1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Farrell and Lisa Brownwitz Jailey. We bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,560 Speaker 1: Find Bloomberg Surveillance on Apple podcast, sun Cloud, Bloomberg dot 5 00:00:23,560 --> 00:00:30,800 Speaker 1: com and of course on the Bloomberg terminal. Lauretta Mester 6 00:00:31,080 --> 00:00:34,519 Speaker 1: is a mathematician. She has been consistent and she has 7 00:00:34,560 --> 00:00:39,800 Speaker 1: been very very articulate about her views on the Fed. 8 00:00:39,960 --> 00:00:43,280 Speaker 1: Of course, with Michael McKee and with Jonathan Farrell in 9 00:00:43,360 --> 00:00:46,240 Speaker 1: the great precursor to what we'll hear from Jerome Polier 10 00:00:46,840 --> 00:00:49,600 Speaker 1: in about an hour. We do this with the markets 11 00:00:49,680 --> 00:00:54,440 Speaker 1: churning this morning. Our Jonathan Farrell were the president of 12 00:00:54,480 --> 00:00:57,639 Speaker 1: the Cleveland Fed, New York City especial Welcome to ot 13 00:00:57,640 --> 00:01:01,120 Speaker 1: CV and radio audience worldwide. Bloomberg's My McKey alongside us. 14 00:01:01,360 --> 00:01:03,920 Speaker 1: Happy to say joining us both Cleveland Fed President the 15 00:01:04,000 --> 00:01:07,440 Speaker 1: Randomester President Memester. Always fantastic to catch up with you. 16 00:01:07,440 --> 00:01:09,600 Speaker 1: You know the setup right now, We've got Deutsche Bank 17 00:01:09,720 --> 00:01:12,840 Speaker 1: City JP, Morgan Goldman all calling for rate hikes in March, 18 00:01:12,920 --> 00:01:15,520 Speaker 1: some of your colleagues doing the same. What obstacles the 19 00:01:15,600 --> 00:01:19,280 Speaker 1: left of any for making a move that suit. Well, 20 00:01:19,319 --> 00:01:22,240 Speaker 1: you know, the economy is on a really good track. 21 00:01:22,800 --> 00:01:26,360 Speaker 1: The inflation numbers are high. It looks now that inflation 22 00:01:26,480 --> 00:01:30,959 Speaker 1: is more persistent. I'm going forward early in the pandemic. Earlier, 23 00:01:31,080 --> 00:01:33,840 Speaker 1: you know, in the last year, a lot of those 24 00:01:34,040 --> 00:01:37,839 Speaker 1: rate price increases were really on things that are really 25 00:01:37,920 --> 00:01:40,640 Speaker 1: tied to the reopening of the economy and the supply chain. 26 00:01:40,920 --> 00:01:44,280 Speaker 1: Now those price increases of broadened. So if the economy 27 00:01:44,319 --> 00:01:46,640 Speaker 1: in March looks like it does today and the outlook 28 00:01:46,680 --> 00:01:49,440 Speaker 1: is similar, and of course there's uncertainty around that, but 29 00:01:49,520 --> 00:01:51,800 Speaker 1: if it does, and I would support moving the funds 30 00:01:51,880 --> 00:01:54,680 Speaker 1: right up at that meeting and starting to move back 31 00:01:54,720 --> 00:01:58,440 Speaker 1: from some of the extraordinary accommodation we needed earlier in 32 00:01:58,480 --> 00:02:00,560 Speaker 1: the pandemic. And you know, I just want to point 33 00:02:00,560 --> 00:02:02,800 Speaker 1: out that even when we make that first rate move, 34 00:02:02,880 --> 00:02:07,480 Speaker 1: whenever it is that's not really policy tightening, accommodation is 35 00:02:07,520 --> 00:02:10,000 Speaker 1: still going to be really high at that point. So 36 00:02:10,680 --> 00:02:13,560 Speaker 1: you know, I think that the case is really strong 37 00:02:13,720 --> 00:02:17,480 Speaker 1: to begin to wind back some of that accommodation. Well, 38 00:02:17,520 --> 00:02:19,800 Speaker 1: that raises the question for our friends on the trading 39 00:02:19,840 --> 00:02:23,960 Speaker 1: floor of how far how fast and where do you stop? 40 00:02:24,919 --> 00:02:27,080 Speaker 1: Bill Dudley says you probably need to do four or 41 00:02:27,200 --> 00:02:30,160 Speaker 1: five rate moves this year. You've long been an inflation hawk. 42 00:02:30,720 --> 00:02:33,080 Speaker 1: How far do you think you need to go? Well, 43 00:02:33,120 --> 00:02:36,960 Speaker 1: I can tell you in that December set submission, I 44 00:02:37,040 --> 00:02:40,480 Speaker 1: had three pencil in for for this year and a 45 00:02:40,520 --> 00:02:43,760 Speaker 1: few more over than you know next the trajectory. But 46 00:02:43,840 --> 00:02:46,160 Speaker 1: I also want to point out that you know, we're 47 00:02:46,160 --> 00:02:48,640 Speaker 1: gonna have to see how the economy does over time 48 00:02:48,680 --> 00:02:52,200 Speaker 1: before we can say for sure how many rate increases 49 00:02:52,200 --> 00:02:54,600 Speaker 1: are needed. You know that there's still a lot of 50 00:02:54,639 --> 00:02:58,400 Speaker 1: uncertainty round the outlook. There's uncertainty about how the pandemic 51 00:02:58,480 --> 00:03:03,120 Speaker 1: plays out. As we've seen each new bariat, the economy 52 00:03:03,200 --> 00:03:07,160 Speaker 1: has really navigated it in terms of the economic outlook. 53 00:03:07,680 --> 00:03:09,919 Speaker 1: But right now, you know, we have to say that 54 00:03:10,000 --> 00:03:14,840 Speaker 1: we probably need to recalibrate our policy stance because inflation 55 00:03:14,960 --> 00:03:18,359 Speaker 1: is well above where we need it to be. The 56 00:03:18,440 --> 00:03:21,600 Speaker 1: employment markets, you know, labor markets are tight from the 57 00:03:21,639 --> 00:03:25,239 Speaker 1: standpoint of a policy relevant framework. Do I think we'll 58 00:03:25,240 --> 00:03:28,680 Speaker 1: see labor force participation move up somewhat after we get 59 00:03:28,720 --> 00:03:31,360 Speaker 1: beyond the pandemic, of course, but I don't think we 60 00:03:31,400 --> 00:03:34,880 Speaker 1: can ignore the shorter run or medium run tightness in 61 00:03:34,920 --> 00:03:36,880 Speaker 1: that labor market. So I think we're in a good 62 00:03:36,920 --> 00:03:40,200 Speaker 1: place to move policy, and you know, we'll have to 63 00:03:40,280 --> 00:03:43,440 Speaker 1: see how that affects the economy going forward and the 64 00:03:43,480 --> 00:03:48,320 Speaker 1: other factors affecting economic growth and employment going forward. Well, 65 00:03:48,360 --> 00:03:51,760 Speaker 1: speaking of moving policy, the Fed's statement of principle says 66 00:03:51,880 --> 00:03:54,960 Speaker 1: that the interest rate, the FED funds rate, should be 67 00:03:55,040 --> 00:03:58,080 Speaker 1: the primary tool. But you also have a lot of 68 00:03:58,280 --> 00:04:02,560 Speaker 1: bonds on the ballot. Cheat how does quantitative tightening to 69 00:04:02,640 --> 00:04:05,839 Speaker 1: use the market term fit into your thinking? How much 70 00:04:05,840 --> 00:04:10,240 Speaker 1: would that be worth uh in terms of additional tightening 71 00:04:10,360 --> 00:04:12,800 Speaker 1: and when do you think that should be done, if 72 00:04:12,800 --> 00:04:16,240 Speaker 1: at all? Yeah, So, I mean we have a little 73 00:04:16,240 --> 00:04:18,440 Speaker 1: bit of a playbook from the last time, but I 74 00:04:18,480 --> 00:04:21,680 Speaker 1: think this time is different in the sense that we 75 00:04:22,120 --> 00:04:24,599 Speaker 1: basically have a much larger balance sheet than we did 76 00:04:24,600 --> 00:04:27,080 Speaker 1: because we had to do those asset purchases at the 77 00:04:27,120 --> 00:04:30,919 Speaker 1: start of the pandemic because of financial market conditions being 78 00:04:32,040 --> 00:04:34,440 Speaker 1: the disruption of the financial markets, we really needed to 79 00:04:34,480 --> 00:04:37,840 Speaker 1: make sure that the financial markets continue to function. Now 80 00:04:37,960 --> 00:04:45,080 Speaker 1: that additional liquidity is serving as a accommodate of policy tool. Um, 81 00:04:45,240 --> 00:04:48,359 Speaker 1: we also have a much stronger economy now, so you know, 82 00:04:48,480 --> 00:04:51,400 Speaker 1: I think we'll be able to to allow the balance 83 00:04:51,400 --> 00:04:54,520 Speaker 1: sheet to run down much faster than we did last 84 00:04:54,600 --> 00:04:58,600 Speaker 1: time because of those two factors and adjusting you know, 85 00:04:59,560 --> 00:05:02,640 Speaker 1: how far to go and how We're still considering that, 86 00:05:03,279 --> 00:05:05,320 Speaker 1: but I do think that it's good to look at 87 00:05:05,640 --> 00:05:08,040 Speaker 1: sort of the policy tool to interest rate as our 88 00:05:08,040 --> 00:05:10,719 Speaker 1: main tool, but to take into account that we also 89 00:05:10,720 --> 00:05:14,360 Speaker 1: are going to allow the balance sheet um to to 90 00:05:14,360 --> 00:05:16,760 Speaker 1: to run down. I mean, we double the balance sheet 91 00:05:16,800 --> 00:05:20,159 Speaker 1: over this pandemic period, and I think we can bring 92 00:05:20,200 --> 00:05:25,080 Speaker 1: it down um also to support less accommodate of monetary 93 00:05:25,200 --> 00:05:27,920 Speaker 1: policy stance. And we'll have to see. I mean, frankly, 94 00:05:27,960 --> 00:05:30,440 Speaker 1: there's a lot of estimates out there what happened the 95 00:05:30,520 --> 00:05:34,240 Speaker 1: last time we did quantitaryated eat you know, easing and 96 00:05:34,279 --> 00:05:37,880 Speaker 1: then tightening. But the pandemic is a different environment as 97 00:05:37,880 --> 00:05:40,960 Speaker 1: we've seen the whole time, right, I mean, you know, 98 00:05:41,040 --> 00:05:43,120 Speaker 1: we don't still know kind of what those effects will 99 00:05:43,160 --> 00:05:45,040 Speaker 1: be and we'll have to keep monitoring that. But that's 100 00:05:45,120 --> 00:05:48,400 Speaker 1: kind of what we do always when we're doing monetary policy. 101 00:05:48,480 --> 00:05:51,000 Speaker 1: We always sort of think about we take an action 102 00:05:51,040 --> 00:05:55,000 Speaker 1: that we look at the data. We're very data dependent. Um, 103 00:05:55,120 --> 00:05:57,599 Speaker 1: we're very you know, looking at the current economy and 104 00:05:57,640 --> 00:06:00,400 Speaker 1: then the you know, what's on the horizon for the outlook, 105 00:06:00,440 --> 00:06:03,320 Speaker 1: and then we take into account the risk around that outlook, 106 00:06:03,360 --> 00:06:05,760 Speaker 1: and then we recalibrate our policy. And I that we're 107 00:06:05,760 --> 00:06:08,520 Speaker 1: going to do that this time. I'm sure President message 108 00:06:08,520 --> 00:06:09,880 Speaker 1: just to get some more clarity on that, I think 109 00:06:09,920 --> 00:06:12,279 Speaker 1: this is important. Do you think balance sheet reduction is 110 00:06:12,279 --> 00:06:15,200 Speaker 1: something that runs passively in the background alongside decisions you 111 00:06:15,240 --> 00:06:17,520 Speaker 1: make separately on rate hikes or is it something that 112 00:06:17,560 --> 00:06:19,880 Speaker 1: supports the right hike effort? Mike and I are trying 113 00:06:19,880 --> 00:06:22,440 Speaker 1: to consider trying to work out whether the balance sheet 114 00:06:22,480 --> 00:06:25,680 Speaker 1: reduction reduces the need for further rate hikes at some 115 00:06:25,760 --> 00:06:27,680 Speaker 1: point as well. How do you think about that dynamic. 116 00:06:27,839 --> 00:06:29,960 Speaker 1: Is it's something that runs off in the background passively 117 00:06:30,040 --> 00:06:34,240 Speaker 1: or something that you think about together alongside interest rate hikes. Well, 118 00:06:34,320 --> 00:06:36,240 Speaker 1: I I'm gonna answer your question the way You're not 119 00:06:36,240 --> 00:06:40,000 Speaker 1: gonna like both, right. I Mean, my kind of way 120 00:06:40,040 --> 00:06:41,919 Speaker 1: I think about it is I'd like to sort of 121 00:06:41,960 --> 00:06:45,599 Speaker 1: set sort of a path for the balance sheet, you know, 122 00:06:45,720 --> 00:06:49,640 Speaker 1: communicate that in advance from the markets that will you know, 123 00:06:49,760 --> 00:06:53,280 Speaker 1: reduce accommodation and then we'll use our policy tool, the 124 00:06:53,279 --> 00:06:56,479 Speaker 1: fit fund rate, as our active tool. But you know, 125 00:06:56,680 --> 00:06:59,360 Speaker 1: sometimes we have to recalibrate, as you saw we did 126 00:06:59,400 --> 00:07:01,760 Speaker 1: that in No we're in the December meeting. We started 127 00:07:01,800 --> 00:07:05,239 Speaker 1: with you know, uh, tapering of the asset purchase program 128 00:07:05,240 --> 00:07:07,400 Speaker 1: we announced in November, and then in December of the 129 00:07:07,440 --> 00:07:10,240 Speaker 1: committee sped that up and and that may have to 130 00:07:10,280 --> 00:07:13,080 Speaker 1: happen over this period as we calibrate, But in general, 131 00:07:13,560 --> 00:07:15,680 Speaker 1: you know, my approach will be come up with what 132 00:07:15,720 --> 00:07:18,080 Speaker 1: we think is the right plan for that balance sheet, 133 00:07:18,440 --> 00:07:22,080 Speaker 1: how that happening, and then use the policy tool as 134 00:07:22,080 --> 00:07:25,360 Speaker 1: our main tool of monetary policy. A couple of times 135 00:07:25,400 --> 00:07:28,560 Speaker 1: in this conversation already have used that phrase reduced accommodation 136 00:07:29,320 --> 00:07:31,600 Speaker 1: when we heard from Bill Dundley yesterday talked about the 137 00:07:31,600 --> 00:07:34,400 Speaker 1: fantasy land of Delvish forecasts at the Federal Reserve. And 138 00:07:34,440 --> 00:07:37,880 Speaker 1: I just want to do we need restrictive policy at 139 00:07:37,880 --> 00:07:39,720 Speaker 1: the Federal Reserve? Do we need to get away from 140 00:07:39,720 --> 00:07:43,040 Speaker 1: talking about reducing accommodation and talk about outright having a 141 00:07:43,080 --> 00:07:46,840 Speaker 1: restrictive policy stance. So I don't think we need to 142 00:07:46,880 --> 00:07:49,520 Speaker 1: do that at this point. I think that that's got 143 00:07:49,520 --> 00:07:52,800 Speaker 1: to be on the table of you know, where's the endpoint. 144 00:07:52,960 --> 00:07:54,920 Speaker 1: But you know, when we do our steps, it's three 145 00:07:55,000 --> 00:07:57,400 Speaker 1: years away. And as we've seen, you know, the economy 146 00:07:57,400 --> 00:08:02,000 Speaker 1: can change in ways um that are very unexpected. So again, 147 00:08:02,360 --> 00:08:05,320 Speaker 1: at this point, I think it's really important that we 148 00:08:05,360 --> 00:08:11,200 Speaker 1: take actions to bring inflation down given the environment. And 149 00:08:11,240 --> 00:08:13,000 Speaker 1: you know, a lot of times people think, oh, you're 150 00:08:13,000 --> 00:08:17,840 Speaker 1: either for maximum employment or for you know, lowering inflation, 151 00:08:17,880 --> 00:08:21,360 Speaker 1: and I don't see them as opposing one to drink again, 152 00:08:21,400 --> 00:08:24,520 Speaker 1: how can you reduce inflation without a restrictive policy stance 153 00:08:24,520 --> 00:08:27,280 Speaker 1: with that tone of financial conditions, How does that work? Right? 154 00:08:27,320 --> 00:08:30,000 Speaker 1: Because the markets are reacting, right, So we've already seen 155 00:08:30,040 --> 00:08:32,640 Speaker 1: some tightening and financial conditions in the market, and so 156 00:08:33,000 --> 00:08:34,520 Speaker 1: you know, I think what we have to do is 157 00:08:34,559 --> 00:08:37,640 Speaker 1: we have to bring our polishy rate in line with 158 00:08:37,960 --> 00:08:41,360 Speaker 1: the economy and where we wanted the inflation rates to go, 159 00:08:41,480 --> 00:08:44,120 Speaker 1: and we're gonna have to take actions to do that. 160 00:08:44,480 --> 00:08:48,360 Speaker 1: So right now, if you look at long term inflation expectations, 161 00:08:48,760 --> 00:08:50,920 Speaker 1: you may take some comfort in the fact that they're 162 00:08:51,559 --> 00:08:55,040 Speaker 1: basically maybe a little elevator butt around our cheaper same goal. 163 00:08:55,520 --> 00:08:57,600 Speaker 1: I don't think that much comfort in it because that's 164 00:08:58,559 --> 00:09:01,800 Speaker 1: based on, you know, the taking appropriate actions. So it's 165 00:09:01,840 --> 00:09:05,000 Speaker 1: incumbetent on us to take those actions. And I think 166 00:09:05,040 --> 00:09:07,679 Speaker 1: we're in a good place to do that now. Well, 167 00:09:07,679 --> 00:09:10,360 Speaker 1: you've said that we need to see how the economy 168 00:09:10,400 --> 00:09:12,600 Speaker 1: develops before you know what you're going to have to 169 00:09:12,640 --> 00:09:15,960 Speaker 1: do in total. But the pessimistic view expressed by a 170 00:09:15,960 --> 00:09:18,280 Speaker 1: lot of people, you know who they are, is that 171 00:09:18,320 --> 00:09:20,600 Speaker 1: you've waited too long, you're behind the curve, You're gonna 172 00:09:20,640 --> 00:09:22,840 Speaker 1: have to move too far, too fast, and as the 173 00:09:22,840 --> 00:09:26,599 Speaker 1: phrase goes, you'll break something, maybe send the economy into recession. 174 00:09:26,920 --> 00:09:30,160 Speaker 1: How do you reassure people that won't happen, given that 175 00:09:30,200 --> 00:09:34,120 Speaker 1: the Fed's track record in this area isn't very good. Well, 176 00:09:34,120 --> 00:09:36,080 Speaker 1: I don't know whether the track record is that bad. 177 00:09:36,120 --> 00:09:38,440 Speaker 1: I mean, I think that the last cycle proved that 178 00:09:38,480 --> 00:09:41,280 Speaker 1: we kind of navigated that pretty well and that we 179 00:09:41,320 --> 00:09:45,040 Speaker 1: had a very very long expansion, right, a historically long expansion. 180 00:09:45,080 --> 00:09:49,040 Speaker 1: So this is a pandemic environment, new things. We're gonna 181 00:09:49,080 --> 00:09:51,480 Speaker 1: look at the data. We're gonna make sure we're focused 182 00:09:51,480 --> 00:09:55,720 Speaker 1: on meaning both of our goals and maximum employment and inflation. 183 00:09:55,960 --> 00:09:58,680 Speaker 1: It's it seems clear to me now, and inflation is 184 00:09:58,720 --> 00:10:01,960 Speaker 1: too high, and labor markets are strong, and we need 185 00:10:02,000 --> 00:10:05,160 Speaker 1: to take action and ask the economy moves. We will 186 00:10:05,200 --> 00:10:08,520 Speaker 1: take appropriate action to make sure that we're doing what 187 00:10:08,600 --> 00:10:12,000 Speaker 1: we can to keep the economy on a positive trajectory, 188 00:10:12,040 --> 00:10:16,880 Speaker 1: and that means taking actions to bring inflation down without 189 00:10:17,559 --> 00:10:20,920 Speaker 1: right harming the positive trajectory of the economy. And that's 190 00:10:20,920 --> 00:10:23,520 Speaker 1: gonna be a challenge, There's no doubt about it. That 191 00:10:23,559 --> 00:10:25,920 Speaker 1: will be a challenge for us. But that's what we do, 192 00:10:26,040 --> 00:10:28,600 Speaker 1: that's what we're charged to do, and that's what we'll 193 00:10:28,640 --> 00:10:30,880 Speaker 1: be doing. Let me shift gears a little bit and 194 00:10:30,880 --> 00:10:35,880 Speaker 1: anticipated question from Elizabeth Warren, Massachusetts Senator to the FED 195 00:10:35,960 --> 00:10:40,079 Speaker 1: Chairman J. Powell. Today, we've seen two FED bank presidents resigned. 196 00:10:40,240 --> 00:10:43,640 Speaker 1: We're now seeing the vice chairman resigned early. Does the 197 00:10:43,720 --> 00:10:47,320 Speaker 1: FED have an ethics problem? I don't not believe we 198 00:10:47,360 --> 00:10:50,240 Speaker 1: have an ethics problem. I think what happened was there 199 00:10:50,280 --> 00:10:54,520 Speaker 1: was illumination on things that gave an appearance issue. Right, 200 00:10:54,640 --> 00:10:57,520 Speaker 1: they were technically correct in terms of the rules, but 201 00:10:57,720 --> 00:11:00,959 Speaker 1: it was the appearance issue. Um that share and the 202 00:11:00,960 --> 00:11:05,319 Speaker 1: FED are taking actions to strengthen the rules upon which 203 00:11:05,400 --> 00:11:08,760 Speaker 1: we have to abide, and I think that is addressing 204 00:11:08,800 --> 00:11:12,080 Speaker 1: the situation. I do not believe there's an ethics issue 205 00:11:12,120 --> 00:11:15,240 Speaker 1: at the Federal Reserve Presidents. The final question from us 206 00:11:16,000 --> 00:11:18,720 Speaker 1: every cycle for the past few cycles, the feed funds 207 00:11:18,800 --> 00:11:21,080 Speaker 1: right has piked at a lower level. Do you think 208 00:11:21,080 --> 00:11:23,679 Speaker 1: the dynamics are now in place with this economy? They 209 00:11:23,720 --> 00:11:25,360 Speaker 1: give you reason to think that might not be the 210 00:11:25,400 --> 00:11:30,360 Speaker 1: case this time. Well, I mean partly, that's where what 211 00:11:30,400 --> 00:11:32,440 Speaker 1: we've just been talking about is how far do we 212 00:11:32,480 --> 00:11:35,959 Speaker 1: need to go in order to re calorie policy to 213 00:11:36,040 --> 00:11:38,400 Speaker 1: meet our two mandated goals. But I also want to 214 00:11:38,440 --> 00:11:41,800 Speaker 1: point out that the factors that held down inflation over 215 00:11:41,840 --> 00:11:47,800 Speaker 1: the last cycle, globalization, technological change, demographics, there's probably still 216 00:11:47,840 --> 00:11:51,079 Speaker 1: in play in the economy. It's just that they've been 217 00:11:51,160 --> 00:11:57,040 Speaker 1: swamped by the supply chain issues, the high accommodation that's 218 00:11:57,080 --> 00:12:00,679 Speaker 1: in the markets right now, um labor market issues that 219 00:12:00,800 --> 00:12:02,840 Speaker 1: keep people out of the labor market. So all of 220 00:12:02,840 --> 00:12:06,600 Speaker 1: those things right are now front and center. Eventually will 221 00:12:06,640 --> 00:12:09,679 Speaker 1: probably get back to a low interest rate environment. The 222 00:12:09,720 --> 00:12:12,640 Speaker 1: red messed up the Cleveland Fed. President, Thank you very 223 00:12:12,679 --> 00:12:20,199 Speaker 1: much for being with my McKay and my staff this morning. Well, 224 00:12:20,320 --> 00:12:24,240 Speaker 1: we really need is someone who knows negative celsius and 225 00:12:24,480 --> 00:12:26,319 Speaker 1: like you get the rollodex out and there's only one 226 00:12:26,400 --> 00:12:30,440 Speaker 1: name in surveillance land, and that's David Harrow, Packers fan 227 00:12:30,880 --> 00:12:34,000 Speaker 1: and David in two thousand eight Giants Packers you were 228 00:12:34,040 --> 00:12:37,679 Speaker 1: there and it was a negative thirty one celsius windshill. 229 00:12:38,000 --> 00:12:41,560 Speaker 1: How cold was that game? That was pretty cold? And 230 00:12:41,720 --> 00:12:43,640 Speaker 1: you know you have to cover everything up and make 231 00:12:43,679 --> 00:12:46,680 Speaker 1: sure that as you're drinking beer that you had in 232 00:12:46,720 --> 00:12:50,079 Speaker 1: your face mask. You needed a little thing for you 233 00:12:50,600 --> 00:12:53,240 Speaker 1: drink your beer because the beer, of course keeps you warm. 234 00:12:55,520 --> 00:12:58,800 Speaker 1: Tw notes and you have to start the day with 235 00:12:58,840 --> 00:13:03,160 Speaker 1: the broad worst because that is your fuel. So the 236 00:13:03,200 --> 00:13:09,720 Speaker 1: beer is anti freeze and the fuel is the problems problem. 237 00:13:10,000 --> 00:13:13,720 Speaker 1: Thank you for that analysis from balmb in Chicago this morning. 238 00:13:13,800 --> 00:13:18,080 Speaker 1: David Harrow on international investment, the fuel is a weaker dollar. 239 00:13:18,440 --> 00:13:24,080 Speaker 1: Are you going to get international equity performance singularly because 240 00:13:24,120 --> 00:13:26,160 Speaker 1: you need a weak dollar. You need a weak dollar 241 00:13:26,240 --> 00:13:29,760 Speaker 1: to make it work. Now it's it's certainly been a 242 00:13:29,920 --> 00:13:32,720 Speaker 1: headwind by the way. Strong dollar has been a definite 243 00:13:32,760 --> 00:13:35,760 Speaker 1: headwind over the better part of the decade really, and 244 00:13:35,800 --> 00:13:39,400 Speaker 1: now that the dollar seems to have peaked, perhaps that 245 00:13:39,480 --> 00:13:42,800 Speaker 1: we could get some reversal of this, but that's just 246 00:13:42,920 --> 00:13:46,760 Speaker 1: one of the factors that has impacted international returns has 247 00:13:46,760 --> 00:13:49,600 Speaker 1: been the strength of the dollar. It has been a headwind. 248 00:13:49,600 --> 00:13:52,080 Speaker 1: I expect that will probably be a tail one. But 249 00:13:52,160 --> 00:13:55,400 Speaker 1: I think more importantly areas like Europe coming out of 250 00:13:55,440 --> 00:13:59,280 Speaker 1: the pandemic ending the negative real interest rate, the negative 251 00:13:59,320 --> 00:14:04,880 Speaker 1: interest rate experiment will be even bigger drivers, especially given 252 00:14:04,920 --> 00:14:09,200 Speaker 1: the valuation differentials between say, European equities and the rest 253 00:14:09,200 --> 00:14:12,240 Speaker 1: of the world. So David, let's push that forward into 254 00:14:12,280 --> 00:14:14,680 Speaker 1: your call on European equities, especially as we get a 255 00:14:14,679 --> 00:14:17,480 Speaker 1: headline this morning that the World Health Organization is saying 256 00:14:17,480 --> 00:14:20,040 Speaker 1: the O macron may in fact more than half of 257 00:14:20,080 --> 00:14:22,640 Speaker 1: all Europeans within the next couple of weeks, based on 258 00:14:22,680 --> 00:14:25,960 Speaker 1: how much the transmission rates are increasing. Is your view 259 00:14:26,240 --> 00:14:28,840 Speaker 1: that Europe will actually emerge from this more quickly, will 260 00:14:28,880 --> 00:14:32,080 Speaker 1: actually have a lower interest rate policy for longer, and 261 00:14:32,080 --> 00:14:35,080 Speaker 1: will actually allow equities to outperform in a way that 262 00:14:35,120 --> 00:14:38,080 Speaker 1: most people are not expecting. Yeah. I think what will 263 00:14:38,120 --> 00:14:42,760 Speaker 1: happen is this uh amicron rolls through the world, and 264 00:14:42,840 --> 00:14:46,240 Speaker 1: it kind of seemed to have triggered first in Europe 265 00:14:46,280 --> 00:14:49,560 Speaker 1: compared to the US UH and as as you know, 266 00:14:49,600 --> 00:14:52,680 Speaker 1: the Spanish Prime Minister said today, we've gotta stop stop 267 00:14:52,720 --> 00:14:55,440 Speaker 1: looking at this as a pandemic and start just learning 268 00:14:55,440 --> 00:14:57,760 Speaker 1: to deal with this with the flu. And eventually the 269 00:14:57,800 --> 00:15:00,240 Speaker 1: rest of the world will get this message. I looks 270 00:15:00,240 --> 00:15:01,680 Speaker 1: like China is going to be the last one to 271 00:15:01,720 --> 00:15:04,640 Speaker 1: get this message. But what will happen is is they 272 00:15:04,680 --> 00:15:08,280 Speaker 1: reopen the economy and you you finally are getting this 273 00:15:08,960 --> 00:15:13,680 Speaker 1: is synchronized reopening. This will be a major boost to 274 00:15:13,720 --> 00:15:16,760 Speaker 1: the European economy as it will be to the global economy, 275 00:15:17,120 --> 00:15:22,040 Speaker 1: and European businesses really have a heavy export component to them, 276 00:15:22,440 --> 00:15:26,440 Speaker 1: and so as the global economy reopens, I think you 277 00:15:26,480 --> 00:15:29,280 Speaker 1: will expect to see the European economy is almost a 278 00:15:29,320 --> 00:15:34,200 Speaker 1: warrant on global economic growth because the heavy export influence 279 00:15:34,520 --> 00:15:37,520 Speaker 1: it has on their economy. And in the meantime, you 280 00:15:37,600 --> 00:15:41,280 Speaker 1: have had these negative interview rates almost since post the 281 00:15:41,280 --> 00:15:44,120 Speaker 1: financial crisis. I do believe this will be coming to 282 00:15:44,160 --> 00:15:47,120 Speaker 1: an end as well as the global financial system is 283 00:15:47,120 --> 00:15:51,440 Speaker 1: fully capitalized. Uh you know, the reserves that have been 284 00:15:51,480 --> 00:15:54,880 Speaker 1: built up over the decade can now the money earned 285 00:15:54,920 --> 00:15:58,240 Speaker 1: can now be used to invest, to grow to give 286 00:15:58,320 --> 00:16:01,560 Speaker 1: the owners. Um So I do believe that it's going 287 00:16:01,600 --> 00:16:04,600 Speaker 1: to be a better environment that the tail winds hurting 288 00:16:05,280 --> 00:16:09,560 Speaker 1: investors in Europe and outside the United States, or the 289 00:16:09,600 --> 00:16:13,280 Speaker 1: headwinds hurting them become So, David, is the way to 290 00:16:13,320 --> 00:16:16,120 Speaker 1: get the most out of that call to go into 291 00:16:16,160 --> 00:16:20,320 Speaker 1: European banks. I think that's one way. That is one way. 292 00:16:20,320 --> 00:16:23,120 Speaker 1: I think this is has been for a long time 293 00:16:23,160 --> 00:16:26,040 Speaker 1: and times in the kidney because we've been stubbornly attached 294 00:16:26,080 --> 00:16:29,720 Speaker 1: to these why because the price is low, and even 295 00:16:29,800 --> 00:16:34,120 Speaker 1: despite those macro headwinds, they've been able to grow earnings now, 296 00:16:34,160 --> 00:16:38,200 Speaker 1: albeit at a slow rate, but you know, you have 297 00:16:38,320 --> 00:16:43,960 Speaker 1: been able to see acceptable business performance despite the very 298 00:16:44,160 --> 00:16:50,280 Speaker 1: poor macro conditions. Now these macro conditions are changing, and 299 00:16:50,400 --> 00:16:52,880 Speaker 1: so I believe you will see even a faster build 300 00:16:52,960 --> 00:16:55,880 Speaker 1: up of capital. Instead of that capital having to stay 301 00:16:55,880 --> 00:16:59,880 Speaker 1: on the balance sheet because of reserve requirements, they're in 302 00:17:00,000 --> 00:17:01,960 Speaker 1: to be able to use that capital. So you're gonna 303 00:17:01,960 --> 00:17:04,640 Speaker 1: see an increase in the velocity of money. And this 304 00:17:04,760 --> 00:17:08,240 Speaker 1: is exactly why the central banks can't send David, we 305 00:17:08,280 --> 00:17:11,040 Speaker 1: gotta turn to European banking. It has been a horrific 306 00:17:11,080 --> 00:17:14,240 Speaker 1: two thousand twenty one from management all sorts of stories. 307 00:17:14,280 --> 00:17:17,320 Speaker 1: You've actually been knee deep in this and very visible 308 00:17:17,440 --> 00:17:21,960 Speaker 1: and I'm sure at times invisible as well. Is European 309 00:17:22,119 --> 00:17:27,679 Speaker 1: banking management becoming more Anglo American where they will really 310 00:17:27,800 --> 00:17:31,879 Speaker 1: adapt to shareholder pressure. You know, I was just talking 311 00:17:31,880 --> 00:17:35,680 Speaker 1: to your your very good reporter and covers this, Yeah, 312 00:17:35,800 --> 00:17:39,000 Speaker 1: Jehan Heinrich Forster by the way, and he you know, 313 00:17:39,400 --> 00:17:42,840 Speaker 1: I think it's improved greatly. It is if you look, 314 00:17:42,880 --> 00:17:46,920 Speaker 1: I look across our whole needs UH in Italy and 315 00:17:47,000 --> 00:17:50,480 Speaker 1: TESSAs al Polo and France b NP. I mean, two 316 00:17:50,520 --> 00:17:53,359 Speaker 1: of the best banking CEOs, I would say in the world, 317 00:17:54,160 --> 00:17:58,880 Speaker 1: and UH and and leading those organizations. Credit Suite, of course, 318 00:17:58,920 --> 00:18:03,159 Speaker 1: which is struggled, really really struggle. Come on, David, David, 319 00:18:03,200 --> 00:18:05,960 Speaker 1: I gotta cut you off. Let's get to the chase, 320 00:18:06,119 --> 00:18:08,600 Speaker 1: David Harrow. Does Credit Sweeze have to be put out 321 00:18:08,640 --> 00:18:12,560 Speaker 1: of its misery? You know what happen has to happen 322 00:18:12,560 --> 00:18:16,439 Speaker 1: at Credit Sweets is they have to allow change to 323 00:18:16,600 --> 00:18:21,800 Speaker 1: happen via the new chairman, um Antonio ortez O Sario. 324 00:18:22,359 --> 00:18:27,320 Speaker 1: If he is very capable, he stabilized and repaired Lloyd's. 325 00:18:27,680 --> 00:18:32,360 Speaker 1: He's the exact answer to their problems. Now. To be honest, 326 00:18:33,240 --> 00:18:34,840 Speaker 1: I think this is their lot. This is the last 327 00:18:34,920 --> 00:18:39,199 Speaker 1: chance you. He is the answer to their problems. You 328 00:18:39,280 --> 00:18:42,159 Speaker 1: need organization, you need discipline, you need a culture of 329 00:18:42,280 --> 00:18:47,720 Speaker 1: risk control. These are exactly what he brings to the table. David, 330 00:18:47,760 --> 00:18:50,200 Speaker 1: and I think that if he's not allowed to do this, 331 00:18:50,280 --> 00:18:52,760 Speaker 1: and if they pick on him over this quarantine stuff, 332 00:18:53,000 --> 00:18:55,960 Speaker 1: then you then it should probably be broken up. So 333 00:18:56,080 --> 00:19:00,359 Speaker 1: as an investor, how much time are you giving them? Well, 334 00:19:00,920 --> 00:19:03,840 Speaker 1: you're being paid to weight in essence because the price 335 00:19:03,920 --> 00:19:06,639 Speaker 1: of the business is fifty or sixty of book value. 336 00:19:06,920 --> 00:19:09,679 Speaker 1: When I run properly, it should be a double or 337 00:19:09,680 --> 00:19:13,280 Speaker 1: triple that. So we will be patient as long as 338 00:19:13,320 --> 00:19:17,280 Speaker 1: we're seeing progress, and then if if it becomes unfixable, 339 00:19:17,320 --> 00:19:20,400 Speaker 1: as Tom you know and suggested, Um you know, by 340 00:19:20,400 --> 00:19:23,240 Speaker 1: the way, many parts of the business are operating just fine, 341 00:19:23,960 --> 00:19:27,800 Speaker 1: and unfortunately those many parts of the business. Azzi Grubel 342 00:19:27,840 --> 00:19:30,920 Speaker 1: said this. You know, it's really simple. Banks make money, 343 00:19:31,000 --> 00:19:33,280 Speaker 1: but the object is to keep it after you make it, 344 00:19:33,880 --> 00:19:37,240 Speaker 1: and in Credit Sweezes case, they didn't or have not 345 00:19:37,320 --> 00:19:39,600 Speaker 1: been able to keep all of what they've made because 346 00:19:39,640 --> 00:19:43,520 Speaker 1: of poor risk control and poor legal and compliance etcetera, etcetera. 347 00:19:43,840 --> 00:19:47,760 Speaker 1: So if you can fix these things, all that money 348 00:19:47,840 --> 00:19:49,960 Speaker 1: that has been made in the past, that has been 349 00:19:49,960 --> 00:19:55,320 Speaker 1: fritted away two finds and two losses will become gains 350 00:19:55,440 --> 00:19:58,720 Speaker 1: for the shareholders. And I think this is what's important 351 00:19:58,800 --> 00:20:02,240 Speaker 1: is you know the engine has been producing income. It's 352 00:20:02,240 --> 00:20:06,159 Speaker 1: been coming in the front door, unfortunately because of sour 353 00:20:06,960 --> 00:20:10,400 Speaker 1: leadership and management. And I think you know it's been 354 00:20:10,400 --> 00:20:14,080 Speaker 1: no secret. I think the past chairman of the business, 355 00:20:14,119 --> 00:20:17,400 Speaker 1: who has been there over a decade, presided over all 356 00:20:17,480 --> 00:20:22,520 Speaker 1: these legal incidents and all these marketing fractions. Now that 357 00:20:22,560 --> 00:20:25,480 Speaker 1: you have proper top leadership at the top of the organization, 358 00:20:26,119 --> 00:20:30,840 Speaker 1: I believe that this this income that is generated can 359 00:20:30,880 --> 00:20:34,560 Speaker 1: be captured. It's David, you mentioned a word that unfixable. 360 00:20:34,800 --> 00:20:37,920 Speaker 1: What does unfixable look like? How do you know it 361 00:20:37,960 --> 00:20:44,280 Speaker 1: when you see it? When you continue to see losses 362 00:20:44,320 --> 00:20:50,240 Speaker 1: and infractions and a lack of executional excellence and a 363 00:20:50,320 --> 00:20:54,080 Speaker 1: lack of discipline. You need discipline, and especially in financial 364 00:20:54,119 --> 00:20:58,440 Speaker 1: services where you have in many cases translent, translucent or 365 00:20:58,520 --> 00:21:02,200 Speaker 1: opaque assets, and you need to be able to control 366 00:21:02,280 --> 00:21:05,439 Speaker 1: and manage risk. You don't completely eliminate risk. You have 367 00:21:05,520 --> 00:21:09,200 Speaker 1: to look at risk reward. You have to price risk 368 00:21:09,560 --> 00:21:13,920 Speaker 1: properly and balance it properly in order for a financial 369 00:21:13,960 --> 00:21:19,040 Speaker 1: institution to be successful. And unfortunately this is what credits. Yeah, David, 370 00:21:19,119 --> 00:21:21,800 Speaker 1: we don't care what we want to know Aaron Rodgers. 371 00:21:21,880 --> 00:21:24,000 Speaker 1: I mean, he's got a left tackle back. The gentleman 372 00:21:24,040 --> 00:21:27,520 Speaker 1: from Colorado and Boulder, David bak tr tell me all 373 00:21:27,560 --> 00:21:30,200 Speaker 1: the importance of the line for Aaron Rodgers and that 374 00:21:30,359 --> 00:21:33,760 Speaker 1: left tackle well back, of course, it is critical. He's 375 00:21:33,800 --> 00:21:36,439 Speaker 1: probably one of the best tackles in the league. And 376 00:21:36,480 --> 00:21:38,560 Speaker 1: if you give more, if you get more time to 377 00:21:38,640 --> 00:21:42,560 Speaker 1: Aaron Rodgers, you know, that's like given a sharpshooter. You know, 378 00:21:43,560 --> 00:21:47,480 Speaker 1: you you he becomes even dead later. He becomes even 379 00:21:47,520 --> 00:21:52,199 Speaker 1: dead later. Thank you, John, I misspelled Aaron Rodgers. I'm 380 00:21:52,240 --> 00:21:54,520 Speaker 1: gonna go so much to the Packers time out chair. 381 00:21:55,119 --> 00:21:59,200 Speaker 1: I'm never gonna be invited in Wisconsin again, David, thank you, 382 00:21:58,880 --> 00:22:01,520 Speaker 1: thank you. How I associate it's given how cold some 383 00:22:01,560 --> 00:22:04,720 Speaker 1: of those games out? Is that good enough chanting for you? 384 00:22:04,880 --> 00:22:08,240 Speaker 1: Minus thirty one degrees? Win? Chill give me a bright 385 00:22:14,080 --> 00:22:15,960 Speaker 1: right now, Brent shooting gets the started here. We've got 386 00:22:15,960 --> 00:22:18,800 Speaker 1: a really eventful hour for you on radio and television 387 00:22:18,840 --> 00:22:22,200 Speaker 1: with Northwestern Mutual. Where short term is five years, Brent, 388 00:22:22,320 --> 00:22:24,760 Speaker 1: forget about short term is five years. Let's bring it 389 00:22:24,800 --> 00:22:28,080 Speaker 1: in big time to a three year perspective. What is 390 00:22:28,119 --> 00:22:32,639 Speaker 1: the three year perspective? Given the cacophony right now? I 391 00:22:32,640 --> 00:22:34,399 Speaker 1: think in the narrow term, I actually think the market 392 00:22:34,440 --> 00:22:36,280 Speaker 1: has legs to go higher. Now. I know we're going 393 00:22:36,280 --> 00:22:38,800 Speaker 1: through this painful kind of rotation, which has always been 394 00:22:38,800 --> 00:22:40,680 Speaker 1: a question of ours. Can you actually deflate some of 395 00:22:40,720 --> 00:22:43,320 Speaker 1: the more excessive parts of the markets without causing that 396 00:22:43,359 --> 00:22:45,960 Speaker 1: to leak into the broader market. And so far, despite 397 00:22:46,000 --> 00:22:48,920 Speaker 1: all that commentary, you have seen value stocks hold up well. 398 00:22:49,320 --> 00:22:51,800 Speaker 1: You've seen hopes, dreams, themes and memes, some of those 399 00:22:51,840 --> 00:22:54,119 Speaker 1: things that didn't make sense that we're bit up on 400 00:22:54,359 --> 00:22:58,520 Speaker 1: excessive monetary policy, dy've deflated more than fift I think 401 00:22:58,560 --> 00:23:00,680 Speaker 1: you continue to see that throughout the year. I think 402 00:23:00,680 --> 00:23:03,240 Speaker 1: hopefully we get better news on COVID. I think inflation 403 00:23:03,440 --> 00:23:06,919 Speaker 1: does pull back as we shift more from goods buying 404 00:23:07,040 --> 00:23:09,920 Speaker 1: to services buying. And then I think that allows the 405 00:23:10,000 --> 00:23:12,040 Speaker 1: Fed to be just a bit less aggressive than market 406 00:23:12,119 --> 00:23:14,920 Speaker 1: is pricing against an economic backdrop that is still strong. 407 00:23:15,160 --> 00:23:17,160 Speaker 1: And I think the first half is a pretty good 408 00:23:17,160 --> 00:23:20,080 Speaker 1: part of the year policy right now, Brent, And just 409 00:23:20,119 --> 00:23:22,399 Speaker 1: to jump in because this is important. You think this 410 00:23:22,480 --> 00:23:24,600 Speaker 1: is a problem for pockets of the market, not the 411 00:23:24,680 --> 00:23:27,640 Speaker 1: overall market, at least in the front half. Yeah, And 412 00:23:27,880 --> 00:23:29,399 Speaker 1: that was mentioned by Tom in the opening when you 413 00:23:29,400 --> 00:23:31,360 Speaker 1: talked about a nuanced market. I mean you're seeing parts 414 00:23:31,359 --> 00:23:33,040 Speaker 1: of the market that are actually doing okay. The last 415 00:23:33,080 --> 00:23:36,120 Speaker 1: few weeks, you've seen value stocks hold up quite well. Look, 416 00:23:36,440 --> 00:23:40,560 Speaker 1: you've had an abnormal economy. The word economic adaptation has occurred. 417 00:23:40,600 --> 00:23:42,920 Speaker 1: We had that forecast for a while that has led 418 00:23:43,080 --> 00:23:47,080 Speaker 1: to market abnormalities. Hope streams, themes and memes are one, 419 00:23:47,359 --> 00:23:50,160 Speaker 1: but then you also have growth strack talks trading at 420 00:23:50,200 --> 00:23:53,480 Speaker 1: record pees relative to value stocks. You have large caps 421 00:23:53,480 --> 00:23:56,239 Speaker 1: trading at record pease relative to small caps. And so 422 00:23:56,320 --> 00:23:59,160 Speaker 1: we think that as the economy normalizes, which we think 423 00:23:59,200 --> 00:24:01,760 Speaker 1: we're continuing to do, the market will have to normalize, 424 00:24:01,960 --> 00:24:03,720 Speaker 1: and that means that part of the market that hasn't 425 00:24:03,720 --> 00:24:06,040 Speaker 1: done as well, that is quite frankly cheap, will do 426 00:24:06,080 --> 00:24:08,800 Speaker 1: better as real interest rates move higher. Tait me to 427 00:24:08,840 --> 00:24:12,280 Speaker 1: the second half, then I worry more than because at 428 00:24:12,320 --> 00:24:13,680 Speaker 1: the second half of the year, we could be out 429 00:24:13,680 --> 00:24:16,199 Speaker 1: of economic slack or moving towards that. Think about it 430 00:24:16,280 --> 00:24:18,280 Speaker 1: this way, at the end of two thousand nineteen we 431 00:24:18,320 --> 00:24:21,840 Speaker 1: had a pretty tight labor market. Between now and the 432 00:24:21,920 --> 00:24:23,320 Speaker 1: end of the year, we could be back to where 433 00:24:23,320 --> 00:24:24,879 Speaker 1: we were in two thousand nineteen at the end of 434 00:24:25,240 --> 00:24:27,400 Speaker 1: at the end of that time period, a later economic 435 00:24:27,440 --> 00:24:30,320 Speaker 1: cycle market where we're out of labor market slack, and 436 00:24:30,359 --> 00:24:33,560 Speaker 1: then the question because becomes can productivity keep up? We 437 00:24:33,600 --> 00:24:36,119 Speaker 1: only have around four million more people to hire before 438 00:24:36,160 --> 00:24:38,159 Speaker 1: we're back all us being equal to where we were 439 00:24:38,200 --> 00:24:40,399 Speaker 1: in two thousand nineteen, and at two hundred four hundred 440 00:24:40,440 --> 00:24:43,000 Speaker 1: thousand per month, that means ten to twenty months before 441 00:24:43,000 --> 00:24:45,160 Speaker 1: the labor market could potentially be tight, and that's when 442 00:24:45,200 --> 00:24:47,920 Speaker 1: you might have more real inflation, not the one that 443 00:24:47,960 --> 00:24:50,080 Speaker 1: you're having right now, which is based upon COVID and 444 00:24:50,119 --> 00:24:52,680 Speaker 1: some of those abnormalities. Brent, you talk about the first 445 00:24:52,720 --> 00:24:55,600 Speaker 1: half and the second half and a bifurcated nature between 446 00:24:55,600 --> 00:24:57,280 Speaker 1: the two halves, and you're not alone. A lot of 447 00:24:57,280 --> 00:24:59,960 Speaker 1: people have said the same thing. How do you arrange 448 00:25:00,080 --> 00:25:03,560 Speaker 1: a strategy where you have the flexibility to rejigger at 449 00:25:03,560 --> 00:25:06,240 Speaker 1: a time when everybody is doing the same thing in 450 00:25:06,320 --> 00:25:09,480 Speaker 1: response to the same inputs, and liquidity is being drained 451 00:25:09,480 --> 00:25:12,679 Speaker 1: from the system. Yeah. I mean we've been to overweight 452 00:25:12,720 --> 00:25:14,560 Speaker 1: more of the value of the small, the cheaper parts 453 00:25:14,560 --> 00:25:15,960 Speaker 1: of the market for some time, and we're going to 454 00:25:16,040 --> 00:25:18,000 Speaker 1: continue to be overweight those parts of the market, probably 455 00:25:18,040 --> 00:25:19,600 Speaker 1: to the middle half of the year. And then we 456 00:25:19,640 --> 00:25:21,239 Speaker 1: start looking and thinking about do we want to bring 457 00:25:21,280 --> 00:25:23,639 Speaker 1: our equity ratio down just a bit to reflect the 458 00:25:23,680 --> 00:25:25,440 Speaker 1: fact that a lot of the easy money has been made. 459 00:25:25,600 --> 00:25:28,880 Speaker 1: The labor market maybe tight then uh, and the output gap, 460 00:25:28,920 --> 00:25:31,720 Speaker 1: which is an important concept, maybe closed. Um. I still 461 00:25:31,760 --> 00:25:34,359 Speaker 1: think the economy has legs into because I do think 462 00:25:34,359 --> 00:25:37,040 Speaker 1: productivity is kind of the unsung story that will become 463 00:25:37,560 --> 00:25:39,640 Speaker 1: kind of the more sung story towards the second half 464 00:25:39,640 --> 00:25:42,679 Speaker 1: of the year, and that keeps us going four. But 465 00:25:42,760 --> 00:25:45,800 Speaker 1: certainly the risk arising. Brent, you said that you reduced 466 00:25:46,080 --> 00:25:49,480 Speaker 1: equity exposure and then go into what our bonds the 467 00:25:49,520 --> 00:25:52,840 Speaker 1: place to go? Do you go into bitcoin? Uh? No, 468 00:25:52,960 --> 00:25:55,080 Speaker 1: not bitcoin, I said, hope streams themes and memes, and 469 00:25:55,080 --> 00:25:57,119 Speaker 1: I would extend that to crypto. Um, just as a 470 00:25:57,200 --> 00:25:59,600 Speaker 1: kind of a framework. Um. You know, that's a good question, 471 00:25:59,640 --> 00:26:01,439 Speaker 1: and I guess we'll we'll cross that regimen get there. 472 00:26:01,480 --> 00:26:03,280 Speaker 1: I think you're gonna see yields normalize a bit more 473 00:26:03,320 --> 00:26:05,040 Speaker 1: in the coming months, which could provide the more of 474 00:26:05,040 --> 00:26:07,560 Speaker 1: an opportunity in the bond market for a real return 475 00:26:07,600 --> 00:26:09,800 Speaker 1: at some point. But for right now, we are still 476 00:26:09,840 --> 00:26:12,119 Speaker 1: overweight equities relative to fixed income, and we'll play that 477 00:26:12,200 --> 00:26:15,160 Speaker 1: day by day, Brent. Brent, final question, Can I call 478 00:26:15,359 --> 00:26:19,560 Speaker 1: negative nine celsius cold? Is that cold enough for you? 479 00:26:20,119 --> 00:26:21,600 Speaker 1: It's cold enough for me, and it's cold enough here 480 00:26:21,600 --> 00:26:23,480 Speaker 1: in Milwaukee, although I'm setting in my basement so it's 481 00:26:23,520 --> 00:26:25,560 Speaker 1: rather warmed down here. But I think the temperatures were 482 00:26:25,560 --> 00:26:30,320 Speaker 1: outrun zero outside zero fahrenheit, zero fahrenheit. That's all I 483 00:26:30,359 --> 00:26:35,280 Speaker 1: do math fahrenheit French of Northwestern Uture. I'm just not 484 00:26:35,359 --> 00:26:38,760 Speaker 1: familiar with fahrenheit on I asked Brent, Tom because every 485 00:26:38,760 --> 00:26:43,119 Speaker 1: time I say it's freezing, you tell me this is nothing. Today. 486 00:26:43,160 --> 00:26:44,879 Speaker 1: We're on you know, we're not on the edge of 487 00:26:44,880 --> 00:26:54,840 Speaker 1: Buffalo today in the negative nights. But you know, Renicent 488 00:26:55,040 --> 00:26:57,040 Speaker 1: is gonna walk off the stage here if we don't 489 00:26:57,080 --> 00:26:59,439 Speaker 1: get to her. A Reticent joins us right now Directive 490 00:26:59,480 --> 00:27:02,879 Speaker 1: Research in Energy Aspects, and she is wonderful on the 491 00:27:02,920 --> 00:27:06,800 Speaker 1: micro economics that gets you to twenty dollars a barrel 492 00:27:06,800 --> 00:27:09,680 Speaker 1: and Brent crude or maybe sixty dollars a barrel and 493 00:27:09,760 --> 00:27:12,239 Speaker 1: Brent crude, and we're gonna send me. There's never been 494 00:27:12,280 --> 00:27:14,480 Speaker 1: a greater time out of the g d P marked 495 00:27:14,520 --> 00:27:18,639 Speaker 1: down by Golden Sex and China. The mystery of oil 496 00:27:18,720 --> 00:27:21,760 Speaker 1: demand to me right now off the chart, do you 497 00:27:21,800 --> 00:27:23,919 Speaker 1: have a clue what oil demand is going to be 498 00:27:23,960 --> 00:27:28,600 Speaker 1: this year? Yeah, we think it is going to continue 499 00:27:28,600 --> 00:27:32,320 Speaker 1: to rise and rise by about close to three million 500 00:27:32,359 --> 00:27:33,880 Speaker 1: barrels per day. It's not going to be quite there, 501 00:27:33,920 --> 00:27:36,679 Speaker 1: but close to that. China actually isn't going to be 502 00:27:36,720 --> 00:27:40,120 Speaker 1: the biggest driver of growth because you know, you've obviously 503 00:27:40,119 --> 00:27:43,400 Speaker 1: still got zero COVID policy there. We don't necessarily think 504 00:27:43,400 --> 00:27:46,320 Speaker 1: they're going to lift that anytime soon, but it is 505 00:27:46,359 --> 00:27:48,200 Speaker 1: going to be the rest of Asia. Most of Asia 506 00:27:48,240 --> 00:27:52,920 Speaker 1: hasn't actually had much of summer driving season, as we've 507 00:27:52,960 --> 00:27:56,160 Speaker 1: seen in the West last year. A lot of parts 508 00:27:56,160 --> 00:27:58,800 Speaker 1: of Asia was still in lockdown or at least under 509 00:27:58,840 --> 00:28:01,080 Speaker 1: some form of mobility striction. So you're going to see 510 00:28:01,280 --> 00:28:03,880 Speaker 1: you are already seeing a lot of strong demand growth 511 00:28:03,960 --> 00:28:05,960 Speaker 1: numbers coming out of there. Of course, now cases are 512 00:28:06,080 --> 00:28:09,280 Speaker 1: rising everywhere in the East, but once we are through 513 00:28:09,359 --> 00:28:12,040 Speaker 1: this period, the summer should be very, very strong and 514 00:28:12,119 --> 00:28:14,080 Speaker 1: reading what do you make of this Francisco Blanche of 515 00:28:14,119 --> 00:28:17,879 Speaker 1: Banco America call for a hundred dollars or plus oil 516 00:28:17,920 --> 00:28:23,120 Speaker 1: prices by the second quarter. I mean our price forecast, 517 00:28:23,160 --> 00:28:25,200 Speaker 1: which has been, like you know, consistent for a few 518 00:28:25,240 --> 00:28:28,240 Speaker 1: years now, we've been calling for a hundred and fourteen 519 00:28:28,240 --> 00:28:30,680 Speaker 1: dollars for next year. That's an annual average. Of course, 520 00:28:30,680 --> 00:28:33,560 Speaker 1: it goes well above one next year. We don't necessarily 521 00:28:33,560 --> 00:28:36,320 Speaker 1: see that this year, even though we are saying and 522 00:28:36,359 --> 00:28:40,880 Speaker 1: our models are showing that that inventories globally are not 523 00:28:40,960 --> 00:28:43,920 Speaker 1: just at a record low levels um this summer, they're 524 00:28:43,920 --> 00:28:45,960 Speaker 1: going to fall down to those levels, but they are 525 00:28:46,000 --> 00:28:48,400 Speaker 1: going to be at levels we've really never seen, specially 526 00:28:49,280 --> 00:28:52,200 Speaker 1: on a global basis, but especially in in a non 527 00:28:52,200 --> 00:28:54,600 Speaker 1: O E c D countries. So yes, there are risks 528 00:28:54,640 --> 00:28:57,120 Speaker 1: that prices go higher. I mean, our annual average for 529 00:28:57,160 --> 00:29:00,160 Speaker 1: this year is eighty five. But the worry of us 530 00:29:00,160 --> 00:29:03,360 Speaker 1: in the near terms still is COVID demand is still hamstrung. 531 00:29:03,680 --> 00:29:07,120 Speaker 1: OPEC still has barrels to give, so for us, the 532 00:29:07,200 --> 00:29:10,920 Speaker 1: real spike in oil price story remains second half, like 533 00:29:11,040 --> 00:29:14,000 Speaker 1: really end of this year into next year. The caveat 534 00:29:14,040 --> 00:29:16,480 Speaker 1: to that is these supply outages. We've seen so many 535 00:29:16,520 --> 00:29:20,760 Speaker 1: of them Ecuador, Libya, Nigeria, Kazakhs down recently. If these 536 00:29:20,840 --> 00:29:23,479 Speaker 1: keep mounting, of course you can get two hundred dollars earlier, 537 00:29:23,520 --> 00:29:26,120 Speaker 1: but without those it will still be end of the 538 00:29:26,200 --> 00:29:29,480 Speaker 1: year into next year. How much are we underestimating the 539 00:29:29,600 --> 00:29:32,840 Speaker 1: higher cost to actually refine some of the oil that's 540 00:29:32,840 --> 00:29:35,760 Speaker 1: going to be coming online, especially in light of some 541 00:29:35,840 --> 00:29:39,160 Speaker 1: of the other material inflation that we've seen around the world. 542 00:29:41,200 --> 00:29:43,440 Speaker 1: It's a great question, and you know, something we've been 543 00:29:43,440 --> 00:29:47,000 Speaker 1: accounting for in our balances. To to Tom's point, in 544 00:29:47,120 --> 00:29:49,520 Speaker 1: terms of the economics of it, it becomes very important. 545 00:29:49,760 --> 00:29:52,400 Speaker 1: We are looking at cost inflation of at least ten 546 00:29:52,440 --> 00:29:56,200 Speaker 1: to fifteen percent across the upstream industry, and that just 547 00:29:56,280 --> 00:29:58,720 Speaker 1: means that again, you need a higher price just for 548 00:29:59,000 --> 00:30:02,520 Speaker 1: these producers to bring even because they need that much 549 00:30:02,600 --> 00:30:06,920 Speaker 1: more in terms of their equipment and just for sustaining 550 00:30:06,960 --> 00:30:10,000 Speaker 1: their production. So that's a minimum tend toftcent. In some 551 00:30:10,080 --> 00:30:14,320 Speaker 1: areas we're hearing about inflation when it comes to oil 552 00:30:14,360 --> 00:30:17,440 Speaker 1: services and said, just finally, how strong is our understanding 553 00:30:17,480 --> 00:30:20,720 Speaker 1: of the relationship between say, banant sheet reduction and creed prices, 554 00:30:20,800 --> 00:30:23,480 Speaker 1: interest rate hikes and create prices. The latter We have 555 00:30:23,480 --> 00:30:28,560 Speaker 1: a ton of experience with the form and us so much. Oh. Absolutely, 556 00:30:28,560 --> 00:30:30,000 Speaker 1: And I think this is going to be again if 557 00:30:30,000 --> 00:30:32,880 Speaker 1: you talk about wild cards or you know, just events 558 00:30:32,920 --> 00:30:36,480 Speaker 1: outside of the core fundamentals of oil impacting crew this year, 559 00:30:36,520 --> 00:30:39,960 Speaker 1: it's going to be hugely important. Um generally speaking, if 560 00:30:40,000 --> 00:30:44,320 Speaker 1: we do enter a period of tightening monetary policy or 561 00:30:44,360 --> 00:30:46,680 Speaker 1: even physical policy for that matter, we are going to 562 00:30:46,720 --> 00:30:49,080 Speaker 1: be in a period of lower growth and by definition 563 00:30:49,120 --> 00:30:53,040 Speaker 1: lower oil prices. But if you that is accompanied with inflation, 564 00:30:53,400 --> 00:30:55,880 Speaker 1: oil tends to do perform very well in a high 565 00:30:55,920 --> 00:30:59,719 Speaker 1: inflationary period. So that's your juxtap position with that theory, 566 00:31:00,000 --> 00:31:02,320 Speaker 1: This is really tough. That's the bottom line. I'm ready 567 00:31:02,320 --> 00:31:04,960 Speaker 1: to sent Thank you of Energy Aspects. This is the 568 00:31:04,960 --> 00:31:09,640 Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays 569 00:31:09,680 --> 00:31:13,160 Speaker 1: from seven to ten am Eastern on Bloomberg Radio and 570 00:31:13,280 --> 00:31:17,560 Speaker 1: on Bloomberg Television each day from six to nine am 571 00:31:17,600 --> 00:31:21,360 Speaker 1: for insight from the best in economics, finance, investment and 572 00:31:21,440 --> 00:31:28,000 Speaker 1: international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, 573 00:31:28,160 --> 00:31:31,720 Speaker 1: Bloomberg dot com, and of course, on the terminal. I'm 574 00:31:31,760 --> 00:31:34,440 Speaker 1: Tom Keene, and this is Bloomberg.