Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferrill and Lisa Brownwitz Jay Lee. We bring
Speaker 1: you insight from the best an economics, finance, investment, and
Speaker 1: international relations. To find Bloomberg Surveillance on Apple podcast, Suncloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg terminal.
Speaker 1: Let's get into the earnings right now with Peter Roppenheimer,
Speaker 1: Chief Global Equity strategistic Goldman Sachs. Peter, everybody's talking about
Speaker 1: the step down for the Federal Reserve, maybe a shift
Speaker 1: from seventy five to fifty to twenty five. Can we
Speaker 1: talk about the step down that you're expecting in earnings
Speaker 1: an EPs, going back from twenty one to two to three. Yeah, absolutely, John,
Speaker 1: I think this is really going to be a crucial
Speaker 1: factor that investors going to have to take into account.
Speaker 1: We've seen some of the optimism building up again about
Speaker 1: the prospect for the rate rises to start to moderate,
Speaker 1: but on the other side of that, we're seeing a
Speaker 1: deterioration in earnings just as been a not a disastrous
Speaker 1: earning season, but certainly not nearly as strong as we've
Speaker 1: seen previously. And The key thing that's happening, and we've
Speaker 1: been arguing this for some time, is that margins are
Speaker 1: starting to come under pressure as a result of these
Speaker 1: higher input costs, and that means that the forward looking
Speaker 1: earnings are also deteriorating. Revisions are starting to come down,
Speaker 1: and I think it's too premature for markets to be
Speaker 1: really pricing peak interest rates without taking to account the
Speaker 1: lower earnings and growth that's coming on the other side
Speaker 1: of that. Appear to the seismic change for next year
Speaker 1: is we have a risk free rate, we have brevity,
Speaker 1: as Tellub says it, Do you assume more transactions in
Speaker 1: truly more combinations is stacks as corporations confront a reality
Speaker 1: from decades ago. Yeah, absolutely, this is this is an
Speaker 1: overwhelming shift that's happened. I mean, we have to take
Speaker 1: into account that it was only at the beginning of
Speaker 1: last year that the markets were only pricing one or
Speaker 1: two rate rises this year in the US, nothing in
Speaker 1: Europe until next year. And we've seen now a whole
Speaker 1: range of significant rate increases with more to come. And
Speaker 1: you know, just over a year ago, a quarter of
Speaker 1: all government debt around the world had a negative yield.
Speaker 1: People were paying for the privilege of lending to governments.
Speaker 1: Now you're getting around four percent for US tenure treasurers.
Speaker 1: This is a big shift, and it requires valuations of
Speaker 1: financial assets to moderate. We've seen some of that, but
Speaker 1: probably not enough given the scale of that shift in
Speaker 1: the cost of capital, and that's why we think there's
Speaker 1: more downside in the near term on on valuations and
Speaker 1: market pricing. We're talking in general, but I was looking
Speaker 1: at a Fang plus index that is down fort pent
Speaker 1: from its recent peak. I mean, some of the declines
Speaker 1: in specific sectors have been extraordinary, Peter. Have we've seen
Speaker 1: the bulk of the pain in some of the high
Speaker 1: flyers and some of the tech names or is it
Speaker 1: still broad based? Is it really a more general kind
Speaker 1: of rerating repricing that still needs to take place. Well,
Speaker 1: I think that what you've really seen is the rise
Speaker 1: and interest rates hitting the longest duration assets most aggressively.
Speaker 1: To begin with it, things like unprofitable tech, which had
Speaker 1: its route earlier in the year. Profitable tech companies, cash
Speaker 1: generative tech, and during long duration companies have held up
Speaker 1: reasonably well, but they're now coming under pressure because they
Speaker 1: are impacted by the gravity of rising rates and indeed
Speaker 1: some slow down in the earnings you know as well.
Speaker 1: So I think it's really about the broad index adjusting
Speaker 1: valuations two levels which are consistent to a new normal
Speaker 1: in terms of in terms of interest rates having settled that,
Speaker 1: what we have seen is a bit of a reversal
Speaker 1: of that ten or twelve year trend that preceded this year,
Speaker 1: where growth was hugely out performing value, supported by record
Speaker 1: low rates and phenomenally strong earnings in the growth sectors.
Speaker 1: This year has been a year predominantly of value out performance,
Speaker 1: and I think that probably has some further to go.
Speaker 1: So the aggregate valuations probably still need to adjust downwards,
Speaker 1: but we are seeing a you know, a shift in
Speaker 1: the mix. And it's pretty extraordinary that despite the hit
Speaker 1: that we've seen to some of the really big tech
Speaker 1: stots through this earning season, the broader now for example,
Speaker 1: has continued to do very well. And I think that's
Speaker 1: a reflection of this shift in leadership within the market.
Speaker 1: I'm so happy that Peter that Tom wasn't listening at
Speaker 1: the end there. Peter Oppenheimer of Government Sex Right Now
Speaker 1: for Global Wall Street Lean Forward because Edward Morris joins
Speaker 1: us his global herd of commodities research at City or
Speaker 1: priamisra of TD Securities. I think of with the real
Speaker 1: yield John, There's been other calls that we've seen through
Speaker 1: the year. Mike Wilson and equities and Ed Morris nailed oil,
Speaker 1: there's no question about it. When it was over a
Speaker 1: hundred of barrel, he said, uh, maybe not and here
Speaker 1: we are under a hundred dollars a barrel at Morris.
Speaker 1: To cut to the chase, if China reopens, many say
Speaker 1: that will give a demand that will get oil back
Speaker 1: above a hundred of barrel, even to one ten, one twenty.
Speaker 1: Do you agree, um, Actually, we don't agree it. It
Speaker 1: depends on a lot of other things. The only way
Speaker 1: to get oil back to a hundred and ten or
Speaker 1: a hundred and twenty is to have a bunch of
Speaker 1: supply disruptions from places like Libya, Nigeria and maybe even
Speaker 1: Iran and Iraq. Uh. It's it's a supply side phenomenon
Speaker 1: to get above And yes we have you know, okay
Speaker 1: plus thinking that they need to put a floor into
Speaker 1: prices and they can work with that a little bit,
Speaker 1: but now trying to demand coming back. Well, of course,
Speaker 1: have an impact on the market. But uh, we're in
Speaker 1: a world where demand is slashing down. Work around the world,
Speaker 1: whether you look at the U S or Europe and
Speaker 1: shining Yeah, as the third biggest economy in the world
Speaker 1: had low demand. But look at where they've been in
Speaker 1: the last two months. Since the middle of the summer.
Speaker 1: They first went up a million barrels a day and imports.
Speaker 1: Now there are up two million barrels a day on imports. Uh.
Speaker 1: And we're having oil since the last okat Clus meeting,
Speaker 1: you know in the sideways little dance. It's not going anywhere. Uh.
Speaker 1: So I think this ample supplying the market for us
Speaker 1: to not have a big impact from trying to coming back.
Speaker 1: So at why are we training the SPR Does that
Speaker 1: make sense to you? Uh? Yeah, I'm on the side
Speaker 1: of those who think these are unusual times. We're actually
Speaker 1: in what Fiona Hill, as you know, calls World War three. Um.
Speaker 1: And the instruments are basically economic instruments. Some of them
Speaker 1: are used foolishly, like the pace price cap that you
Speaker 1: were just discussing. Some of them I think are a
Speaker 1: bit wise. Uh. And let's look at the SPR. So
Speaker 1: if we look at the world date, UM we've had
Speaker 1: an inventory built year. Today that inventory built accelerated and
Speaker 1: now the inventory build as we measure it is bigger
Speaker 1: than the spr elers. So the SPR least was there
Speaker 1: to tide over times when we had a first warfare
Speaker 1: reaction to Russia and Ukraine with oil embargos imposed on
Speaker 1: Russian oil and there was a bidding up of the
Speaker 1: price of Brent and w t I as a result.
Speaker 1: We have another potential round of that coming up by
Speaker 1: December five, which is associated with the potential oil cap
Speaker 1: or the price cap. But we're gonna have this bidding
Speaker 1: up our rent, and we're already seeing the bidding up
Speaker 1: and the SPR is playing an important role in it.
Speaker 1: So we have so far in the world year to day,
Speaker 1: as in the middle of last week to thee we
Speaker 1: can measure it an inventory build of of of some
Speaker 1: uh a hundred and all billion barrels UM and the
Speaker 1: SP well, the SPR is a big chunk of that.
Speaker 1: Actually the build has been two hundred and seventy three
Speaker 1: million barrels here today SBR is two d and thirty
Speaker 1: million of that. But if we look at the last
Speaker 1: two months of beginning about the SPR on a combined
Speaker 1: you know, from September to the middle of October, oil
Speaker 1: on land has risen by thirty million barrels. But more telling,
Speaker 1: the oil in the water has risen by eighty two
Speaker 1: million barrels. It's oil in transit, and a lot of
Speaker 1: that is coming actually from the US. The last last
Speaker 1: week's data printed a US export number of an astonishing
Speaker 1: eleven point two million barrels a day, the highest one record.
Speaker 1: And we've been, you know, playing with ten million barrels
Speaker 1: a day for the last three months. So the US
Speaker 1: has really been supplying the world and taking the edge
Speaker 1: off of what would have been you know, a difficult
Speaker 1: distortion with the with the with the yeah, with the
Speaker 1: conflict that we saw with respect to Russia in vadeing Ukraine.
Speaker 1: Given that backdrop, do you think that we're ever going
Speaker 1: to get back down to that seventy two dollar a
Speaker 1: barrel kind of level that the US administration has said
Speaker 1: they would really start buying barrels to refill the spr
Speaker 1: Are we going to get there the next year, for example?
Speaker 1: I think we could get there, depends on the nature
Speaker 1: of the recession and how how reactive people are. We
Speaker 1: have to remember that this is a world with a
Speaker 1: lot less open interest in futures and options than we
Speaker 1: had before. So volatility levels are you know, very high,
Speaker 1: and we have ten or fifteen dollar moves that have
Speaker 1: become the normal in this high volatility world. So I
Speaker 1: would not I would not exclude seventy dollars. I would
Speaker 1: also note that the administration has not nail day particular
Speaker 1: number that giving a range um that ranges in the
Speaker 1: kind of eight, and you get the seventy by by
Speaker 1: looking at the sixty eight range um. Uh. And the
Speaker 1: increasing thing of this is that we have the US
Speaker 1: government range that you know, averages as you say, seventy
Speaker 1: dollars for buying spr to put a floor under prices,
Speaker 1: and we have OPEC whereas the dollar range. It's intriguing
Speaker 1: that China also has a range with the bottom and
Speaker 1: the top. Then they activate policies if oil gets belower
Speaker 1: above that range, they ride by strategic stocks, but they
Speaker 1: freeze prices at home, or they sell strategic stocks by
Speaker 1: freezing prices at home at the upper level. So, uh,
Speaker 1: you know, we we have sensitivity now to not going
Speaker 1: back to negative pricing, not going back to you know,
Speaker 1: twenty dollar pricing because of what it does to the
Speaker 1: productive production side. Uh and uh and uh. It's a
Speaker 1: it's kind of a new world when you have the
Speaker 1: largest economies along with OPEC plus on the producer side
Speaker 1: and by the way, the largest oil producing country naming
Speaker 1: the US. Thinking about what the floor again again on
Speaker 1: a game at most a city. One of the very
Speaker 1: best at Thank you so white. Our good news is
Speaker 1: Michael Gabon's with us, the chief US economist the Bank
Speaker 1: of America. Thrilled he could be with us. He's from
Speaker 1: the University of James Bullard also known as Indiana University,
Speaker 1: and of course with work at the International Monetary Fund
Speaker 1: as well. Thank you so much, Dr Gavin for joining
Speaker 1: us today. I want to cut right to the chase
Speaker 1: you and I give Chris Lowe at f t N
Speaker 1: credit for this as well. There's a massive allusion to
Speaker 1: the American economy Jeroan Powle faces today, and that is
Speaker 1: within the core equation. Net exports are holding us up.
Speaker 1: How poor our domestic final sales, so final sales to
Speaker 1: domestic purchasers, which would be g d P less trade
Speaker 1: and inventories grew at four tents in the third quarter,
Speaker 1: and it was two tents I believe in the second
Speaker 1: quarter is that a recession indicating no, it's It would
Speaker 1: essentially be the FED soft landing where growth is positive
Speaker 1: but not you know, still below trend um. So the
Speaker 1: interest rate sensitive sectors of the economy, housing structures, we're
Speaker 1: we're really what weight on activity in the third quarter.
Speaker 1: I think the inventory rebuilding cycle is also largely behind us. So, yes,
Speaker 1: we got the boost from trade in the quarter, but
Speaker 1: it accounted for all of the growth in the quarter.
Speaker 1: Underneath that, the economy is cooling down. We've been talking
Speaker 1: about the lag time, right the lag the variable effects,
Speaker 1: the lag time that the VET is watching right now.
Speaker 1: How long would you estimate it takes before the full effect,
Speaker 1: the dampening effect of the rate highs that have been
Speaker 1: executed so far take effect. The cumulative effect, probably as
Speaker 1: long as twelve to eighteen months. You see the initial
Speaker 1: signs of it, maybe six to nine months out like
Speaker 1: we are now. The interest rate sensitive sectors tend to
Speaker 1: respond first. If financial conditions tightened in March and April,
Speaker 1: you'd expect by the third quarter of the year it's
Speaker 1: going to show up. And it is the cumulative fact.
Speaker 1: It's kind of matriculate all the way through the rest
Speaker 1: of the economy twelve to eighteen months. How high does
Speaker 1: unemployment need to go to get inflation down? This is
Speaker 1: the number one question that the sentence us have right now.
Speaker 1: What kind of damage is this FED going to do
Speaker 1: to achieve his ultimate objective of getting back to two.
Speaker 1: So our forecast is that it will be a little
Speaker 1: higher than the FED thinks. We're we're up to about
Speaker 1: five and a half percent is where we think the
Speaker 1: unemployment rate may go. The FED, as you know, isn't
Speaker 1: looking at about a percentage point rise to the mid fours.
Speaker 1: Let's say consensus is probably around five. So somewhere between
Speaker 1: the four and a half to five and a half
Speaker 1: range seems to be what what we're all thinking the Fed.
Speaker 1: Your points exactly spot on the FED saying we need
Speaker 1: to remove imbalances in the labor market to bring inflation down.
Speaker 1: That's a bit of a euphemism for we think the
Speaker 1: unemployment rate has to rise better balanced supply and demand. Um,
Speaker 1: that is the number one question right now. We say
Speaker 1: a little more than than others. Your research was cited
Speaker 1: by Senator Warren. I'm sure you're aware of that. She
Speaker 1: put it in her letter to Chairman Bank of America
Speaker 1: expects the unemployment will pick at five point six percent,
Speaker 1: implying in any two percentage point jump in the unemployment
Speaker 1: right over the next year and the loss of more
Speaker 1: than three million jobs. The question they're asking Chairman Pal,
Speaker 1: is this the price we need to pay? Is it
Speaker 1: worth paying this price to get inflation down? Now? I
Speaker 1: don't expect you to do Chairman Pal's work for him,
Speaker 1: but there is this line you can if you want,
Speaker 1: This line that he used in Jackson Hole, and I'd
Speaker 1: love to get your thoughts on it. He said, of
Speaker 1: failure to restore price stability would make far greater paint.
Speaker 1: Can you elaborate on that a little bit for us
Speaker 1: might how people understand what would happen if they didn't
Speaker 1: tackle this. So the FEDS believe I'm wired the same
Speaker 1: way is to think that the economy performs best over
Speaker 1: the very long term when we're not spending an hour
Speaker 1: talking about where is inflation and where is it going?
Speaker 1: You want to remove that variable off the table, so
Speaker 1: low and stable inflation gets you the best macro outcomes
Speaker 1: over the long term. I think there's a we make
Speaker 1: a mistake right now. When we think, oh, the FED
Speaker 1: is going to overtighten and make up policy error, I
Speaker 1: think that the fetus saying no, no, no. The policy
Speaker 1: error is not getting inflation down to two. Now. We
Speaker 1: don't know if we need a recession to get us there,
Speaker 1: but if we do, if that is ultimately what's needed,
Speaker 1: the FED would say we should pay that price now
Speaker 1: because to your point, waiting and paying it later history says, well,
Speaker 1: we're gonna have to pay a lot more. So we
Speaker 1: don't like to be in the position that we're in,
Speaker 1: but we need to remove imbalances in in the labor market,
Speaker 1: and we wanted We think we need to get to
Speaker 1: that sooner than than later. So the true policy mistake
Speaker 1: is not getting inflation down to two. It's not. The
Speaker 1: mistake is not creating some pain in the labor market
Speaker 1: to get there. If that makes sense. You know he's
Speaker 1: in their office right now. So chem and powmaking nuts.
Speaker 1: In the news conference where you asked the question, I
Speaker 1: read that the Senator Warren letter carefully. Senator Warren did
Speaker 1: not site Mark Cabannah. I don't know what that is
Speaker 1: about his side and gaping, but not Cabannah. Just the
Speaker 1: stuff on the banag sheet sheet. I'm wanting you know,
Speaker 1: but you know my cap in their banks America. David
Speaker 1: Rubinstein will speak with the Surgeon General of the United States,
Speaker 1: that is VIVENK. Murphy, and he joins David here for
Speaker 1: a peer to peer conversation. Look for that nine PM tonight.
Speaker 1: Mr Rubenstein joins us right now on this most unique physician, David.
Speaker 1: What I love about Dr Murphy is twenty years ago
Speaker 1: at Yale, he basically invented something called healer's art. He
Speaker 1: seems to have been a generation ahead on the mental
Speaker 1: health challenges that we have all lived in a pandemic.
Speaker 1: What did you learn about him about the persistency of
Speaker 1: the challenges we face. Well, he's very concerned about the
Speaker 1: mental health problems that our country has coming out of
Speaker 1: COVID and obviously for school children as well. And he's
Speaker 1: also concerned about the isolation many young men have and
Speaker 1: the mental health problems associated with that. We've seen some
Speaker 1: of that recently obviously. Um So he's worked hard on that.
Speaker 1: The Surgeon General of the United States is a position
Speaker 1: that is not known to a lot of people about
Speaker 1: what it actually is. It's a position where he's designed
Speaker 1: to talk about healthcare issues. Advised the president and overseas
Speaker 1: six thousand healthcare UH professionals around the country. He's been
Speaker 1: the surgeon General under President Obama and then, to his surprise,
Speaker 1: was reappointed under President Biden. He's the first person to
Speaker 1: do it twice under two different presidents. He's a very
Speaker 1: talented person, the son of immigrants from India, grew up
Speaker 1: in Florida, valugatory of his class, went to Harvard Yale
Speaker 1: Medical School. Very very talented person. What does he say
Speaker 1: about COVID who he mentioned there in the comments? It's
Speaker 1: still Germaine. But have we deluded ourselves that COVID is
Speaker 1: over under four hundred deaths per day? Yes, you've got
Speaker 1: three to four hundred deaths per day. And these people
Speaker 1: who are dying are dying, his view, because they're unvaccinated
Speaker 1: or they haven't up to date with their vaccinations. So
Speaker 1: I just came through COVID myself and the first time
Speaker 1: I had it, and I'm up to date on my vaccines.
Speaker 1: But I probably could have gotten a booster more readily
Speaker 1: than I probably did the most recent one. But maybe
Speaker 1: that's why I got it. But his point is that
Speaker 1: people are not vaccinated at all, they are really in
Speaker 1: danger of being one of the three to four hundred
Speaker 1: a week or dying. And so we're not completely out
Speaker 1: of the woods here in large part because about a
Speaker 1: third of our country doesn't want to be vaccinated. Well,
Speaker 1: and David, I'm glad that you're feeling better, uh, and
Speaker 1: a lot of people have been going through it right now.
Speaker 1: Just pairing the two ideas that we just have been
Speaker 1: through a pandemic that caused real fissures in the social
Speaker 1: fabric that have exacerbated some of these mental health issues.
Speaker 1: Did Dr Morthey talk about that about how the pandemic
Speaker 1: and some of the responses really did exacerbate the mental
Speaker 1: health problems in the nation. Yes. What happens is when
Speaker 1: you stay at home, you think, Okay, I'm going to
Speaker 1: be safe, but actually you are deteriorating your and your
Speaker 1: ability to relate to other people, and ultimately, for many
Speaker 1: people who become so isolated, they have mental health challenges.
Speaker 1: His biggest concern is the mental health isolation right now
Speaker 1: in the country. There are a lot of healthcare problems, obviously,
Speaker 1: opioid addiction, cancer, whole bunch of other problems, but right
Speaker 1: now his particular focus is healthcare mental health, and that's
Speaker 1: something he's focused on his whole career. Yeah, with respect
Speaker 1: to loneliness really and what that does to people as well.
Speaker 1: I'm wondering what this says with respect to any kind
Speaker 1: of response from a government like the United States to
Speaker 1: additional pandemics or other health problems, if there is this
Speaker 1: add on of the mental health component afterwards, which could
Speaker 1: be just as pernicious, if not more so, certainly in
Speaker 1: certain communities and among certain certain kids who are actually
Speaker 1: having to resocialize going back to school. Yes, you don't
Speaker 1: really know what the impact is going to be until
Speaker 1: much later. In other words, if you get COVID, you
Speaker 1: can see the impact right away. But if you're isolated
Speaker 1: and you have a mental health problem, you and I
Speaker 1: picked that up for four months, five months, six months,
Speaker 1: and he might not get the kind of treatment you needed.
Speaker 1: And one of the things he points out is that
Speaker 1: mental health problems don't get reimbursed by insurers or the
Speaker 1: federal government quite the way that physical health problems do.
Speaker 1: And so there's certain stigma associated with mental health. There
Speaker 1: always has been, but the stigma hasn't gone away, and
Speaker 1: the insurers still don't reimburse you for mental health treatment
Speaker 1: that you might need, David, is a surgeon general job,
Speaker 1: if you will. Is it political? Is it? Do they
Speaker 1: just try to find somebody with major chops in medicine
Speaker 1: or is it a political football from Republican to Democrat
Speaker 1: to Republican. Well, I wouldn't say it's a political football,
Speaker 1: but I would say that you want, you need to
Speaker 1: be a healthcare professional. But clearly you are appointed by
Speaker 1: a president and you're confirmed by the Senate. And the
Speaker 1: first time around, when he was appointed by President Obama,
Speaker 1: he had a difficult time being confirmed because he had
Speaker 1: said that there was a problem with guns guns in
Speaker 1: our country and that was seen as the healthcare problem
Speaker 1: him and many people didn't want to confirm him for that.
Speaker 1: He did get confirmed this time, it wasn't so complicated.
Speaker 1: I would say nothing in Washington is a political and
Speaker 1: I would say there's still some political nature to it. David, Now,
Speaker 1: thank you so much. David, greatly appreciate it. With Carlisle Group,
Speaker 1: the Code chairman and of course the host of the
Speaker 1: David Rubenstone Show, period of your conversation here on medicine
Speaker 1: and something gripping all of us, regardless of our politics,
Speaker 1: the mental health of the nation's Surgeon General, Vive Murphy
Speaker 1: with David rubensteinmar for that. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television
Speaker 1: each day from six to nine am for insight from
Speaker 1: the best in economics, finance, investment, and international relations. And
Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot com, and of course on the terminal. I'm Tom
Speaker 1: Keene and this is Bloomer