Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.
Speaker 2: And my house is almost nothing on our guests.
Speaker 1: On my coffee table in my living room, there is
Speaker 1: a one hundred page plus researcher report from JP Morgan
Speaker 1: eighteen months ago which brilliantly plays out the demand dynamics
Speaker 1: of what we don't talking us about, which is emerging
Speaker 1: markets joining us now, Christian Malick, Global Heat of Energy, STRATUMY,
Speaker 1: JP Morgan, COVID dot in Away.
Speaker 2: Let's just be honest, China shutdown gotten Away.
Speaker 1: Do you reaffirm what you said eighteen months ago about
Speaker 1: the durability of demand.
Speaker 2: In em for sure?
Speaker 3: Actually, I think it's always good to be here again
Speaker 3: and on demand. What I'd say is that I think
Speaker 3: we're actually stronger in demand growth on a medium term
Speaker 3: than we thought you were. And the main reason is
Speaker 3: that when you look at all the fuels in the world,
Speaker 3: particularly the clean energy fuels. In the second edition of
Speaker 3: that report, we showed that the system the distribution of
Speaker 3: that energy will basically fail the generation of lean energy.
Speaker 3: So you've got all these duels being generated, you can't
Speaker 3: get it to the consumer. What happens is we end
Speaker 3: up with a massive gap of energy in terms of
Speaker 3: what to fill. How do we fill that? We have
Speaker 3: to fill it through the traditional fuels. What that will
Speaker 3: do is drive more demand for hydrocarbons. Are there for
Speaker 3: more demand for oil?
Speaker 1: I mean, I mean we can spend an hour with
Speaker 1: you and as duels focus as a physics estimate of
Speaker 1: energy and the thermone dynamics and ev vehicles and all there.
Speaker 2: But I'm not going there this morning.
Speaker 1: What I will say is you got to get traditional
Speaker 1: hydrocarbons from Saudi Arabian such through the straight to Malaca
Speaker 1: and up the Pacific Ring.
Speaker 2: Is that model still in place? Absolutely?
Speaker 3: And in fact, when we think about Sadi share of
Speaker 3: demand growth, and we've written about this extensively, you know
Speaker 3: a few years ago that ultimately with the industry retreating
Speaker 3: in terms of investments in oil. What we'll see is
Speaker 3: SADI share of demand growth going up to between fifty
Speaker 3: to sixty percent of all demand growth by twenty thirty. Now,
Speaker 3: just to give you perspective on that, the average was
Speaker 3: eleven percent the last thirty years. The low was four
Speaker 3: when we had shale at its max. But a high
Speaker 3: cost of equity, you know, more cash return to shareholders,
Speaker 3: a high cost of debt, higher for longer rates, and
Speaker 3: clearly a push to drive away from the transition has
Speaker 3: meant that the industry is massively underinvested, and that we
Speaker 3: weren't a fan of this un investment. Pisis for a
Speaker 3: very long time. We turn bullets with a super cycle
Speaker 3: in twenty twenty. I always like to say that, but
Speaker 3: that investment now is now way too late.
Speaker 4: Do presidential politics matter, given the crude production in America
Speaker 4: is close to a record at the moment.
Speaker 3: I think it does in the sense that you could
Speaker 3: potentially push for more investments in shale.
Speaker 2: But the issue of shale, and it sort of.
Speaker 3: Goes back years five or six years ago, were all
Speaker 3: wondering how is it when all prices go off, we
Speaker 3: see so many barrels just turning.
Speaker 2: Up, blowing up, lots and lots of wells.
Speaker 3: That was fine then, but we sort of what you
Speaker 3: saw now, you've seeing productivity slow. So as a result
Speaker 3: of the way that was fragged, well dated, showing us
Speaker 3: that productivity is now slowing. So even if we said right,
Speaker 3: go drill, baby, drill right and in lots of investments,
Speaker 3: even if banks were to turn around and say listen,
Speaker 3: will finance you, the issue is the wells themselves. It's
Speaker 3: not magic dust you just throw over wells. That slow
Speaker 3: down is happening, and the marginal cost is going up.
Speaker 3: The one thing I probably learned this year in all
Speaker 3: markets is that we tested seventy and we bounced back.
Speaker 4: Looking at prices now ninety four on Brent, looking at
Speaker 4: the bond market, yield to push in five percent, five
Speaker 4: twenty two year and four fifty out of ten year,
Speaker 4: conversation we're having in the bond market is what is
Speaker 4: the new normal?
Speaker 5: Is it the old normal?
Speaker 4: What's the conversation like in the commodity market, what's the
Speaker 4: new normal for commodity prices?
Speaker 5: Given everything you've just told us.
Speaker 3: Well, I love the way you talk about because I
Speaker 3: think that before in our in terms of we were
Speaker 3: very bullished and then we sort of took time out
Speaker 3: this year. We're very barish in December and we've basically
Speaker 3: gone back to bullish, So we're sort of we've been
Speaker 3: quite tactical that before and after its rates. The flow
Speaker 3: of capital into new or supply is just not what
Speaker 3: it was like in the last thirty years. You had
Speaker 3: cheap money, a lot of productivity. So to ask you
Speaker 3: a question, what that's doing is driving the long term
Speaker 3: price the back end of the curve up to eighty
Speaker 3: and north of eighty, we think it probably normalized towards
Speaker 3: one hundred dollars, And just to sort of give you
Speaker 3: a bottom up sense the companies themselves, if you take capex, dividends, buybacks, debt,
Speaker 3: and windfall tax in this country, in Europe, you need
Speaker 3: at least eighty dollars to be able to invest in
Speaker 3: marginal new oil. That's of fact we've done. We did analysis.
Speaker 3: We call it the cash break even. So that's very
Speaker 3: supportive for the eighty dollars. The question we've had a
Speaker 3: lot today is why one hundred. Well, when you look
Speaker 3: at their capacity of opek over the next few years,
Speaker 3: the only ones that are going to be able to
Speaker 3: fill that fill that gap in supply, is opek origue
Speaker 3: When spare capacity has fallen to sort of between five
Speaker 3: and ten percent of total capacity in the world, that's
Speaker 3: a risk premium, which we i haven't used that term
Speaker 3: for a very long time in oil, maybe last year briefly.
Speaker 3: That will drive twenty dollars above the eighty to one hundred.
Speaker 6: So when you talk about opek being the big swing factor,
Speaker 6: we've been hearing a lot that Saudi Arabia and what
Speaker 6: they decide to produce is really going to determine whether
Speaker 6: things stay at one hundred, whether things stay at ninety,
Speaker 6: or whether things stay below. Do you reject that? Do
Speaker 6: you think that that sort of a simplistic way of
Speaker 6: looking at it? And in the near term they have
Speaker 6: less control than people give them credit.
Speaker 3: Well, it's a question that's very, very very they have control.
Speaker 2: They have to have control.
Speaker 3: I think ultimately the size have played their cards very
Speaker 3: well and done a fantastic job managing the volatility and oil.
Speaker 3: Right With that in mind, if they're taking great share
Speaker 3: of demand growth, they have a sort of fiducial duty
Speaker 3: to make sure they're stabilizing the price. So people talk
Speaker 3: about an absolute price I just viewed that. I think
Speaker 3: what they're trying to do is make sure it stays
Speaker 3: within a range, which by definition means if we see
Speaker 3: a very cold winter, hurricanes and prices spike very quickly,
Speaker 3: they'll be managing the upside just this way they're managing
Speaker 3: the downside. So I've told generalists this morning, put your
Speaker 3: seatbelts on. It's it's going to be a very volatile supercycle.
Speaker 3: It's not going to be a straight line. And therefore,
Speaker 3: in some ways, I think the bullish factor to that
Speaker 3: inequities is Saudi can control that range, so generalists don't say, wait,
Speaker 3: this is way too this is way too high octane.
Speaker 2: For me to the right. Now.
Speaker 6: That's the reason why I think it's one hundred and
Speaker 6: not one hundred and ten. Right, You think that that's
Speaker 6: where they're going to kind of cap it. But what
Speaker 6: about say Russia and the fact that they just banned
Speaker 6: exports of gasoline.
Speaker 5: And things of that nature.
Speaker 6: Are there other areas that could kind of go against
Speaker 6: what we're seeing from Saudi.
Speaker 3: I think other areas will be demand, and I think
Speaker 3: we're in demand discovery. I mean, everyone's got a view.
Speaker 3: What price does demand? We've looked at historic analysis, and
Speaker 3: one hundred or oil is not that expensive. In fact,
Speaker 3: it's sort of closest or sevent soil of real Again
Speaker 3: before and after it's higher rates, you've got higher rates.
Speaker 3: And therefore, what's the real sort of level of normalized
Speaker 3: price the market demand the.
Speaker 2: World can acclimatize to. We don't know.
Speaker 3: We think one hundred and ten hundred and twenty is fine,
Speaker 3: and therefore at that price, if we started to see
Speaker 3: massive demand destruction, we're wrong. That's the point where I
Speaker 3: suspect Saudi and Rush will have to sort of manage
Speaker 3: that downside once again.
Speaker 5: So the message this morning is buckle up, buckle.
Speaker 3: Up, buckle up, very long, very bullish, but be very
Speaker 3: tactical when you get positioned in.
Speaker 5: That's quite something, Takay it is.
Speaker 2: There's a lot.
Speaker 1: You know, this is really important that the people we
Speaker 1: talk to they all have different views. We heard that
Speaker 1: from mister Morris's city group, different from mister Mail, like
Speaker 1: a JP Morgan, and you got to respect the density
Speaker 1: of the granularity rather Johan, that these people study something
Speaker 1: where we just go, well, Brent's ninety two and that
Speaker 1: just doesn't get it done.
Speaker 2: It's way more grand.
Speaker 5: You're about to do that right now. Brent's ninety four.
Speaker 4: Thanks Christ, Thank you of JP Morgan on the latest
Speaker 4: and the commodity market.
Speaker 1: Joining us right now with the most important interview of
Speaker 1: the day, because when it's like this, you triangulate to
Speaker 1: foreign exchange.
Speaker 2: Jordan Rochester's G ten epix strategists and Murra. I got
Speaker 2: one basic question.
Speaker 1: I'm told I can't get back on the plane and
Speaker 1: go back to New York unless they get a one
Speaker 1: nineteen print and sterling. How quick is Prime Minister Suna
Speaker 1: going to get me to a one nineteen sterling.
Speaker 7: That's something that could happen before your end. The moves
Speaker 7: aren't as rock and rollers last year, though. We haven't
Speaker 7: got a Liz Trust versus a Lettus moment right now
Speaker 7: to kind of get you that move lower. But we
Speaker 7: were at one eighteen in March earlier earlier this year,
Speaker 7: so it's very possible that one nineteen we could be
Speaker 7: talking the next six weeks.
Speaker 5: You're a parity call.
Speaker 4: Earlier this week on this program, Jane Foley wrap our Banks,
Speaker 4: she said, maybe where are you on that?
Speaker 7: Now?
Speaker 5: I was going to say, is that the call?
Speaker 7: It's definitely a maybe, but that that requires your next
Speaker 7: guest to tell us about oil, Christian Amic. So if
Speaker 7: oil goes to one hundred, okay, we get to one
Speaker 7: oh five maybe one o four in euro but to
Speaker 7: get down to parity, we need that energy squeeze that
Speaker 7: will hit that trade bands. Because what's happened. The euro
Speaker 7: Area's got a lovely current account service once again thanks
Speaker 7: to lower natural guests, so we need a cold weather
Speaker 7: forecas froctile.
Speaker 4: So things need to go wrong in Europe. We've done
Speaker 4: enough on the US side. That's not where the surprise
Speaker 4: comes from for you, I.
Speaker 7: Think, so the US in the next two CPI prints,
Speaker 7: what's going to be interesting is oil's up seven percent
Speaker 7: this month, but gasoline futures are down, so we're not
Speaker 7: going to get a really hot CPI print on headline
Speaker 7: that we got for last month. We've got zero point
Speaker 7: six month a month. The next month could just be
Speaker 7: zero point two for headline. But if gasoline futures weren't
Speaker 7: a spike back, we get another hot CPI for the US,
Speaker 7: followed by another one. If oil goes to one hundred,
Speaker 7: then you could be talking parity in Europe from a
Speaker 7: US perspective.
Speaker 6: In general, we talk about dollar strength right now, is
Speaker 6: it a dollar story or is it everything else story
Speaker 6: being weak?
Speaker 7: Oh, it's bothally, So the dollars strong because we've had
Speaker 7: a basically reinflation. We've had not just energy prices going
Speaker 7: back up, but these UAW strikes. We're interesting seeing some
Speaker 7: signals that car inflation could come back. So it's really
Speaker 7: hard for the market to look for a dubbish fed
Speaker 7: right now, especially with continuing claims falling lower once again.
Speaker 7: So we're not seeing any material job layoffs in the US,
Speaker 7: and then that's the US side. In Europe, it's horrendous
Speaker 7: in terms of growth. Look at the UK Services PMI.
Speaker 7: We had one of the biggest falls in the employment
Speaker 7: index within that PMI today, so it's quite clear that
Speaker 7: unemployment's rising in the UK and we're seeing softness in
Speaker 7: German labor market data as well. So an answer your
Speaker 7: question is always both, because it's currencies, we always do both.
Speaker 7: The European data for growth and for employments are looking
Speaker 7: pretty shaky.
Speaker 6: What's the level of strength for the dollar where it
Speaker 6: becomes truly disruptive.
Speaker 7: Well, in terms of the disruption, we're already getting close
Speaker 7: to those levels, as John said, parity in euro that
Speaker 7: would be a disruptive level for sure.
Speaker 2: Oil.
Speaker 4: I want to talk a little bit more about Croute
Speaker 4: and the move we've seen. You said that maybe if
Speaker 4: something goes wrong with gas, what about Brent and WTI?
Speaker 4: What about that we're already in the nineties on Brent.
Speaker 4: Doesn't that change things for Europe?
Speaker 7: It already has, it already has That's why I think
Speaker 7: the first half of this year and energy was weak.
Speaker 7: I thought that we could see euro finished a year higher,
Speaker 7: but that's completely changed. I didn't expect Brent to go
Speaker 7: above ninety. Well you changed from one fifteen to one
Speaker 7: oh five on the euro right, Brent move for sure,
Speaker 7: and we had this horrible range. So macro pms have
Speaker 7: had a very, really tough first half to the year
Speaker 7: because Euro has been in the yo yo and everyone
Speaker 7: getting excited at the high, it is excited at the
Speaker 7: lows get stopped out chasing their tail. I think we
Speaker 7: were going to see a proper breakout. FX has lacked
Speaker 7: a trend in the dollar this year. We're now getting
Speaker 7: a trend thanks to the energy story. So last year
Speaker 7: was thanks to Vladimir Putin. We got a big trend
Speaker 7: in the euro this year. It's thanks to MBS in
Speaker 7: Saudi Arabia. Why isn't the yen weaker today, Well, because
Speaker 7: you haven't had a hawkish move from the Bank Japan.
Speaker 7: What's what's quite interesting is we thought the Ford guidance
Speaker 7: would change. The Ford Guidance still says potential additional easoning easing.
Speaker 5: Could be used.
Speaker 7: So that was a bit odd given we thought you
Speaker 7: Wade a shifted a little bit more hawkish with his
Speaker 7: article from two about two weeks ago. And then the
Speaker 7: main problem for dolly En is it's quite easy to
Speaker 7: say cost to carry is very expensive to be long
Speaker 7: the ends, so therefore don't buy it. But you've got
Speaker 7: the Ministry of Finance threatening FX intervention risk and we've
Speaker 7: even had softer words from US Treasury Secretary of Yellen
Speaker 7: about maybe Japan can intervene. She hasn't said it that exclusively,
Speaker 7: but she's definitely softened her tone.
Speaker 6: So in other words, we can take a look at
Speaker 6: the yen and just say that nobody wants to bet
Speaker 6: against the central bank, and nobody wants to bet against
Speaker 6: foreign intervention that they're likely to deploy, but it has
Speaker 6: nothing to do with the differential at this point between
Speaker 6: the monetary particiesly.
Speaker 5: Has everything to do with the differential.
Speaker 7: And if the MF thret of intervention wasn't there, we
Speaker 7: would be closer to one fifty right now. If the
Speaker 7: idea of the boj turning hawkish wasn't there, we'd be
Speaker 7: closer to one fifty. But because of that threat, people
Speaker 7: are being reluctant to get into that trade.
Speaker 5: But if you were to look at.
Speaker 7: The cost of carry, it's even higher than what it
Speaker 7: was last year when we were at these exact same levels.
Speaker 5: Belisa, it's deja vus.
Speaker 7: I was in September, New York, in New York hours
Speaker 7: the Ministry of Finance came in and intervened at Dollian
Speaker 7: around one fifty.
Speaker 5: It feels a bit like deja VU's.
Speaker 7: People are just bit reluctant.
Speaker 1: Here.
Speaker 2: You and I are in the same page.
Speaker 1: First thing in the morning I do was I look
Speaker 1: at swissy frank different pairs to four decimal points, to
Speaker 1: just see when a Swiss Frank in his signal strength.
Speaker 1: You say, Switzerland stakey is a place chf sek swissy
Speaker 1: stacky is a trade to play here for long Swiss Frank.
Speaker 2: Why will the Swiss frank strength. Let's start with that.
Speaker 7: Yeah, absolutely, so we always have our main dollar views,
Speaker 7: our sterling views. But then you have to talk about
Speaker 7: RV and what we're talking about here, Tom is long Switzerland,
Speaker 7: short Sweden. Now, Switzerland has seen massive appreciation of its
Speaker 7: currency over the past year, but I think that's a
Speaker 7: trend that carries on. We're going through a period of
Speaker 7: an adjustment for Switzerland. Last year, before they started raising rates,
Speaker 7: it was negative seventy five basis points. We're now around
Speaker 7: the one fifty one seventy five on the front end,
Speaker 7: So you're getting paid for holding Swiss in the bank account,
Speaker 7: where last year you were being charged. We've known that
Speaker 7: for a while, but we're still going through an adjustment phase.
Speaker 7: And the banking repatriation flows back into Switzerland. Those Swiss
Speaker 7: banks were lending to American corporates, ping corporates, they're not
Speaker 7: going to do that next year because they've got nice
Speaker 7: yields at home. So we're seeing a lot of that
Speaker 7: money come back into Swiss, boosting the currency. And the
Speaker 7: second reason is when growth slows down, you go along
Speaker 7: the Swiss.
Speaker 1: Okay, I'll go with that, except the SMB to me's
Speaker 1: almost a sovereign wealth fund with the equity ownership they
Speaker 1: have and particularly the load de bode.
Speaker 2: Position and Apple as well.
Speaker 1: Does their equity stub within the central Bank Does that
Speaker 1: preclude usual strong Swiss dynamics.
Speaker 7: I think the SMB has just taking the view that
Speaker 7: we're happy to take a loss on our FX reserves.
Speaker 7: And in fact what they're doing is they're selling their
Speaker 7: foreigner holdings as well, so they're actually consistent sellers of
Speaker 7: They're eighty percent bonds, twenty percent inequities, so the largest
Speaker 7: part will be in the fixed income space. But we've
Speaker 7: seen eleven billion of intervention per month from the Swiss
Speaker 7: give me.
Speaker 1: A level and euroswissly the core pair there at the
Speaker 1: word point nine five point ninety four.
Speaker 7: It's easier to trade this Swiss stocky than EuroSwiss EuroSwiss.
Speaker 5: I've actually stayed out of it.
Speaker 7: It's one of the most non macro currency pairs in
Speaker 7: the G.
Speaker 4: Ten EuroSwiss Swissy stocky. It's the most London thing I've
Speaker 4: heard all week.
Speaker 2: Well, you know, I mean, it's it's real, man. We've
Speaker 2: got to bring these people in.
Speaker 1: I mean, there are days General Levy and I got
Speaker 1: Rochester here, and you know, we got to bring our
Speaker 1: FX people in. They start me, you know, go start
Speaker 1: me today. They watch in Singapore every evening.
Speaker 5: That's very killed, and they watch me and.
Speaker 1: There popa FX trades and Singapore off what we're blathering about.
Speaker 1: So I got to go to Rochester here to get
Speaker 1: some romance in it.
Speaker 2: Can we just finish Mayfair and look at a Ferrari?
Speaker 4: So that's Sweden versus Switzerland on the Swiss side, that
Speaker 4: haven currency on that growth slowed down, you think money
Speaker 4: is going to go back there? Who else is in
Speaker 4: that bucket? Because it used to be Japan?
Speaker 5: What else is the good question?
Speaker 2: Yeah, it's it is Euro.
Speaker 7: That's kind of why the Euro hasn't been rock and roll.
Speaker 7: So you're asking me about the one o five down
Speaker 7: to parrot of you. We've got better trades to do.
Speaker 7: Short sterling versus the dollars, a better trade. The way
Speaker 7: we're playing euro is short euro versus CAD. But the
Speaker 7: reason I mentioned Euro is because we are having banking repatriation.
Speaker 7: For a long time, German banks, French banks had negative
Speaker 7: interst rates.
Speaker 5: American corporates asking for money let's go for it.
Speaker 7: Let's lend abroad that's now reversing because they've got positive
Speaker 7: yields up.
Speaker 1: Do you have a level on DXY where you go omg,
Speaker 1: you wake up in London and go wow d X
Speaker 1: y one oh seven, one ten? What's what's the prism
Speaker 1: you have of DXY where things change?
Speaker 7: Well by what what do you mean? So for the
Speaker 7: Fed for it to have an impact.
Speaker 2: Mean for us, for people trading the market got.
Speaker 5: Ten seconds to give us a number before one tent.
Speaker 4: There you go, that's that's what we're scaring one ten Jordan,
Speaker 4: Thank you, Jord and roast of Numa.
Speaker 2: Swissy Stacking.
Speaker 1: Sarah Melick with US now chief investment officer at Nuven. Sarah,
Speaker 1: though fear is out priced down yield up. Should we
Speaker 1: be in a sense of panic or frenzy or caution
Speaker 1: or is this a.
Speaker 2: Normal adjustment that we will survive.
Speaker 8: Well, there's two issues the market needs to suggest to
Speaker 8: and that's what's going on with the economy and what's
Speaker 8: going on with race. The economic soft lending narrative is
Speaker 8: definitely being challenged and the markets had started to price
Speaker 8: that in.
Speaker 9: So that's what the markets are adjusting to rates.
Speaker 8: Of course, interest rates higher for longer, inflation higher for longer,
Speaker 8: all of that together is going to be a headwind
Speaker 8: for the markets.
Speaker 9: Also, we think long term a lot of cash still on.
Speaker 8: The sidelines, So I don't think the bull market's over,
Speaker 8: but short term you do need to be a little
Speaker 8: bit cautious. The two areas we like our technology stocks
Speaker 8: and dividend growers. Technology stocks still less correlated to economic growth,
Speaker 8: so I think they can have a rebound from here,
Speaker 8: and the dividend growers is an area the market that's
Speaker 8: really underperformed here today, and they tend to perform well
Speaker 8: in markets that have that are going down, so they
Speaker 8: have less downside captured. So those stocks I think are
Speaker 8: cheap and could protect portfolios and provide income.
Speaker 6: Sarah, what you just said is actually incredibly controversial today.
Speaker 6: It might not have been controversial two weeks ago, but today,
Speaker 6: basically you're going against everything that everyone is saying. At
Speaker 6: a time you have tech go going down to such
Speaker 6: a degree and leading the declines. So how is tech
Speaker 6: defensive at a time when they potentially could be interest
Speaker 6: rate sensitive and when they have exploded? The Big seven
Speaker 6: seven magnificent stocks have absolutely driven everything we've seen so
Speaker 6: far in terms of gains in the US equity market.
Speaker 8: Well, let's start with semiconductors, which is an area that
Speaker 8: we like. September tends to be their seasonally worst month
Speaker 8: in terms of performance.
Speaker 9: So not surprised to see that they peaked out in
Speaker 9: about July.
Speaker 8: But if you look at the tailwinds for semis and software,
Speaker 8: which is our two favorite areas of technology. First of all,
Speaker 8: artificial intelligence, we don't think that it's hype, it's a
Speaker 8: real trend. It did get a little bit crowded, but
Speaker 8: I think it'll last for many years. Second, inflation has
Speaker 8: been increasing because of energy prices, which we think will
Speaker 8: moderate after the huge upswing that we've seen.
Speaker 9: And then continued services.
Speaker 8: Spending, which has been around for a while that continues
Speaker 8: to moderate. Another tailwind for technology sucks and interest rates.
Speaker 8: We see the FED basically one and done from here.
Speaker 8: One more rate hike. What got priced out of the
Speaker 8: market next year was two rate cuts. We didn't expect
Speaker 8: rate cuts for twenty twenty four. But as the FED
Speaker 8: positive again, I think these are all positives or tech stocks.
Speaker 8: So a few of these headwinds that have come in
Speaker 8: the last two months as the sector did get crowded,
Speaker 8: will move out.
Speaker 10: Of the way.
Speaker 8: Also, looking at portfolio managers, they generally were underweight to
Speaker 8: some of these megacap techtocks coming into this year, so
Speaker 8: you could see a lot of people stepping in for
Speaker 8: catching up.
Speaker 9: To get their waiting in their portfolios to the right level.
Speaker 8: And then clients are holding still about twenty five percent
Speaker 8: of their portfolios and cash that at some point needs
Speaker 8: to come back into the markets.
Speaker 6: Does it though, I mean this is sort of the
Speaker 6: key question. Does it if you're earning five percent on it?
Speaker 6: Actually maybe it looks pretty good. And there's a question
Speaker 6: about whether we've actually seen the effects of rates that
Speaker 6: are now the highest going back more than a decade
Speaker 6: two thousand and seven, two thousand and six, depending on
Speaker 6: which denomination you look at. Are you saying that these
Speaker 6: are rates that we can live at that basically we
Speaker 6: have seen the effects and they haven't been too bad.
Speaker 7: Yeah.
Speaker 8: I think what clients learned this year was there was
Speaker 8: an opportunity cost for holding cash is when inflation is
Speaker 8: at the levels that it was, and the markets have
Speaker 8: done what they've done, you know, year to date, even
Speaker 8: though they've moderated a bit in the last couple of months.
Speaker 8: Markets are still well above cash here to date, so
Speaker 8: there's an opportunity costs for holding onto that cash. So
Speaker 8: I think clients are figuring that out. And when it
Speaker 8: comes to high interest rates, you know, the ten year
Speaker 8: at over four percent is a headwind for the markets,
Speaker 8: but it all depends on what economic growth does. And
Speaker 8: if economic growth stays strong, I think the markets can
Speaker 8: handle a tenor that's at these levels.
Speaker 1: Sarah, this discussion on technology is so absolutely critical, a
Speaker 1: huge body of retails taking the story. If institutional is
Speaker 1: not now the gloom is rates up. There's a duration
Speaker 1: argument about technology.
Speaker 2: I get it.
Speaker 1: Where in the income statement will you see tech superiority,
Speaker 1: Are they going to outperform on revenue growth or do
Speaker 1: you go down where they surprise with a better marginal
Speaker 1: free cash flow And.
Speaker 9: The answer is all of the above.
Speaker 8: In the sense that the good news for software companies
Speaker 8: is they don't need to rely on pricing power, and
Speaker 8: as inflation does continue to moderate, which we think that
Speaker 8: it will take, software companies are less effective by having
Speaker 8: to lower their prices because and hold on to pricing power.
Speaker 9: Margins are important for tech sucks.
Speaker 8: You thought saw that with Meta this year, where they
Speaker 8: were ahead of the curve in terms of cutting costs
Speaker 8: and preserving their margins, and other companies have followed, which
Speaker 8: is important too. And then strong free cash flow growers.
Speaker 8: You look at Broadcom right now as a company that
Speaker 8: we like, strong free cashal ability to buy it back
Speaker 8: up to like nine billion in shares. VMware is going
Speaker 8: to add free cashload to their model. So all the
Speaker 8: above for these companies.
Speaker 1: Lisa's buying a new iPhone today at Covent Garden, Syrus
Speaker 1: should should be also acquiring Apple shares at the margin.
Speaker 8: Apple as a company we've not been as bullish on
Speaker 8: for many reasons. Number one is the post COVID normalization
Speaker 8: of their unit growth I think is going to be
Speaker 8: an issue for them.
Speaker 9: And even with the uppers of the iPhones.
Speaker 8: I'm a user of an iPhone myself, but uppers have
Speaker 8: been pretty incremental recently, so they're not as exciting.
Speaker 9: I'm glad Lisa as excited about it though.
Speaker 8: And also their next big product is VR, which has
Speaker 8: a very high price point, so I think those could
Speaker 8: be struggles for Apples, which has got you premium multiple
Speaker 8: as people that's been a consensus holding for many investors.
Speaker 6: I just want to set the records straight and Tom,
Speaker 6: they know this. I am not a line waiter. I
Speaker 6: am not someone who's some sort of rabid enthusiast. I
Speaker 6: cracked my phone, so at some point I'm gonna have
Speaker 6: to get a new photo garden lined up there.
Speaker 5: Oh my god, is Lisa bradits lence? Yeah, so let's
Speaker 5: move on.
Speaker 2: Sara.
Speaker 6: I'm curious though, just as we sort of take a
Speaker 6: look at the whole week, is sixty forty still profoundly
Speaker 6: challenged at a time where we're seeing bond sell off
Speaker 6: at the same time intended with stocks.
Speaker 9: And it was challenged in twenty twenty two.
Speaker 8: I think twenty twenty three's had had a better return
Speaker 8: for the sixty forty forty portfolio, but it taught us
Speaker 8: a lesson about diversification and alternatives. An area we really
Speaker 8: like outside of the traditional sixty forty is private credit.
Speaker 8: It also tends to be resilient to an economic slowdown,
Speaker 8: and that's really important right now is owning areas of
Speaker 8: in your portfolio that are less successible to economics slowdowns
Speaker 8: can continue to grow. You know, I did also have
Speaker 8: one more question for all of you. Though you talked
Speaker 8: about Katy Perry, are you are you and the Katy
Speaker 8: Perry camp or Taylor Sweat? Oh?
Speaker 1: Well yeah, I got to go with Katie Frankie. But
Speaker 1: well I love what Taylor's been doing with the National
Speaker 1: I mean she and Antonov, what they've done has been extraordinary.
Speaker 2: She's gonna with a needle on GDP.
Speaker 1: I mean, can Olivia go out there and move the
Speaker 1: same needle.
Speaker 2: You're asking him?
Speaker 5: I'm not engaging, That's what was that a question for Sarah?
Speaker 2: No, it was for you. Didn't try to just compare.
Speaker 2: She's ignoring me.
Speaker 1: Thank god, we needed a voice near the end of
Speaker 1: our sojourn to provide balance and of you forward.
Speaker 2: There's no one in London that.
Speaker 1: Can do that like Janet Henry, Global Chief Economy for
Speaker 1: the Hong Kong and Shanghai Banking Corporation wired into Asia.
Speaker 2: Literally like no one we talked to. You've got a
Speaker 2: lovely view. And then there's China.
Speaker 1: What does HSBC, with all of your context, say about
Speaker 1: the stability and the economic recovery of China.
Speaker 10: HSBC has a perhaps more balanced view of China than
Speaker 10: some of the hysteria that hit the markets. Yes, not
Speaker 10: so long ago. I think we're not going to get
Speaker 10: any quick answers one way or the other on China,
Speaker 10: and we need to learn to live with that.
Speaker 2: You know.
Speaker 10: Financial markets always want to know with certainty where things
Speaker 10: are going to be in two years time, and they
Speaker 10: want to price it today. The fact is, in China,
Speaker 10: what we have seen recently is some signs of stabilization
Speaker 10: in the economy. Industrial production showed some improvement, Retail sales
Speaker 10: showed some improvement. Credit data is showing some improvement. Are
Speaker 10: there still major challenges in the property sector. Yes, and
Speaker 10: we are seeing a gradual rollout of policy stimulus that
Speaker 10: is now being reflected in monetary data. Are there major
Speaker 10: issues in local government debt stocks? Yes, there are, but
Speaker 10: are they providing liquidity?
Speaker 2: Yes.
Speaker 10: This is a multi year story of ongoing stabilization and
Speaker 10: the next round will be structural reforms to deliver the
Speaker 10: long promised higher quality of growth.
Speaker 1: And monthly and three monthly annualizing. Within your research note,
Speaker 1: we see a disinflationary tinge that dovetails. Was Steve Major's
Speaker 1: long term conviction of price up yield down that's been
Speaker 1: tested the last seventy two hours. Do you guys stand
Speaker 1: with a disinflationary tendency which filters in to lower yield well.
Speaker 10: From an RCER economic perspective, for the last two years,
Speaker 10: tom As you know, I've been talking about a deterioration
Speaker 10: in the growth inflation tradeoff, a different mix of lower
Speaker 10: growth higher inflation, and that probably requires a different policy
Speaker 10: rate level than we were used to in a pre
Speaker 10: pandemic era. Yes, we have some disinflation, but there are
Speaker 10: plenty of risks out there. Even the Fed's goldilocks view
Speaker 10: that they set out at the FOMC, the level of
Speaker 10: uncertainty around that they are omitting is quite high. But
Speaker 10: by the same token, it's not so long as you've
Speaker 10: already highlighted that everyone was forecasting a recession first half
Speaker 10: of last year, this year, second half of this year,
Speaker 10: now a soft landing. The fact is this is an
Speaker 10: unusual cycle. The last three years were unusual. Why does
Speaker 10: the market keep fitting with the idea that this is
Speaker 10: going to be a very ordinary downturn with a very
Speaker 10: ordinary FED response.
Speaker 5: Changed, Janet?
Speaker 4: From your perspective, the relationship between the labor market and
Speaker 4: price pressure just based on those forecasts and chair and
Speaker 4: power and self hesitant to ascribe a narrative to a
Speaker 4: median projection.
Speaker 5: But let's have that conversation anyway. We have done over
Speaker 5: the last couple of days.
Speaker 4: They're essentially saying we can get inflation down to two
Speaker 4: with unemployment not climbing much above four percent.
Speaker 5: What do we learn from that.
Speaker 10: We've learned that they are extrapolating what's happened so far
Speaker 10: right now. Yes, so you're right. I mean, it's remarkable.
Speaker 10: We've never been in the recession camp. We've been in
Speaker 10: the more protracted slow down, the rolling recession camp, a
Speaker 10: couple of years of sub trend kind of growth. But
Speaker 10: now the Fed has overtaken us on the unemployment rate.
Speaker 10: You know, we only had unemployment at four percent by
Speaker 10: the end of the year, but we've got at four
Speaker 10: and a half by the end of next year. The
Speaker 10: Fed hasn't even got that, having previously said that it
Speaker 10: was going to rise by more. It has been extraordinary
Speaker 10: that wage growth has gone from nearly six to just
Speaker 10: over four. But the recent progress has actually been a
Speaker 10: bit slower. And everyone's talking about the strike. We don't know.
Speaker 10: It could be that actually there are other areas of
Speaker 10: the economy where because of collectivized wage bargaining in Europe,
Speaker 10: because of public sector pay in the UK, because of
Speaker 10: strikes in the US. That it's not a linear story. Actually,
Speaker 10: it's a bit rocky on the way down. And the
Speaker 10: disinflation process, as we've discussed before, does not continue us.
Speaker 10: We've got other areas of inflation volatility, and the markets
Speaker 10: are going to have to accept that they really are
Speaker 10: willing to keep interest rates higher for longer.
Speaker 4: So people who go on the Federal Reserve website and
Speaker 4: they open up the summary of economic projections, should they
Speaker 4: view them as foe casts or respirations?
Speaker 10: What are they they should view them? Obviously that every
Speaker 10: central bank, given their inflation targets, their inflation priorities, that
Speaker 10: is their primary goal and they will do what is
Speaker 10: required to get there. Obviously, what we got in the
Speaker 10: FED projections, and to some extent we've got in another
Speaker 10: central bank projections as well, is that they're almost willing
Speaker 10: to take a little bit longer to get there. The
Speaker 10: FED is saying it's not going to be at target
Speaker 10: till twenty twenty six, so and they have said that
Speaker 10: their central scenario is now that they can get there
Speaker 10: by being a bit slower, a bit more patient about
Speaker 10: getting there. They can get there without a traditional recession
Speaker 10: when the economy has kind of deep contraction. But as you,
Speaker 10: no one never read it. Page two, Page four, Question four,
Speaker 10: Question five, what's your certainty about this range of forecasts?
Speaker 10: It's still very high. It's not where it was during
Speaker 10: the pandemic, but it's still high.
Speaker 6: Are you basically saying what we're seeing this week in
Speaker 6: markets is a sea change about our understanding of central
Speaker 6: bank's patients. With such high inflation that they will tolerate
Speaker 6: it for quite a bit longer, and that means it
Speaker 6: will become more entrenched in a way that people previously
Speaker 6: had not expected.
Speaker 10: I'm not saying that they will tolerate it staying at
Speaker 10: these levels, and they certainly will not tolerate any signs
Speaker 10: that it's reigniting, whether that's from wage pressures or elsewhere.
Speaker 10: They need to see further progress. They need to be
Speaker 10: confident that that progress is going to continue. And obviously
Speaker 10: financial markets at the first sign that maybe a central
Speaker 10: bank is done, is celebrating the fact that the next
Speaker 10: move is going to be downwards. And actually the more
Speaker 10: that financial markets do that, the more likely it is
Speaker 10: that a central bank that's trying to tighten financial conditions
Speaker 10: actually stops raising rates. So I think that what they're
Speaker 10: telling us is that they are determined to drive at
Speaker 10: lower They might be patient about the timeline with which
Speaker 10: they gets there, but they're not going to take any
Speaker 10: risk that it becomes entrenched. You have that from the
Speaker 10: bundanz Bank again overnight.
Speaker 6: The game theory that you just laid out, does that
Speaker 6: mean that the yields that we're seeing now are finally
Speaker 6: self fulfilling and will actually create or faster the tight
Speaker 6: credit conditions that are necessary to get to the FEDS,
Speaker 6: and that they're central bank scores? I mean, in other words,
Speaker 6: do you think that these are sustainable or do you
Speaker 6: think that this is what we need to get lower?
Speaker 10: I think how financial markets react, obviously, I'm just the macroeconomist,
Speaker 10: will be a function of what central banks obviously do.
Speaker 10: But the central bank is trying to tighten financial conditions,
Speaker 10: is trying to slow demand. They still think by slowing
Speaker 10: demand they can impact on inflation and ensure that the
Speaker 10: inflation continues to slow. But we keep talking about that
Speaker 10: all of the uncertainty that are still out there we've
Speaker 10: got a renewed inflation volatility, not least from oil and
Speaker 10: from food. We've still got uncertainties regarding labor markets. The
Speaker 10: truth is they don't know what they're going to have
Speaker 10: to do, which is why as well as saying we're
Speaker 10: ready to raise rates higher, we're ready to keep them
Speaker 10: on hole for a very very long time. It's actually
Speaker 10: all still about the data dependency. So yes, they're still
Speaker 10: watching all of these factors as long as they can
Speaker 10: see progress, whether it's a consequence of high yields where
Speaker 10: the it's a consequence of what's happening in equity markets,
Speaker 10: whether it's a consequence of what's happening in spending behavior.
Speaker 10: As long as they see the inflation data coming down,
Speaker 10: that will be enough to become more confident about the
Speaker 10: medium term.
Speaker 2: I have to ask this question.
Speaker 1: It's with immense respect for what HSBC, like Bloomberg went
Speaker 1: through with COVID. I mean, we've heard from the quarantines
Speaker 1: of HSBC in the travels during COVID and China.
Speaker 2: You walk out of the Bloomberg building.
Speaker 1: In Hong Kong, you go across that historic tramway and
Speaker 1: there's one Queen's Center you're building your place. It's the
Speaker 1: foundation of Hong Kong finance. What's the stereotype right now?
Speaker 1: We most get wrong about the new Hong Kong.
Speaker 10: That is a very broad question.
Speaker 2: That's a friday.
Speaker 10: It is a Friday. But actually, you know, as an economist,
Speaker 10: I always think that sometimes we think about countries, you know,
Speaker 10: obviously as an economist, and I love it that people
Speaker 10: want to talk about countries, they want to talk about
Speaker 10: central banks. But a lot of the things that happen,
Speaker 10: whether it is in Hong Kong, whether it's in Dubai,
Speaker 10: whether it's in London, whether it's in New York, is
Speaker 10: actually more about sectors and it's more about companies. So
Speaker 10: whatever you view you have regarding the macro story, when
Speaker 10: we're thinking about where the true transformational shifts lie in
Speaker 10: the coming years, and a lot of it is in technology,
Speaker 10: there is still a lot of dynamism and there's still
Speaker 10: money being provided to companies ten seconds.
Speaker 5: So you are trying to us in trouble. That's what
Speaker 5: you're trying to do.
Speaker 2: My Hong Kong, are you homecore?
Speaker 10: Absolutely, As someone that's lived in Hong Kong for five years,
Speaker 10: I'm still a homegouryist.
Speaker 5: Or are you done on that subject?
Speaker 1: I think it's important. I think HSBC Steve Major, great,
Speaker 1: Janet Henry. These people have a prison in there. You
Speaker 1: know all the stereotype blatherer we deal with are Steve Engel.
Speaker 4: Since we're causing trouble, Miss David Blame, I'm miss David bloom.
Speaker 2: Yeah, he's truble, he was great.
Speaker 5: Names Trouble's trum. JOHNA. Henrick, thank you appreciate it's going
Speaker 5: to say.
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and
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Speaker 11: And the Bloomberg Business app. You can watch us live
Speaker 11: on Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks
Speaker 11: for listening. I'm Tom Keen, and this is Bloomberg
Speaker 9: Resing the Haste