Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, sun Cloud, Bloomberg dot
Speaker 1: com and of course on the Bloomberg terminal. Lauretta Mester
Speaker 1: is a mathematician. She has been consistent and she has
Speaker 1: been very very articulate about her views on the Fed.
Speaker 1: Of course, with Michael McKee and with Jonathan Farrell in
Speaker 1: the great precursor to what we'll hear from Jerome Polier
Speaker 1: in about an hour. We do this with the markets
Speaker 1: churning this morning. Our Jonathan Farrell were the president of
Speaker 1: the Cleveland Fed, New York City especial Welcome to ot
Speaker 1: CV and radio audience worldwide. Bloomberg's My McKey alongside us.
Speaker 1: Happy to say joining us both Cleveland Fed President the
Speaker 1: Randomester President Memester. Always fantastic to catch up with you.
Speaker 1: You know the setup right now, We've got Deutsche Bank
Speaker 1: City JP, Morgan Goldman all calling for rate hikes in March,
Speaker 1: some of your colleagues doing the same. What obstacles the
Speaker 1: left of any for making a move that suit. Well,
Speaker 1: you know, the economy is on a really good track.
Speaker 1: The inflation numbers are high. It looks now that inflation
Speaker 1: is more persistent. I'm going forward early in the pandemic. Earlier,
Speaker 1: you know, in the last year, a lot of those
Speaker 1: rate price increases were really on things that are really
Speaker 1: tied to the reopening of the economy and the supply chain.
Speaker 1: Now those price increases of broadened. So if the economy
Speaker 1: in March looks like it does today and the outlook
Speaker 1: is similar, and of course there's uncertainty around that, but
Speaker 1: if it does, and I would support moving the funds
Speaker 1: right up at that meeting and starting to move back
Speaker 1: from some of the extraordinary accommodation we needed earlier in
Speaker 1: the pandemic. And you know, I just want to point
Speaker 1: out that even when we make that first rate move,
Speaker 1: whenever it is that's not really policy tightening, accommodation is
Speaker 1: still going to be really high at that point. So
Speaker 1: you know, I think that the case is really strong
Speaker 1: to begin to wind back some of that accommodation. Well,
Speaker 1: that raises the question for our friends on the trading
Speaker 1: floor of how far how fast and where do you stop?
Speaker 1: Bill Dudley says you probably need to do four or
Speaker 1: five rate moves this year. You've long been an inflation hawk.
Speaker 1: How far do you think you need to go? Well,
Speaker 1: I can tell you in that December set submission, I
Speaker 1: had three pencil in for for this year and a
Speaker 1: few more over than you know next the trajectory. But
Speaker 1: I also want to point out that you know, we're
Speaker 1: gonna have to see how the economy does over time
Speaker 1: before we can say for sure how many rate increases
Speaker 1: are needed. You know that there's still a lot of
Speaker 1: uncertainty round the outlook. There's uncertainty about how the pandemic
Speaker 1: plays out. As we've seen each new bariat, the economy
Speaker 1: has really navigated it in terms of the economic outlook.
Speaker 1: But right now, you know, we have to say that
Speaker 1: we probably need to recalibrate our policy stance because inflation
Speaker 1: is well above where we need it to be. The
Speaker 1: employment markets, you know, labor markets are tight from the
Speaker 1: standpoint of a policy relevant framework. Do I think we'll
Speaker 1: see labor force participation move up somewhat after we get
Speaker 1: beyond the pandemic, of course, but I don't think we
Speaker 1: can ignore the shorter run or medium run tightness in
Speaker 1: that labor market. So I think we're in a good
Speaker 1: place to move policy, and you know, we'll have to
Speaker 1: see how that affects the economy going forward and the
Speaker 1: other factors affecting economic growth and employment going forward. Well,
Speaker 1: speaking of moving policy, the Fed's statement of principle says
Speaker 1: that the interest rate, the FED funds rate, should be
Speaker 1: the primary tool. But you also have a lot of
Speaker 1: bonds on the ballot. Cheat how does quantitative tightening to
Speaker 1: use the market term fit into your thinking? How much
Speaker 1: would that be worth uh in terms of additional tightening
Speaker 1: and when do you think that should be done, if
Speaker 1: at all? Yeah, So, I mean we have a little
Speaker 1: bit of a playbook from the last time, but I
Speaker 1: think this time is different in the sense that we
Speaker 1: basically have a much larger balance sheet than we did
Speaker 1: because we had to do those asset purchases at the
Speaker 1: start of the pandemic because of financial market conditions being
Speaker 1: the disruption of the financial markets, we really needed to
Speaker 1: make sure that the financial markets continue to function. Now
Speaker 1: that additional liquidity is serving as a accommodate of policy tool. Um,
Speaker 1: we also have a much stronger economy now, so you know,
Speaker 1: I think we'll be able to to allow the balance
Speaker 1: sheet to run down much faster than we did last
Speaker 1: time because of those two factors and adjusting you know,
Speaker 1: how far to go and how We're still considering that,
Speaker 1: but I do think that it's good to look at
Speaker 1: sort of the policy tool to interest rate as our
Speaker 1: main tool, but to take into account that we also
Speaker 1: are going to allow the balance sheet um to to
Speaker 1: to run down. I mean, we double the balance sheet
Speaker 1: over this pandemic period, and I think we can bring
Speaker 1: it down um also to support less accommodate of monetary
Speaker 1: policy stance. And we'll have to see. I mean, frankly,
Speaker 1: there's a lot of estimates out there what happened the
Speaker 1: last time we did quantitaryated eat you know, easing and
Speaker 1: then tightening. But the pandemic is a different environment as
Speaker 1: we've seen the whole time, right, I mean, you know,
Speaker 1: we don't still know kind of what those effects will
Speaker 1: be and we'll have to keep monitoring that. But that's
Speaker 1: kind of what we do always when we're doing monetary policy.
Speaker 1: We always sort of think about we take an action
Speaker 1: that we look at the data. We're very data dependent. Um,
Speaker 1: we're very you know, looking at the current economy and
Speaker 1: then the you know, what's on the horizon for the outlook,
Speaker 1: and then we take into account the risk around that outlook,
Speaker 1: and then we recalibrate our policy. And I that we're
Speaker 1: going to do that this time. I'm sure President message
Speaker 1: just to get some more clarity on that, I think
Speaker 1: this is important. Do you think balance sheet reduction is
Speaker 1: something that runs passively in the background alongside decisions you
Speaker 1: make separately on rate hikes or is it something that
Speaker 1: supports the right hike effort? Mike and I are trying
Speaker 1: to consider trying to work out whether the balance sheet
Speaker 1: reduction reduces the need for further rate hikes at some
Speaker 1: point as well. How do you think about that dynamic.
Speaker 1: Is it's something that runs off in the background passively
Speaker 1: or something that you think about together alongside interest rate hikes. Well,
Speaker 1: I I'm gonna answer your question the way You're not
Speaker 1: gonna like both, right. I Mean, my kind of way
Speaker 1: I think about it is I'd like to sort of
Speaker 1: set sort of a path for the balance sheet, you know,
Speaker 1: communicate that in advance from the markets that will you know,
Speaker 1: reduce accommodation and then we'll use our policy tool, the
Speaker 1: fit fund rate, as our active tool. But you know,
Speaker 1: sometimes we have to recalibrate, as you saw we did
Speaker 1: that in No we're in the December meeting. We started
Speaker 1: with you know, uh, tapering of the asset purchase program
Speaker 1: we announced in November, and then in December of the
Speaker 1: committee sped that up and and that may have to
Speaker 1: happen over this period as we calibrate, But in general,
Speaker 1: you know, my approach will be come up with what
Speaker 1: we think is the right plan for that balance sheet,
Speaker 1: how that happening, and then use the policy tool as
Speaker 1: our main tool of monetary policy. A couple of times
Speaker 1: in this conversation already have used that phrase reduced accommodation
Speaker 1: when we heard from Bill Dundley yesterday talked about the
Speaker 1: fantasy land of Delvish forecasts at the Federal Reserve. And
Speaker 1: I just want to do we need restrictive policy at
Speaker 1: the Federal Reserve? Do we need to get away from
Speaker 1: talking about reducing accommodation and talk about outright having a
Speaker 1: restrictive policy stance. So I don't think we need to
Speaker 1: do that at this point. I think that that's got
Speaker 1: to be on the table of you know, where's the endpoint.
Speaker 1: But you know, when we do our steps, it's three
Speaker 1: years away. And as we've seen, you know, the economy
Speaker 1: can change in ways um that are very unexpected. So again,
Speaker 1: at this point, I think it's really important that we
Speaker 1: take actions to bring inflation down given the environment. And
Speaker 1: you know, a lot of times people think, oh, you're
Speaker 1: either for maximum employment or for you know, lowering inflation,
Speaker 1: and I don't see them as opposing one to drink again,
Speaker 1: how can you reduce inflation without a restrictive policy stance
Speaker 1: with that tone of financial conditions, How does that work? Right?
Speaker 1: Because the markets are reacting, right, So we've already seen
Speaker 1: some tightening and financial conditions in the market, and so
Speaker 1: you know, I think what we have to do is
Speaker 1: we have to bring our polishy rate in line with
Speaker 1: the economy and where we wanted the inflation rates to go,
Speaker 1: and we're gonna have to take actions to do that.
Speaker 1: So right now, if you look at long term inflation expectations,
Speaker 1: you may take some comfort in the fact that they're
Speaker 1: basically maybe a little elevator butt around our cheaper same goal.
Speaker 1: I don't think that much comfort in it because that's
Speaker 1: based on, you know, the taking appropriate actions. So it's
Speaker 1: incumbetent on us to take those actions. And I think
Speaker 1: we're in a good place to do that now. Well,
Speaker 1: you've said that we need to see how the economy
Speaker 1: develops before you know what you're going to have to
Speaker 1: do in total. But the pessimistic view expressed by a
Speaker 1: lot of people, you know who they are, is that
Speaker 1: you've waited too long, you're behind the curve, You're gonna
Speaker 1: have to move too far, too fast, and as the
Speaker 1: phrase goes, you'll break something, maybe send the economy into recession.
Speaker 1: How do you reassure people that won't happen, given that
Speaker 1: the Fed's track record in this area isn't very good. Well,
Speaker 1: I don't know whether the track record is that bad.
Speaker 1: I mean, I think that the last cycle proved that
Speaker 1: we kind of navigated that pretty well and that we
Speaker 1: had a very very long expansion, right, a historically long expansion.
Speaker 1: So this is a pandemic environment, new things. We're gonna
Speaker 1: look at the data. We're gonna make sure we're focused
Speaker 1: on meaning both of our goals and maximum employment and inflation.
Speaker 1: It's it seems clear to me now, and inflation is
Speaker 1: too high, and labor markets are strong, and we need
Speaker 1: to take action and ask the economy moves. We will
Speaker 1: take appropriate action to make sure that we're doing what
Speaker 1: we can to keep the economy on a positive trajectory,
Speaker 1: and that means taking actions to bring inflation down without
Speaker 1: right harming the positive trajectory of the economy. And that's
Speaker 1: gonna be a challenge, There's no doubt about it. That
Speaker 1: will be a challenge for us. But that's what we do,
Speaker 1: that's what we're charged to do, and that's what we'll
Speaker 1: be doing. Let me shift gears a little bit and
Speaker 1: anticipated question from Elizabeth Warren, Massachusetts Senator to the FED
Speaker 1: Chairman J. Powell. Today, we've seen two FED bank presidents resigned.
Speaker 1: We're now seeing the vice chairman resigned early. Does the
Speaker 1: FED have an ethics problem? I don't not believe we
Speaker 1: have an ethics problem. I think what happened was there
Speaker 1: was illumination on things that gave an appearance issue. Right,
Speaker 1: they were technically correct in terms of the rules, but
Speaker 1: it was the appearance issue. Um that share and the
Speaker 1: FED are taking actions to strengthen the rules upon which
Speaker 1: we have to abide, and I think that is addressing
Speaker 1: the situation. I do not believe there's an ethics issue
Speaker 1: at the Federal Reserve Presidents. The final question from us
Speaker 1: every cycle for the past few cycles, the feed funds
Speaker 1: right has piked at a lower level. Do you think
Speaker 1: the dynamics are now in place with this economy? They
Speaker 1: give you reason to think that might not be the
Speaker 1: case this time. Well, I mean partly, that's where what
Speaker 1: we've just been talking about is how far do we
Speaker 1: need to go in order to re calorie policy to
Speaker 1: meet our two mandated goals. But I also want to
Speaker 1: point out that the factors that held down inflation over
Speaker 1: the last cycle, globalization, technological change, demographics, there's probably still
Speaker 1: in play in the economy. It's just that they've been
Speaker 1: swamped by the supply chain issues, the high accommodation that's
Speaker 1: in the markets right now, um labor market issues that
Speaker 1: keep people out of the labor market. So all of
Speaker 1: those things right are now front and center. Eventually will
Speaker 1: probably get back to a low interest rate environment. The
Speaker 1: red messed up the Cleveland Fed. President, Thank you very
Speaker 1: much for being with my McKay and my staff this morning. Well,
Speaker 1: we really need is someone who knows negative celsius and
Speaker 1: like you get the rollodex out and there's only one
Speaker 1: name in surveillance land, and that's David Harrow, Packers fan
Speaker 1: and David in two thousand eight Giants Packers you were
Speaker 1: there and it was a negative thirty one celsius windshill.
Speaker 1: How cold was that game? That was pretty cold? And
Speaker 1: you know you have to cover everything up and make
Speaker 1: sure that as you're drinking beer that you had in
Speaker 1: your face mask. You needed a little thing for you
Speaker 1: drink your beer because the beer, of course keeps you warm.
Speaker 1: Tw notes and you have to start the day with
Speaker 1: the broad worst because that is your fuel. So the
Speaker 1: beer is anti freeze and the fuel is the problems problem.
Speaker 1: Thank you for that analysis from balmb in Chicago this morning.
Speaker 1: David Harrow on international investment, the fuel is a weaker dollar.
Speaker 1: Are you going to get international equity performance singularly because
Speaker 1: you need a weak dollar. You need a weak dollar
Speaker 1: to make it work. Now it's it's certainly been a
Speaker 1: headwind by the way. Strong dollar has been a definite
Speaker 1: headwind over the better part of the decade really, and
Speaker 1: now that the dollar seems to have peaked, perhaps that
Speaker 1: we could get some reversal of this, but that's just
Speaker 1: one of the factors that has impacted international returns has
Speaker 1: been the strength of the dollar. It has been a headwind.
Speaker 1: I expect that will probably be a tail one. But
Speaker 1: I think more importantly areas like Europe coming out of
Speaker 1: the pandemic ending the negative real interest rate, the negative
Speaker 1: interest rate experiment will be even bigger drivers, especially given
Speaker 1: the valuation differentials between say, European equities and the rest
Speaker 1: of the world. So David, let's push that forward into
Speaker 1: your call on European equities, especially as we get a
Speaker 1: headline this morning that the World Health Organization is saying
Speaker 1: the O macron may in fact more than half of
Speaker 1: all Europeans within the next couple of weeks, based on
Speaker 1: how much the transmission rates are increasing. Is your view
Speaker 1: that Europe will actually emerge from this more quickly, will
Speaker 1: actually have a lower interest rate policy for longer, and
Speaker 1: will actually allow equities to outperform in a way that
Speaker 1: most people are not expecting. Yeah. I think what will
Speaker 1: happen is this uh amicron rolls through the world, and
Speaker 1: it kind of seemed to have triggered first in Europe
Speaker 1: compared to the US UH and as as you know,
Speaker 1: the Spanish Prime Minister said today, we've gotta stop stop
Speaker 1: looking at this as a pandemic and start just learning
Speaker 1: to deal with this with the flu. And eventually the
Speaker 1: rest of the world will get this message. I looks
Speaker 1: like China is going to be the last one to
Speaker 1: get this message. But what will happen is is they
Speaker 1: reopen the economy and you you finally are getting this
Speaker 1: is synchronized reopening. This will be a major boost to
Speaker 1: the European economy as it will be to the global economy,
Speaker 1: and European businesses really have a heavy export component to them,
Speaker 1: and so as the global economy reopens, I think you
Speaker 1: will expect to see the European economy is almost a
Speaker 1: warrant on global economic growth because the heavy export influence
Speaker 1: it has on their economy. And in the meantime, you
Speaker 1: have had these negative interview rates almost since post the
Speaker 1: financial crisis. I do believe this will be coming to
Speaker 1: an end as well as the global financial system is
Speaker 1: fully capitalized. Uh you know, the reserves that have been
Speaker 1: built up over the decade can now the money earned
Speaker 1: can now be used to invest, to grow to give
Speaker 1: the owners. Um So I do believe that it's going
Speaker 1: to be a better environment that the tail winds hurting
Speaker 1: investors in Europe and outside the United States, or the
Speaker 1: headwinds hurting them become So, David, is the way to
Speaker 1: get the most out of that call to go into
Speaker 1: European banks. I think that's one way. That is one way.
Speaker 1: I think this is has been for a long time
Speaker 1: and times in the kidney because we've been stubbornly attached
Speaker 1: to these why because the price is low, and even
Speaker 1: despite those macro headwinds, they've been able to grow earnings now,
Speaker 1: albeit at a slow rate, but you know, you have
Speaker 1: been able to see acceptable business performance despite the very
Speaker 1: poor macro conditions. Now these macro conditions are changing, and
Speaker 1: so I believe you will see even a faster build
Speaker 1: up of capital. Instead of that capital having to stay
Speaker 1: on the balance sheet because of reserve requirements, they're in
Speaker 1: to be able to use that capital. So you're gonna
Speaker 1: see an increase in the velocity of money. And this
Speaker 1: is exactly why the central banks can't send David, we
Speaker 1: gotta turn to European banking. It has been a horrific
Speaker 1: two thousand twenty one from management all sorts of stories.
Speaker 1: You've actually been knee deep in this and very visible
Speaker 1: and I'm sure at times invisible as well. Is European
Speaker 1: banking management becoming more Anglo American where they will really
Speaker 1: adapt to shareholder pressure. You know, I was just talking
Speaker 1: to your your very good reporter and covers this, Yeah,
Speaker 1: Jehan Heinrich Forster by the way, and he you know,
Speaker 1: I think it's improved greatly. It is if you look,
Speaker 1: I look across our whole needs UH in Italy and
Speaker 1: TESSAs al Polo and France b NP. I mean, two
Speaker 1: of the best banking CEOs, I would say in the world,
Speaker 1: and UH and and leading those organizations. Credit Suite, of course,
Speaker 1: which is struggled, really really struggle. Come on, David, David,
Speaker 1: I gotta cut you off. Let's get to the chase,
Speaker 1: David Harrow. Does Credit Sweeze have to be put out
Speaker 1: of its misery? You know what happen has to happen
Speaker 1: at Credit Sweets is they have to allow change to
Speaker 1: happen via the new chairman, um Antonio ortez O Sario.
Speaker 1: If he is very capable, he stabilized and repaired Lloyd's.
Speaker 1: He's the exact answer to their problems. Now. To be honest,
Speaker 1: I think this is their lot. This is the last
Speaker 1: chance you. He is the answer to their problems. You
Speaker 1: need organization, you need discipline, you need a culture of
Speaker 1: risk control. These are exactly what he brings to the table. David,
Speaker 1: and I think that if he's not allowed to do this,
Speaker 1: and if they pick on him over this quarantine stuff,
Speaker 1: then you then it should probably be broken up. So
Speaker 1: as an investor, how much time are you giving them? Well,
Speaker 1: you're being paid to weight in essence because the price
Speaker 1: of the business is fifty or sixty of book value.
Speaker 1: When I run properly, it should be a double or
Speaker 1: triple that. So we will be patient as long as
Speaker 1: we're seeing progress, and then if if it becomes unfixable,
Speaker 1: as Tom you know and suggested, Um you know, by
Speaker 1: the way, many parts of the business are operating just fine,
Speaker 1: and unfortunately those many parts of the business. Azzi Grubel
Speaker 1: said this. You know, it's really simple. Banks make money,
Speaker 1: but the object is to keep it after you make it,
Speaker 1: and in Credit Sweezes case, they didn't or have not
Speaker 1: been able to keep all of what they've made because
Speaker 1: of poor risk control and poor legal and compliance etcetera, etcetera.
Speaker 1: So if you can fix these things, all that money
Speaker 1: that has been made in the past, that has been
Speaker 1: fritted away two finds and two losses will become gains
Speaker 1: for the shareholders. And I think this is what's important
Speaker 1: is you know the engine has been producing income. It's
Speaker 1: been coming in the front door, unfortunately because of sour
Speaker 1: leadership and management. And I think you know it's been
Speaker 1: no secret. I think the past chairman of the business,
Speaker 1: who has been there over a decade, presided over all
Speaker 1: these legal incidents and all these marketing fractions. Now that
Speaker 1: you have proper top leadership at the top of the organization,
Speaker 1: I believe that this this income that is generated can
Speaker 1: be captured. It's David, you mentioned a word that unfixable.
Speaker 1: What does unfixable look like? How do you know it
Speaker 1: when you see it? When you continue to see losses
Speaker 1: and infractions and a lack of executional excellence and a
Speaker 1: lack of discipline. You need discipline, and especially in financial
Speaker 1: services where you have in many cases translent, translucent or
Speaker 1: opaque assets, and you need to be able to control
Speaker 1: and manage risk. You don't completely eliminate risk. You have
Speaker 1: to look at risk reward. You have to price risk
Speaker 1: properly and balance it properly in order for a financial
Speaker 1: institution to be successful. And unfortunately this is what credits. Yeah, David,
Speaker 1: we don't care what we want to know Aaron Rodgers.
Speaker 1: I mean, he's got a left tackle back. The gentleman
Speaker 1: from Colorado and Boulder, David bak tr tell me all
Speaker 1: the importance of the line for Aaron Rodgers and that
Speaker 1: left tackle well back, of course, it is critical. He's
Speaker 1: probably one of the best tackles in the league. And
Speaker 1: if you give more, if you get more time to
Speaker 1: Aaron Rodgers, you know, that's like given a sharpshooter. You know,
Speaker 1: you you he becomes even dead later. He becomes even
Speaker 1: dead later. Thank you, John, I misspelled Aaron Rodgers. I'm
Speaker 1: gonna go so much to the Packers time out chair.
Speaker 1: I'm never gonna be invited in Wisconsin again, David, thank you,
Speaker 1: thank you. How I associate it's given how cold some
Speaker 1: of those games out? Is that good enough chanting for you?
Speaker 1: Minus thirty one degrees? Win? Chill give me a bright
Speaker 1: right now, Brent shooting gets the started here. We've got
Speaker 1: a really eventful hour for you on radio and television
Speaker 1: with Northwestern Mutual. Where short term is five years, Brent,
Speaker 1: forget about short term is five years. Let's bring it
Speaker 1: in big time to a three year perspective. What is
Speaker 1: the three year perspective? Given the cacophony right now? I
Speaker 1: think in the narrow term, I actually think the market
Speaker 1: has legs to go higher. Now. I know we're going
Speaker 1: through this painful kind of rotation, which has always been
Speaker 1: a question of ours. Can you actually deflate some of
Speaker 1: the more excessive parts of the markets without causing that
Speaker 1: to leak into the broader market. And so far, despite
Speaker 1: all that commentary, you have seen value stocks hold up well.
Speaker 1: You've seen hopes, dreams, themes and memes, some of those
Speaker 1: things that didn't make sense that we're bit up on
Speaker 1: excessive monetary policy, dy've deflated more than fift I think
Speaker 1: you continue to see that throughout the year. I think
Speaker 1: hopefully we get better news on COVID. I think inflation
Speaker 1: does pull back as we shift more from goods buying
Speaker 1: to services buying. And then I think that allows the
Speaker 1: Fed to be just a bit less aggressive than market
Speaker 1: is pricing against an economic backdrop that is still strong.
Speaker 1: And I think the first half is a pretty good
Speaker 1: part of the year policy right now, Brent, And just
Speaker 1: to jump in because this is important. You think this
Speaker 1: is a problem for pockets of the market, not the
Speaker 1: overall market, at least in the front half. Yeah, And
Speaker 1: that was mentioned by Tom in the opening when you
Speaker 1: talked about a nuanced market. I mean you're seeing parts
Speaker 1: of the market that are actually doing okay. The last
Speaker 1: few weeks, you've seen value stocks hold up quite well. Look,
Speaker 1: you've had an abnormal economy. The word economic adaptation has occurred.
Speaker 1: We had that forecast for a while that has led
Speaker 1: to market abnormalities. Hope streams, themes and memes are one,
Speaker 1: but then you also have growth strack talks trading at
Speaker 1: record pees relative to value stocks. You have large caps
Speaker 1: trading at record pease relative to small caps. And so
Speaker 1: we think that as the economy normalizes, which we think
Speaker 1: we're continuing to do, the market will have to normalize,
Speaker 1: and that means that part of the market that hasn't
Speaker 1: done as well, that is quite frankly cheap, will do
Speaker 1: better as real interest rates move higher. Tait me to
Speaker 1: the second half, then I worry more than because at
Speaker 1: the second half of the year, we could be out
Speaker 1: of economic slack or moving towards that. Think about it
Speaker 1: this way, at the end of two thousand nineteen we
Speaker 1: had a pretty tight labor market. Between now and the
Speaker 1: end of the year, we could be back to where
Speaker 1: we were in two thousand nineteen at the end of
Speaker 1: at the end of that time period, a later economic
Speaker 1: cycle market where we're out of labor market slack, and
Speaker 1: then the question because becomes can productivity keep up? We
Speaker 1: only have around four million more people to hire before
Speaker 1: we're back all us being equal to where we were
Speaker 1: in two thousand nineteen, and at two hundred four hundred
Speaker 1: thousand per month, that means ten to twenty months before
Speaker 1: the labor market could potentially be tight, and that's when
Speaker 1: you might have more real inflation, not the one that
Speaker 1: you're having right now, which is based upon COVID and
Speaker 1: some of those abnormalities. Brent, you talk about the first
Speaker 1: half and the second half and a bifurcated nature between
Speaker 1: the two halves, and you're not alone. A lot of
Speaker 1: people have said the same thing. How do you arrange
Speaker 1: a strategy where you have the flexibility to rejigger at
Speaker 1: a time when everybody is doing the same thing in
Speaker 1: response to the same inputs, and liquidity is being drained
Speaker 1: from the system. Yeah. I mean we've been to overweight
Speaker 1: more of the value of the small, the cheaper parts
Speaker 1: of the market for some time, and we're going to
Speaker 1: continue to be overweight those parts of the market, probably
Speaker 1: to the middle half of the year. And then we
Speaker 1: start looking and thinking about do we want to bring
Speaker 1: our equity ratio down just a bit to reflect the
Speaker 1: fact that a lot of the easy money has been made.
Speaker 1: The labor market maybe tight then uh, and the output gap,
Speaker 1: which is an important concept, maybe closed. Um. I still
Speaker 1: think the economy has legs into because I do think
Speaker 1: productivity is kind of the unsung story that will become
Speaker 1: kind of the more sung story towards the second half
Speaker 1: of the year, and that keeps us going four. But
Speaker 1: certainly the risk arising. Brent, you said that you reduced
Speaker 1: equity exposure and then go into what our bonds the
Speaker 1: place to go? Do you go into bitcoin? Uh? No,
Speaker 1: not bitcoin, I said, hope streams themes and memes, and
Speaker 1: I would extend that to crypto. Um, just as a
Speaker 1: kind of a framework. Um. You know, that's a good question,
Speaker 1: and I guess we'll we'll cross that regimen get there.
Speaker 1: I think you're gonna see yields normalize a bit more
Speaker 1: in the coming months, which could provide the more of
Speaker 1: an opportunity in the bond market for a real return
Speaker 1: at some point. But for right now, we are still
Speaker 1: overweight equities relative to fixed income, and we'll play that
Speaker 1: day by day, Brent. Brent, final question, Can I call
Speaker 1: negative nine celsius cold? Is that cold enough for you?
Speaker 1: It's cold enough for me, and it's cold enough here
Speaker 1: in Milwaukee, although I'm setting in my basement so it's
Speaker 1: rather warmed down here. But I think the temperatures were
Speaker 1: outrun zero outside zero fahrenheit, zero fahrenheit. That's all I
Speaker 1: do math fahrenheit French of Northwestern Uture. I'm just not
Speaker 1: familiar with fahrenheit on I asked Brent, Tom because every
Speaker 1: time I say it's freezing, you tell me this is nothing. Today.
Speaker 1: We're on you know, we're not on the edge of
Speaker 1: Buffalo today in the negative nights. But you know, Renicent
Speaker 1: is gonna walk off the stage here if we don't
Speaker 1: get to her. A Reticent joins us right now Directive
Speaker 1: Research in Energy Aspects, and she is wonderful on the
Speaker 1: micro economics that gets you to twenty dollars a barrel
Speaker 1: and Brent crude or maybe sixty dollars a barrel and
Speaker 1: Brent crude, and we're gonna send me. There's never been
Speaker 1: a greater time out of the g d P marked
Speaker 1: down by Golden Sex and China. The mystery of oil
Speaker 1: demand to me right now off the chart, do you
Speaker 1: have a clue what oil demand is going to be
Speaker 1: this year? Yeah, we think it is going to continue
Speaker 1: to rise and rise by about close to three million
Speaker 1: barrels per day. It's not going to be quite there,
Speaker 1: but close to that. China actually isn't going to be
Speaker 1: the biggest driver of growth because you know, you've obviously
Speaker 1: still got zero COVID policy there. We don't necessarily think
Speaker 1: they're going to lift that anytime soon, but it is
Speaker 1: going to be the rest of Asia. Most of Asia
Speaker 1: hasn't actually had much of summer driving season, as we've
Speaker 1: seen in the West last year. A lot of parts
Speaker 1: of Asia was still in lockdown or at least under
Speaker 1: some form of mobility striction. So you're going to see
Speaker 1: you are already seeing a lot of strong demand growth
Speaker 1: numbers coming out of there. Of course, now cases are
Speaker 1: rising everywhere in the East, but once we are through
Speaker 1: this period, the summer should be very, very strong and
Speaker 1: reading what do you make of this Francisco Blanche of
Speaker 1: Banco America call for a hundred dollars or plus oil
Speaker 1: prices by the second quarter. I mean our price forecast,
Speaker 1: which has been, like you know, consistent for a few
Speaker 1: years now, we've been calling for a hundred and fourteen
Speaker 1: dollars for next year. That's an annual average. Of course,
Speaker 1: it goes well above one next year. We don't necessarily
Speaker 1: see that this year, even though we are saying and
Speaker 1: our models are showing that that inventories globally are not
Speaker 1: just at a record low levels um this summer, they're
Speaker 1: going to fall down to those levels, but they are
Speaker 1: going to be at levels we've really never seen, specially
Speaker 1: on a global basis, but especially in in a non
Speaker 1: O E c D countries. So yes, there are risks
Speaker 1: that prices go higher. I mean, our annual average for
Speaker 1: this year is eighty five. But the worry of us
Speaker 1: in the near terms still is COVID demand is still hamstrung.
Speaker 1: OPEC still has barrels to give, so for us, the
Speaker 1: real spike in oil price story remains second half, like
Speaker 1: really end of this year into next year. The caveat
Speaker 1: to that is these supply outages. We've seen so many
Speaker 1: of them Ecuador, Libya, Nigeria, Kazakhs down recently. If these
Speaker 1: keep mounting, of course you can get two hundred dollars earlier,
Speaker 1: but without those it will still be end of the
Speaker 1: year into next year. How much are we underestimating the
Speaker 1: higher cost to actually refine some of the oil that's
Speaker 1: going to be coming online, especially in light of some
Speaker 1: of the other material inflation that we've seen around the world.
Speaker 1: It's a great question, and you know, something we've been
Speaker 1: accounting for in our balances. To to Tom's point, in
Speaker 1: terms of the economics of it, it becomes very important.
Speaker 1: We are looking at cost inflation of at least ten
Speaker 1: to fifteen percent across the upstream industry, and that just
Speaker 1: means that again, you need a higher price just for
Speaker 1: these producers to bring even because they need that much
Speaker 1: more in terms of their equipment and just for sustaining
Speaker 1: their production. So that's a minimum tend toftcent. In some
Speaker 1: areas we're hearing about inflation when it comes to oil
Speaker 1: services and said, just finally, how strong is our understanding
Speaker 1: of the relationship between say, banant sheet reduction and creed prices,
Speaker 1: interest rate hikes and create prices. The latter We have
Speaker 1: a ton of experience with the form and us so much. Oh. Absolutely,
Speaker 1: And I think this is going to be again if
Speaker 1: you talk about wild cards or you know, just events
Speaker 1: outside of the core fundamentals of oil impacting crew this year,
Speaker 1: it's going to be hugely important. Um generally speaking, if
Speaker 1: we do enter a period of tightening monetary policy or
Speaker 1: even physical policy for that matter, we are going to
Speaker 1: be in a period of lower growth and by definition
Speaker 1: lower oil prices. But if you that is accompanied with inflation,
Speaker 1: oil tends to do perform very well in a high
Speaker 1: inflationary period. So that's your juxtap position with that theory,
Speaker 1: This is really tough. That's the bottom line. I'm ready
Speaker 1: to sent Thank you of Energy Aspects. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays
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Speaker 1: Tom Keene, and this is Bloomberg.