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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: the ve on Wall Street this morning. This is what
Speaker 2: it sounds like. Stephen Arthur Federated writing, we're maintaining our
Speaker 2: outlook for more modest but volatile, positive single digit returns
Speaker 2: in US Starstream twenty twenty seven. Steve joins us now
Speaker 2: for more. Steve, Welcome to the program. I read the
Speaker 2: recent note let's work through it. Do you still believe
Speaker 2: this is just another brick in a so called climbable
Speaker 2: wall of worry?
Speaker 3: Well, jarthan there's a fine line between a wall of
Speaker 3: worry and a brick wall. So for the moment, we
Speaker 3: think it's still another brick but as you guys have
Speaker 3: been highlighting, it really is a matter of.
Speaker 4: How long this goes on.
Speaker 3: The market is trying to look through the valley here,
Speaker 3: you know, to the other side of the valley, and
Speaker 3: you can see that in the shape of the Eel curve.
Speaker 3: You can see it in the shape of the vall
Speaker 3: curve of the futures market, you know, oil energy futures.
Speaker 3: I think the spot oil is about ten dollars higher
Speaker 3: right now than the future's price of oil at bround
Speaker 3: sixty seven. Same way, you know with with the volatility index.
Speaker 3: The you know, the vall out on the outside of
Speaker 3: the curve is down in the low twenties. The thing is,
Speaker 3: it's still higher than it was at the beginning of
Speaker 3: the year, both volatility and oil.
Speaker 4: Even if you go out.
Speaker 3: More, you know further, which is what the market stocks
Speaker 3: are pricing off of.
Speaker 4: I mean, we've talked about this on your show.
Speaker 3: That oil market is a spot market that has to
Speaker 3: trade commodities on a daily basis. This stock market is
Speaker 3: looking at the future price a while, and you know
Speaker 3: that price is lower. But the longer this goes on,
Speaker 3: the future and the presence start to combine. So I
Speaker 3: think You're right to be focusing on how long this lasts,
Speaker 3: and the market is trying to look through this. It's
Speaker 3: fortunate that we cut our target price on the S
Speaker 3: and P prior to this whole thing happening.
Speaker 4: That was just pure luck, I suppose.
Speaker 3: But the reason we did that was we did anticipate
Speaker 3: to be some kind of a correction, and we're kind
Speaker 3: of setting.
Speaker 5: The levels at which we would re.
Speaker 3: Enter the market with new cash because I think you know,
Speaker 3: if your target on the S and P is lower,
Speaker 3: which it is for us, you know, you need a
Speaker 3: little more upside before you're going to step in, especially
Speaker 3: to a situation like this. So for now, we're holding firm.
Speaker 3: We're watching events just like you are and waiting to
Speaker 3: see even when the end comes nearer.
Speaker 4: One thing is sure.
Speaker 2: It's going to.
Speaker 4: End, you know, that's not a question.
Speaker 3: The question is how long it's either going to end
Speaker 3: with a regime change or it's going to end, you know,
Speaker 3: with some sort of ceasefire and a kind of hobbled
Speaker 3: Iranian regime. But one way or the other, this will end.
Speaker 1: Steve, you said that the one challenge to your relatively
Speaker 1: constructive view for the year ahead of single digit returns
Speaker 1: until twenty twenty seven was sustained levels of ninety dollars
Speaker 1: or above of crude. I'm just wondering, what does sustained mean?
Speaker 1: How long does it have to remain above ninety dollars
Speaker 1: for you to materially change your view.
Speaker 3: Yeah, I don't know that we have a precise number
Speaker 3: of days, Lisa, but you know, somewhere probably in the
Speaker 3: two to three month range. You know, if you had
Speaker 3: ninety dollars that long, you're going to have two impacts
Speaker 3: that are going to have to cause us and I
Speaker 3: think others to up their economic outlook in terms of
Speaker 3: the growth rate. We're still at three percent growth this year,
Speaker 3: and we've got earnings very very strong this year and next.
Speaker 3: But you know, if you go three months or so,
Speaker 3: you're going to really start to impact economic activity, particularly
Speaker 3: on the low end of the consumption bandwagon, if you will,
Speaker 3: which is kind of where we were expecting a recovery
Speaker 3: this year because of all the things going on with
Speaker 3: the one big beautiful.
Speaker 4: Bill and the lawyer goes on.
Speaker 3: The higher the risk that this one time price impulse
Speaker 3: gets kind of normalized and fed into a broader inflation
Speaker 3: in the economy, which then takes off the table the
Speaker 3: eight cuts that we have in our forecast. As you know,
Speaker 3: we've got two or three cuts out there over the
Speaker 3: next twelve months, which we think we're still on track for.
Speaker 3: But if oil stays up this, you know, for two
Speaker 3: or three months, maybe the people started asking for raises
Speaker 3: against that price, and then it bleeds into a broader inflation.
Speaker 2: Hi, Stave, I just want to deal with the word
Speaker 2: defensive gets thrown around a lot. Being defensive means different
Speaker 2: things at different times, and it's highly dependent on the shock.
Speaker 2: There are times when tech has defensive quality staples, the
Speaker 2: usual one, but this foe is different. What is defensive
Speaker 2: in a moment like this one, we think.
Speaker 3: Defensive is some of these hard asset companies. We were
Speaker 3: talking about this when I was on the show last time,
Speaker 3: you know, in more in the value space, and certain
Speaker 3: like defense companies are defensive right now because they're hard
Speaker 3: asset companies that also are seeing good, strong top line
Speaker 3: growth for obvious reasons. Energy companies are big stocks in
Speaker 3: the value indices form of companies, strong dividends, broad you know,
Speaker 3: broadly diversified, and well defended.
Speaker 4: You know, product modes if you will.
Speaker 3: So it's it's these companies that are very broadly diversified,
Speaker 3: as reliant on you know, where the market is valued,
Speaker 3: have a good dividend yield, and in a single digit
Speaker 3: return environment, dividendials of four percent three percent start to
Speaker 3: look more attractive. If the market's going up twenty percent,
Speaker 3: no one cares about the dividendials. So I think those
Speaker 3: are the kind of defensive areas that we like here.
Speaker 3: We like them coming into this. They've actually underperformed, some
Speaker 3: of them, not all. I mean the financials are also
Speaker 3: in the value and the seas they've underperformed obviously, But
Speaker 3: you know, we like those areas here, especially coming out
Speaker 3: of this. Provide it we don't have to take another
Speaker 3: haircut to our economic growth.
Speaker 2: Stay with US multile index Savanance coming up off to this,
Speaker 2: let's tend to the federal serve. The Republican Senates a
Speaker 2: Tom Tillis prising FENCH nominee Kevin Walsh following their meeting yesterday,
Speaker 2: but not wavering on his promise to block any FED
Speaker 2: nominations until the criminal pro into the current chair Jpow ends.
Speaker 2: The former Sam Lewis FED president Jim Ballad joins us
Speaker 2: now for more, Jim, welcome to the program. Set the stage.
Speaker 2: How difficult a moment is this for an incoming FED share.
Speaker 6: Yeah, so you've got to get through the nomination process first.
Speaker 6: And as I as I understand it anyway, I don't
Speaker 6: think anything's going to happen. So nobody is going to
Speaker 6: be on the FED board anytime soon. The way this
Speaker 6: is going, the administration will have to come to some
Speaker 6: kind of deal. They don't seem to be talking about that.
Speaker 6: So I think it's stalled for now.
Speaker 2: It's the second time we've had to deal with this, Jim.
Speaker 2: Before it was largely in the President's hands, and for
Speaker 2: whatever reason, Biden stalled. He stilled, he stored, and waited
Speaker 2: a long long time to reselect, renominate chair power for
Speaker 2: a second term. And some people, even people who were
Speaker 2: on the committe at the time. So that's what stopped
Speaker 2: this FEDER reserve from hiking quick enough to respond to
Speaker 2: the energy crisis and the inflation pandemic shock coming out
Speaker 2: of the pandemic. Now, Jim, I just wondered this time
Speaker 2: around how critical this moment actually is with a frenchile
Speaker 2: labor market and pressure once again on inflation, coming from energy.
Speaker 6: Well, it's always critical, always lots of lots of interesting
Speaker 6: things going on. I would say about this shock, it's
Speaker 6: not like the seventies. I mean, this is of course,
Speaker 6: this is going to bring up you know, hearkening back
Speaker 6: to the seventies. But the US is a leading oil
Speaker 6: producer today and weren't at that time. So I think
Speaker 6: the recession threat from this shock is probably smaller than
Speaker 6: it would have otherwise been because you've got the supply
Speaker 6: side kind of offsetting demand.
Speaker 4: Destruction that could occur.
Speaker 6: So so I think and then on the inflation side, well,
Speaker 6: you know, the FED looks through or press shocks anyway,
Speaker 6: they look at core inflation. So there's only a small
Speaker 6: effect on core inflation from this. So it's really whether
Speaker 6: inflation expectations would start to rise because markets would start
Speaker 6: to think that the FED was going to accommodate this shock,
Speaker 6: which is what happened in the seventies. I don't think
Speaker 6: that committees in much of a mood to do that.
Speaker 6: So I think it's a different situation. Even though this
Speaker 6: is a really big shock, it's a different situation than
Speaker 6: what we saw earlier in the post war era.
Speaker 1: Jim what gives you confidence that there's enough momentum in
Speaker 1: the underlying economy to make this not an issue of
Speaker 1: demand destruction, not an issue of the consumer increasingly crimped.
Speaker 6: Yeah, I just think, you know, the shock would hit
Speaker 6: the US economy and that would be you know, gas
Speaker 6: prices are certainly something that we all pay every day,
Speaker 6: so that has acted like a tax in the past.
Speaker 6: But you've also got a supply side, you know, being
Speaker 6: the world's leading oil producer, which is offsetting some of that.
Speaker 6: I would also say that we've you know, we've seen
Speaker 6: actually higher oil prices in the past if I recall
Speaker 6: collect correctly in two thousand and eight, and in real terms,
Speaker 6: that would be over two hundred dollars a barrel. So
Speaker 6: that's a very different scenario. Markets are right to focus on, well,
Speaker 6: how long would this conflict continue to go on?
Speaker 4: You know, US could withdraw at.
Speaker 6: Any point saying it's declare victory and withdrawal.
Speaker 4: So we'll we'll see what happens here.
Speaker 1: We see Jim expectations over at the ECB as well
Speaker 1: as the Bank of England for a potential rate hike.
Speaker 1: Increasingly priced and in response to higher oil prices.
Speaker 5: Do you think that.
Speaker 1: People will start thinking about the same here in the US.
Speaker 6: I don't know if they go that far. I think
Speaker 6: more would have to happen before they go that far.
Speaker 6: I think the more likely scenarios that they just stay
Speaker 6: on hold longer than they otherwise would have in order
Speaker 6: to send a signal that they want to keep inflation
Speaker 6: under control. But again, it's the inflation expectations probably that
Speaker 6: matter more.
Speaker 4: Than the oil price movements directly.
Speaker 7: Well, we already see airlines across Europe and Asia increasing fares.
Speaker 7: They're raising the fuel surcharges given what's going on in
Speaker 7: the war. Also in America, we are farmed to table society.
Speaker 7: All of our food comes because of petrol and gasoline
Speaker 7: on trucks. Isn't that going to be a problem for
Speaker 7: this Federal Reserve? Not just the fact that gasoline prices
Speaker 7: this morning are closer to four dollars a gallon than three.
Speaker 6: Yeah, I mean, it's going to be a problem for
Speaker 6: headline inflation, but you know, the committee looks at core inflation.
Speaker 6: So the whole point of that is to say that
Speaker 6: they're not going to react to movements in food and
Speaker 6: energy prices that can be pretty transitory and have historically
Speaker 6: been pretty transitory, so that what they want is the
Speaker 6: underlying trend in inflation.
Speaker 4: And you can look at.
Speaker 6: Core PC inflation, which the Committee likes, or Dallas fed
Speaker 6: trim med inflation, which throws out some of the high
Speaker 6: and low price changes that occur in the price change distribution.
Speaker 4: So sure, yeah, people are really paying these things.
Speaker 6: It really does matter, Yes, but when you're trying to
Speaker 6: make policy for the medium term, you've better look through
Speaker 6: some of it.
Speaker 2: Stay with us more Bloomberg surveillance Coming up after this.
Speaker 2: The IEA considering a record release of emergency or reserves
Speaker 2: to easearch and crude costs. This coming as German and
Speaker 2: Japanese officials announced plans to release part of their own
Speaker 2: national reserves. Samantha the cohead of Global Commodities research at
Speaker 2: Golment Sechs writing, because the straight up Homers flows data
Speaker 2: unnoisy and the broader situation remains fluid, We've not changed
Speaker 2: our oil price forecast, but estimate the large upset I
Speaker 2: risk in longer disruption scenarios. Sam joined us for more. Sam,
Speaker 2: good morning, what's your assessment of where we are right now?
Speaker 2: Never mind the pr effort coming from officials at the moment,
Speaker 2: what's this disruption currently look like.
Speaker 8: Yeah, so we're losing about fifteen point four million barres
Speaker 8: a day of supply from the region. If this release
Speaker 8: goes through, and it looks like it will, it can
Speaker 8: offset that by about let's say two and a half. Well,
Speaker 8: the fastest ever release that we've had from the group
Speaker 8: was at a pace of two and a half, So
Speaker 8: you can talk about a three to four hundred million
Speaker 8: barre release, but it's not going to be all at
Speaker 8: once matching the pace one to one to the loss.
Speaker 5: So on that we are.
Speaker 8: Still likely to be losing over ten million bears a
Speaker 8: day of oil from the market.
Speaker 2: So when they say four hundred, someone like you, here's
Speaker 2: to two point five per day.
Speaker 8: Yeah, because at least that's what we observed in the past.
Speaker 8: What is the mac space that they've released, So you
Speaker 8: can't really count on anything bigger than that.
Speaker 5: It might happen. We have to wait and see.
Speaker 8: But based on what we've seen on net, we're still
Speaker 8: going to be losing a lot of oil day by day,
Speaker 8: and it matters because what the market is looking at
Speaker 8: is Okay, here's the size of the shock. This can
Speaker 8: reduce the size of the shock a little bit, but
Speaker 8: still it's a very large shock. So if it continues
Speaker 8: for long enough, that's when prices go back to that
Speaker 8: kind of panic mode of demand destruction. You know, when
Speaker 8: we cross one hundred dollars a barrow. To me, that's
Speaker 8: the signal being sent. It's like, oh, we can't manage
Speaker 8: this fast enough, so we need to destroy demand a
Speaker 8: little bit faster.
Speaker 5: This release can slow this down a little bit. I
Speaker 5: think Lisa was just.
Speaker 8: Mentioning this that, you know, it keeps the curve a
Speaker 8: little bit more more managed.
Speaker 7: But when we saw the headline come out of four
Speaker 7: hundred million barrels a day, actually we saw prices take
Speaker 7: back up a little bit. Is the market panicking that
Speaker 7: policy makers think this is going.
Speaker 5: To last a lot longer. I don't think it's a
Speaker 5: panic yet. I don't call it that.
Speaker 8: But remember yesterday we also had a little bit of
Speaker 8: conflicting headlines as to whether the US head escorted a
Speaker 8: thinker or not.
Speaker 5: So I think the rebounding.
Speaker 8: Prices that we saw late yesterday might.
Speaker 5: Have been associated with that.
Speaker 8: Oh so, the flow through hormos is not really improving,
Speaker 8: And to be fair, the data that we have seen
Speaker 8: so far, even.
Speaker 5: Though it is noisy and it is revised.
Speaker 8: All the time, so far, it does suggest that flows
Speaker 8: through hormones have not really improved.
Speaker 7: When it comes to some of that misinformation that we're seeing,
Speaker 7: How does it make it that much harder for traders
Speaker 7: for the market to position?
Speaker 5: It creates a lot of volatility.
Speaker 8: The past two days are a perfect illustration of that,
Speaker 8: because again I think the uncertainty on duration makes such
Speaker 8: a big difference. If this is a one month's shock,
Speaker 8: and we know ahead of time it's a one month shock, okay,
Speaker 8: we get the release, we upset most if not all
Speaker 8: of it. India can access some of the sanctions barrels
Speaker 8: from Russia as well.
Speaker 5: We're actually okay by the end of the year.
Speaker 8: There's no panic, there's no demand destruction needed. But if
Speaker 8: it's a one month shop, but we don't know that yet,
Speaker 8: the market has to price in the risk that.
Speaker 5: It might be two months, it might be three months.
Speaker 8: So that sense of urgency to destroy a little bit
Speaker 8: more of the man now to avoid inventor is going
Speaker 8: to critically low levels shows up a little more. So
Speaker 8: this is what keeps us from above one hundred now
Speaker 8: below one hundred. Maybe this is going to be overseeing
Speaker 8: more confidence. Oh but the flows are still low and
Speaker 8: then you're hit with this release from the IA. Okay,
Speaker 8: so maybe the piece of drawdown in stocks is not
Speaker 8: quite as fast. So to your point, it keeps the
Speaker 8: market guessing. What are we trying to manage here? So
Speaker 8: the two aspects of it that we're going to be
Speaker 8: tracking day by day Number one the volumes, what is
Speaker 8: the disruption every day? And what can be offset by
Speaker 8: these releases?
Speaker 5: That's number one? But number two, how long is this
Speaker 5: going to? Asked?
Speaker 8: Where is that confidence that this can be contained within
Speaker 8: a month versus say two or three months, in which
Speaker 8: case the market needs to hedge against much bigger disruptions.
Speaker 1: I'm struck by the dissonance between the financialization of some
Speaker 1: of these futures contracts and the physical world, which takes time,
Speaker 1: is messy, needs to be restarted, has time lag. I'm
Speaker 1: just wondering, based on what we've heard so far about
Speaker 1: closures or stoppage, is how long you think it will
Speaker 1: take to restart some of the production that has already
Speaker 1: been taken offline.
Speaker 8: Yeah, you have a little over six million bears a
Speaker 8: day already down from production oil of crude oil in
Speaker 8: the region.
Speaker 5: We estimate that.
Speaker 8: If it were to restart today, it would take about
Speaker 8: four weeks to get back to normal.
Speaker 5: Four weeks. Four weeks.
Speaker 1: So, I guess, how are people saying if this resolves
Speaker 1: in the next week, there won't be a prolonged increase
Speaker 1: risk premium on oil prices.
Speaker 5: I guess.
Speaker 1: Can we just say that from here on now we
Speaker 1: can average eighty dollars a barrel or eighty five dollars
Speaker 1: a barrel for the.
Speaker 5: Rest of the year if it ends in a week,
Speaker 5: let alone longer. Yeah, it's a good point.
Speaker 8: We have to remember that going into this year, the
Speaker 8: market wasn't a surplus, so we are coming from a
Speaker 8: position of comfortable levels of inventories. Inventories in OCD they
Speaker 8: had been at pretty average levels going into the shop
Speaker 8: wasn't low. If you look at usspr okay, it was
Speaker 8: on the low side, but overall commercial stocks were pretty average.
Speaker 8: China strategic reserves are higher than normal. So we came
Speaker 8: in okay in stocks and with a surplus, and now
Speaker 8: we're eating away into that surplus and getting potentially into
Speaker 8: a death sits. So yes, to your point, there is
Speaker 8: a sustained impact on storage, but especially if we do
Speaker 8: get the release from the IA, that can be moderated
Speaker 8: over time, so that storage won't look that comfortable for
Speaker 8: a few weeks, but over enough months, say five, six,
Speaker 8: seven months, where that release from the IA ends, then
Speaker 8: you can be back at a more comfortable position.
Speaker 2: Sam Lisa told about the time it takes. Can we
Speaker 2: sit on that just for an extra bit? The difference
Speaker 2: between cutting production and shutting in production? What's the difference
Speaker 2: between those two headlines and why is it so significant?
Speaker 8: So the way that we think about it, it's more
Speaker 8: the difference between stopping exports and stopping production. So for example,
Speaker 8: if I stop exports today, but I have spare capacity
Speaker 8: on my inventories, then I can just stockpile stock, buy
Speaker 8: stock bio. When the chaos calms down, I can just
Speaker 8: send that back to the market. So you're delaying volumes
Speaker 8: as opposed to losing them. But when you're shutting in production,
Speaker 8: when you actually halt your production because you don't have
Speaker 8: work to put it, then that's production lost.
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