WEBVTT - Surveillance: Oil Price War With Yergin 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.960 Bloomberg dot Com, and of course on the Bloomberg. Joining 0:00:28.040 --> 0:00:31.000 us now, Mike Wilson, markin Stanley, chief US equity strategist, 0:00:31.040 --> 0:00:33.400 joining us on the fun fantastic to have Michael with us. 0:00:33.479 --> 0:00:35.240 Might let me just begin with a line of yours 0:00:35.479 --> 0:00:38.199 that comes from your team and your research. COVID nineteen 0:00:38.600 --> 0:00:41.159 may simply be the accelerant for a cycle that was 0:00:41.200 --> 0:00:45.520 already on its way to ending your thoughts, Mike, Yeah, 0:00:45.760 --> 0:00:48.159 I think that's you know, our main message over the 0:00:48.200 --> 0:00:51.320 past month actually is that we actually think that this 0:00:51.400 --> 0:00:55.600 correction we're going through now is just a continuation of 0:00:55.640 --> 0:00:58.800 the correction that really began almost two years ago. Okay, 0:00:58.840 --> 0:01:01.440 and you guys are familiar with our work on the 0:01:01.560 --> 0:01:06.039 rolling bear market, the consolidation call, and quite frankly, the 0:01:06.080 --> 0:01:09.760 fourth quarter of last year was a false breakout that 0:01:09.840 --> 0:01:14.920 was orchestrated by extraordinary liquidity. And sure, the fundamentals we're 0:01:14.959 --> 0:01:17.959 trying to bottom. But as you all know, and you know, 0:01:18.000 --> 0:01:19.759 we wrote about it, a lot of other people wrote 0:01:19.760 --> 0:01:21.880 about it. You know, the market's got way ahead of 0:01:21.920 --> 0:01:26.320 the fundamental recovery that was apparent, and so it was 0:01:26.360 --> 0:01:29.360 a liquidity driven rally in the fourth quarter. And that's fine, 0:01:29.400 --> 0:01:31.880 and you know that trapped a lot of people, including 0:01:32.000 --> 0:01:35.600 us to some degree. And you know, now we're back 0:01:35.640 --> 0:01:39.240 to reality, which is that the cycle was already moving 0:01:39.280 --> 0:01:41.920 in this direction and it all you know, this is 0:01:41.959 --> 0:01:44.560 the way, this is the way recessions happened, right you. 0:01:45.080 --> 0:01:48.040 You have a host of headwinds and I'll just go 0:01:48.120 --> 0:01:50.600 through a few of them. We had the margin pressure, 0:01:51.240 --> 0:01:53.960 you know, from the fiscal stimulus, and that's been that's 0:01:53.960 --> 0:01:55.920 been the crux of our call for the last two years, 0:01:55.920 --> 0:01:59.080 is that we're actually still in an earnings recession in 0:01:59.120 --> 0:02:02.080 the US for the average company. The second one was 0:02:02.120 --> 0:02:04.480 the tariffs, which are still in place. By the way, 0:02:04.520 --> 0:02:06.680 they haven't really gone away. They've just been, you know, 0:02:06.800 --> 0:02:09.880 not getting worse. Of course, we had a federal reserve 0:02:10.000 --> 0:02:13.040 that you know, went the distance on tightening two years ago. 0:02:13.120 --> 0:02:15.880 They did a tremendous amount of tightening via both the 0:02:15.880 --> 0:02:18.959 balance sheet and rates, and that works with about a 0:02:19.040 --> 0:02:21.519 two year lag, and so we're kind of right back 0:02:21.520 --> 0:02:24.600 on schedule. And and but nobody ever knows what the 0:02:24.639 --> 0:02:27.480 event is going to be. That kind of pushes you over. 0:02:27.520 --> 0:02:30.959 But to look at the virus, or quite frankly, the 0:02:31.040 --> 0:02:33.560 price war in in oil markets, which is I think 0:02:33.560 --> 0:02:36.600 even a bigger deal potentially for credit markets. You take 0:02:36.639 --> 0:02:39.920 the two of those together, and you know, in conjunction 0:02:39.960 --> 0:02:42.360 with what's already a headwind for you know, in the 0:02:42.400 --> 0:02:45.200 global economy and the US economy, and you have the 0:02:45.240 --> 0:02:48.359 recipe for just finishing the cycle. And I think markets 0:02:48.360 --> 0:02:51.840 have appropriately started to discount down and we've done a 0:02:51.840 --> 0:02:54.680 lot of damage in the last month. I mean stocks 0:02:54.680 --> 0:02:58.240 were down overnight, you know, from p to trough. So 0:02:58.400 --> 0:03:01.080 we're there and we're in a process of doing that. 0:03:01.160 --> 0:03:04.280 And so today we're having a giant rally hopes for 0:03:04.320 --> 0:03:07.080 fiscal Eton. This is how bottoms are made. It will 0:03:07.080 --> 0:03:09.600 all happen on one day. It's gonna take you know, 0:03:09.639 --> 0:03:11.760 it's gonna take time, you know. And by the way, 0:03:11.840 --> 0:03:15.000 you know, policymakers, this is exactly what they typically do. 0:03:15.040 --> 0:03:18.280 They throw out a suggestion to the market and say, hey, 0:03:18.320 --> 0:03:20.600 how about you know, a fifty basist going emergency cut, 0:03:20.760 --> 0:03:22.840 the market doesn't like it, Oh, how about this? How 0:03:22.840 --> 0:03:25.920 about that? And then eventually, you know, we find a 0:03:26.080 --> 0:03:28.520 level that you know, supports where we are. So Mike 0:03:28.600 --> 0:03:30.160 Lease is gonna want to ask you about credit and 0:03:30.240 --> 0:03:32.280 just the moment, I want to understand from your perspective, 0:03:32.800 --> 0:03:34.720 is there not a fiscal response that could be unvowed 0:03:34.720 --> 0:03:36.960 today that would be sufficient in your rise to extend 0:03:37.000 --> 0:03:40.480 this cycle. I don't think we can extend. I think 0:03:40.520 --> 0:03:43.720 we have to get away from this idea about extending 0:03:43.760 --> 0:03:47.000 the cycle and let's talk about how do we now 0:03:47.800 --> 0:03:52.880 deal with the downturn and protect the next cycle. Okay, 0:03:52.960 --> 0:03:55.880 that's that's that's my mindset. And we don't know, we 0:03:55.960 --> 0:03:57.800 don't know if we're gonna have a recession right now, 0:03:57.840 --> 0:04:00.840 but good grief, I mean every cater we look at 0:04:00.880 --> 0:04:04.000 suggests that's what the market expects at this point. I mean, 0:04:04.000 --> 0:04:05.720 that's what the bond market has been telling us for 0:04:06.040 --> 0:04:09.360 quite frankly, for two years. And then this extraordinary move 0:04:09.360 --> 0:04:12.120 we've seen in the last month, which exceeded anything in 0:04:12.160 --> 0:04:13.960 our dreams in terms of how low we would go. 0:04:14.040 --> 0:04:16.479 I mean, I think it's you know, I think the 0:04:16.520 --> 0:04:21.040 markets have basically spoken, and and so now policy choices 0:04:21.080 --> 0:04:23.360 should be about how do we make sure we don't 0:04:23.360 --> 0:04:27.880 get stuck, okay, in a trap where you know, we 0:04:28.000 --> 0:04:31.360 end up with rate at these levels in perpetuity and 0:04:31.400 --> 0:04:33.560 you know we're in a situation where the US looks 0:04:33.600 --> 0:04:35.719 like Japan Europe. That's not our view, by the way, 0:04:35.760 --> 0:04:37.159 we don't think that we are going to end up 0:04:37.160 --> 0:04:40.679 in that situation. But you know, that's what policymakers should 0:04:40.680 --> 0:04:42.640 be thinking about. How do we how do we kind 0:04:42.680 --> 0:04:45.440 of get the next cycle going. What's the investor playbook 0:04:45.720 --> 0:04:47.600 given the fact that there is a lot of uncertainty 0:04:47.640 --> 0:04:50.080 about what this bottom will look like, and given the 0:04:50.120 --> 0:04:53.800 fact that we're going to get some policy response, I 0:04:53.800 --> 0:04:55.520 think the mark well, first of all, the play our 0:04:55.560 --> 0:04:59.800 playbook has been to be much more defensively oriented. You 0:05:00.000 --> 0:05:03.240 are in our sector preferences, right, So we've been playing 0:05:03.240 --> 0:05:05.880 for this now for almost two years. We've we've been 0:05:05.880 --> 0:05:09.360 over what utilities and staples because those are always the 0:05:09.360 --> 0:05:11.760 sectors that do well at the end of a cycle. 0:05:11.960 --> 0:05:15.039 I mean clearly, things like software and technology that are 0:05:15.160 --> 0:05:17.680 defensive that they've done really well too, because they're they're 0:05:17.720 --> 0:05:21.520 geared to lower interest rates and there's somewhat defensive business models, 0:05:21.560 --> 0:05:24.159 so it doesn't have to be pure defense. But my 0:05:24.200 --> 0:05:27.400 point is is that the playbook has been to be 0:05:27.600 --> 0:05:31.559 more defensively oriented in your positioning, whether it be long 0:05:31.880 --> 0:05:36.880 duration or long defensively oriented sectors away from cyclical areas. 0:05:37.160 --> 0:05:39.000 And I would argue we're in the eighth inning of that. 0:05:39.040 --> 0:05:40.520 I mean, this has been going on now for a 0:05:40.560 --> 0:05:43.400 long time. So the playbook now is to think about 0:05:43.520 --> 0:05:46.239 when do I want to play for the next cycle 0:05:46.960 --> 0:05:50.039 and get more cyclically geared, and that would be things 0:05:50.120 --> 0:05:53.839 like you know, consumer discretionary and banks and materials and 0:05:54.160 --> 0:05:56.960 early cycle sectors. I think it's premature to do that. 0:05:57.760 --> 0:05:59.920 We're getting closer. I'm like going to catch up with 0:06:00.040 --> 0:06:01.960 this morning, busy morning on now for the whole team 0:06:02.000 --> 0:06:04.480 over at Morgan Stanley. We appreciate your time. Morgan Stanley's 0:06:04.680 --> 0:06:19.240 Mike Wilson, that chief US equity strategistic Who do you 0:06:19.320 --> 0:06:21.680 turn to in a given crisis like this when you 0:06:21.720 --> 0:06:24.320 look at the different shocks that we've seen, And one 0:06:24.360 --> 0:06:29.480 would be a gentleman who re affirmed a style of 0:06:29.520 --> 0:06:32.200 writing linking history and in this case in the hydro 0:06:32.240 --> 0:06:35.240 carbons and that of course is Daniel Jorgan's surprize that 0:06:35.360 --> 0:06:39.119 in itself was extraordinary. Far more important was only seven 0:06:39.160 --> 0:06:42.000 years later he followed up with The Commanding Heights, which 0:06:42.040 --> 0:06:44.880 is a definitive look at how we have vaulted from 0:06:44.880 --> 0:06:48.080 World War Two forward in our capitalism. We're thrilled that 0:06:48.160 --> 0:06:50.479 Daniel Jorgan could join us today with I H S 0:06:50.520 --> 0:06:53.320 as well. Dr Jorgina, thank you so much for finding 0:06:53.360 --> 0:06:57.599 time with us. Is this a set of crises that 0:06:57.760 --> 0:07:00.800 we get over, like the end of a IRUs or 0:07:00.880 --> 0:07:04.839 Russia and Saudi Arabia meeting together to get to a 0:07:04.880 --> 0:07:08.480 more stable oil price, or do you send some permanence 0:07:09.000 --> 0:07:12.320 in our in our lives due to the set of crises. 0:07:13.200 --> 0:07:17.040 I think that it's a that at some point you 0:07:17.040 --> 0:07:20.080 can imagine the Russians and the Saudis getting together again. 0:07:20.560 --> 0:07:23.880 But right now this is a grudge match that's going 0:07:23.920 --> 0:07:27.000 on between the two countries. The Saudis of price cut 0:07:27.040 --> 0:07:30.600 their prices and oil particularly aimed at the Russia's market 0:07:30.600 --> 0:07:34.240 in Northwest Europe. So it's really two shocks at the 0:07:34.280 --> 0:07:38.400 same time. One is an unprecedented demand shock resulting from 0:07:38.440 --> 0:07:43.360 the virus, and then it's this declaration of battle for 0:07:43.440 --> 0:07:46.120 market share, and we've had those before, but we've never 0:07:46.160 --> 0:07:49.920 had this together. Is the OPEC imperium over is you 0:07:50.040 --> 0:07:52.600 wrote of in the prize twenty nine years ago? Is 0:07:52.640 --> 0:07:55.240 the cartel broken? Well? I think I mean, at the 0:07:55.360 --> 0:07:57.280 end of the day, it's what a few countries want 0:07:57.280 --> 0:07:59.280 to do and whether how they want to use it. 0:07:59.600 --> 0:08:02.040 And I think the fact that they recognize that they 0:08:02.120 --> 0:08:04.600 needed to create this OPEC plus make a deal with 0:08:04.680 --> 0:08:07.640 Russia tells you how the world has changed right now. 0:08:07.680 --> 0:08:11.040 It's really instead of the OPEC imperiments the Big three, 0:08:11.080 --> 0:08:14.280 it's what happens to Saudi Arabia, Russia, and what happens 0:08:14.320 --> 0:08:16.960 to the world's largest oil producer, which is the United 0:08:17.000 --> 0:08:18.960 States down I'm sure you've lost count the amount of 0:08:18.960 --> 0:08:21.000 times over the last few decades that we've declared the 0:08:21.040 --> 0:08:24.280 death of OPEC, but we seem to be doing it again. Shale, though, 0:08:24.560 --> 0:08:27.240 is a game changer. I'm trying to understand where the 0:08:27.280 --> 0:08:30.640 greatest tension is right now. Is it between Saudi Arabia 0:08:30.720 --> 0:08:34.240 and Russia or between those two countries and US Shale. 0:08:34.559 --> 0:08:38.120 I think it's one for Saudi Arabia. It's between Saudi 0:08:38.120 --> 0:08:41.080 Arabia and Russia, right now, I think the Russians have 0:08:41.240 --> 0:08:45.600 their sights on US shale because of the tremendous growth, 0:08:45.679 --> 0:08:48.960 losing market share to it, and I think that they 0:08:49.040 --> 0:08:52.319 see the US now using its muscle energy and want 0:08:52.360 --> 0:08:55.160 to counteract ave. So the Russians have always over the 0:08:55.200 --> 0:08:58.240 last several years been more alarmed by the growth of shale. 0:08:58.240 --> 0:09:00.199 It seemed to me that the Saudis had d of 0:09:00.240 --> 0:09:05.280 accommodated themselves to this is the new reality. I'm just wondering, Dan, 0:09:05.400 --> 0:09:09.240 going forward, does this ultimately destroy demand for oil or 0:09:09.360 --> 0:09:12.360 actually increased demand for oil? And I asked, because people 0:09:12.400 --> 0:09:15.600 were talking about peak oil demand in the next decade 0:09:15.720 --> 0:09:18.320 as renewable start to gain online, and does this actually 0:09:18.320 --> 0:09:21.720 give oil a longer shelf life because it's cheaper. Well, 0:09:21.760 --> 0:09:24.560 I think it Normally would say that this would mean 0:09:24.600 --> 0:09:27.400 that demand, you know, you get prices like this, demand 0:09:27.440 --> 0:09:30.280 should really go up. That's what we've seen before. I 0:09:30.320 --> 0:09:32.640 think the difference here is the virus. I mean, what 0:09:32.800 --> 0:09:36.160 started this whole thing was this unprecedented demand shock. In 0:09:36.240 --> 0:09:38.800 the first quarter of this year, we think oil demand 0:09:38.880 --> 0:09:41.760 is almost four million barrels a day lower than it 0:09:41.840 --> 0:09:44.800 was in the same quarter last year, and that that 0:09:44.800 --> 0:09:47.040 that is going to continue. And you know, we see 0:09:47.080 --> 0:09:50.120 the markets responding very positively as you've been talking this 0:09:50.160 --> 0:09:53.520 morning to the talks of the stimulus coming out of Washington. 0:09:54.000 --> 0:09:56.120 But keep in mind, and this is what really weighs 0:09:56.120 --> 0:09:59.960 in my mind. You have low gasoline prices, they don't 0:10:00.120 --> 0:10:03.160 really matter if schools are closed, if you've canceled your 0:10:03.200 --> 0:10:05.760 next two trips and you're working from home, you're not 0:10:05.800 --> 0:10:09.200 going to see that up uptick in demand. And so 0:10:09.280 --> 0:10:11.480 I think when the Russians, in particular, we're looking at 0:10:11.480 --> 0:10:14.880 the market, they were seeing this virus spreading across North 0:10:14.920 --> 0:10:18.920 America and across Europe and demand continuing to be week 0:10:19.440 --> 0:10:22.079 going in at least going into the beginning of the summer. 0:10:22.320 --> 0:10:24.720 So that's what's different I think about this time. And normally, 0:10:24.880 --> 0:10:27.280 normally a prices like this would be great for demand 0:10:27.320 --> 0:10:29.520 and it would be a stimulus to the economy, but 0:10:29.600 --> 0:10:31.600 not with the other things that are going on right now. 0:10:31.920 --> 0:10:35.440 But Dan just sort of pushing it forward longer term. 0:10:35.559 --> 0:10:39.280 Is there any longer lasting implication for oil? Is sort 0:10:39.320 --> 0:10:43.520 of the benchmark use of for energy going forward from 0:10:43.600 --> 0:10:48.840 this coronavirus plus war between Saudi Arabia and Russia. Well, 0:10:48.880 --> 0:10:51.600 I think that going to your your question, I mean 0:10:51.640 --> 0:10:55.360 we still see demand continuing to grow into the twenty 0:10:55.440 --> 0:10:57.520 surgies in oil, which I know is not what other 0:10:57.559 --> 0:11:01.040 people see. But looking at population grows an economic growth, 0:11:01.559 --> 0:11:05.520 I think that, um, you know this, this pandemic, when 0:11:05.600 --> 0:11:08.120 let's call it what it is, a pandemic, will end 0:11:08.120 --> 0:11:10.880 and it probably ends around you know, at least you 0:11:10.920 --> 0:11:14.120 hear public health authorities saying maybe somewhere in the second 0:11:14.200 --> 0:11:17.760 or third quarter, at that point you'll see the rebound. 0:11:17.800 --> 0:11:21.400 But when you have a whole country like Italy shut down, uh, 0:11:21.440 --> 0:11:24.120 that is that contributes to the demand shock. People are 0:11:24.120 --> 0:11:26.000 not doing a lot of driving in Italy. Right now, 0:11:26.280 --> 0:11:29.480 we welcome all of you worldwide, including in Italy with us. Daniel, 0:11:29.600 --> 0:11:31.360 you're going to buy us, of course, the author of 0:11:31.400 --> 0:11:34.480 the prize, the quest and also the Commanding Heights. You 0:11:34.559 --> 0:11:37.760 have a brilliant section in the Commanding heightstand you're going 0:11:37.800 --> 0:11:41.160 to where Churchill marches off to Potsdam and marches back 0:11:41.200 --> 0:11:45.040 to massive electoral defeat. I mean the tumult of populism. 0:11:45.120 --> 0:11:47.760 Right now. We have a president today who's going to 0:11:47.880 --> 0:11:51.880 commit fiscal stimulus with his fellow Republicans on the hill. 0:11:51.960 --> 0:11:54.440 I guess, how have we come to a point where 0:11:54.480 --> 0:11:59.080 creating fiscal support to any given nation, any given economy 0:11:59.480 --> 0:12:02.480 is so diff the call that wasn't the case across 0:12:02.520 --> 0:12:05.560 your book the Commanding Heights, And now we have this 0:12:05.679 --> 0:12:09.720 embedded austerity. Where did it come from? Well, I think 0:12:10.440 --> 0:12:13.560 I think it looks like embedded austerity until you look 0:12:13.600 --> 0:12:18.079 at the budget deficits across the around the world and 0:12:18.240 --> 0:12:21.840 uh rate that against GDP. But I think that what 0:12:21.960 --> 0:12:25.760 you're pointing to, I mean, certainly there's you know, we've 0:12:25.800 --> 0:12:29.560 seen a kind of loss of confidence in markets, and 0:12:29.600 --> 0:12:31.720 I think if we pick up on the Commanding Heights, 0:12:31.960 --> 0:12:35.960 we're really seen as a test of of of globalization 0:12:36.000 --> 0:12:38.200 as it's developed. As I wrote about it in Commanding 0:12:38.280 --> 0:12:43.360 Heights and in the in the people talked about decoupling 0:12:43.440 --> 0:12:46.679 from China. We have really discovered from this how coupled 0:12:46.679 --> 0:12:50.000 we are with China, how interconnected this economy is. And 0:12:50.080 --> 0:12:53.720 going to your point, Tom, it's the question of international coordination. 0:12:54.040 --> 0:12:55.760 In two thousand and eight we had a lot of 0:12:56.440 --> 0:12:59.920 very clear international coordination going on. It's harder at the 0:13:00.120 --> 0:13:03.040 time because of the kind of populism and nationalism you're 0:13:03.080 --> 0:13:05.960 talking about, and yet yeah, you need it. This is 0:13:06.000 --> 0:13:08.600 exactly what Philip Hilda ran A black Rock said today, 0:13:08.640 --> 0:13:11.480 John Ferrell. The lack of coordination here is critical. It's 0:13:11.480 --> 0:13:13.599 been a massive problem, and I think OPEC speaks to 0:13:13.600 --> 0:13:15.760 the much broader issue of a lack of coordination in 0:13:15.800 --> 0:13:18.160 the places we expect it at times like this. Dan, 0:13:18.240 --> 0:13:21.480 you've touched on globalization. I think it's critical. This issue 0:13:21.480 --> 0:13:23.880 of national security has been thrown around so much over 0:13:23.920 --> 0:13:26.120 the last few years. But when you start to find 0:13:26.120 --> 0:13:28.840 out just how much you depend on one country to 0:13:28.920 --> 0:13:34.480 supply things like pharmaceutical ingredients, we've got a problem, haven't we, Dan, Well, absolutely, 0:13:34.520 --> 0:13:37.000 I mean we're you know, although we're scrambling to make 0:13:37.679 --> 0:13:40.840 masks here by the way, which are a petrochemical product, 0:13:40.880 --> 0:13:44.319 all those and mass we find out that the bulk 0:13:44.320 --> 0:13:47.360 of them and a lot of medical supplies come from China, 0:13:47.360 --> 0:13:50.480 and I think people didn't realize just how interconnected these 0:13:50.480 --> 0:13:54.360 supply chains are and the stress on them and what's happening. 0:13:54.559 --> 0:13:58.120 Tankers were tens and tens of thousands of containers are 0:13:58.160 --> 0:14:01.199 in the wrong place or their right there's nothing to 0:14:01.240 --> 0:14:03.440 put back in them. So that's where I think this 0:14:03.520 --> 0:14:07.040 is really a test of globalization on top of everything else, Dan, 0:14:07.120 --> 0:14:09.480 You're gonna thank you so much for joining us today, 0:14:09.600 --> 0:14:12.400 Dr Jurgen. Of course with the prize. And even though 0:14:12.400 --> 0:14:17.240 it's twenty nine years old, John No, no, you used 0:14:17.280 --> 0:14:19.720 to walk around on campus because it was cool with 0:14:19.800 --> 0:14:22.120 Da Battis at the time. For our listeners to haven't 0:14:22.160 --> 0:14:24.480 read this book. I mean, if you will take from Amazon, 0:14:24.600 --> 0:14:28.280 it will come in a very very large ball, as 0:14:28.320 --> 0:14:30.240 is the Community Nights as well. Dan, You're gonna of 0:14:30.240 --> 0:14:44.160 course the more modern the quest as well. Philip Bill 0:14:44.240 --> 0:14:47.239 the brand of black Rock, and Stephen Major of HSBC, 0:14:47.400 --> 0:14:50.880 their global head of fixed income research, and Philip, what 0:14:50.960 --> 0:14:53.160 I want to do a show a chart which you know, 0:14:53.320 --> 0:14:55.360 something I've used over the years with Bill Gross and 0:14:55.400 --> 0:14:58.280 frankly I should use it with Steve Major. This is 0:14:58.320 --> 0:15:01.000 one of the great calls of all time. Think Eisenhower 0:15:01.040 --> 0:15:04.200 in the fifties up to the moment of Paul Volker 0:15:04.760 --> 0:15:08.240 and then the great great disinflation and what is so 0:15:08.360 --> 0:15:11.480 true along the way here and credit Sueez to me 0:15:11.520 --> 0:15:15.040 always said Steve Major, the best best idea. Rates are 0:15:15.040 --> 0:15:18.560 gonna go up. Rates are gonna go up. Rates are 0:15:18.560 --> 0:15:20.640 gonna go up. You get you get the theme here. 0:15:20.760 --> 0:15:23.080 Rates are gonna go up, Rates are gonna go up, 0:15:23.080 --> 0:15:26.240 and now we're down here at an imaginable low interest rate, 0:15:26.720 --> 0:15:31.240 something that Stephen Major has absolutely nailed like no other 0:15:31.360 --> 0:15:34.640 strategists at no other house. We're thrilled to Steve Major 0:15:34.640 --> 0:15:38.040 could join us with Dr Hildebrand this morning. Steve Major, 0:15:38.120 --> 0:15:40.080 the cry is out there, rates are gonna go up. 0:15:40.120 --> 0:15:46.880 Why aren't they? Well, the first reason is we can't 0:15:46.880 --> 0:15:50.040 afford them to go up. And part of the explanation 0:15:50.200 --> 0:15:53.480 for low yields over the years has been the excessive debt. 0:15:54.120 --> 0:15:58.240 So it's a question of servicing costs. The the economy, 0:15:58.360 --> 0:16:01.800 both the public and private set to combined, cannot afford 0:16:02.480 --> 0:16:08.400 to have higher rates. The the latest shock in the 0:16:08.400 --> 0:16:13.080 form of the virus as maybe accelerated an inevitable shift 0:16:13.160 --> 0:16:17.440 towards a weakening economy and even a recession. So for 0:16:17.560 --> 0:16:22.040 now rates are stuck close to the zero bound in 0:16:22.080 --> 0:16:25.880 the US and negative elsewhere. At the moment, all we're 0:16:25.920 --> 0:16:29.520 waiting to see is the central banks responding or even 0:16:29.600 --> 0:16:33.840 reacting to what's already happened. That the interest rates are 0:16:33.880 --> 0:16:37.200 an outcome from what's come before. It's not like they're 0:16:37.200 --> 0:16:41.240 actually leading anything within there will be the new disinflation. 0:16:41.360 --> 0:16:44.920 Many people are writing about this demand shark, this supply shark, 0:16:45.000 --> 0:16:48.880 and the idea of an aggregate disinflation. Will we see 0:16:48.960 --> 0:16:52.480 rates drive ever lower? Will we see negative interest rates? 0:16:52.480 --> 0:16:58.160 For example, in the United Kingdom, well, negative rates have 0:16:58.320 --> 0:17:01.480 been evident for the last deck aid in real terms, 0:17:01.520 --> 0:17:06.000 so every big country has had deep negative real rates. 0:17:06.200 --> 0:17:09.280 The US was the outlier in two thousand and eighteen 0:17:09.359 --> 0:17:12.199 with the rate hikes, which now with hindsight looked like 0:17:12.240 --> 0:17:15.600 a massive policy mistake. So negative real rates for the 0:17:15.640 --> 0:17:18.359 last decade has been normal. The UK has had deep 0:17:18.880 --> 0:17:22.840 nominal negative real rates. In Switzerland and Denmark you have 0:17:22.920 --> 0:17:26.520 minus seventy five. I mean the direction of travels quite clear. 0:17:27.200 --> 0:17:29.640 M d CB isn't going to be hiking rates this week, 0:17:29.720 --> 0:17:34.200 is it? Obviously the mover is down. But Stephen, we'll 0:17:34.240 --> 0:17:36.000 get back to that in a second. You know, looking 0:17:36.040 --> 0:17:38.840 at the real yields, you know got negative US on 0:17:38.920 --> 0:17:41.800 the tenure US, but actually is the yield going to 0:17:41.840 --> 0:17:44.040 go negative? It's not the real but just is it 0:17:44.040 --> 0:17:49.160 going to go negative this year? Well, in the US, 0:17:49.480 --> 0:17:53.320 um it looks like there's a strong resistance to negative 0:17:53.359 --> 0:17:58.320 policy rates and negative yields in the UK. Yesterday, we 0:17:58.400 --> 0:18:01.520 know that the market traded negative, but we're a long 0:18:01.560 --> 0:18:05.520 way from negative policy rates. The resistance to negative rates 0:18:05.640 --> 0:18:09.160 is quite strong, and there's a big banking lobby out there, 0:18:09.560 --> 0:18:13.320 and there's the existence of cash that for now is 0:18:13.640 --> 0:18:16.480 a big barrier to go in negative. But never say never, 0:18:16.800 --> 0:18:20.119 maybe for the next cycle. Did you agree with that? 0:18:21.600 --> 0:18:25.000 Who certainly would never say never? Yeuh, that's a that's 0:18:25.000 --> 0:18:27.720 a good dictim I mean, look, from a macro perspective, 0:18:27.800 --> 0:18:32.040 something has to change for rates to change. As steven 0:18:32.080 --> 0:18:34.639 she said, the rates are not low because central banks 0:18:34.640 --> 0:18:37.439 put them there, but because of macro phenomena. So what 0:18:37.520 --> 0:18:41.320 could change. Demographics aren't going to change. Productivity could in 0:18:41.359 --> 0:18:45.360 principle change. You know, we don't fully understand why productivity 0:18:45.400 --> 0:18:47.720 has been solo. So we could see at some point 0:18:47.800 --> 0:18:50.960 a jump in productivity, or we could see a major 0:18:51.000 --> 0:18:54.159 shift in policy. But something has to change for the 0:18:54.280 --> 0:18:56.439 rate outlook to change. And as I said earlier, if 0:18:56.480 --> 0:18:59.040 you look at the inflation forecast for a very long 0:18:59.080 --> 0:19:01.960 time to come measure in years, the market right now 0:19:02.000 --> 0:19:05.000 does not expect that. I mean, this is such an 0:19:05.000 --> 0:19:08.159 interesting discussion, and what Steve Major said there and then 0:19:08.240 --> 0:19:10.200 this is what we always hear from a brave guy 0:19:10.280 --> 0:19:14.639 like Steve Major. Dr Hilda Brand is the banking lobby 0:19:14.720 --> 0:19:16.920 who is the blame? I mean, you're a connected guy. 0:19:17.320 --> 0:19:21.960 Who is the banking lobby out there dictating what policy 0:19:22.040 --> 0:19:25.640 should be two institutional policy holders as you were at 0:19:25.640 --> 0:19:28.880 this SISS National Bank. Did these guys calling up means 0:19:28.920 --> 0:19:33.280 there a special phone. There's not a special phone. But 0:19:33.560 --> 0:19:38.280 I certainly went through my bruising exchanges with some CEOs. 0:19:38.400 --> 0:19:43.120 But at the end of the day, you know, I think, um, look, 0:19:43.160 --> 0:19:46.840 nobody likes when the environment makes you job difficult. So 0:19:46.920 --> 0:19:50.160 I have some sympathy for bankers, but they also need 0:19:50.200 --> 0:19:53.560 to recognize that again, as Steve said, you know rightly, 0:19:53.640 --> 0:19:56.199 this is not the low interest rate environment. Is it 0:19:56.200 --> 0:19:59.280 difficult for banks? Yes? Was it caused by policy makers? Know? 0:20:00.160 --> 0:20:04.919 It is a result a consequence of demographics of savings. 0:20:05.600 --> 0:20:07.920 These are global phenomena, which is why we have low 0:20:07.960 --> 0:20:11.840 interest rates throughout the world. So bankers need to also 0:20:12.000 --> 0:20:15.240 brush up on their macs a little bit and understand 0:20:15.280 --> 0:20:17.239 why we are where we are. Steve major. I mean, 0:20:17.240 --> 0:20:19.800 this is such a delicate conversation, as you say, there's 0:20:19.800 --> 0:20:24.320 a banking alabbya out there. I mean, they've observed negative 0:20:24.359 --> 0:20:27.640 interest rates in Europe and basically the Anglo Saxon world 0:20:27.680 --> 0:20:30.240 is saying no, Anglo American world is saying, no, we 0:20:30.320 --> 0:20:34.080 don't want to do that. Are our mechanisms any better 0:20:34.160 --> 0:20:39.320 than negative interest rates? Well, you might notice that I 0:20:39.359 --> 0:20:42.959 worked for a bank, and the concern I have is 0:20:43.000 --> 0:20:48.000 that the central banks do not set the policy rates 0:20:48.080 --> 0:20:51.680 so banks can make money and pay bonuses. They set 0:20:52.080 --> 0:20:56.240 policy rates for the real economy. So that's why there's 0:20:56.320 --> 0:21:02.320 that tension there. Obviously, negative rates and very flat curves 0:21:02.320 --> 0:21:04.640 are not very good for banks, but everyone knows that. 0:21:05.320 --> 0:21:09.159 Um so, so the alternative so interesting, and that's why 0:21:09.440 --> 0:21:12.960 the market has moved on to start debating about yield 0:21:13.040 --> 0:21:16.679 curve control. As we've seen in Japan. We've had caps 0:21:16.720 --> 0:21:20.800 in place in the US throughout history. People will remember 0:21:21.400 --> 0:21:24.920 financial repression from war, bonds and consoles in the UK, 0:21:25.320 --> 0:21:28.640 so people are thinking along these lines. Um I think 0:21:28.720 --> 0:21:33.320 QUE is not an obvious next step either, because the 0:21:33.359 --> 0:21:35.880 more central banks do QUE, the more pressure they put 0:21:35.880 --> 0:21:38.119 on the banking system. Because of the reserves that are 0:21:38.160 --> 0:21:41.880 created and that and that's quite unproductive for banks. So 0:21:41.880 --> 0:21:45.320 so I think the next step needs to be a 0:21:45.400 --> 0:21:49.480 little bit more creative. And that's why over the years 0:21:49.560 --> 0:21:52.720 people have started to talk about all these alternative policies 0:21:52.760 --> 0:21:57.359 and and you know, helicopter money has been suggested, etcetera. 0:21:58.280 --> 0:22:00.080 I was going to ask you about that, Stephen, what 0:22:00.119 --> 0:22:03.000 would it take for the FED to use helicopter money 0:22:04.040 --> 0:22:06.520 or any other central bank? Actually, well, we know back 0:22:06.520 --> 0:22:09.679 in yeah, we're back in two thousand and sixteen, we 0:22:09.760 --> 0:22:12.000 wrote papers about this and it was that it was 0:22:12.040 --> 0:22:14.439 at the time what we called the elephant in the 0:22:14.560 --> 0:22:17.800 room that and in fact it was wrong. We we 0:22:17.920 --> 0:22:21.560 got completely wrong sided. And there is a danger sometimes 0:22:21.680 --> 0:22:25.800 people like me could get too gloomy. I am actually 0:22:25.960 --> 0:22:28.439