highlight that if we
Speaker 1: have a reset to hire inflation expectations, is that good
Speaker 1: for equities or less good? I think that it keeps
Speaker 1: the value trade going forward, and I think that ends
Speaker 1: up being a destabilizing force for the equity market, simply
Speaker 1: because we do need that growth side to really stabilize.
Speaker 1: That's really where more of the market cap is in
Speaker 1: the SMP five hundred these days. But we actually just
Speaker 1: took a look at how different sectors in the market
Speaker 1: have traded in regards to that University of Michigan five
Speaker 1: year inflation expectation number. People used to make fun of
Speaker 1: me for using it. It actually, you know, turned out
Speaker 1: it was good. We had it to dust off the shelf. Um.
Speaker 1: But the reality is it's things like energy, materials, financials,
Speaker 1: and even in the big cap space rates that tend
Speaker 1: to outperform when inflation expectations are rising. So if that
Speaker 1: trend continues, it's you know, gonna let this value trade
Speaker 1: live a little bit longer and keep some pressure on
Speaker 1: the growth trade, which again is a is a pressure
Speaker 1: on the SMP. Yeah, and we've certainly seen growth bearing
Speaker 1: the bulk of the selling pressure. The Nasdaq one hundred
Speaker 1: is down twenty seven and a half percent year a date,
Speaker 1: But even beyond tech, there's been more pain for one
Speaker 1: area in particular, Lorie retail. The SNP five retailing index
Speaker 1: is down a full thirty percentage points so far in
Speaker 1: two of course, you've heard from target cutting in out
Speaker 1: like twice, the focus really being on margins. When are
Speaker 1: we going to start to see that bleeding into more
Speaker 1: areas of this market, because it started with retail, doesn't
Speaker 1: end there. It's a great question, Kayley. And one of
Speaker 1: the things we point out in our pieces that if
Speaker 1: you look at the declines we've seen in the consumer
Speaker 1: discretionary sector as well as the communication services sector, which
Speaker 1: has a lot of sort of consumer sensitive names in
Speaker 1: it as well, the declines we've already seen in those
Speaker 1: sectors are very close to the average declines that we've
Speaker 1: seen in them in the past four recessions. Now, what's
Speaker 1: interesting if we are headed into a recession, areas like financials, industrials,
Speaker 1: materials should have been underperforming. That's part of the historical
Speaker 1: recession playbook that the cyclical areas tend to underperform heading
Speaker 1: into recessions, though they of course do quite well in
Speaker 1: the rebounds. Another one that we've been talking to people
Speaker 1: a little bit about is energy. Um Energy has you know,
Speaker 1: actually done quite well this year for obvious reasons, but
Speaker 1: heading into recessions it does normally see decline. So I
Speaker 1: think it's fair to ask whether some of those winners
Speaker 1: that we've seen here to date. If this recession fear
Speaker 1: really does continue to take cold, are they going to
Speaker 1: continue to see that resilience or will there be a
Speaker 1: bit of a catchdown. Okay, so maybe you don't want
Speaker 1: to continue to buy into areas of the market that
Speaker 1: have been ripping, Laurie, but you mentioned that there are
Speaker 1: some now pockets of this market in which you've seen
Speaker 1: enough to be risking that maybe it provides some kind
Speaker 1: of an entry point. What would those be? So one
Speaker 1: place we've been putting people towards its small caps, and
Speaker 1: we're technically neutral on small cap versus large cap, but
Speaker 1: we did say if you've been underweight, now, we think
Speaker 1: is the time to remove that underweight and get back
Speaker 1: to neutral um. And really, when we look at the
Speaker 1: positioning data on the CFTC work, you've been below financial
Speaker 1: crisis lows. Valuations are cheap, not just in relative terms,
Speaker 1: but they're also getting pretty darn close to where they
Speaker 1: tend to bottom out um in in recent years if
Speaker 1: you're not in a massive recession like the financial crisis.
Speaker 1: So we've got a clearvaluation appeal. What we don't have
Speaker 1: right as a fundamental tailwind here, This is not really
Speaker 1: an area you typically want to be in when the
Speaker 1: FETE is hiking rates, when GDP growth is slowing, when
Speaker 1: I s M is falling. But we do know that
Speaker 1: that risk started to get priced in very early and
Speaker 1: historically recessions are great buying opportunities in that part of
Speaker 1: the market. And for those of you who want to know,
Speaker 1: Lori Kelvisina catch down is a phrase from cf A
Speaker 1: level five. That's that's where she got that from. You
Speaker 1: know where she probably learned that to the Great University
Speaker 1: of Virginia. She's a fellow cavalier. Oh my word, yeah, go,
Speaker 1: who's okay, Lauri Kelvisina with us. Thank you. We'll do
Speaker 1: something in dardn here in the future. RBC Capital Markets.
Speaker 1: I have been data dependent. I've been criticized for calling
Speaker 1: it a Fred parlor game. Francis Donald agrees with me,
Speaker 1: because Francis Donald is writing brilliant economics for manual life
Speaker 1: investment asking if her mother in law knows who Chairman
Speaker 1: Powell is, and you know, Francis, that your mother in
Speaker 1: law will drive. She's lovely, by the way, folks, She'll
Speaker 1: drive thirty kilometers out of her way to save ten
Speaker 1: cents a gale. And how does Chairman Powell speak to
Speaker 1: your mother in law? Well, he's not He's tried, he said,
Speaker 1: let me speak directly to the American people. But the
Speaker 1: big challenge for this Federal Reserve is that inflation expectations,
Speaker 1: which they're so desperate to control, are really not going
Speaker 1: to calm down, at least in the near term. On
Speaker 1: rate heikes, most of the general public is going to
Speaker 1: see what they're paying at the pub and what they're
Speaker 1: paying at the checkout simultaneously here that rates are rising.
Speaker 1: This is gonna be a very different communication. They're very
Speaker 1: difficult communications challenge for all central banks. Uh, they don't
Speaker 1: have the luxury of being honest about what control they
Speaker 1: have on inflation. That's the underlying problems facing Chair Powell,
Speaker 1: Legard and many other central bankers. Jeron Bernankian CNN this week,
Speaker 1: and let's get out his textbook, Able Bernankey, which is
Speaker 1: in my hallway at home. Francis, I look at Able
Speaker 1: Bernankey and back in chapter twenty two ish, it's about
Speaker 1: the effect of what the Fed does on finance. If
Speaker 1: they pop seventy beeps now or July or whenever, what
Speaker 1: does that do to North American banking. Well, it's a struggle,
Speaker 1: and it's another strain on the system. We're looking we
Speaker 1: could be inverted on the yield curve again by today
Speaker 1: or tomorrow, And unlike back in April, you're not gonna
Speaker 1: hear as much pushback that this isn't a signal or
Speaker 1: a precursor to a recession ahead. Financials are tightening, the
Speaker 1: economy is slowing. The consumer looks fine now, but all
Speaker 1: leading indicators suggests it slower. Do your political risk is up.
Speaker 1: If you made a whole table of challenges for the economy,
Speaker 1: almost every single one would tell you that for the
Speaker 1: next sense to twelve months things are going to be
Speaker 1: much more challenging. That's why this is such a difficult
Speaker 1: situation because despite all of these leading indicators, we have
Speaker 1: not seen the central banks blink. Fact last week we
Speaker 1: saw most central banks that we're seeking actually appear even
Speaker 1: more hawkish. So the hope that bad news would be
Speaker 1: good news and create a reversal in this market, it's
Speaker 1: just falling away in front of us Francis. Consumer sentiment
Speaker 1: at its lowest on record, and your mother in law
Speaker 1: driving thirty st kilometers to get a ten cents less
Speaker 1: on a gas can drive around and see a lot
Speaker 1: of variation as things just climb higher and higher. Francis,
Speaker 1: at what point does it have to reach peak negativity
Speaker 1: before you get uh some response from the Fed that
Speaker 1: can to really address this, because right now that between
Speaker 1: a rock and a hard place. If they actually come
Speaker 1: out as hawkish, perhaps I will create better sentiment underpinning
Speaker 1: markets and consumers. This is a great question. I mean,
Speaker 1: macro tends to be most valuable at inflection points in
Speaker 1: the story, and we're not at an inflection point just yet.
Speaker 1: We haven't seen a blink from central bankers, we haven't
Speaker 1: materially seen employment start to rise. All those some leading
Speaker 1: into pater suggests that gets better consumer sentiment. There's a
Speaker 1: range of indicators. A lot of people focused on University
Speaker 1: of Michigan last Friday. Consumer confidence, which waits a little
Speaker 1: bit more towards jobs, doesn't look as bad. But the
Speaker 1: challenge for consumers is we're gonna get retail sales numbers
Speaker 1: this week, and in nominal terms they might look just fine,
Speaker 1: and you'll hear a lot of the consumers good narrative,
Speaker 1: but in real terms, every single month, this is a
Speaker 1: consumer that loses purchasing power, and now initial jobless can
Speaker 1: starting to move up, so they're losing purchasing power and
Speaker 1: they're gonna start worrying about their jobs. That transition from
Speaker 1: capital to labor, well, it's looking like it was very
Speaker 1: short lived. And that's really the biggest challenge facing this
Speaker 1: consumer right now. Francis Mike Wilson over at Morgan Stanley
Speaker 1: came out and said, people are not pricing in the
Speaker 1: consumer weakness that we are going to see given exactly
Speaker 1: how much their budgets are being crimped. You have Lori
Speaker 1: Calvacino of RBC saying that if we break through the
Speaker 1: levels that lows that we have seen here to date,
Speaker 1: we could get down to thirty four hundred pretty quickly
Speaker 1: on the SMP. Do you think that this is all
Speaker 1: act that people have not taken into account how much
Speaker 1: the disposable income is getting eaten into Two of my
Speaker 1: favorite strategists, two very good calls. That's the challenge here
Speaker 1: is that the narrative has been for the last two
Speaker 1: and a half years. There were huge simulus checks. The
Speaker 1: balance sheets look good, death service ratios are fantastic, but
Speaker 1: actually real wages are declining. We're gonna start seeing challenges
Speaker 1: and jobs and that age old idea. Oh, the balance
Speaker 1: sheets are really solid. Well that's where they are now,
Speaker 1: but where they're gonna be in this next six and
Speaker 1: twelve months is more challenging. So that brings me to
Speaker 1: the question of when does the central bank really start
Speaker 1: to pivot? And it looks like what they're telling to
Speaker 1: us is they can't do it until inflation mollifies. What
Speaker 1: I'd like to see from share Powell this week because
Speaker 1: maybe some yell in type comments we want to focus
Speaker 1: a little bit more on core as opposed to headline
Speaker 1: and reminding the general public whoever is listening. My mother
Speaker 1: in law will not be listening, that they can control
Speaker 1: some segments of inflation but not other ones. That would
Speaker 1: be for the beginning seedlings of what we could hope
Speaker 1: for in terms of a of it ahead, But generally
Speaker 1: I don't think this Wednesday we're going to get it,
Speaker 1: and that's why we're not yet at an inflection point
Speaker 1: in the macro story. Are we going to get a
Speaker 1: hint at seventy five is coming in July? Francis, Oh,
Speaker 1: I'm not sure. I mean sexual banks are trying to
Speaker 1: open the door. The Bank of Canada did it last
Speaker 1: week previously that they said, oh, we're not interested in
Speaker 1: seventy five basis points, and then when asked if they
Speaker 1: would raise it by fifty basis points, they said maybe
Speaker 1: more than that. Thin. These are central banks that want
Speaker 1: full optionality. What we might get which might be helpful
Speaker 1: with a little more symmetry in that optionality. More talk
Speaker 1: about a September reassessment could be very valuable. But again
Speaker 1: I don't think we get that this week. We probably
Speaker 1: need much more indication than inflation and inflation expectations beginning
Speaker 1: to cool. Well, they're definitely not cooling yet, Francis. And
Speaker 1: as you say, the FED can't be responsible for bringing
Speaker 1: in all of the factors contributing to inflation. They can't
Speaker 1: do anything about the supply side. How confident are you
Speaker 1: in their ability to get it down towards their target
Speaker 1: without a hard landing. Not very confident if this is
Speaker 1: their current strategy. So we're reevaluating our forecasts now, and
Speaker 1: there is a very significant weak patch in most economic
Speaker 1: models between Q one and Q three. Of whether or
Speaker 1: not it tips the scales into mathematical recession depends what
Speaker 1: you're looking at But the real story is this is
Speaker 1: a material growth slow down and guess what, whether it's
Speaker 1: recession or not recession, that's not the name of the
Speaker 1: game here. That's overly binary type of focus. Francis, Thanks
Speaker 1: so much, Stephen Whiting. Let's go to your wheelhouse. Our
Speaker 1: profits threatened, Yes, um, we are in a period of
Speaker 1: very high profits and that makes them more vulnerable. We
Speaker 1: think that will be a year of decline for EPs
Speaker 1: UM at this point. Again, we don't see the need
Speaker 1: for a plunge in every industry's profits. We don't see
Speaker 1: a need to unwind all of the gains that we've
Speaker 1: had over the last couple of years. But clearly the
Speaker 1: impact of stimulus fiscal stimulus on demand bled through into
Speaker 1: profits in a positive way. That's how we had at
Speaker 1: EPs year last year. Now this means downward earnings estimate revisions.
Speaker 1: This is not going to be a year of ten
Speaker 1: EPs gains followed by another next year. I do think
Speaker 1: share prices already understand this. In other words, the drop
Speaker 1: is already uh to some extent said that these estimates
Speaker 1: or nonsense. Steve. When when we get tested like this,
Speaker 1: do companies that display free cash flow persistency. Do they
Speaker 1: go down with everything else or do they partition and
Speaker 1: separate from the gloom. They do, And it really often
Speaker 1: comes down to dividend courage, dividend delivery. Again, it's really
Speaker 1: boring stuff, but but good stuff. If we take a
Speaker 1: look at US shares that have the most consider to
Speaker 1: long run UH dividend increases UM, they fall in half
Speaker 1: as much as the broad market and they yield nearly
Speaker 1: twice as much. So UM, this is an area again
Speaker 1: to hide out in our own discretionary portfolios. We have
Speaker 1: eleven percent of all discretionary portfolios US or non US
Speaker 1: and for any asset class benchmarked to that particular type
Speaker 1: of style investing. Again, and these were not the companies
Speaker 1: that could gain in twenty They weren't the tech solutions
Speaker 1: and they weren't the really beaten down cyclicals of one.
Speaker 1: So they didn't perform terribly well for the last couple
Speaker 1: of years. And we think they're a very good place
Speaker 1: again now, UM, in a market that's far from perfect
Speaker 1: even what's the distance between now and later? And I
Speaker 1: look at Bank of America putting out this idea that's
Speaker 1: just way too existential. What did you say this idea
Speaker 1: that you have a consumer that's strong, you have corporations
Speaker 1: that are strong. How far is the distance from now
Speaker 1: to a lesser now to one that people are forecasting
Speaker 1: and the prices of stocks so so look, Um, some
Speaker 1: of the lagging indicators like inflation will take a long
Speaker 1: time to roll over, but it doesn't mean we have
Speaker 1: to assume that inflation will rise forever. And just because
Speaker 1: consumer fundamentals are are firm in many ways, you know
Speaker 1: a lot is chipping against it. So we would expect,
Speaker 1: for example, this slowdown in goods consumption to result in
Speaker 1: lesser need for employment. UM. So employment growth will be
Speaker 1: slowing down by later in the year. UM, you won't
Speaker 1: be able to say that a low unemployment rate um
Speaker 1: is the reason why nothing is going to go wrong.
Speaker 1: And I don't want to see ultra bearish here, but
Speaker 1: this is again the reasons why UM. I think from
Speaker 1: a forward looking perspective in terms of monetary policy, you
Speaker 1: can't say, well, we need to raise rates until inflation
Speaker 1: is low. By then you will have created the forward
Speaker 1: looking conditions for a much much deeper decline in the
Speaker 1: on me than you're aiming for. Alan Blinder, the former
Speaker 1: Fed Vice chair came out over the weekend in a
Speaker 1: story and said, the Chair of the Fed doesn't want
Speaker 1: to let the R words slip out of his mouth
Speaker 1: in a positive way, that we need a recession, but
Speaker 1: there are a lot of euphemisms and he'll use them. Stephen,
Speaker 1: what are we going to hear from him on Wednesday?
Speaker 1: It will be very interesting because you can't really satisfy
Speaker 1: markets over short term inflation outcomes. You know, again, we
Speaker 1: we've kind of joked around. It's like, well, you know,
Speaker 1: why don't you raise rates a thousand basis points? And
Speaker 1: it's like, what will that do to next month's CPI reading?
Speaker 1: And there's very little they can do. I think that
Speaker 1: there has been less acknowledgement than we might have seen,
Speaker 1: and everybody's it's probably spending so much time criticizing the Fed.
Speaker 1: It's too easy um for all of us. But supply
Speaker 1: shocks periods in which we have instability in the economy,
Speaker 1: think about we were just talking earlier on the break
Speaker 1: airfares have shot up by thirty two over two months.
Speaker 1: That's non annualized. What were we seeing at goods prices
Speaker 1: last year? The same thing? The sources of demanded economy
Speaker 1: or too unstable. We think monetary policy can take care
Speaker 1: of everything. It can't. These are periods where we don't
Speaker 1: stabilize short in the short term. Stephen whyn you with us,
Speaker 1: and we continue with City Group, Private Bank. I want
Speaker 1: to look at a better tape right now. Futures negative
Speaker 1: up ten ten points in negative eighties six on futures
Speaker 1: futures negative five seven yields to a little better. Really,
Speaker 1: across the Bloomberg screen, everything doing better, even the two
Speaker 1: stents spread from quick inversion two hours ago. We're now
Speaker 1: up ten basis points on the two stands spread. Kaylee, Well,
Speaker 1: on the subject of the two year, yes, things have moderated, Tom,
Speaker 1: but you are still seeing that selling pressure in the
Speaker 1: short end of the curve. I was just taking a
Speaker 1: look at what has happened to the two year treasury
Speaker 1: yield in the month of June, and keep in mind
Speaker 1: it's only June three. We're not even halfway there, and
Speaker 1: we're not yet to the Fed decision on Wednesday. That
Speaker 1: two year treasury yield is up sixty one basis points.
Speaker 1: This is a market that has moved incredibly quickly. Stephen
Speaker 1: now to price in a hundred and seventy five basis
Speaker 1: points of tightening by the Federal Reserve or hikes by
Speaker 1: the Federal Reserve by September. So I guess one word question,
Speaker 1: and I say that with a little shrug for our
Speaker 1: listeners on radio. Well, look, um, if they're going to
Speaker 1: do seventy five, it's better to do it sooner than
Speaker 1: later when policy is still at a very low interest rate.
Speaker 1: But it also goes to the fact that they've could
Speaker 1: have lost control of the dialogue over this. I mean
Speaker 1: they need a monetary policy approach that they can sustain.
Speaker 1: Just take a look at the history of FED tightening
Speaker 1: cycles over the last forty five years. When the Federal
Speaker 1: Reserve reaches its maximum policy rate, it's unly kept it
Speaker 1: before cutting seven months on average. And if you really
Speaker 1: wanted again to to deal with the longer term inflationary
Speaker 1: and balances in the economy, you want a monetary policy
Speaker 1: that you can sustain. Now again, you can gain this out.
Speaker 1: Maybe I'm the wrong person to guess this, but if
Speaker 1: you just had created a shock and awe effect where
Speaker 1: everyone believes, okay, this is under wraps, and then a
Speaker 1: couple of months later the CPI is still arising, I
Speaker 1: don't know what you've accomplished if you were tightening so
Speaker 1: much that you have a recession and then you have
Speaker 1: any easing cycle and you are doing QT. So now
Speaker 1: you've got to do QUI again, this whole approach again
Speaker 1: of the Federal Reserve going from feast to faminine back
Speaker 1: again in a pro sequable way. I mean, look, the
Speaker 1: mistake that was made was easing in a boom last year.
Speaker 1: You can make two mistakes of monetary policy, not just one.
Speaker 1: So I think again, trying to satisfy the market, uh
Speaker 1: and short term inflation outcomes might be the wrong approach,
Speaker 1: at least as far as I'm concerned. Okay, so what
Speaker 1: you're describing, Stephen is essentially Jerome Powell with an impossible
Speaker 1: job that he just can't do this right. Either you're
Speaker 1: going to upset the market potentially get inflation under control,
Speaker 1: or you don't want to move to aggressively and surprise
Speaker 1: the market. Therefore inflation as a allowed to run hotter
Speaker 1: for longer. Isn't that binary? Realistically? Well, the one thing
Speaker 1: that we just can't um dispute it is the fact
Speaker 1: that monetary policy doesn't complete control of the economy. UM
Speaker 1: there are really positive developments beneath the surface. On the
Speaker 1: supply side. You know, you could see the price of
Speaker 1: appliances was down. Okay, why well, consumer goods production is
Speaker 1: now rising four and a half percent unit terms, consumer
Speaker 1: goods consumption is falling, imports arising. If you want to
Speaker 1: get through this, you know, we need to get through
Speaker 1: the next leg event, which is going to be services,
Speaker 1: which is going to be housing related issues. Um, do
Speaker 1: you really want to create more instability? I think they're
Speaker 1: gonna be in an environment where they're trying to avoid
Speaker 1: that and still communicate effectively. Maybe they can't do both.
Speaker 1: Stephen Whiting, thank you so much. Great brief this morning
Speaker 1: with City Global Wealth Management here with some turmoil, a
Speaker 1: little bit of a pullback working with Edward a Heiman
Speaker 1: over evercre I s I, Julian Emmanuel joins us now
Speaker 1: their chief equity and quantitative strategists. You have such a
Speaker 1: privilege to work with the evercres I s I team
Speaker 1: and dovetail the micro analysis of ed Heiman into your
Speaker 1: equity work. And the heart of it is inflation comes down,
Speaker 1: but it only gets down in the vicinity of four percent.
Speaker 1: That's a change, right that that is a change, that
Speaker 1: is an acknowledgment that basically what we saw last week
Speaker 1: says well, there may be a peak somewhere in here,
Speaker 1: because mathematically, if you get to nothing but base effects,
Speaker 1: you probably get a peek, but it is likely to
Speaker 1: be a higher plateau for longer. And Ed took his
Speaker 1: inflation number for up to four percent. And that's the issue.
Speaker 1: That's where the Fed has much less wiggle room than
Speaker 1: we would potentially like given the stress that we're seeing
Speaker 1: on assets since its days of c. J. Lawrence. We've
Speaker 1: all watched the white paper with the black mark. You
Speaker 1: got the black marker and one of my shirts once
Speaker 1: you had to buy me a new shirt. It was
Speaker 1: stupid black mark. Tom Oh, I'm sorry, Tom, I got you.
Speaker 1: Is the black marker calling for a recession? Right now?
Speaker 1: I've been nailed with the yellow highlighters the last couple
Speaker 1: of weeks. Umh no no. Ed took his growth number
Speaker 1: down to one point four percent for two a long
Speaker 1: time ago, and he saw these headwinds. We still think
Speaker 1: the base case is no recession, but obviously, again the
Speaker 1: same math that applies to the potential peaking of inflation
Speaker 1: also tells you that you know, one point four percent
Speaker 1: to what could be a recessionary number. There's not a
Speaker 1: lot of distance there, Julian. When does your a bear
Speaker 1: case become your base case of sp uh? Well, all
Speaker 1: I can say is when we spoke about this last week,
Speaker 1: we certainly didn't envision three days of carnage in the
Speaker 1: markets that that we've seen since we adopted that much
Speaker 1: more cautious view. And frankly, you know, when you think
Speaker 1: about it from a trading perspective, what's been missing the
Speaker 1: entire last several months is sort of what I would
Speaker 1: call a cathartic flush out where you get the vix
Speaker 1: above forty, which is one of the things you need
Speaker 1: for at least the trading bottom. This week is fraught
Speaker 1: with peril. I got a ay questions, but Lesa's you're
Speaker 1: just folks. I just want to, you know, in the
Speaker 1: carners that we've got here, in the more data checks,
Speaker 1: we need to point out that it is the Bramo
Speaker 1: base case bearcase. Yeah, well, this week is brought frought
Speaker 1: with peril, Julian. I mean, I couldn't say it better
Speaker 1: than than you know myself. Going forward, then, how do
Speaker 1: you determine if we've hit catharsis just a forty level
Speaker 1: on the VIX or is there something more? Is there
Speaker 1: some sort of forced selling, a disorderly unwind that we
Speaker 1: have yet to see despite all the pain. So what
Speaker 1: we are likely to see, regardless of you know, whether
Speaker 1: the markets decisively take out the May twenty low, which
Speaker 1: looks like is a distinct stability today, uh, certainly into Wednesday,
Speaker 1: is you're gonna have an enormous amount of volume at
Speaker 1: mid month and the end of the month, quadruple witching
Speaker 1: the Russell Index rebalance. We'd love to see that kind
Speaker 1: of volume, you know, twenty billion shares, perhaps twenty five
Speaker 1: billion shares on a day, along with the vix UH
Speaker 1: surging towards those levels. Those are the kinds of recipes
Speaker 1: for a Catharsis that we think you need really to
Speaker 1: entice buyers back. And the less several weeks has not
Speaker 1: been about selling overwhelming. It's been about a complete lack
Speaker 1: of buying well. And yet the case remains Julian that
Speaker 1: we've already seen this immense selling pressure, and even before today,
Speaker 1: the SMP five hundred has already teetered on the edge
Speaker 1: of bear market territory. You already have a tenure yield
Speaker 1: that has at three four and we've only just seen
Speaker 1: the start of quantitative tightening. It only really has just begun,
Speaker 1: because of course these markets are anticipatory there forward looking
Speaker 1: how long is are going to be until this market
Speaker 1: is looking even further out and saying, well, the Fed's
Speaker 1: gonna actually have to pump on the brakes here a
Speaker 1: little bit and we start to see things reversing. Well,
Speaker 1: that is that is a question that watching the bond market,
Speaker 1: and one of our core thess around the view that
Speaker 1: two was going to be volatile, you know, before Russian
Speaker 1: invaded Ukraine, was the fact that the correlation between stocks
Speaker 1: and bonds in a higher inflation environment was flipping from
Speaker 1: risk on risk off. Of that's been twenty five years
Speaker 1: along to a positive correlation. We will be looking for
Speaker 1: the ten year yield, the ascent in the ten year
Speaker 1: yield to start to moderate a little bit. It wouldn't
Speaker 1: be a surprise if we get towards three and a
Speaker 1: half uh in the near term to start to see
Speaker 1: some buyers come into bonds that would stabilize stocks. Okay,
Speaker 1: so maybe there's going to be eventually an entry point
Speaker 1: to buy the dip into bonds or do you see
Speaker 1: any entry points at this time in the equity market
Speaker 1: anywhere that valuations have come in enough that it actually
Speaker 1: is safe to dip your toe back in. Yet, I
Speaker 1: think there are pockets of value, pockets of stocks that
Speaker 1: have been proven, you know, still growing earnings in this environment,
Speaker 1: and that are returning cash. Remember, in in an environment
Speaker 1: where we are focused on return of capital, companies that
Speaker 1: can return capital successfully, our names you want to own,
Speaker 1: are they going to return cost cutting? Because if we
Speaker 1: get an ed him in four percent stability and inflation,
Speaker 1: I'm a corporation. I have to adjust, you do, and
Speaker 1: And part of the dynamic here that's causing this incremental
Speaker 1: market pricing closer to recession being a base case is
Speaker 1: the fact that all of these factors together is going
Speaker 1: to cause pressure in the labor market, which paradoxically, again
Speaker 1: the FED would wish to see a little bit of that.
Speaker 1: But you know, the difference between soft soft dish and
Speaker 1: something else is very fine. Julian Emmanuel, thank you so much.
Speaker 1: With every core I s I because Brands is talking
Speaker 1: about a gallon of gas, there's an entire another story
Speaker 1: in hydrocarbons. Daraikun joins US now Head of Commodities dws
Speaker 1: UH and we're just thrilled a good join us here
Speaker 1: on what I've ignored and I've been remiss on the
Speaker 1: star way, which is natural gas. No one talks about
Speaker 1: the price of a gallon of natural gas, do they.
Speaker 1: It's much less known. But outside of US, I'm sure
Speaker 1: people are very concerned about high price of natural gas.
Speaker 1: US natural gas has kind of multiple times of the
Speaker 1: price since beginning of the year, and um that strong
Speaker 1: demand couple with limited production growth and now more robust
Speaker 1: export demand has driven off the US price as well.
Speaker 1: You you are so go to the fundamentals of all
Speaker 1: of this and the underlying fundamentals of export import pressure
Speaker 1: of hydrocarbons in the United States. Describe right now who's
Speaker 1: gonna win the battle. Do we export more? Do we
Speaker 1: keep it instead of exporting it? Do we start to
Speaker 1: import hydrocarbons again? At this point in the near term,
Speaker 1: we are fairly maxed out on export capacity and that
Speaker 1: won't change until we anticipate four and beyond. And there
Speaker 1: are scheduled projects to come online to convert our natural
Speaker 1: gas into liquid form that can be exported. Our export
Speaker 1: capacity to Mexico via pipelines fairly maxed out, and we
Speaker 1: always have some import and export between Canada and US
Speaker 1: to deliver gas from places that's less accessible in each country,
Speaker 1: but most of those pipelines are in maximum capacity. In
Speaker 1: the near term one not going to see a significant
Speaker 1: dynamic change. UM. Even how low US price still is
Speaker 1: compared to the global price, were less than about between
Speaker 1: a half to a third of global price, the pressure
Speaker 1: will be there for us to export more once that
Speaker 1: pipeline UM, I'm sorry, it wants that capacity to explore
Speaker 1: liquid natural gas increases from natural gas to crude gas,
Speaker 1: refined goods gasoline and diesel. The fact that we're seeing
Speaker 1: such incredible lifts in gasoline prices really basically regardless of
Speaker 1: what happens in the brand crude market. At what point
Speaker 1: the prices fall enough for it to actually matter for
Speaker 1: refined goods given the lack of refineries, Well, that's a
Speaker 1: great question. I think in the near term we still
Speaker 1: see strong draws from gasoline inventory. Up to this point,
Speaker 1: we should have been seeing seasonal build in gasoline inventory
Speaker 1: as refiners prepare for summer, and we've seemed just opposite,
Speaker 1: so that natural demand raw will continue. I think that
Speaker 1: the solution to gasoline high gasoline price really comes from
Speaker 1: demand reduction. We have to see a significant remnt reduction
Speaker 1: to allow for the price to fall. We still see
Speaker 1: quite a bit of pinned up driving demand and that's
Speaker 1: driving the castling price right now. So how long we're
Speaker 1: at what level will that demand destruction really start to
Speaker 1: kick in? How far away are we from that? Well,
Speaker 1: anticipating a year from now, we'll probably seek less of
Speaker 1: that recovery demand from COVID nineteen x China and that
Speaker 1: should help with the price next summer. Unfortunately, for this
Speaker 1: summer we probably won't see that realized. Well, you mentioned China.
Speaker 1: Obviously COVID zero still an overhanging that economy. You're still
Speaker 1: seeing large parts of it dealing with restrictions to contain
Speaker 1: the virus Shanghai just one example. If and when China
Speaker 1: opens back up, what does that do to this entire
Speaker 1: supply and demand dynamic globally. That's a great question. The
Speaker 1: time means very important. Uh. We do anticipate the additional
Speaker 1: stimulus program as well announced ahead of time, both fiscal
Speaker 1: and monetary, to help with demand growth. In China. However,
Speaker 1: it's very difficult to tell exactly when that's going to
Speaker 1: take place. UM. Even recently we've seen additional lockdown efforts
Speaker 1: again from Shanghai just because of the zero policy. Zero
Speaker 1: COVID nineteen faction policy is still in effect. UM. Without
Speaker 1: that being resolve, we don't see the demand coming back up.
Speaker 1: We do hope though, in the next twelve month, as
Speaker 1: the demand go down, we have to spend themand go
Speaker 1: down x China because of the old interest rate moves
Speaker 1: US has made and other countries are like to follow.
Speaker 1: Uh we are hoping that the demand from China will
Speaker 1: help balance that down a downward movement and keep the
Speaker 1: price stabilized in the near term. The way uh In
Speaker 1: City Group put out a report overnight where they were
Speaker 1: talking about how the amount of GDP destruction from where
Speaker 1: gas prices, where oil prices are right now is really
Speaker 1: reminiscent of what we saw in the nineteen seventies. Do
Speaker 1: you think that that oil shock analogy is the right one?
Speaker 1: It's similar. We do see both in both situations. We
Speaker 1: see sharp rising oil prices and we've seen artificial constraints
Speaker 1: on supply which we're resulting as we have seen before.
Speaker 1: Eventually we're going to see demand destruction, whether we see
Speaker 1: a significant destruction that leads to a significant economic downturn
Speaker 1: or a more moderate, a soft landing scenario that will
Speaker 1: determine the outcome of oil price going forward. Are we
Speaker 1: thank you so much? Are we coming with us today
Speaker 1: with DWS here on commodities. We'll get them back here soon,
Speaker 1: particularly on the commodity dynamics of China. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live week
Speaker 1: days from seven to ten am Eastern on Bloomberg Radio
Speaker 1: and on Bloomberg Television each day from six to nine
Speaker 1: am for insight from the best in economics, finance, investment,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on Apple, podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm
Speaker 1: Tom Keene, and this is Bloomberg