WEBVTT - The Yield Curve and Shipping Risks 0:00:02.529 --> 0:00:05.370 Bloomberg Audio Studios. Podcasts. 0:00:05.690 --> 0:00:06.210 Radio. 0:00:06.650 --> 0:00:07.050 News. 0:00:12.530 --> 0:00:16.680 This is the Bloomberg Surveillance Podcast. Catch us live weekdays 0:00:16.730 --> 0:00:20.220 at 7 a.m. Eastern on Apple CarPlay or Android Auto 0:00:20.300 --> 0:00:23.880 with the Bloomberg Business App. Listen on demand wherever you 0:00:23.920 --> 0:00:27.000 get your podcasts or watch us live on YouTube. 0:00:27.580 --> 0:00:31.790 Kim Harvey is stick professor at the Fuca School. of business, 0:00:31.830 --> 0:00:35.050 Duke University, all sorts of abilities. I love how he 0:00:35.070 --> 0:00:38.190 was at Chicago, and he did what the brave do. 0:00:38.250 --> 0:00:42.290 He went over to the Stockholm School of Economics, which 0:00:42.370 --> 0:00:46.950 is a whole different twisted view to get perspective. He's 0:00:46.990 --> 0:00:51.050 also an advisor to Duke football as well, 4-0. Paul 0:00:51.070 --> 0:00:54.370 Sweeney of Duke with Professor Harvey. Cam, thanks so much 0:00:54.410 --> 0:00:58.170 for joining us here today. A lot of folks, Cam, 0:00:58.210 --> 0:01:01.590 on Global Wall Street, they've never seen interest rates at 0:01:01.630 --> 0:01:04.080 these levels before, and I'm sure none of your students 0:01:04.120 --> 0:01:04.940 have either here. 0:01:05.540 --> 0:01:08.280 Frame out what this interest rate environment, what does that 0:01:08.360 --> 0:01:11.060 mean for this economy? What does that mean for these markets? 0:01:12.459 --> 0:01:17.380 Yeah, I think that people are generally misinterpreting what's going on. 0:01:18.080 --> 0:01:22.569 So number one, the rate, the yield on the 10-year 0:01:23.270 --> 0:01:28.290 is statistically the highest we've seen in 25 years. But 0:01:28.350 --> 0:01:33.280 you need to keep the context in mind that during 0:01:33.410 --> 0:01:37.230 the past 25 years, we've had these extraordinary events like 0:01:37.270 --> 0:01:41.729 the global financial crisis and COVID that drove the rate 0:01:41.810 --> 0:01:45.960 down to unusually low levels. And where we are right 0:01:46.020 --> 0:01:50.280 now is about average if you look at a longer history. 0:01:50.520 --> 0:01:53.100 And you're correct that many people have not seen rates 0:01:53.220 --> 0:01:56.490 this high, but you need to have a historical perspective 0:01:56.890 --> 0:02:00.990 that the rate that we're seeing today is not abnormal. 0:02:01.330 --> 0:02:05.130 What was abnormal was when the rate was 1%, people 0:02:05.170 --> 0:02:09.600 getting mortgages at 2% or 3%. That's abnormal. So where 0:02:09.620 --> 0:02:14.160 we are today is historically where we've been many times. 0:02:14.840 --> 0:02:18.269 And I also think that the causes of the increases 0:02:18.490 --> 0:02:20.770 in the rate are really misunderstood. 0:02:21.490 --> 0:02:22.960 All right, so I feel a little bit better about 0:02:23.000 --> 0:02:25.280 sitting with my 6% mortgage here. 0:02:25.680 --> 0:02:26.620 Cam, the Fed. 0:02:26.580 --> 0:02:29.639 Continues to talk about this 2% inflation rate. 0:02:30.400 --> 0:02:32.620 I'm wondering if that's the right bogey these days. 0:02:32.639 --> 0:02:37.010 Is inflation in this economy maybe structurally higher than maybe 0:02:37.030 --> 0:02:37.549 it used to be? 0:02:38.830 --> 0:02:40.109 Well, you say this economy? 0:02:40.550 --> 0:02:41.950 Yes. What about the past economy? 0:02:42.010 --> 0:02:42.209 Okay. 0:02:42.490 --> 0:02:43.230 So you just need to. 0:02:43.250 --> 0:02:47.840 Look at the Fed's announcement of the 2% target and 0:02:47.880 --> 0:02:52.830 then look at the average inflation rate. So the Fed 0:02:53.410 --> 0:02:57.130 doesn't do a very good job of the 2%. And 2% 0:02:57.130 --> 0:03:01.280 is an arbitrary number anyways. So the best way to 0:03:01.320 --> 0:03:06.020 think about expected inflation is to look at the TIPS market. 0:03:06.600 --> 0:03:09.820 So you look at the difference between a nominal 10-year 0:03:09.860 --> 0:03:14.079 yield and the real yield, you get expected inflation or 0:03:14.100 --> 0:03:21.180 breakeven inflation. So that breakeven rate today is about 2.36%. 0:03:22.330 --> 0:03:22.770 Yesterday. 0:03:23.410 --> 0:03:27.630 So that means that people don't believe the 2% target. 0:03:28.470 --> 0:03:32.459 And this is really important, that the increase in rates 0:03:33.260 --> 0:03:38.690 that we're experiencing is not due to expected inflation. I 0:03:38.710 --> 0:03:42.570 know it's kind of non-intuitive to people paying over $ 6 0:03:42.490 --> 0:03:49.160 for diesel. But the expected inflation, the break-even inflation, has 0:03:49.260 --> 0:03:53.710 not moved over the past year. So even since the 0:03:53.770 --> 0:03:58.830 invasion or the bombing of Iran, the break-even inflation has 0:03:58.890 --> 0:03:59.370 not moved. 0:04:00.070 --> 0:04:01.990 Professor, I want to get this in two thoughts, and 0:04:02.050 --> 0:04:04.030 one is a victory lap for you and Rob or not. 0:04:04.710 --> 0:04:07.750 But first, if I look at the cacophony on the 0:04:07.810 --> 0:04:11.880 Bloomberg screen, If I look at linkages, say, a French 0:04:12.060 --> 0:04:16.339 debt with Japanese interest rates, these are things that's hard 0:04:16.400 --> 0:04:19.960 for our listeners, our viewers to grasp. Is the easy 0:04:20.020 --> 0:04:25.220 solution to just look at inflation-adjusted real yields? And what 0:04:25.240 --> 0:04:28.370 do you think about the glide path up to new, 0:04:28.650 --> 0:04:30.630 higher American real yields? 0:04:32.110 --> 0:04:37.349 Yeah, so this is exactly the right question to ask. 0:04:37.770 --> 0:04:41.350 So thank you for asking it. So the rate has 0:04:41.410 --> 0:04:45.620 gone up, and it's not because of an increase in 0:04:45.680 --> 0:04:49.460 expected inflation. So that's very, very clear, even though people 0:04:49.520 --> 0:04:53.360 talk about it all the time. It's not due to 0:04:53.980 --> 0:05:00.400 an increase in the riskiness of U.S. government debt. Because 0:05:00.750 --> 0:05:01.520 if the U.S. 0:05:01.730 --> 0:05:04.029 Ever defaulted, it would. 0:05:03.910 --> 0:05:07.730 Be through printing money to pay the coupons and interest, 0:05:08.290 --> 0:05:11.860 and that would be reflected in in expected inflation. And 0:05:11.900 --> 0:05:15.400 I've already mentioned expected inflation is identical as to where 0:05:15.430 --> 0:05:20.350 it was a year ago. So it's also the case 0:05:20.430 --> 0:05:24.070 if you look at the spread between, let's say, corporate 0:05:24.089 --> 0:05:28.539 debt and treasury debt, that hasn't moved either. So the 0:05:28.580 --> 0:05:32.279 key thing that's moved in the economy, whether it is 0:05:32.300 --> 0:05:36.180 a corporate bond or the government bond, is the expected 0:05:36.640 --> 0:05:40.700 real interest rate. And this goes all the way back 0:05:40.760 --> 0:05:44.690 to my dissertation at the University of Chicago that shows 0:05:44.900 --> 0:05:50.029 there is a positive relation between expected real growth. And 0:05:50.050 --> 0:05:53.650 the expected Brill rate. The reason that rates are going 0:05:53.790 --> 0:05:58.830 up is because of higher expected real economic growth. It's 0:05:58.920 --> 0:05:59.539 that simple. 0:05:59.900 --> 0:06:03.300 He was in class with Frank Knight in 1921. I mean, 0:06:03.339 --> 0:06:05.159 you know that's the way it is. Okay, I've got 0:06:05.200 --> 0:06:07.200 to do a victory lap here, folks. And Matt Brill, 0:06:07.220 --> 0:06:10.820 thank you so much for waiting. Kim Harvey, folks, is 0:06:10.880 --> 0:06:13.820 my essay of the year. This year, the essay is 0:06:13.860 --> 0:06:19.469 a research report. Rob Arnott, Christopher Brightman, Campbell R. Harvey, 0:06:21.570 --> 0:06:27.090 and Omid Shakaria. It is an absolute must-read in March 0:06:27.390 --> 0:06:30.660 on fundamental growth. Cam Harvey, quickly, because I've got to 0:06:30.700 --> 0:06:33.700 get to Matt Brill. We are taught that cheap is 0:06:33.760 --> 0:06:39.080 value and expensive is growth. Wrong explanation point. Why is 0:06:39.100 --> 0:06:42.030 your essay with Rob my essay of the year? 0:06:44.339 --> 0:06:50.230 Yeah, so people misunderstand value and growth investing. So often 0:06:50.990 --> 0:06:56.390 the growth stocks are anti-value. So if you're expensive, you're growth. 0:06:57.380 --> 0:07:00.280 And what we do is just focus on growth. Think 0:07:00.320 --> 0:07:04.339 about sales growth. Think about R & D growth. So 0:07:04.480 --> 0:07:09.540 why not look at growth when you're investing in growth? Indeed, 0:07:09.720 --> 0:07:11.960 if you think of the major indices like the Russell 0:07:11.960 --> 0:07:16.250 1000 value, Russell 1000 growth, you put those together equally, 0:07:16.550 --> 0:07:21.170 you get the market portfolio, the Russell 1000. So what's 0:07:21.270 --> 0:07:25.570 not in value is in growth. And it's not just Russell, 0:07:25.610 --> 0:07:29.570 but the other index providers also. So we made the case, 0:07:30.120 --> 0:07:33.280 if you're a value and growth investor, why would you 0:07:33.340 --> 0:07:38.720 invest in expensive low growth stocks? That makes no sense. 0:07:38.880 --> 0:07:39.600 We've got to leave it there. 0:07:39.640 --> 0:07:43.180 If you're buying the market, you're buying expensive low growth. 0:07:43.640 --> 0:07:45.960 So it's a different way. 0:07:46.360 --> 0:07:47.840 Paul and I want to get you back on here 0:07:47.880 --> 0:07:49.720 before the end of the year, Cam Harvey, to talk 0:07:49.780 --> 0:07:54.950 about this extraordinary research. Basically, he says growthiness wins. Lots 0:07:54.970 --> 0:08:00.410 to talk about there. Cam Harvey at Duke. Stay with us. 0:08:00.730 --> 0:08:03.970 More from Bloomberg Surveillance coming up after this. 0:08:11.220 --> 0:08:14.830 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:08:14.910 --> 0:08:16.990 weekday afternoons from 7 to 10 a.m. 0:08:17.030 --> 0:08:17.429 Eastern. 0:08:17.530 --> 0:08:20.830 Listen on Apple CarPlay and Android Auto with the Bloomberg 0:08:20.850 --> 0:08:21.450 Business app. 0:08:21.650 --> 0:08:23.370 Or watch us live on YouTube. 0:08:23.870 --> 0:08:26.970 Kate Luff walked in. She said, Tom, what's the 30-year bond? 0:08:27.010 --> 0:08:31.180 Because everybody's looking at it. 5.66%. Kate Luff driving all 0:08:31.200 --> 0:08:34.640 her retail banking. It's Citigroup. I love her notes. They're 0:08:34.660 --> 0:08:38.540 like bullet points. central right now. I got to go. 0:08:38.559 --> 0:08:41.959 I got eight ways to go here on retail banking, 0:08:42.740 --> 0:08:45.980 but everybody's trying to get an edge and you're doing 0:08:46.000 --> 0:08:49.540 it with something called city premium boost. Is that like 0:08:49.580 --> 0:08:53.000 a Christmas card, a Christmas club account on steroids? 0:08:53.750 --> 0:08:56.750 No, I would say it's relationship banking actually in action. 0:08:56.970 --> 0:09:00.870 So when you think about city premium boost, we're actually 0:09:00.890 --> 0:09:03.510 rewarding clients for some of the banking behavior they do today. 0:09:04.020 --> 0:09:06.339 On top of all the things we give in relationship tiers, 0:09:06.380 --> 0:09:10.800 like advisors or relationship managers, lifestyle. But I talk about 0:09:10.850 --> 0:09:16.030 relationship banking because it's super important. It's just not transactional 0:09:16.090 --> 0:09:20.370 yield chasing. It's really valuing clients who are deepening their 0:09:20.390 --> 0:09:21.230 relationship with us. 0:09:21.929 --> 0:09:26.090 What's your distinction versus the 14 other flavors out there? Yeah. 0:09:26.590 --> 0:09:30.570 So it's both value and rate, as well as actually relationships. 0:09:30.990 --> 0:09:33.230 And simplicity. Again, we start with the client. We have 0:09:33.270 --> 0:09:35.730 about $ 3 trillion off of us in my business alone 0:09:35.770 --> 0:09:38.930 and wallet. And we know clients are, when you look 0:09:38.960 --> 0:09:41.640 at our Citi Gold, Citi Premium Boost, if you do 0:09:41.640 --> 0:09:45.440 $ 5, 000 in direct deposit or $ 25, 000 in investments, you have 0:09:45.480 --> 0:09:47.720 an always-on savings rate. You don't have to go to 0:09:47.740 --> 0:09:50.500 the high-yield competitors anymore. You don't have to go to 0:09:50.540 --> 0:09:54.150 a sweep into money market funds. It's simplicity of being 0:09:54.190 --> 0:09:57.209 able to consolidate your relationships. And we know our clients 0:09:57.250 --> 0:10:00.250 are doing this behavior anyway. They're just doing it not 0:10:00.330 --> 0:10:01.030 always with us. 0:10:00.990 --> 0:10:04.670 Right Citi just opened a bank a branch right across 0:10:04.700 --> 0:10:08.240 the street from Bloomberg HQ here on Lexington Avenue. Why 0:10:08.580 --> 0:10:11.140 talk to us about the, the value of a branch 0:10:11.179 --> 0:10:13.260 in a world of digital this and digital that, and 0:10:13.280 --> 0:10:14.059 everything's on my phone. 0:10:14.260 --> 0:10:18.140 Yeah, there's two parts. So one of the 59th and 0:10:18.240 --> 0:10:20.920 Lex branch is beautiful. We have a new branch manager, Kevin, 0:10:20.940 --> 0:10:25.660 you should meet him. But really it's people still need 0:10:26.059 --> 0:10:30.100 advice for those higher level transactions. That's why you see 0:10:30.140 --> 0:10:34.120 our clients are about two times more affluent than the 0:10:34.420 --> 0:10:38.470 market itself. They're seeking advice. So we still need physical locations. 0:10:38.970 --> 0:10:41.689 And what we're doing is we know foot traffic has 0:10:41.730 --> 0:10:46.070 dropped in banks more broadly. We're actually using that for outreach. 0:10:46.150 --> 0:10:49.790 We're using AI to help arm our advisors and our 0:10:49.809 --> 0:10:51.670 bankers of what do clients need. 0:10:52.570 --> 0:10:55.010 The charge card derby. I mean, do we need to 0:10:55.050 --> 0:10:59.860 get steeled for a fancy charge card being $ 1, 000? annual fee. 0:10:59.880 --> 0:11:04.280 I know you're below that with American airlines, but I mean, Paul, 0:11:04.300 --> 0:11:06.500 the fees are nuts. 0:11:06.540 --> 0:11:09.080 It's all over this stuff. She's got a million cards 0:11:09.140 --> 0:11:10.300 in premium. 0:11:10.350 --> 0:11:13.550 This premium to people like, like bread, Brian Kelly was 0:11:13.590 --> 0:11:16.809 in the points guy. He has 27 charge cards in 0:11:16.870 --> 0:11:19.030 his wallet. Is that good, man? 0:11:19.050 --> 0:11:22.410 I would say if you take a step back, you're right. 0:11:22.460 --> 0:11:25.660 City does not have that level of fees, but even 0:11:25.720 --> 0:11:28.480 if you look in my world, Clients are looking for 0:11:28.520 --> 0:11:33.480 more transparency and less gotcha, less friction. In retail banking especially, 0:11:33.540 --> 0:11:36.270 cards has always evolved this way, right? There's different value. 0:11:36.710 --> 0:11:39.430 But in retail banking, the industry has competed off friction. 0:11:40.050 --> 0:11:43.630 What we're actually transitioning to is competing off value, especially 0:11:43.670 --> 0:11:47.050 as AI and searching and the transparency and data around 0:11:47.090 --> 0:11:50.679 the market is so much more achievable for any client 0:11:50.700 --> 0:11:54.040 to understand. you have to actually compete off value. So 0:11:54.080 --> 0:11:58.079 I think the fees, especially in retail banking, are a 0:11:58.100 --> 0:11:58.840 term of the past. 0:11:59.640 --> 0:12:03.569 What are younger demos doing? How are they banking these days? 0:12:04.330 --> 0:12:07.910 Yeah, so same thing. Actually, what surprises me the most 0:12:08.010 --> 0:12:11.170 when we did research, about 73% of Gen Z clients 0:12:11.190 --> 0:12:13.929 still want to branch because they still need some of 0:12:13.950 --> 0:12:16.699 that safety net of, I don't know everything I don't 0:12:16.740 --> 0:12:18.980 know yet, right? They don't know what questions to ask. 0:12:19.360 --> 0:12:20.920 Even if they have an AI tool to help them, 0:12:21.300 --> 0:12:23.000 they still need to know what questions to ask. 0:12:23.330 --> 0:12:27.189 I have to ask this. Yesterday for your Tepper School 0:12:27.370 --> 0:12:31.650 at Carnegie Mellon was an extraordinary day. Our Lisa O'Brien 0:12:31.670 --> 0:12:35.630 was in conversation with a gentleman from Citadel of a 0:12:35.710 --> 0:12:40.410 ginormous amount of money to make the food better at Tepper. 0:12:40.690 --> 0:12:43.880 Alan Meltzer once took me to the student union to 0:12:43.929 --> 0:12:48.260 improve the food. As someone, an alumni of Carnegie Mellon University, 0:12:48.380 --> 0:12:52.980 what's it like having $ 3 billion thrown at your institution? 0:12:53.820 --> 0:12:56.209 It's a proud day for all of us. Tepper and 0:12:56.610 --> 0:12:58.710 CMU is an extraordinary institution. 0:13:00.550 --> 0:13:00.950 I'm glad. 0:13:01.130 --> 0:13:03.030 There are a lot of smart people there that are 0:13:03.070 --> 0:13:06.150 doing great things, and this investment just helps drive that further. 0:13:06.220 --> 0:13:10.160 So a proud day for all alumnus of Carnegie Mellon yesterday. 0:13:10.520 --> 0:13:13.300 Somehow I can think there's going to be a Citibank branch. 0:13:14.450 --> 0:13:17.070 So the CMU fighting women. 0:13:17.090 --> 0:13:17.929 What do you do that? 0:13:18.090 --> 0:13:18.470 Yes. 0:13:18.530 --> 0:13:20.630 What are the, what's the mascot of this? 0:13:20.690 --> 0:13:22.470 We're the, uh, fighting tartans. 0:13:22.710 --> 0:13:27.069 Tartans. Oh, the tartans. I watched a football game once 0:13:27.809 --> 0:13:31.209 up on the field. It's a small thing called buggy 0:13:31.630 --> 0:13:33.990 where you take someone like Kate left and you throw 0:13:34.030 --> 0:13:37.360 her down a hillside in a little engineered tube thing 0:13:37.410 --> 0:13:38.720 and you're sure she's going to die. 0:13:39.690 --> 0:13:40.590 That's what they do out there. 0:13:40.630 --> 0:13:44.550 That's the way they roll in Pittsburgh. Kate Luff, thank 0:13:44.580 --> 0:13:47.300 you so much. She's with Citigroup driving all of their 0:13:47.320 --> 0:13:53.500 retail effort. Stay with us. More from Bloomberg Surveillance coming 0:13:53.630 --> 0:13:54.590 up after this. 0:14:01.860 --> 0:14:05.439 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:14:05.520 --> 0:14:07.600 weekday afternoons from 7 to 10 a.m. 0:14:07.640 --> 0:14:08.059 Eastern. 0:14:08.140 --> 0:14:11.420 Listen on Apple CarPlay and Android Auto with the Bloomberg 0:14:11.460 --> 0:14:12.059 Business app. 0:14:12.260 --> 0:14:14.000 Or watch us live on YouTube. 0:14:14.420 --> 0:14:16.920 Okay, so I usually look at the incredible statistics of 0:14:16.940 --> 0:14:20.200 the Bloomberg folks. And I got one year. I didn't 0:14:20.240 --> 0:14:21.880 know we could do these decimals, Paul. 0:14:22.120 --> 0:14:22.370 Oh, yeah? 0:14:22.730 --> 0:14:24.470 One year up 1,059%. Five year, 85%. I think it's 0:14:24.530 --> 0:14:32.450 per year. The Sharpe ratio, I'd never seen that Sharpe ratio. 0:14:33.190 --> 0:14:37.350 Joining us now with an original excellence, John Kartzonis. He's 0:14:37.810 --> 0:14:41.470 with Breakwave Partners here on shipping. Eric Belchunas says you 0:14:41.490 --> 0:14:44.790 have the number one performing ETF on shipping. I look 0:14:44.850 --> 0:14:47.890 at to the moon, which is what shipping has done, 0:14:47.960 --> 0:14:51.020 and your returns are extraordinary. In the last 90 days, 0:14:51.100 --> 0:14:56.800 up 441% on your shipping ETF. Doesn't it just at 0:14:56.860 --> 0:15:00.640 some point reverse and can I respectfully say crash? 0:15:02.110 --> 0:15:06.489 That's an excellent question. I think that, yes, probably it 0:15:06.570 --> 0:15:08.010 will at some point. I'm not sure if it's going 0:15:08.050 --> 0:15:11.110 to be a crash, but freight rates have to adjust 0:15:11.750 --> 0:15:13.770 because at the end of the day, who is paying 0:15:13.810 --> 0:15:17.420 that is the consumer, right? You're paying about 30 bucks 0:15:18.460 --> 0:15:21.520 a barrel to move the oil from the Middle East 0:15:21.640 --> 0:15:25.090 to wherever it's going. If you go back a year ago, 0:15:25.130 --> 0:15:28.170 it was like probably two bucks. This is not sustainable 0:15:28.470 --> 0:15:29.390 by any means. 0:15:29.430 --> 0:15:31.210 How do you hedge shipping rates? 0:15:32.870 --> 0:15:35.670 Well, these are the freight futures that our ETFs hold, right? 0:15:35.730 --> 0:15:37.820 I mean, like other futures that you have, oil futures, 0:15:37.880 --> 0:15:40.910 you have like interest rate futures, stock futures. You can 0:15:40.980 --> 0:15:46.160 hedge this probably not as a consumer, but for industrial players. 0:15:47.020 --> 0:15:49.660 The question here is like when, it's not if. And 0:15:49.700 --> 0:15:53.600 I think the when has been... around this crisis for 0:15:53.640 --> 0:15:56.560 a while now. Could be six months, could be next month, 0:15:56.580 --> 0:15:59.710 could be a year, nobody knows. But what is driving 0:15:59.770 --> 0:16:02.650 that is significant inefficiencies. 0:16:03.250 --> 0:16:03.790 Around the world. 0:16:04.470 --> 0:16:07.250 We had an energy analyst sitting in that seat yesterday morning, 0:16:07.850 --> 0:16:10.240 Paul Sankey, saying the only reason oil is getting through 0:16:10.260 --> 0:16:11.640 the Strait of Hormuz is because the U.S. 0:16:11.680 --> 0:16:14.380 Navy is there kind of making sure that happens. But 0:16:14.770 --> 0:16:16.370 How long can the U.S. Navy stay in the Strait 0:16:16.390 --> 0:16:17.869 of Hormuz? How long do we want to spend the 0:16:17.930 --> 0:16:21.030 money to do that? If the Navy were to pull out, 0:16:21.430 --> 0:16:22.950 that Strait would be closed tomorrow, wouldn't it? 0:16:24.200 --> 0:16:24.920 Probably will. 0:16:24.940 --> 0:16:28.900 I mean, the costs are significant, right? And that's why 0:16:29.820 --> 0:16:32.060 ship owners are getting paid this amount of money to 0:16:32.100 --> 0:16:34.450 go through the Strait of Hormuz. Whether that's insurance, that's 0:16:34.500 --> 0:16:36.810 like the extra risk that you're taking. You have seafarers 0:16:36.850 --> 0:16:39.890 on board, right? explosions left and right, this is not 0:16:39.970 --> 0:16:43.390 an easy thing to do. But yeah, the costs are significant. 0:16:43.470 --> 0:16:44.910 And at the end of the day, it's the consumer 0:16:44.930 --> 0:16:47.020 who's paying this cost because it's the delivered price of 0:16:47.060 --> 0:16:48.120 the barrel that matters. 0:16:49.120 --> 0:16:50.900 And it's not just the Strait of Hormuz. I mean, 0:16:50.920 --> 0:16:54.820 there's hot spots all around the world. I mean, just 0:16:54.880 --> 0:16:57.380 talk to us about, are we in a new world 0:16:57.420 --> 0:17:02.630 of shipping costs and inflation associated with that? Because I'm not, again, 0:17:02.910 --> 0:17:04.690 I'm not sure the Strait of Hormuz ever goes back. 0:17:05.130 --> 0:17:07.240 I don't know what's going on with the Houthis in 0:17:07.260 --> 0:17:07.880 the Red Sea. 0:17:08.000 --> 0:17:11.540 I don't know where that goes. You know, where do 0:17:11.580 --> 0:17:14.760 we go here? The Suez Canal, the Panama Canal, there's 0:17:15.080 --> 0:17:15.980 trouble all over the place. 0:17:16.359 --> 0:17:19.070 I think, you know, this is definitely unprecedented. And that's, 0:17:19.119 --> 0:17:21.930 I'm not saying that lightly. If you go back decades, 0:17:22.290 --> 0:17:25.229 even centuries, when you look, when you never had disruptions 0:17:25.250 --> 0:17:28.190 in happening at the same time in the most important 0:17:28.570 --> 0:17:30.590 waterways in the world, right? You have the Red Sea, 0:17:30.650 --> 0:17:33.109 you have the Arabian Sea, you have the Black Sea, right? 0:17:33.470 --> 0:17:35.940 You know, the heating vessels all over the world. So 0:17:36.760 --> 0:17:39.160 we're definitely in a new paradigm. And I think, like, 0:17:39.940 --> 0:17:43.480 you know, whether that continues, I don't know. But the 0:17:43.520 --> 0:17:45.710 inflation is not showing up in the price of oil. 0:17:45.910 --> 0:17:47.710 It's showing up in the price of refined goods. 0:17:48.150 --> 0:17:49.050 That's what matters. 0:17:49.630 --> 0:17:53.590 And this includes the price of freight and includes what 0:17:53.609 --> 0:17:55.750 they call the crack spread, right, the profit that the 0:17:55.770 --> 0:17:59.470 funders make. But it's the end user price that matters. Diesel, 0:17:59.510 --> 0:18:01.090 gasoline is not the price of oil. 0:18:01.390 --> 0:18:05.540 John, within your set of large cash position and your 0:18:05.580 --> 0:18:11.639 set of futures, you have TD3C forward freight agreement. I 0:18:11.680 --> 0:18:17.300 guess 270,000 megatons, whatever, Middle East Gulf to China, Rastanur 0:18:17.320 --> 0:18:23.200 to Ningbao. Describe what that future contract actually protects or guesses. 0:18:23.530 --> 0:18:28.510 Well, this corresponds to the expected price of freight, how 0:18:28.570 --> 0:18:31.550 much you have to pay to move oil from the 0:18:31.590 --> 0:18:34.909 Middle East to China, right? It's a futures contract. And 0:18:34.950 --> 0:18:37.869 that historically has been a way for, let's say, a 0:18:37.890 --> 0:18:42.190 refiner to hedge their transportation costs. This has exploded because 0:18:42.250 --> 0:18:44.429 right now to cross the Strait of Hormuz, you have 0:18:44.470 --> 0:18:47.810 to pay tens of millions of dollars. And that's why 0:18:47.830 --> 0:18:49.869 you have basically the performance you had in freight. 0:18:50.770 --> 0:18:54.300 If I'm an insurance company, am I insuring a tanker 0:18:54.390 --> 0:18:58.520 going through the Strait of Hormuz? Are these guys insured 0:18:58.560 --> 0:19:00.119 going through there or are they just kind of winging it? 0:19:00.730 --> 0:19:01.330 Good question. 0:19:01.369 --> 0:19:03.550 I mean, at the end of the day, insurance is, 0:19:03.770 --> 0:19:07.690 you know, in these types of risk is the whole 0:19:07.730 --> 0:19:10.930 value of the cargo, right? It's not like our car insurance. 0:19:11.619 --> 0:19:16.700 It's totally different here. Maybe some, maybe not all of them. 0:19:17.440 --> 0:19:20.300 It's a very, very gray area right now what's happening there. 0:19:20.980 --> 0:19:25.400 Take your world over to our listeners and viewers. For example, 0:19:25.940 --> 0:19:28.340 real worry in Europe about how we're going. 0:19:28.240 --> 0:19:30.480 To heat this winter. 0:19:31.000 --> 0:19:32.899 Or I can go to your Simon School at the 0:19:32.980 --> 0:19:37.240 University of Rochester, where in 1934 it was 22 degrees 0:19:37.300 --> 0:19:40.639 below zero. How does this pull into us if we 0:19:40.680 --> 0:19:43.990 have a difficult winter like last winter? 0:19:44.090 --> 0:19:47.270 Yeah, I think like diesel is the biggest worry here, right? 0:19:47.310 --> 0:19:49.950 I mean, that's what matters in this instance. 0:19:52.210 --> 0:19:56.929 The issue, again, goes back to the infrastructure refining. Shipping, 0:19:57.020 --> 0:19:59.320 I mean, yeah, you pay a price, but probably there 0:19:59.340 --> 0:20:01.659 are enough ships to move oil. But on the refining side, 0:20:01.720 --> 0:20:05.619 you had a lot of infrastructure destruction happening, both in 0:20:05.640 --> 0:20:10.520 the Middle East, as were obviously in the Russian refinery system. 0:20:10.960 --> 0:20:13.619 So this is not something that's going to be solved overnight. 0:20:14.730 --> 0:20:17.820 even if you release oil inventories, even if you have, obviously, 0:20:17.900 --> 0:20:20.060 now the transit of crude oil from the Hormuz is 0:20:20.300 --> 0:20:24.170 kind of approaching pre-war levels. But at the end of 0:20:24.190 --> 0:20:27.270 the day, it's the refined product that matters, and that's SCARE. 0:20:27.619 --> 0:20:29.790 Thank you so much for coming in. I really appreciate 0:20:29.850 --> 0:20:34.770 Eric Balchunas talking this up. John Kartzonis is Breakwave Partners, 0:20:34.930 --> 0:20:43.879 and look for their incredible ETF, BWET, Boy Walter Edward Tom. BWET, 0:20:44.240 --> 0:20:49.940 that's done better than good, to say the least. Stay 0:20:49.980 --> 0:20:53.850 with us. More from Bloomberg Surveillance coming up after this. 0:21:01.109 --> 0:21:04.710 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:21:04.800 --> 0:21:06.860 weekday afternoons from 7 to 10 a.m. 0:21:06.920 --> 0:21:07.320 Eastern. 0:21:07.420 --> 0:21:10.700 Listen on Apple CarPlay and Android Auto with the Bloomberg 0:21:10.740 --> 0:21:13.240 Business app or watch us live on YouTube. 0:21:13.619 --> 0:21:16.170 Indeed, our honor, Jack Devine with us, of course, with 0:21:16.310 --> 0:21:19.010 all of his service to the nation with the Central 0:21:19.090 --> 0:21:24.990 Intelligence Agency. Can't say enough about his work. Katie Greifeld, 0:21:25.010 --> 0:21:27.580 I have to blame. Okay. She's out, you know, with 0:21:27.800 --> 0:21:30.260 New Offspring, and she called me up and said, Tom, 0:21:30.280 --> 0:21:31.600 you have to watch The Americans. 0:21:31.619 --> 0:21:32.320 Awesome. 0:21:32.340 --> 0:21:35.000 Which is this whole Soviet, you know, CIA kind of 0:21:35.140 --> 0:21:41.300 FBI thing. Here's the real world. Dmitry Polyakov, Adolf Tolkachev, 0:21:41.720 --> 0:21:47.560 Valery Martinov, and Sergei Motorin all killed off of Aldrich Ames. 0:21:47.720 --> 0:21:53.459 Jack Devine, you worked with Aldrich Ames before... his defection, 0:21:53.500 --> 0:21:57.560 I guess, to the Russians as well. Are those risks 0:21:57.680 --> 0:22:01.639 still apparent today? It's theater for us now. It wasn't 0:22:01.700 --> 0:22:02.500 theater for you. 0:22:03.300 --> 0:22:06.260 It's inherent in the business, Tom. In fact, there was 0:22:06.320 --> 0:22:10.700 a case that the Justice Department just released about a 0:22:10.770 --> 0:22:13.899 group of Russians operating in the United States with plans 0:22:14.109 --> 0:22:19.530 towards disrupting activities in the United States and possible assassination. 0:22:19.590 --> 0:22:23.359 It's pretty old World War II fashion activities. But in 0:22:23.380 --> 0:22:26.740 the case of Rick Ames, there's so many in history, 0:22:26.760 --> 0:22:28.820 the Cambridge Five that betrayed people. 0:22:29.780 --> 0:22:31.860 In Ames' case, he. 0:22:31.820 --> 0:22:34.730 Was disaffected, and what he did is he walked into 0:22:34.750 --> 0:22:37.629 the Russian embassy. He thought he could handle them. He 0:22:37.650 --> 0:22:40.090 thought he could give them a little bit. The second 0:22:40.130 --> 0:22:42.470 time he walked out, he gave up those names, 11 0:22:42.470 --> 0:22:45.939 of them. They were all killed. So that risk is 0:22:46.020 --> 0:22:48.540 inherent in the spy business, and that's why I think 0:22:48.640 --> 0:22:51.020 all of us in it spend a lot of time 0:22:51.080 --> 0:22:53.939 trying to protect those people. But the best way to 0:22:53.960 --> 0:22:57.250 catch a spy is to have a spy inside the system. 0:22:57.910 --> 0:22:59.330 So that's part of our. 0:23:00.869 --> 0:23:03.050 How do you change the spy business? Because it seems 0:23:03.090 --> 0:23:08.940