Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 2: Chadberg, how if I share his investment strategy at Black
Speaker 2: Rock Gagy in the morning? Good to see you. Let's
Speaker 2: just start with this simple question. A colleague of mine
Speaker 2: asked it this morning, and then we've all asked it
Speaker 2: a few times over the last week. What takes your
Speaker 2: fancy this week? Central bank decisions or the tech earnings?
Speaker 2: What's your focus all of it?
Speaker 3: Central Barker warnings actually, ECI, I think that's going to
Speaker 3: be a big one at the end of the week,
Speaker 3: and PC so lots from the micro and the macro front.
Speaker 3: But I think probably what Tom was saying this earlier,
Speaker 3: if you're not in the market, it's probably what impacts
Speaker 3: you most, and what you should focus on is not
Speaker 3: the twenty five decisions but actually how they signal what's
Speaker 3: coming after so how much they can, how much the
Speaker 3: FED can keep their optionality open, and that's what really
Speaker 3: determines the outcome of FED from here on.
Speaker 2: I'm assuming you'd guess that this Wednesday and the news conference,
Speaker 2: the Chairman will try and retain that optionality the threat
Speaker 2: of an additional rate hike. From here they should.
Speaker 3: I think they're going to try very hard not to
Speaker 3: lock themselves in into another September hike. Hopefully, what they'll
Speaker 3: do is acknowledge that there has been some softening in
Speaker 3: the path of inflation, because that is factually correct. But
Speaker 3: at the same time, it's too early to call victory
Speaker 3: on the inflation fighting battle. And after that, what I
Speaker 3: think they should do is just leave all doors open
Speaker 3: so they can go again in November. Or this can
Speaker 3: be the end if this is truly the beginning of
Speaker 3: what I think is a deceleration path of inflation, not
Speaker 3: back to two percent, but back to a much more
Speaker 3: palatable three or three and a half. On course CPI,
Speaker 3: this could be the last one, last hike, and I
Speaker 3: think they should leave that door open.
Speaker 1: Summer races on. I had to buy the books this
Speaker 1: weekend for after thoughts school reading. It was like, you know,
Speaker 1: three big figures. It was amazing, She's like seven books
Speaker 1: to read? What's that about? But what the answer? Summer's
Speaker 1: moving on and there is sell and May and go
Speaker 1: away and you write about by at the end of May.
Speaker 1: Something happened March twenty four, twenty five, twenty excuse me,
Speaker 1: May twenty four, twenty five, twenty six. What happened the
Speaker 1: end of May.
Speaker 3: What happened was we saw the equity market started broadening out.
Speaker 3: We all know and talk a lot about the Big
Speaker 3: seven that has driven much of the performance UTTEL date,
Speaker 3: and what we've seen over the course of June and
Speaker 3: July is that it has broadened out. If you look
Speaker 3: at something like the MSCIIHAW has equal weighted index EUSA
Speaker 3: that has started keeping in pace with the broader And
Speaker 3: why what happened in the macro? I think Number one,
Speaker 3: the growth data started not disappointing so much. The growth
Speaker 3: data started getting better. If you think about housing, if
Speaker 3: you look at retail sales, if you look at durable goods,
Speaker 3: if you look at initial jobless claims, all of that
Speaker 3: started sort of remaining resilient. I think resilient is the
Speaker 3: word of the summer. And then second most important, and
Speaker 3: perhaps even the most important, is that inflation finally took
Speaker 3: a little bit of a breather. And that was of
Speaker 3: course more of a July story.
Speaker 1: Okay, more of a July story. But the bottom line
Speaker 1: is people in cash now, people that have missed this,
Speaker 1: including a huge part of institutional Wall Street. What's the
Speaker 1: to do list? Buy now. So at the margin, I
Speaker 1: catch you up into November and December.
Speaker 3: You know, I think very tactically, if you think that
Speaker 3: this is about of good data that we're getting is
Speaker 3: going to be with us for some time, and if
Speaker 3: the FED is closer to being done, so call it
Speaker 3: one more ratetike at most after this week, I think
Speaker 3: you can play for that quick catch up trade with
Speaker 3: something like an equal weighted basket. I think that does
Speaker 3: make sense, and we've seen flows into that from in
Speaker 3: the ETF space where investors are playing for that catch
Speaker 3: up trade. Number two, I think still focusing on quality.
Speaker 3: I think still looking at companies that obviously we'll find
Speaker 3: out more about this and earnings this week, but looking
Speaker 3: at the profitability. We actually saw how much the companies
Speaker 3: that missed on their profit margins got punished. So I
Speaker 3: think that's something else to focus on.
Speaker 1: Institutionally. What's interesting here is the is the discontinuous trends
Speaker 1: here that I see in one is big cap small cap.
Speaker 1: Somebody who's out there over the weekend, saying back to
Speaker 1: nineteen seventy nine. I'm going to give Lizae Saunders credit.
Speaker 1: I was Gena Martin Adamscuse me, Gina Martin Adams. Large
Speaker 1: and small caps partition goes back to nineteen seventy nine.
Speaker 1: Do you load the boat at Blackrock on small caps?
Speaker 4: Not yet?
Speaker 3: I think that. I mean maybe for a week or so,
Speaker 3: But I think broadly the.
Speaker 1: Which is the last gardy's day trading today?
Speaker 3: Well, no, listen, this is the environment where you have
Speaker 3: to be more nimble. I don't think it's about day trading.
Speaker 3: It's about recognizing that the data can change and we
Speaker 3: have to be nimble enough to change our minds if
Speaker 3: every four or six weeks the data is telling us
Speaker 3: a new story. And right now, I don't think it's
Speaker 3: time to load the boat with small caps.
Speaker 4: No.
Speaker 3: Can we have a quick small cap catch up trade
Speaker 3: for ten days?
Speaker 1: Sure?
Speaker 3: But do you load the boat the answer still remains no.
Speaker 2: You say, maybe time to get defensive. Everyone's got their
Speaker 2: own opinion on what defensive is. What's defensive to you.
Speaker 3: Defensive to us is quality companies. Defensive to us is
Speaker 3: dividend companies. Defensive to us is actually may maybe a
Speaker 3: little bit of minimum volatility so that if you do
Speaker 3: have that downturn, you're still remaining invested with you know,
Speaker 3: with a little bit less votility. But defensive does not
Speaker 3: mean leave the markets and go to cash. Defensive means
Speaker 3: staying in the parts of the market that are likely
Speaker 3: to outperform, like the large gaps, like the quality companies,
Speaker 3: in that in a slightly higher volatility environment.
Speaker 2: Where does AI fit into this? Because I know you
Speaker 2: personally are actually quite constructive on the theme. Most people are,
Speaker 2: but given a run we've seen in some of these names,
Speaker 2: there's some doubt now on how you should play it.
Speaker 3: I know, I definitely think that this earning a season.
Speaker 3: One of the things that we will probably see is
Speaker 3: every company trying to make them out to make themselves
Speaker 3: out to be an AI company. So I think it's
Speaker 3: choosing between which companies are actually using AI to gain efficiencies,
Speaker 3: to gain productivity versus not. And I think the theme
Speaker 3: of AI and we're talking about this as we call
Speaker 3: it mega forces, Mega soon in our midiar outlook. The
Speaker 3: reason we put it that way is that this is
Speaker 3: going to be with us for a long time, but
Speaker 3: it's already obviously impacted performance this year, and you can
Speaker 3: play this through equity, through fixed income, but remembering that
Speaker 3: this is not tomorrow straight, but this can stay with
Speaker 3: us for the medium time, so AI remains with us.
Speaker 3: Thinking about how AI can impact inflation and productivity I
Speaker 3: think is important and looking at AI enablers and developers
Speaker 3: is going to be the next leg of the trade.
Speaker 1: John, is AI just a branded technological progress from another
Speaker 1: time and place. I mean that that was a brilliant answer, Gargey,
Speaker 1: But she says it's out there farther.
Speaker 4: I get it.
Speaker 1: But is AI what we used to call technological progress?
Speaker 2: I think it's part of technological progress.
Speaker 3: Sure.
Speaker 2: The problem that we've got right now, and I think
Speaker 2: Gudly identified it perfectly, is that everyone's going to go
Speaker 2: on the call disc earning season and say we're doing
Speaker 2: AI exactly. It's going to mean twenty different things, twenty
Speaker 2: different people.
Speaker 1: I want to go back to a simpler world like
Speaker 1: beach Ken beach Ken.
Speaker 2: I just want to go back to where you can
Speaker 2: with this this morning.
Speaker 1: Well, I've seen I saw Barbie three times.
Speaker 2: You watched this movie?
Speaker 1: I saw three times? It went back. I had to
Speaker 1: go with each kid.
Speaker 2: You know, have you actually watched this movie?
Speaker 4: Yeah?
Speaker 1: You know, I thought Beachking beach Ken was you know
Speaker 1: where we should be.
Speaker 2: I don't believe you. Khaki, thank you, Khaki, Chatter and
Speaker 2: black Rock.
Speaker 3: Did you see the movie?
Speaker 1: I did?
Speaker 2: Oh good, there's a nerdfest here.
Speaker 3: I'm camp Oppenheimer.
Speaker 2: Are you if you've seen that?
Speaker 3: I am going to today?
Speaker 2: Okay, great, there we go. Great people go to the
Speaker 2: movies on a Sunday night at ten thirty that was
Speaker 2: sold out last night? How did they do that?
Speaker 3: So I had to be here this morning.
Speaker 2: Goes off for like three hours and amazing, they've got lives.
Speaker 1: Gocky Kathleen bus Johnsik joins us right now of course
Speaker 1: with Nationwide with a very clear view on the American economy, Kathleen,
Speaker 1: as Mike always does, he goes to the heart of
Speaker 1: the matter, which is the disaggregation of the American economy.
Speaker 1: Do you sum it? Together into one economy or do
Speaker 1: you have to look at America as separate sets.
Speaker 5: Well, good morning time. I'm happy to be with Mike
Speaker 5: as well, So certainly you do both, right, you look
Speaker 5: at the top down, but then you have to disaggregate.
Speaker 5: I really look at it across the sectors of the economy.
Speaker 5: And it's been a very interesting, uh post COVID. You know,
Speaker 5: first it was a recovery, and now the expansion completely unique,
Speaker 5: and we've seen these rolling recessions and the question is
Speaker 5: does this culminate into you know, a broad based and
Speaker 5: a real recession that the National Bureau of Economic Research
Speaker 5: would claim, yes, we we have recession.
Speaker 1: To the dual mandate. Are we a fully employed America?
Speaker 5: Oh yeah, we're We're over employed, which you know sounds
Speaker 5: great right if you're an employee, but but problematic for
Speaker 5: the Federal Reserve right as they try to balance that
Speaker 5: against inflation pressures, and also for corporations had trouble still
Speaker 5: fighting qualified worker and feeling that wage pressure all during
Speaker 5: this period.
Speaker 6: Kathy, let me go back to what you said about
Speaker 6: rolling recessions, because that was a theme of kind of
Speaker 6: what happened in twenty fifteen sixteen with manufacturing, and now
Speaker 6: we seem to be seeing it again. And we saw
Speaker 6: housing slow down, it's picked up, certainly for new home construction.
Speaker 6: We saw slow down in autos sales, now they've come back.
Speaker 6: Is this what we're going to go through for the
Speaker 6: next year or so, or do we get an overall
Speaker 6: as kind of forecast by a lot of people, decline
Speaker 6: in economic activity for the whole economy.
Speaker 5: Well, that's the key question. It's been quite difficult right
Speaker 5: to gauge that and the timing. So we're still in
Speaker 5: the camp that we're cautious and think that the conditions
Speaker 5: are there for a full blown recession, but we have
Speaker 5: always argued that it would be moderate on the moderate side.
Speaker 5: But you're right, you know, housing was the first sector,
Speaker 5: as it usually is, to feel the pinch of higher
Speaker 5: interest rates, right, it's very interest rates sensitive. But now
Speaker 5: we're coming back at least for construction and new home
Speaker 5: sales because you basically can't find enough supply in the
Speaker 5: existing market and builders, you know, anegoally, we're hearing reports
Speaker 5: that are offering subsidized mortgage rates. You know, five percent,
Speaker 5: you know is a lot better than seven percent. So
Speaker 5: that's what's helping on the housing market. Autos is dancing
Speaker 5: to its own tune. That should be a very interest
Speaker 5: rate sensitive sector, but it's not. Because of that long
Speaker 5: shadow of COVID, there's been a restraint of supply and
Speaker 5: there's still pent up demand. Now maybe auto dealers also
Speaker 5: like the fact that they have pricing power and they're
Speaker 5: kind of continuing that shortage of supply and purpose manufacturing
Speaker 5: like as you said, globally, we're seeing a manufacturing recession
Speaker 5: and it seems to be getting worse right in Europe,
Speaker 5: and China has been a disappoint with its reopening. In
Speaker 5: the US, is is still you know, we've had eleven
Speaker 5: months straight fully FED showing contraction, so you know, time
Speaker 5: will tell. Certainly the labor market a consumer has been
Speaker 5: resilient enough to offset those other factors. But we think
Speaker 5: even the Fed's done tightening, which we expect on Wednesday,
Speaker 5: the last rate height to this cycle, we think restrictive rates,
Speaker 5: you know, eventually going to pinch this economy and we're
Speaker 5: going to see a.
Speaker 6: Slow down, a slow down, But do we actually go negative?
Speaker 6: Is that based on the idea that Americans are just
Speaker 6: going to stop spending because now we've got real wages
Speaker 6: rising faster than inflation.
Speaker 7: That's right.
Speaker 5: I mean, right now the consumers finally getting overall some
Speaker 5: real income gains.
Speaker 1: But I think the key here.
Speaker 5: Is what happens with the corporate profits and balance. Yout
Speaker 5: If inflation continues to trend lower, which is what we
Speaker 5: expect gradually, corporations lose pricing power at the same time
Speaker 5: we're seeing upward wage pressures remain. In fact, there's going
Speaker 5: to be a number of strikers comeing on, probably with
Speaker 5: ups and maybe in the auto sector.
Speaker 7: So that means you've got.
Speaker 5: Sticky wages that that's a profit printer, and usually that
Speaker 5: leads to less employment. So I think ultimately that's where
Speaker 5: the consumer feels. The negative hit is just from less employment.
Speaker 1: Kathy ben Laidler, market strategist, was on earlier and said
Speaker 1: he's riveted on a constructive economy that loses steam on
Speaker 1: inventory dynamics. Lecture us on marginal inventories. I think that's
Speaker 1: off the radars for so many listeners and viewers. Do
Speaker 1: you see where marginal inventories won't assist real GDP forward?
Speaker 5: That is a great point in inventories many times seem
Speaker 5: to be working in the background, but when they swing
Speaker 5: can be a powerful force in the business cycle dynamics.
Speaker 5: It can be a very large dreg or maybe an
Speaker 5: ad to GDP. Say right now that companies have gotten
Speaker 5: their inventories to sell ratio in better shape, but I
Speaker 5: would still say there's elevated inventories, and it doesn't mean
Speaker 5: we're going to see a lot of ad going forward.
Speaker 5: So that's a headwind for GDP growth. Just like you
Speaker 5: know student loan debt repayments coming online. You know that's
Speaker 5: a headwind if we have a strike, So that's going
Speaker 5: to be headwind. So one of the things I would
Speaker 5: say is that you know, certainly the data has been
Speaker 5: stronger and it does give some support to a soft
Speaker 5: landing camp, but the economy still be soft. You have
Speaker 5: a couple hits and shocks, it's not hard to get
Speaker 5: us into recession. And that's where we remain still cautious.
Speaker 1: Well the stock market adapt to this or is the
Speaker 1: stock market removed from American economic slowdown?
Speaker 5: Well, historically the equity market is not immune to recessions
Speaker 5: or a downturn. The question is do we get that already?
Speaker 5: That correction and now you know is you know the
Speaker 5: equity market in better shape. I would argue that valuations
Speaker 5: are quite high. Certainly I understand the tech sector and
Speaker 5: the AI story, but you know, if we have a
Speaker 5: recession profits go down, then that you know, it looks
Speaker 5: a bit rich right now for us, So we would
Speaker 5: be cautious and we don't think it is immune to
Speaker 5: a recession in that case.
Speaker 6: Wednesday, the general feeling is the Fed could just sort
Speaker 6: of stipulate what it's going to do, but what they
Speaker 6: tell us about the future is what's going to matter
Speaker 6: to the market. So what do you think they tell
Speaker 6: us about the future. Do they keep going after one more?
Speaker 5: Yeah, it is what the FMC provides and forward guidance
Speaker 5: at what Sherman Pal you know, tells us or guides
Speaker 5: us in the press conference is going to matter. I mean,
Speaker 5: the twenty five basis point seems to be a sure
Speaker 5: bet at this point. I think there's a lot of uncertainty.
Speaker 5: Last time they added, you know, two dots right to
Speaker 5: the interest rate doc blot saying two more rate hikes,
Speaker 5: but the data's coming better than expected. I think Chairman
Speaker 5: Pal is going to back off that a little bit
Speaker 5: less aukish, but I think still be said fast and still,
Speaker 5: you know, be cautious because they don't want inflation, which
Speaker 5: is starting to go in the right direction, to reverse gears.
Speaker 5: They remember, well that base effect, right, and so inflation
Speaker 5: is going to pick up because the base effect is
Speaker 5: going to be less favorable going forward.
Speaker 1: What's your statistic real GDP statistic for this second quarter?
Speaker 1: You know we're going to get data out here. We're
Speaker 1: into the third quarter now, but for ending June thirty,
Speaker 1: what's the best JON six statistic?
Speaker 5: So we have slightly about two percent two point two percent.
Speaker 5: We start strength resilience in the consumer. Also, I think
Speaker 5: non residential investment of is going to be additive and
Speaker 5: quite strong, and we're going to have less There's the
Speaker 5: first time in a quarters two years we're not going
Speaker 5: to have a drag from residential investment because housing has stabilized.
Speaker 7: So we look, that's going to be above the Fed.
Speaker 5: Remember the Fed wants growth to be below the potential,
Speaker 5: which is one point eight percent of the potential estimate.
Speaker 5: They want to see several quarters of growth has to
Speaker 5: be well below two percent. They're not going to get
Speaker 5: that for the second quarter.
Speaker 1: Kathleen, But Johnsick, thank you so much. She's chief economists
Speaker 1: nationwide with some wonderful perspective there. Let's save ourselves right
Speaker 1: now from X with Matt Burrow, we do this head
Speaker 1: of North America Investment, Great Credit and Investgo as well.
Speaker 4: Matt.
Speaker 1: It's sort of in a no man's land between high yield.
Speaker 1: Everybody's all over high yield spreads and all that, and
Speaker 1: full faith and credit. What do you learn in quality
Speaker 1: US corporate credits right now? How do you see them
Speaker 1: out on yield or total return six months a year?
Speaker 4: Hey goo more and Tom, Yeah, we've been looking at
Speaker 4: total returns for Investment, Great Credit and everybody's comparing cash
Speaker 4: versus actual fixed rate bonds and they're up about three
Speaker 4: and a half percent year to day, which is kind
Speaker 4: of coupon plus, so maybe a little bit ahead of
Speaker 4: where cash and T bills are. But going forward, we
Speaker 4: continue to think there's a pretty good path for them.
Speaker 4: The inflows have been there. We've seen about seventeen straight
Speaker 4: weeks of inflows and that's all yield driven. So spreads
Speaker 4: are kind of neutral over the range, but yields are
Speaker 4: extremely attractive in the low fives, and that's continuing to
Speaker 4: draw money in out of cash little by little people
Speaker 4: are still really hanging onto those T bills, but little
Speaker 4: by little they're continuing to step out the curve, which
Speaker 4: is creating a pretty good technical and I think we're
Speaker 4: setting up for a good six months of total return.
Speaker 1: Here is investco. Do you see corporate issue ince? I
Speaker 1: have no idea what they can do. I notice Apple's
Speaker 1: like ten, you know, way underdebted. But are you going
Speaker 1: to see a lot of corporate issuance here or do
Speaker 1: the CFOs actually clamp down and pull it back. Yeah.
Speaker 4: So for the most part you're seeing the typical corporation
Speaker 4: is saying this is fairly expensive. I don't really want
Speaker 4: to borrow at five and a quarter five and a
Speaker 4: half percent, so they're not levering up. There's been less
Speaker 4: m and A over the near term. You know, we'll
Speaker 4: see if if people kind of adjust to this new
Speaker 4: rate environment. There has not been a lot of debt
Speaker 4: coming doe. So for most corporations, you know, they have
Speaker 4: two three percent bonds little by little or rolling off,
Speaker 4: but they haven't really felt the full shock of the
Speaker 4: rate curve going higher yet.
Speaker 1: So we'll see.
Speaker 4: For the typical industrial within the bank space, banks have
Speaker 4: been borrowing more. Just in the last week we saw
Speaker 4: Morgan Stanley bar about seven billion, Wells Fargo did about
Speaker 4: eight and a half. So you're getting the big banks borrowing,
Speaker 4: but the regional banks are on the sidelines kind of
Speaker 4: looking at this way saying, Wow, this is just too expensive.
Speaker 4: I'm not ready to issue yet.
Speaker 2: So Matt, I'm interested in when they have to borrow,
Speaker 2: not when they want to borrow, Matt, when do they
Speaker 2: need to I remember a great quote from Jeff Gundlack
Speaker 2: a double line, and he asked this question. He said,
Speaker 2: has a high yield bond ever really matured? Because they
Speaker 2: just come out and issue a new one, Matt, and
Speaker 2: I just wonder, where's that window, that horizon, that maturity
Speaker 2: will the technical speed where is it?
Speaker 4: Yeah, so for the IG market, that really is no
Speaker 4: maturity wall. They kind of that's not really an issue there.
Speaker 4: But the iel of market get about three percent coming
Speaker 4: do the rest of this year. You got nine percent
Speaker 4: due in twenty twenty four, but then his spike's a
Speaker 4: little bit to something like fifteen percent twenty twenty five,
Speaker 4: so they'll probably work to address that to make sure.
Speaker 4: You know, to Goodlock's point that that doesn't come around
Speaker 4: to maturity, they'll they'll pre refinance that. But yes, the
Speaker 4: wall is very very controlled or very low for the
Speaker 4: next two years, and then it comes a little higher
Speaker 4: from them, but then it goes back to that point.
Speaker 4: I was making this a little bit ago that no
Speaker 4: one's really felt the full effect of this higher yields
Speaker 4: yet because they have not had a lot of debt
Speaker 4: roll off. If and when that comes, the larger percentage
Speaker 4: of their debt will be at eight nine percent than
Speaker 4: where it is today. I do think this is very
Speaker 4: good for fixed rate borrowers though, that they've been able
Speaker 4: to lock in yields for longer term. Is you feel
Speaker 4: the pain right away if you're in the floating rate
Speaker 4: type of borrower, though.
Speaker 2: Matt, has it ever been this wide the difference between
Speaker 2: a coupon payment for a company, pick any company and
Speaker 2: what it would cost them to borrow in a secondary
Speaker 2: market right now? Has there ever been a big difference
Speaker 2: like this?
Speaker 4: Yeah, not since you know, the the eighties, or you
Speaker 4: know even the early eighties, late seventies, really since you've
Speaker 4: seen this. So they're normally the bond rolls off at
Speaker 4: four percent, you replace it anywhere between three and a
Speaker 4: half and four and a half. But that's just not
Speaker 4: the case right now. But you know, I will point
Speaker 4: out Tom mentioned something like Apple. Apple was boring at
Speaker 4: one one and a half percent for a long time,
Speaker 4: just simply because they could. You know, I think they'll
Speaker 4: keep that in their capital structure. But a lot of
Speaker 4: these tech companies, you know, they may just choose to
Speaker 4: pay it off. They may just say, you know what,
Speaker 4: that five and a half six percent, it doesn't make
Speaker 4: any more any sense anymore. We'll have to see, you know, clearly,
Speaker 4: when they're growing at the speed they are, that's still
Speaker 4: a creative to earnings. But it does change the dynamics
Speaker 4: at these higher rates.
Speaker 1: Met brio, delicate question. I don't want you to get
Speaker 1: in trouble with your general counsel, but it's a bit
Speaker 1: off your remat, but I've got to go there. Splashed
Speaker 1: across the Monday's guys, thanks to the FTV on this
Speaker 1: is challenges in the leveraged loan market. How bad is it?
Speaker 4: Well, it hasn't been bad yet, simply because the economy
Speaker 4: is going so strong. As I was stating earlier. If
Speaker 4: a floating rate borrower does steal the effects immediately rather
Speaker 4: than a fixed rate borrower. So in the loan market,
Speaker 4: you know they're going to get hit right away when
Speaker 4: rates go up. And now you've got some companies borrowing
Speaker 4: at eleven, twelve, thirteen percent. That can be very attractive
Speaker 4: to the to the lender, but it can also be
Speaker 4: very punitive to the borrower. As long as the economy
Speaker 4: stays as strong as it is, they're going to be fine.
Speaker 4: But if you start to see a hard landing, you
Speaker 4: know you could be in more trouble in that particular
Speaker 4: area of the of the fix of the debt markets.
Speaker 2: I Matt, thank you Mike for the update on credit
Speaker 2: mapro there of Investco.
Speaker 1: Our clinic. Now on wheat in the news with Conor Haik,
Speaker 1: head of research at ED and f Man ConA to
Speaker 1: began first principles. Is there a global price to wheat
Speaker 1: like there's a global price to Brent crude?
Speaker 7: Yeah, the CBOT wheat futures is probably the best benchmark.
Speaker 7: That's probably the global Berench mark, but you also have
Speaker 7: a MATIF futures in Europe for Paris two I think
Speaker 7: are the best?
Speaker 1: Is wheat? A singular news item on Ukraine, the Black
Speaker 1: Sea and such, or does it link in the other
Speaker 1: soft commodities.
Speaker 7: Both. To be honest, right now I think we should
Speaker 7: all be talking about wheat. We have one of the
Speaker 7: world's largest wheat suppliers who's just been choked off its
Speaker 7: main archery in terms of experts of the world, just
Speaker 7: as it's about to reap a pretty decent harvest. They
Speaker 7: just don't know how to get out of the country.
Speaker 7: Russia is strategically now blocking you'll obviously they've come out
Speaker 7: of the grains corridor Black Sea, Green Steel, But on
Speaker 7: top of that, the escalation of fighting there, the fact
Speaker 7: that any ship's coming into that port is deemed as
Speaker 7: a military threat, all of this makes it very very
Speaker 7: hard for any shipments to come out of that region.
Speaker 7: And alternative routes are not going to be anywhere near
Speaker 7: as effective. They're going to be higher in terms of
Speaker 7: transportation costs and slower in terms of coming out. And
Speaker 7: this is at a time when globally food prices are
Speaker 7: still pretty elevated.
Speaker 2: You kind of help us work through this then in
Speaker 2: very simple terms, and you did a bit of it
Speaker 2: just then. So Russia has killed the grain deal. They've
Speaker 2: been attacking a desk so we've seen highlights of that,
Speaker 2: headlines of that overnight once again, which is really compromising
Speaker 2: these transport routes through the Black Sea. You mentioned alternative routes.
Speaker 2: Can you describe what those alternative routes actually are and
Speaker 2: why they're more expensive than say, just going through the
Speaker 2: Black Sea like they typically would.
Speaker 7: Yeah, so the alternative wood would be via the rivers,
Speaker 7: So the port of Danube, for example, the River Danube
Speaker 7: has various ports and by the way, those are also
Speaker 7: being attacked overnight, but those require smaller barges, so it's
Speaker 7: smaller tonnage that can go through. They're probably more costly,
Speaker 7: you know, compared to loading a massive Panamax or a
Speaker 7: handy sized built dry block vessel. We're talking small amounts
Speaker 7: of quantities at each time, and it's going through different routs,
Speaker 7: which is again not as effective. The fact of the
Speaker 7: matter is, you know, no one's going to ensure a
Speaker 7: ship coming into the Black Sea region. It's just too
Speaker 7: risky for them. And also it also helps Russia because
Speaker 7: what they can do. Russia also is sitting on a
Speaker 7: massive wheat harvest. They're going to now try and grab
Speaker 7: the market share that Ukraine is not able to get there.
Speaker 7: So Russia will now take advantage of this and try
Speaker 7: and get to the big importing nations like Africa, South Asia, Egypt.
Speaker 7: These are the countries that we're relying on Ukrainian wheat
Speaker 7: and grains. Now they might have to just revert.
Speaker 2: To Russia meet now, Kono. How are other exporting nations,
Speaker 2: exporting nations specifically responding to this, So they're becoming protective
Speaker 2: going through the route with more protectionism around, maybe some
Speaker 2: of their goods to stock up things at home. What
Speaker 2: are they doing.
Speaker 1: So far?
Speaker 7: We haven't seen too much of that, only because in
Speaker 7: the years since Ukraine was last attacked, we're first attacked
Speaker 7: by Russia back in February twenty twenty two. The high
Speaker 7: spike in prices did lead it to a lot of planting,
Speaker 7: so we have seen stocks build up to a certain extent,
Speaker 7: so the panic is not quite there. But if this
Speaker 7: the black seat is cut off for too long, you
Speaker 7: will start seeing a little bit of panic set in.
Speaker 7: One thing we are noticing is well, although it's not
Speaker 7: typically wheat and grains. Rice in India has just been
Speaker 7: given a ban on exports, and India is the world's
Speaker 7: largest rice exports. So I think that's one thing which
Speaker 7: I'm seeing. You're seeing a bit of a reaction by
Speaker 7: different governments. Although it's not necessarily grains, it is potentially
Speaker 7: a substitute because it's a massive, massive staple. Probably for
Speaker 7: the half of the world's population rely on rice, the
Speaker 7: other half would rely on greed grants.
Speaker 1: This is so important. I'm as guilty of this as anybody.
Speaker 1: I'm the ugly American and I look at wheat, I go,
Speaker 1: what's it mean for a loaf of bread at the
Speaker 1: fancy grocery store in New York City has completely removed
Speaker 1: from reality. Explain what wheat price dynamics mean to the
Speaker 1: people of Tunisia across the Mediterranean, to the people of Egypt.
Speaker 1: Give us the scope and scale that we in the
Speaker 1: fancy West don't understand.
Speaker 7: Yeah, so it's just the fact that they are emerging markets.
Speaker 7: By that we mean economically, they're not as advanced as
Speaker 7: us in the West, which therefore means that most of
Speaker 7: their disposable income gets spent on food items and staples.
Speaker 7: So in their typical basket of consumption on a daily basis,
Speaker 7: food ranks very highly, and within food the staple is
Speaker 7: bread or rice, but in Tunisian EGI, it would be bread.
Speaker 7: So yeah, we are facing situation and suddenly most of
Speaker 7: the disposable income is now spent on one or two
Speaker 7: items and that's really affecting their cost of living. And
Speaker 7: there you know, it does impact them economically. And if
Speaker 7: you remember back in the mid two thousands or late
Speaker 7: two thousands, two thousand and eight, shall I say we
Speaker 7: did see food riots in North Africa. It's politically quite
Speaker 7: a hot topic which I think in most governments will
Speaker 7: want to avoid. You could argue the Arab Spring happened
Speaker 7: because of Tunisian food riots, you know. So I think
Speaker 7: this is something which governments will be watching carefully. Food
Speaker 7: inflation is something that most governments would avoid, like a
Speaker 7: plague colone.
Speaker 2: I wouldn't expect you to comment on the politics, but
Speaker 2: just the final one from US. Russia has very few
Speaker 2: friends on the international stage at the moment. Perhaps you
Speaker 2: could describe Turkey as an intermediary between Russia and the
Speaker 2: rest of Europe. China has been a friend on the
Speaker 2: international stage relatively speaking, over the last couple of years.
Speaker 2: Where would this leave China's grain imports and Chinese food
Speaker 2: prices given what's the I think at the moment tame question.
Speaker 7: So China actually has a disinflation problem. They're actually not
Speaker 7: suffering from inflation at all. They were very clever and
Speaker 7: good in terms of an organized in terms of buying
Speaker 7: just when grain prices were quite low, so they've stocked
Speaker 7: up to a certain level. I think they're fairly comfortable
Speaker 7: at any rate. China and Russia are on friendly terms,
Speaker 7: so they will be able to get everything they need
Speaker 7: from Russia very easily, So that's not going to be
Speaker 7: a problem. But in terms of rice, which is by
Speaker 7: the way, there's not a futures commodity in the market
Speaker 7: for that. Rice is done on the spot market. Rice
Speaker 7: is something that China's got a problem with because their
Speaker 7: yields have been affected by the heat wave, and their
Speaker 7: neighboring countries India and Thailand have also seen the rice
Speaker 7: heals fall. So I think that's something that they may
Speaker 7: need to look at a little bit more carefully.
Speaker 2: Kind of this was a clinic thank you kind of
Speaker 2: hacking of ed and f men on the latest in
Speaker 2: self commodities.
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