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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: where stocks holding at record highs as optimism grows over
Speaker 2: and enter the war. Darius down of forty two macro
Speaker 2: writing the twelve month outlook is bullish. The next few months, however,
Speaker 2: may prove volatile. Darius joins is now for more. Darvis,
Speaker 2: good morning, going to see you. Oh great, see you, Jay,
Speaker 2: Welcome to the program as well. What's going to be
Speaker 2: the source of that volatility?
Speaker 3: Well, I think we're not out of the wood yet
Speaker 3: as it relates to the strait of Hormoz dynamic and
Speaker 3: we also have the return of credibiles positioning across gold
Speaker 3: financial markets. So if we get another axio setline that
Speaker 3: is leaking in the wrong direction, then you can have
Speaker 3: a little bit more volatility. But when you take a
Speaker 3: medium term view on the markets and on the economy,
Speaker 3: things are about as good as they've been in a really
Speaker 3: long time.
Speaker 1: I'd say since early twenty twenty one.
Speaker 2: Let's just stay on that. Look at the economic data,
Speaker 2: look at the earning. How impressive is it that we've
Speaker 2: got a central bank that's still holding onto an easing bias.
Speaker 1: Well, that's a hotly separate conversation.
Speaker 3: But the thing I'd say about the FED is the
Speaker 3: biggest mistake the FED can make this year is doing anything.
Speaker 3: This is an economy that has accelerating inflation when you
Speaker 3: look at the inflation components that they care about, this
Speaker 3: economy that is accelerating bank credit growth. At the same time,
Speaker 3: we have a productivity boom, and we are, in our view,
Speaker 3: we think we're heading into a job with recovery. So
Speaker 3: on the push pull dynamic there, it's just say the
Speaker 3: FED should stay on hold. I think that would be
Speaker 3: The markets would probably not like the FED doing anything
Speaker 3: in any one direction because it would create tension on
Speaker 3: the other side of the mandate.
Speaker 1: It's not totally unrelated, though.
Speaker 4: The whole point is when you have such robust growth
Speaker 4: to John's point, the strongest as you were saying since
Speaker 4: twenty twenty one, and then you have a FED with
Speaker 4: an easing bias, how much does that increase the risk
Speaker 4: of an inflationary kind of impulse that creates a headway
Speaker 4: that people aren't really pricing in.
Speaker 3: Yeah, well, I think we're already seeing the inflationary impulse.
Speaker 1: If you look at, for instance, score PC.
Speaker 3: Inflation on three myth vnualized basis, we're a four point
Speaker 3: four percent supercore PC inflation, we're four point five percent.
Speaker 3: So we already have the inflationary impulse. And so the
Speaker 3: best thing that FAY can do right now is to
Speaker 3: jawbone that away to the extent possible. And our view,
Speaker 3: we think it's going to go away because if you
Speaker 3: look at the relationship between productivity growth, we think we're
Speaker 3: in a one hundred and fifty to twenter basis point
Speaker 3: acceleration and trend productivity growth that should knock off about
Speaker 3: forty to fifty basis points from trend inflation, while at
Speaker 3: the same time you have some very depressing components in
Speaker 3: the labor market that are weighing on wage inflation.
Speaker 1: From a cyclical and structural standpoint, the.
Speaker 3: Real inflation dynamic in the economy when we get past
Speaker 3: this inflation shock should be much lower.
Speaker 4: At our pain, you said that there was this depressive
Speaker 4: factor coming from the labor market. How would this market
Speaker 4: treate a very hot labor market report tomorrow, Let's say
Speaker 4: the number of jobs created much above what people had expected.
Speaker 4: Let's say wage increases much more than people expected.
Speaker 3: Yeah, I think what's going to happen is the market's
Speaker 3: going to price in more tightening in the short short
Speaker 3: rates curve. And so that's, in my opinion, I think
Speaker 3: that would be an appropriate response from the market. But
Speaker 3: the reality is, we don't think that dynamic is sustainable
Speaker 3: when you look at you know, for instance, core private
Speaker 3: services payrolls, which lops off healthcare, social services, education, and
Speaker 3: government basically everything that the government is the main consumer
Speaker 3: or the employer of that peaked two years ago two
Speaker 3: years ago. And so in our view, we think this
Speaker 3: AI dynamic is real. I mean, it's hard to statistically
Speaker 3: test it, but we think it's real. We think we've
Speaker 3: never seen a trend like this with the tabooming economy.
Speaker 5: Do you think when it comes to AI that actually
Speaker 5: it's going to help international stocks over US stocks.
Speaker 3: Yeah, I think it's going to help all the stocks
Speaker 3: that have been left behind by the megacap tech companies.
Speaker 3: And the reason we say that is not because we're
Speaker 3: bearish on the megacap tech companies, is that we think
Speaker 3: that the transfer of that technology will create a convergence
Speaker 3: in productivity, create a convergence in margins, create a convergence
Speaker 3: in ultimately evaluations with the stocks that have been left
Speaker 3: behind from a capital allocation standpoint. When wen't we see that,
Speaker 3: I think it's already ongoing. And the trade started a
Speaker 3: year and a half ago, so I think that trade.
Speaker 3: I mean, we obviously took a pause in the context
Speaker 3: of this straight or Her Moves dynamic, because that's a
Speaker 3: cyclical headwind in the economy.
Speaker 1: Once we open the straight or.
Speaker 3: Her Moves and those barrels of petroleum products are flowing,
Speaker 3: I think the market's going to start to look around
Speaker 3: and say, hey, we have a lot of credit bullish
Speaker 3: positioning here. We don't have any credit bulist positioning here,
Speaker 3: but we're going to see a convergence in the operating.
Speaker 2: And just sit on that just for a moment. The
Speaker 2: biggest risks of the tank rally might be a reopening
Speaker 2: of the strain.
Speaker 3: Yeah, well on a relative basis, I don't think you're
Speaker 3: going to sell tech stocks on that, but I think
Speaker 3: on a relative basis, yeah, can we.
Speaker 2: Just finish on the capex boom from big take? Do
Speaker 2: you think that is a bubble? How do you think
Speaker 2: about the capex intentions from a handful of companies.
Speaker 3: Well, look, I'm not smart enough to determine if it
Speaker 3: is or is not a bubble, but I will say
Speaker 3: very better, much better investors than I have have said
Speaker 3: when something doubles in three years and were obviously seeing
Speaker 3: a double one nick Ai capex in.
Speaker 1: One year, it's a bubble.
Speaker 3: And so the key takeaway is that whenever you have
Speaker 3: these historical capex bubbles, you go back to the railboat bubble,
Speaker 3: the consumer durable goods bubble the end, and the it
Speaker 3: capex bubble.
Speaker 1: They tend in in secular bear markets.
Speaker 3: So I think that's where we're headed longer term, but
Speaker 3: I don't think that's a medium term risk.
Speaker 2: What do you do with chips in the meantime seems
Speaker 2: to be a question I get along. We've seen this
Speaker 2: massive rally. Something that is stuck out for me this
Speaker 2: week was a comment from Barclays. We caught up with
Speaker 2: mister Oltman over there and he said, we need to
Speaker 2: focus on where we are, not how we got here.
Speaker 2: How we got here was super fast, vicious rally. Where
Speaker 2: are we now? The valuation? What is the price we're
Speaker 2: paying up for somebody? These chip stories.
Speaker 1: Yeah, I mean it's.
Speaker 3: Loony tunes price. But again, twice a silly price is
Speaker 3: not twice as.
Speaker 1: Silly, right.
Speaker 3: I think that our friend David Eino has said that
Speaker 3: a while back in the meeting. So the thing I
Speaker 3: just say on the chip stocks is that you have
Speaker 3: to take profits and start to look at businesses that
Speaker 3: are going to have a faster convergence in their profitability.
Speaker 1: These are lower comparative based.
Speaker 3: Businesses from the respective of margins, from the respective for earnings.
Speaker 3: So you transfer that technology, we're going to have a
Speaker 3: fast rate of change in their growth rates.
Speaker 1: In our opinion, that's a durable catalyst.
Speaker 2: So just pick them out. What sectors are you focused
Speaker 2: on right now?
Speaker 3: I mean financials are the obvious component. The banks, The banks, Yeah,
Speaker 3: the banks I mean.
Speaker 1: There's so much more. I mean it's very dark. But
Speaker 1: the banks a lot of you.
Speaker 3: Know, employee compensation as a percentage of their total revenue.
Speaker 2: You're expecting job cunts.
Speaker 3: I mean it's the underperforming banks will cut jobs. Underforming
Speaker 3: companies will cut jobs. But the best performing companies will
Speaker 3: just stop hiring. And we've seen that in the labor market.
Speaker 3: Little hire, we'll fire, stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. So here's the
Speaker 2: laces this morning. Oil hovering their triple digits after plunging
Speaker 2: on hopes of a deal between the US and Iran.
Speaker 2: Max Layton the city joined US now for more, Max,
Speaker 2: welcome to the program. Hopium will drive the paper market,
Speaker 2: it will not help demand a supply clear at spot.
Speaker 2: Can we just start with physical? How tight are things still?
Speaker 2: What kind of prices are people paying up for physical barrels?
Speaker 1: Sure?
Speaker 6: Yeah, so the physical barrel price isn't isn't too much
Speaker 6: higher than the futures price. Actually, we've done a lot
Speaker 6: of questions about that particular subject over the last couple
Speaker 6: of weeks, and you know, it reminded me of what
Speaker 6: happened back in twenty twenty when oil went negative at WTI,
Speaker 6: actually across the USA, physical barrels went negative and price
Speaker 6: negative that day and the next day across the US,
Speaker 6: even though they didn't fill up on storage. And the
Speaker 6: point I'm trying to make here is that actually there's
Speaker 6: a lot of information in the futures price. People talk
Speaker 6: a lot about how spot price is the real physical price,
Speaker 6: but the spot price this this physical price actually, for
Speaker 6: example in the second quarter twenty twenty, actually priced off
Speaker 6: the futures price. So I'm not sure it says clear
Speaker 6: cut as Hey, all the information's in spot because a
Speaker 6: lot of the spot people, you know, they will be
Speaker 6: trading based on where the futures are.
Speaker 1: Max.
Speaker 2: This is really important. I just want to build on
Speaker 2: that because most people thought, particularly in the commodity market,
Speaker 2: that we'd see paper prices converge up to physical But
Speaker 2: physical has converged down to paper.
Speaker 1: Markets, right yep. And that's despite MAX.
Speaker 2: That's despite Max the strait still being closed.
Speaker 6: Yeah, And look, a lot of it is to do
Speaker 6: with the I think the fact that there's you know,
Speaker 6: it's quite binary in some ways. It's very difficult to
Speaker 6: predict if in particular, the IRGC leader Vahiti and mons
Speaker 6: tabacome Any are going to do a deal or not.
Speaker 6: And you know, I think it's fairly clear the US
Speaker 6: would like to deal, certainly, you know, on their terms.
Speaker 6: But in that environment where you basically don't know if
Speaker 6: there's going to be a deal or not, very difficult
Speaker 6: to predict. With this new leadership in Iran, you know,
Speaker 6: you're going to be subject to news and you're going
Speaker 6: to be moving around like crazy. Like a week ago,
Speaker 6: we're trading one hundred and twenty five front month and
Speaker 6: we're now at ninety eight. And it's on some hope
Speaker 6: of a deal, of an hope that we'll talk about.
Speaker 5: A deal, but putting a deal to a side the
Speaker 5: actual physical market and basically what you're saying in terms
Speaker 5: of if the physical market is coming down to where
Speaker 5: the futures market is, that basically shows that the world
Speaker 5: has enough oil right now, doesn't it.
Speaker 1: Well, I mean it does.
Speaker 6: Over the last couple of months, what we've lost, what
Speaker 6: we've actually lost in physical barrels is less than what
Speaker 6: we built over the preceding twelve months. So there's been
Speaker 6: quite a There was a decent buffer that we built
Speaker 6: up in the vicinity of seven eight hundred million barrels globally.
Speaker 6: Now most of that built in China, but even still globally,
Speaker 6: we built some significant barrels in the lead up to this,
Speaker 6: and we're kind of eating through that aggressively. Physically, the
Speaker 6: impact is going to be much more kind of spread
Speaker 6: out over time, and I would so, for example, even
Speaker 6: if there was a deal today, it would take at
Speaker 6: least a couple of months to ramp back up production
Speaker 6: to minds, to do all those kind of logistical things,
Speaker 6: and you would roughly double the losses that we've already
Speaker 6: seen over the last two months over the next two months.
Speaker 6: So physically, it's going to happen over time, yeah, I
Speaker 6: mean that. And the other big thing is, obviously, as
Speaker 6: you draw the inventores, there's a convex relationship between inventries
Speaker 6: and price, so you know, as you as you So
Speaker 6: initially we're just drawing what we built over the proceeding
Speaker 6: twelve leading up to the conflict. But eventually, certainly by
Speaker 6: the time you get into the third quarter, and that's
Speaker 6: why a lot of people are talking about that being
Speaker 6: the pinch point, then you get you can potentially get
Speaker 6: inventries down to levels which are consistent with you know,
Speaker 6: one hundred and fifty one hundred and eighty dollars brand
Speaker 6: two hundred dollars plus product prices, that kind of thing.
Speaker 6: So the physical that pool is a bit more gradual.
Speaker 4: Max, just real quick here, what would it take for
Speaker 4: you to actually lower your forecast for oil prices?
Speaker 1: Is given that you.
Speaker 4: Seem to see the market as much more realistic than
Speaker 4: other commodity strategists.
Speaker 6: Yeah, So look, I think it's all about for me,
Speaker 6: it's about any signs that this regime is going to put,
Speaker 6: is going to do a deal, and that they're essentially
Speaker 6: going to put I guess you know, one of the
Speaker 6: benefits of them doing a quick deal is it can
Speaker 6: be tied to legitimacy that they don't want to disrupt
Speaker 6: the global economy and that they'd rather do a deal
Speaker 6: and in exchange for obviously reduced sanctions and a number
Speaker 6: of other monetary benefits. So I think any sign because
Speaker 6: to me, when I take this to an extreme, I
Speaker 6: think this regime can last not just months. I think
Speaker 6: this regime can last under blockade for years. It's plausible
Speaker 6: that they simply print money and prioritize that money towards
Speaker 6: you know, the pro regime portion of the population, and
Speaker 6: so when you think about it from that perspective, this
Speaker 6: regime a lot of the choice about when they deal,
Speaker 6: how they deal is up to them.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this,
Speaker 2: Terry Hanks of Pangaea Policy writing, we put the potential
Speaker 2: for snap back to hostilities as more than a trading
Speaker 2: risk at least. Terry joins us now for more. Terry,
Speaker 2: welcome to the program. This White House seems pretty committed
Speaker 2: to de escalation. They had the opportunity to escalate things
Speaker 2: earlier this week when things got volatile. What would it
Speaker 2: take to resume hostilities?
Speaker 7: Well, I'll take the answering that question, John, I'll take
Speaker 7: the other side of that argument. The White House would
Speaker 7: very much like to de escalate, but they wanted to
Speaker 7: de escalate based on Iran not getting a new and
Speaker 7: the strait of horn Mooz reopening.
Speaker 1: So as long as around won't.
Speaker 7: Agree to that, they're going to continue to do that,
Speaker 7: continue to push, and they're also you know, continuing to
Speaker 7: ratchet up the economic pressure on around. One way to
Speaker 7: look at this is that the White House is betting
Speaker 7: that the economic pressure on Iran causes around to buckle
Speaker 7: before there are serious consequences worldwide. But fundamentally, if Iran
Speaker 7: remains recalcitrant on any of this stuff and sticks to it,
Speaker 7: then I think you're that. I think you are, you know,
Speaker 7: at least likely to see not just rhetoric on ramping up.
Speaker 7: I think you're likely to see some action to show
Speaker 7: people that in Iran that the United States is serious
Speaker 7: about this terry.
Speaker 5: Though when it comes to this one pager, a lot
Speaker 5: of reporting about it basically outlines something very similar.
Speaker 1: To the JCPOA.
Speaker 5: How is that in and of itself acceptable to this
Speaker 5: White House?
Speaker 7: Well, I think there's a lot of crossfire reporting on this,
Speaker 7: and Marie, frankly, you get the kind of memorandum of understanding,
Speaker 7: and at the same time, the memorandum of understanding is
Speaker 7: supposed to describe a condition where serious negotiations will start
Speaker 7: based on that memorandum. So you know, there's a lot
Speaker 7: of gauze here, and you know, Trump is trying to
Speaker 7: limit their options in order to provide more progress and
Speaker 7: ultimately get them do a deal. But you know, the
Speaker 7: way I would look at that is, you know, I
Speaker 7: don't think that's certainly the base acceptable condition to the
Speaker 7: United States. Equally importantly, I don't think it's a base
Speaker 7: acceptable condition to our Gulf allies, who very much want
Speaker 7: to see the Iran genie put back in the bottle
Speaker 7: and for a generation at least, and want a situation
Speaker 7: where they don't have to worry about Iran as a
Speaker 7: threat overall.
Speaker 5: But when it comes to this White House, they're clearly
Speaker 5: concerned about how stocks around the world are being drawn
Speaker 5: down when it comes to fuel and other gasoline products
Speaker 5: and the midterm elections.
Speaker 1: How are they weighing both.
Speaker 5: These options, because obviously, if you escalate in terms of
Speaker 5: kinetic hostilities, that's going to be an increase in oil prices.
Speaker 7: Well, yeah, of course they're concerned about the economy, and
Speaker 7: they should be. But at the same time, I think
Speaker 7: it bears understanding that they're not concerned just about the economy.
Speaker 7: You know, there's there's a there's a long litany of
Speaker 7: things that we all could say. You all said on air,
Speaker 7: I've said, you know that there are lots of downsides
Speaker 7: for Trump going into this, and yet they did it anyway.
Speaker 7: So there's a you know, there's there is a geopolitical
Speaker 7: problem here, the iron nuke problem, and now the straight
Speaker 7: problem that is underappreciated. I think in a lot of
Speaker 7: this and was was considered by this White House to
Speaker 7: be so important that all the downsides, you know, didn't
Speaker 7: balance it out.
Speaker 4: Terry Wiki the potential political rammifications correctly here. Yesterday we
Speaker 4: saw the Indiana and Ohio primaries actually on Tuesday, but
Speaker 4: yesterday we got the actual results, and some of the
Speaker 4: candidates that President Trump supported, even at the behest of.
Speaker 1: Incumbents, were the winners.
Speaker 4: It seemed to indicate the President Trump still has quite
Speaker 4: the clutch over the Republican Party. Are we overestimating the
Speaker 4: political laws from this conflict in the midterms today?
Speaker 7: I think so, Liza on Behalf are for a number
Speaker 7: of reasons. One is that Trump showed in Indiana that
Speaker 7: the base will come out and the base will be
Speaker 7: motivated to.
Speaker 1: Give him what he wants.
Speaker 7: So you consider that accounter to the enthusiasm gap that
Speaker 7: so far as favorite Democrats. Secondly, on the redistricting business,
Speaker 7: you know, there's a lot of people who come on
Speaker 7: and will tell you, oh, you know, the Republicans are
Speaker 7: going to lose this and all the rest redistricting effects
Speaker 7: potentially as many as two hundred out of four hundred
Speaker 7: and thirty five seats in the House. Firstly, Secondly, if
Speaker 7: you bring all those redistrictings together, it comes up with
Speaker 7: assuming that the district stay R or D, it comes
Speaker 7: up with a very tiny R advantage today I think
Speaker 7: it's plus three plus four or something like that. But
Speaker 7: either way, there aren't going to be massive swings in
Speaker 7: the in the House and in the Senate. What it
Speaker 7: looks like is that the progressive left and you know,
Speaker 7: with people like Graham Plattner and the gentleman in Michigan
Speaker 7: who's running, are taking over. But really in doing that
Speaker 7: or seeding the center to people like Susan Collins. Also,
Speaker 7: that's also not good for Democrats. So you know, I'd
Speaker 7: urge everybody to take a breath on the narrative.
Speaker 4: What does that imply for policy that maybe people are underpricing.
Speaker 7: I think what it implies for policies a couple of things.
Speaker 7: One is that if there's a continued Republican Washington, all
Speaker 7: are Washington, then you know, legislation can continue as well
Speaker 7: as regulation. I think what markets are pricing in today
Speaker 7: is that majority in at least one house goes away.
Speaker 7: But even in that scenario, regulation continues. But if there's
Speaker 7: an all our Washington, then you should consider that animal
Speaker 7: spirits will continue to be up because there will continue
Speaker 7: to be optimism about the possibility of Trump continuing to
Speaker 7: stoke the economy and kind of bring it back to
Speaker 7: a position of greater dynamism than there was before.
Speaker 2: Terry Quick final question, can you believe it's been ten
Speaker 2: years since please clap at Jeff Bush in New Hampshire?
Speaker 1: Ten years.
Speaker 7: I'm so glad you brought that up, And just because
Speaker 7: it's great and you know, then we can also throw
Speaker 7: a lot of the Biden ones in, though you know,
Speaker 7: the quality of mercy is not strained and the quality
Speaker 7: of politicians are clearly going down.
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