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Speaker 2: Very all right, Well, the great monetary pivot is near
Speaker 2: a central banker's engineer, a once unthinkable soft landing in
Speaker 2: the world's largest economy. I think to a lot of people,
Speaker 2: that's the big picture takeaway. After yesterday, the FED gave
Speaker 2: its clearest signal yet that its historic policy tightening campaign
Speaker 2: is over by projecting more aggressive interest rate cuts in
Speaker 2: twenty twenty four, in the process of igniting one of
Speaker 2: the biggest post meeting rallies in recent memory. We're going
Speaker 2: cross asset. We're talking stocks with Bloomberg News Markets reporter Abe.
Speaker 2: I'll do a little. We're talking bonds with Bloomberg News
Speaker 2: Rates reporter at Michael McKenzie. They're both here in the
Speaker 2: Bloomberg Interactive Brokers studio. Michael, I want to start with
Speaker 2: you with the rates moves. So is that it the
Speaker 2: Fed's just completely done and five percent was the top
Speaker 2: of the tenure that's it. That's it all right, interview over.
Speaker 2: Thank you for your answer.
Speaker 3: No, I think Waller laid out the game plan and
Speaker 3: clearly he's the intellectual force driving this FED reserve. And
Speaker 3: I think there are a couple of times yesterday when
Speaker 3: journalists were asking Chairman FORED Jerome Powell, whether you know,
Speaker 3: giving him an opportunity to walk back and sort of say, hey,
Speaker 3: you know, Marc has run too far. He just served
Speaker 3: up the sort of dubbish pivot on a silver platter.
Speaker 3: I mean, the mark is run and he's going to
Speaker 3: keep running now because frankly, the rate cuts starting as
Speaker 3: early as March. It's on the table.
Speaker 4: You've written multiple times this year, Mike, because I've read
Speaker 4: these stories about how traders have been burned by piling
Speaker 4: into bets that we're going to get cuts. Are we
Speaker 4: in the same situation now? It was something different this time,
Speaker 4: where you're not going to be writing that story in
Speaker 4: three months from now.
Speaker 3: Well, to be honest, that story changed once we got
Speaker 3: about five percent. Because the ri is reward of buying
Speaker 3: treasures at with a coupon of five percent, we're very compelling,
Speaker 3: and we wrote about that in October and when I
Speaker 3: went out to Los Angeles and southern California talked to
Speaker 3: bond managers in November. They were optimistic that they were
Speaker 3: on the right side of this trade. They were loading
Speaker 3: up on bombs above five percent that I guess at
Speaker 3: the time they didn't really think we're going to get
Speaker 3: this kind of pivot from the Fed. But it's here,
Speaker 3: and I think it's here now because the data is cooperating.
Speaker 3: We are slowing. True, the market has been ahead of this.
Speaker 3: I think Deutsche had the research saying his seventh time
Speaker 3: a charm something, and it does look like seventh time
Speaker 3: is going to be the charm. Because the FED is
Speaker 3: telling you that they want a soft landing, they will
Speaker 3: start easing. I thought one of my compelling lines from
Speaker 3: Power yesterday was when he said, we can't wait to
Speaker 3: cut rates. You know, we can't wait for inflation to
Speaker 3: get to two percent before we start cutting rates. He's
Speaker 3: telling them we're going to start cutting pretty soon if
Speaker 3: the direction of travel and inflation is down towards that
Speaker 3: sort of three percent two point nine to handle. So
Speaker 3: I think the bomb market here is in good shape.
Speaker 3: I think you're still going to have volatility because it
Speaker 3: all will take is another you know, sticky sign of
Speaker 3: inflation early next year, and suddenly that we are back up.
Speaker 3: But I think what's really compelling now for the bomb
Speaker 3: market here is that you've got six trillion dollars of
Speaker 3: money sitting in money market funds. They now have to
Speaker 3: make the move. They missed the boat back in November,
Speaker 3: when you yields are at five percent, you could have
Speaker 3: locked in a two year at five percent, five year
Speaker 3: at five percent.
Speaker 2: That's gone now.
Speaker 3: Then the highest yielding coupon on the treasury curve today
Speaker 3: is the two year at four forty. Pretty Much everything
Speaker 3: out apart from the thirty is below four percent. So
Speaker 3: any backup in yields from here is going to encourage
Speaker 3: people to start saying I've got to start shifting from cash.
Speaker 3: And that's a huge amount of money sitting there.
Speaker 2: Yeah, the question is where they actually shift that cash.
Speaker 2: I want to bring in Abigail do Little, market supporter
Speaker 2: for Bloomberg News. Abigail, I want to talk about the
Speaker 2: equity portion of this rally. You're to date, the S
Speaker 2: and B five hundred is up almost twenty three percent.
Speaker 2: As of this morning, we were talking about a new
Speaker 2: record high for the Nasdaq one hundred for the Dow.
Speaker 2: Since pulled back on these, but we're still in that area.
Speaker 2: This is the rally that caught a lot of people
Speaker 2: by surprise.
Speaker 5: It is indeed, I'm one of them, truthfully, and I've.
Speaker 2: Done you and me both friend.
Speaker 5: From a charting perspective, the markets had been charting tactically
Speaker 5: almost perfectly for nearly two years, just in terms of
Speaker 5: the various moves, and when the market started to rally
Speaker 5: at the beginning of November, the charts did reflect that.
Speaker 5: But for me, at least, it was really hard to
Speaker 5: believe it because FED chair J. Powell had been signaling
Speaker 5: that the FED was going to stay higher for longer,
Speaker 5: and even just less than two weeks, that was still
Speaker 5: his message. You could make the case that there's two Powals. Now.
Speaker 5: It's interesting what you're talking about, Tom, in terms of
Speaker 5: Whiller being the intellectual heft and Powell, you know, decided
Speaker 5: to go along with him, or maybe that was the
Speaker 5: plan all along. We just don't know what their I
Speaker 5: don't want to say trickery is, but their strategy is
Speaker 5: what I'll say. And so I think that a lot
Speaker 5: of folks had been caught off surprise by this market
Speaker 5: starting in early November, mid November, late November, and now
Speaker 5: certainly yesterday. Now what makes it very interesting is so
Speaker 5: the small cap index is still up two point six percent.
Speaker 5: You have the NAZAQ one hundred now down a quarter
Speaker 5: of a percent, and earlier today was almost down closer
Speaker 5: to one percent, So a little bit of a hangover
Speaker 5: from all of the moving to the upside. But what's
Speaker 5: really impressive is on the S and P five hundred,
Speaker 5: the volume today is almost seventy percent above the twenty
Speaker 5: day average. So that suggests that the market's all in
Speaker 5: on the idea that there is in fact a FED
Speaker 5: policy change and they want in. So the move up
Speaker 5: two tons of one percent really says nothing, but that
Speaker 5: volume suggests that folks are really repositioning.
Speaker 2: I want to go to you with this question. Abagail
Speaker 2: And asks the same question to Michael about that six
Speaker 2: trillion dollars in money market funds. Do you think what
Speaker 2: portion of that do you think we can expect to
Speaker 2: go to the equity market? And when and then where
Speaker 2: do you think it goes? If it's not in the
Speaker 2: equity market, does it go to the bond market?
Speaker 5: So from an equity market standpoint, each of the indexes
Speaker 5: right now is at a real crossroads. They're basically at resistance,
Speaker 5: so the selling pressure that has come in, So the
Speaker 5: NAZAC one hundred, it's record high, it's basically now going
Speaker 5: back down into the range. We've seen that sort of
Speaker 5: action a lot of times. It's going to be interesting
Speaker 5: to see whether or not that money does go into
Speaker 5: equities to push it higher or more. Interested in the
Speaker 5: FED if you can trade with the FED, I mean
Speaker 5: it's stocks too, but the bonds your trading in the
Speaker 5: safest asset class in the world. You know that you're
Speaker 5: backed by the biggest balance sheet in the world. Why
Speaker 5: not go there? Whereas stocks there's some risk. Right now
Speaker 5: one month correlations are higher, the vix is lower. That's
Speaker 5: a fancy way of saying that. The voltels suggest that
Speaker 5: in two to four weeks equities could be a little
Speaker 5: bit dicey because everybody's trying to move from the magnificent
Speaker 5: seven into other sectors. But the problem is that magnificent
Speaker 5: seven that's fifty percent of the Nasdaq one hundred, it's
Speaker 5: thirty percent of the S and P five hundred, So
Speaker 5: that only goes so far. So I don't know the
Speaker 5: answer to the question. If I had to speculate at
Speaker 5: this point, and also technically chart technicals on yields, there's
Speaker 5: air pockets. They're just going to keep going lower, So
Speaker 5: I would say probably more so bonds.
Speaker 4: Mike, what did you think of Powell's categorization of the
Speaker 4: loosening in financial conditions because he didn't put back on
Speaker 4: them at all, And I'm curious, like what you think
Speaker 4: he's thinking right now to look at the market action
Speaker 4: right now.
Speaker 3: I think he's and the other members of the effirmc
Speaker 3: have discovered that once you introduce financial conditions, is best
Speaker 3: just to stay quiet and move away from that. I
Speaker 3: think it was an error to do that in the
Speaker 3: last meeting. They've really set themselves in a trap. And
Speaker 3: a lot of people have talked about this. Even when
Speaker 3: they did introduce financial conditions as helping them restrict the
Speaker 3: economy back in November, there are plenty of people in
Speaker 3: the bomb market saying why are they doing this? And
Speaker 3: I think he just dodged the question. Yes, he just
Speaker 3: you know, it's I can understand why they did it
Speaker 3: at the time, but I think it's it's just too
Speaker 3: much information from the FED, and you can't really I
Speaker 3: mean financial conditions, I mean the classic financial conditioning. Tinly,
Speaker 3: we've already seen the mortgage market, but if you look
Speaker 3: at the NBA weekly data, people are still trying to
Speaker 3: get mortgages. At the end of the day, whether you
Speaker 3: pay seven eight percent, it's a thirty year rate, you
Speaker 3: know at some point you're going to be able to
Speaker 3: refinance much much lower. And people who buy houses are
Speaker 3: buying houses very much a long term perspective.
Speaker 2: Can you think about the economy. The number of people
Speaker 2: who are buying homes is relatively small, even though it
Speaker 2: has a big impact on the economy because then they
Speaker 2: go out and buy couches and they you know, redo
Speaker 2: the homes and stuff like that. But I think that's
Speaker 2: one of the reasons why we heard from j Powell
Speaker 2: over the last year that there have been a lot
Speaker 2: of Americans who are shielded from those higher mortgage rates
Speaker 2: because they've locked in those smaller mortgage rates. Abigail, I'm
Speaker 2: just in the last thirty seconds. What derails this rally?
Speaker 5: That's a great question. I think just maybe too far,
Speaker 5: too fast. And also there are a lot of people
Speaker 5: like me who are very surprised by FED chair J.
Speaker 5: Powell's sudden pivots. The best of my memory, it's the
Speaker 5: fastest since December January of twenty eighteen. I think that
Speaker 5: there's a sentiment out there that wants stocks to go down.
Speaker 5: Whether or not that works or not, I don't know,
Speaker 5: but I would say too far, too fast. I mean
Speaker 5: the NAZAC one hundred this year, in the first half
Speaker 5: it was up forty percent. It was the most ever.
Speaker 5: You know, buy through physics. Parabolic uptrends can't last. They
Speaker 5: have to at least consolidate.
Speaker 2: Yeah, it's pretty pretty remarkable moves both in the equity
Speaker 2: market hand and the bond market. A big thank you
Speaker 2: both of you for joining us for this roundtable. It's
Speaker 2: Blomberg News Markets reporter al Abigail Doolittle and Bloomberg News
Speaker 2: Rates reporter Michael mackenzie, both here in the Bloomberg Interactive
Speaker 2: Brokers studio. Emikrafao and I are just getting started on
Speaker 2: this Thursday afternoon. It's Bloomberg Business Week.
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Speaker 2: Okay, Emily, you've had some time to think about this. Okay,
Speaker 2: don't look at the notes. Pop quiz, where do you
Speaker 2: think the majority of US electricity comes from fossil fuels?
Speaker 3: Ah?
Speaker 2: Ding ding ding? You're right, Okay, you win. So about
Speaker 2: sixty point four percent comes from fossil fuels, so natural gas, coal, petroleum.
Speaker 2: You said solar before that it wasn't when you were
Speaker 2: right about that. Twenty one percent comes from renewables, so win,
Speaker 2: solar hydropower. So here we are more than eighty percent.
Speaker 2: The rest, well, that comes from nuclear energy, which has
Speaker 2: remained stagnant over the last decade at about nineteen percent. This,
Speaker 2: by the way, is all according to the US Energy
Speaker 2: Information Administration, But our next guest, along with many others,
Speaker 2: argue that in order to reach net zero goals, governments
Speaker 2: have to go nuclear. Maria Korusnik is CEO of the
Speaker 2: Nuclear Energy Institute. It's a nuclear industry trade association that
Speaker 2: advocates advocates for more nuclear power generation. She joins us
Speaker 2: on Zoom from Washington, d C. Maria, how are you.
Speaker 6: I'm doing great? Thanks good to hear you, good.
Speaker 2: To talk to you, and you're in luck because both
Speaker 2: Emily and I love talking on nuclear energy here. Why
Speaker 2: do you think, gosh, I want to go in so
Speaker 2: many different directions, but I want to talk to you
Speaker 2: about the challenges of nuclear energy. When people say they
Speaker 2: know it takes it's going to take nuclear energy for
Speaker 2: us to get to net zero, they also say, well,
Speaker 2: we also know that it takes so long and it's
Speaker 2: so expensive to build nuclear power plants here in the US.
Speaker 2: What would you say to that.
Speaker 7: It's say, you have to look at the value of
Speaker 7: nuclear quite frankly, right, It's that seven twenty four around
Speaker 7: the clock. Not only is a carbon free, it's highly reliable.
Speaker 7: And I think we don't talk as much about the
Speaker 7: value that you're getting. These power plants are built not
Speaker 7: for forty years, not for sixty years, you know, eighty years,
Speaker 7: one hundred years, and so you really have to look
Speaker 7: at the complete picture that you get when you build
Speaker 7: nuclear Yes, they're large projects, Yes they're going to cost
Speaker 7: in order to make that happen, but the value that
Speaker 7: they bring to the system is really incredible. And again,
Speaker 7: I think we just need to shift a little bit
Speaker 7: more to the value conversation.
Speaker 4: So you were at COP twenty eight, can you give
Speaker 4: us a sense of the narrative around nuclear energy? Was
Speaker 4: the consensus that this is green energy? Like, how were
Speaker 4: people actually talking about this form of energy?
Speaker 6: Absolutely?
Speaker 7: In fact, you know, some are coining this the nuclear
Speaker 7: cop you know, and I've been to the last few
Speaker 7: COPS and I would just describe nuclear as a little
Speaker 7: bit trying to get a seat at the table, trying
Speaker 7: to create some conversation this COP.
Speaker 6: You know, we're in the sort of official documents from COP.
Speaker 7: We're in what's called the stock take, you know, paragraphs
Speaker 7: about nuclear, about wind and solar together being what's required.
Speaker 7: The fact is that, you know, nuclear was never officially
Speaker 7: credited and mentioned in the way that it is here.
Speaker 7: Tripling nuclear was a pledge that was signed by twenty
Speaker 7: four plus countries. The IAEA had a pledge on just
Speaker 7: crediting nuclear for being part of the decarbonizing solution. Over
Speaker 7: forty countries signed that. So I would really say this
Speaker 7: COP was sort of a real, real recognition of the
Speaker 7: value that nuclear is going to bring. And quite frankly,
Speaker 7: we're not going to get anywhere close to the commitments
Speaker 7: if we don't include nuclear in the solution, we have
Speaker 7: to be there.
Speaker 2: I think people are still scared of nuclear. I have
Speaker 2: to tell you I grew up and people who've heard
Speaker 2: me talk about this before apologies, but I grew up
Speaker 2: near a nuclear power plant in California. It's actually the
Speaker 2: last online nuclear power plant right now, Diablo Canyon in
Speaker 2: San Luis, Obismo County. We would have siren drills once
Speaker 2: a year. I think it was the first weekend in
Speaker 2: September at noon when you know, the sirens would go
Speaker 2: off to to you know, warn people like, Okay, this
Speaker 2: is what would happen if there were some sort of
Speaker 2: nuclear meltdown. People had iodine pills at their disposal. Is that,
Speaker 2: you know. And they grew up, you know, thinking about
Speaker 2: Chernobyl three Mile Island. You know, get what's the safety
Speaker 2: around this stuff. For people who say, wait a second,
Speaker 2: I'm a little scared of nuclear.
Speaker 6: Yeah, honestly, it's incredibly safe.
Speaker 7: And you know, I also, I'll say, grew up around
Speaker 7: this nuclear I've operated plants. I've been a nuclear plant operator.
Speaker 7: I've been a site vice president in charge of one plant.
Speaker 7: I've been a chief nuclear officer in charge of five
Speaker 7: reactors at three locations. And I just say, I know
Speaker 7: nuclear from the inside, and I would live next to
Speaker 7: a nuclear plant any day they're in. They're incredibly safe,
Speaker 7: and especially as compared to other technologies that we need.
Speaker 7: And I would also say that, you know, nuclear uses
Speaker 7: the fewest critical minerals. Nuclear uses the lowest land space,
Speaker 7: if you will, for the volume of energy that it produces.
Speaker 7: From a life cycle perspective, it is in the lowest
Speaker 7: use of carbon for the whole life cycle of the plant.
Speaker 7: It's clean energy and uh, you know, in terms of
Speaker 7: carbon free and in terms of other emissions and and jobs.
Speaker 7: You get a lot of jobs with nuclear. There are
Speaker 7: little economic engines for the local community.
Speaker 2: I think to a lot of people it's almost perfect.
Speaker 2: But I think a lot of people would also say,
Speaker 2: what about the waste. We still haven't figured out what
Speaker 2: to do with nuclear waste.
Speaker 6: Yeah, you know, I look at that a little differently.
Speaker 7: I'm so proud of nuclear for being able to account
Speaker 7: for all of its waste.
Speaker 6: You know, oftentimes we look at nuclear and say, what
Speaker 6: are you going to do?
Speaker 7: And I say, well, you know what, we know where
Speaker 7: every piece of it is from all of the waste
Speaker 7: or all of the nuclear power that we've used since
Speaker 7: the nineteen sixties. We know where every piece of that is.
Speaker 7: And you're absolutely right. Some of the fuel that we
Speaker 7: have today, which we call waste, I would prefer to
Speaker 7: say it's used fuel. And why do I say that,
Speaker 7: because it can be used again in other types of reactors.
Speaker 6: And those other types of reactors.
Speaker 7: Are ones that we are trying to bring to the
Speaker 7: marketplace literally as we speak. And so I would say
Speaker 7: that used fuel you have today is a future resource
Speaker 7: and we should look at it like that.
Speaker 4: What's next for nuclear in the US? Are we trying
Speaker 4: to build more reactors actively in.
Speaker 7: This So we're building some down in Georgia right now.
Speaker 7: One went online this year and the second will go
Speaker 7: online next year. And what we're in the process of
Speaker 7: doing right now, if you could imagine an innovation pipeline,
Speaker 7: chocolate block full of different designs, and that is coming
Speaker 7: out over the next five, ten, fifteen years. And these
Speaker 7: are partnerships between our national labs and private companies and
Speaker 7: very much one a beautiful, quite frankly innovation here in
Speaker 7: the United States. And I'll tell you nuclear is not
Speaker 7: just being talked about in the United States. It's being
Speaker 7: talked about around the world. We just talked about cop
Speaker 7: but many other countries right now are looking to expand
Speaker 7: nuclear and they're looking at the United States to help them.
Speaker 7: So what we need to be doing here in the
Speaker 7: United States is bringing some of these innovations and getting
Speaker 7: them built so that these other countries can have a
Speaker 7: chance to see them and then choose which design they
Speaker 7: want built in their country. At cop Poland, for example,
Speaker 7: said we already have six sites. At each site, we
Speaker 7: want four small modular reactors. We're teaming with a US company.
Speaker 7: We want to put twenty four in place.
Speaker 4: Maria, I have to ask, what do you make of
Speaker 4: the price of uranium. It's up seventy five percent this year.
Speaker 4: I write about ETFs and commodities markets, and there's a
Speaker 4: lot of interest for buying into this nuclear energy uranium trade.
Speaker 4: But why is it up so much seventy five percent
Speaker 4: this year?
Speaker 6: Well, a couple of things.
Speaker 7: For one thing, we are I think that's an indication
Speaker 7: that people are bullish, if you will, as they look
Speaker 7: ahead for a nuclear and I think also we're looking
Speaker 7: very much at ensuring that we have a solid and
Speaker 7: stable fuel supply as we move forward. You've seen that
Speaker 7: we want to invest in the US fuel supply here
Speaker 7: so that we have not only the mining but also
Speaker 7: conversion and enrichment services available to this industry, so that
Speaker 7: we have a solid supply as we move forward. And
Speaker 7: so I think a lot of that has put attension
Speaker 7: on the front end of this fuel supply, and I
Speaker 7: think that's causing some of that price increase.
Speaker 2: Well, it's really interesting stuff. As I mentioned, Emily and
Speaker 2: I both love talking nuclear so we really appreciate you
Speaker 2: taking the time and joining us this afternoon. Maria kors
Speaker 2: Nik a CEO of the Nuclear Energy Institute. It is
Speaker 2: a nuclear industry trade association that advocates for more nuclear
Speaker 2: power generations. She joined us on Zoom from Washington, DC.
Speaker 2: The issue is just the timetable for these Emily, I
Speaker 2: just wonder, you know, politicians don't necessarily have long term
Speaker 2: horizons when it comes to their decision making because of
Speaker 2: reelection campaigns, and it's so hard to do these big
Speaker 2: infrastructure projects. So I just wonder, you know, what the
Speaker 2: appetite is for building more nuclear power in the US.
Speaker 4: And like you said, there's so many people that are
Speaker 4: so excited about this and then there's still some people
Speaker 4: that just can't shake that idea of Chernobyl.
Speaker 1: Yeah, you're listening to the Bloomberg Business Week. Catch us
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Speaker 2: Out in the Cold. It's a most read story on
Speaker 2: the Bloomberg Terminal, and it's the cover of the new
Speaker 2: issue at Bloomberg BusinessWeek magazine. You can read it now
Speaker 2: on newsstands, on the Bloomberg Terminal and at Bloomberg dot
Speaker 2: com slash BusinessWeek. It's a deep dive into the cutthroat
Speaker 2: world of commodities trading and how individuals can profit at
Speaker 2: the expense of some of the world's least developed nations.
Speaker 2: The trade at the center of the story involves a
Speaker 2: Swiss based commodities firm, a state controlled Italian energy group
Speaker 2: in Pakistan, one of the world's poorest nations, which found
Speaker 2: itself Yeah Out in the Cold. Steven Stepchansky is senior
Speaker 2: energy reporter at Bloomberg News and part of the team
Speaker 2: that wrote the story. He joins us on Zoom from Japan.
Speaker 2: Also here is the editor of Bloomberg business Week, Joel Weber.
Speaker 2: He's with us in the Bloomberg Interactive Brokers studios, Joel.
Speaker 2: Pakistan is a country of more than two hundred million people,
Speaker 2: and it faced some serious consequences when it found itself
Speaker 2: in recent years without the leg that it thought it
Speaker 2: had signed contracts for. I mean, we're talking factories being
Speaker 2: forced to shut down or dramatically cut their output, people
Speaker 2: going into poverty. It even trained foreign currency result reserves.
Speaker 2: This is a huge story. How did it get on
Speaker 2: Business Week's radar? How did you get on your radar?
Speaker 3: Steven?
Speaker 8: One word?
Speaker 9: And Stephen has been all over energy. And what's interesting
Speaker 9: though about this was, and we're going to rewound the
Speaker 9: clock and a'll hear directly from him, because basically, there
Speaker 9: was a trading opportunity that the outset of the Russia's
Speaker 9: invasion of Ukraine created. Traders we saw it coming and
Speaker 9: were able to do something about it. What ultimately we're
Speaker 9: going to describe here is I think a glimpse inside
Speaker 9: the energy trading world that I think is exceedingly rare
Speaker 9: and what Stephen was able to show us, I think
Speaker 9: is just an amazing business story. It also speaks to
Speaker 9: the world's energy resources and how those resources are allocated
Speaker 9: and how they move around the world. LNG liquified natural
Speaker 9: gas is ultimately what this story is about, and it
Speaker 9: has in general been a very powerful tool that a
Speaker 9: country like Pakistan, which may not have abundant natural resources
Speaker 9: to provide energy for itself, is able to import from abroad.
Speaker 9: But it also becomes a unique vulnerability because of that. Steven,
Speaker 9: let's bring you in. How did this story find you?
Speaker 10: I mean, I'm an energy reporter, right, so I'm like
Speaker 10: the nerdiest nerd. I'm talking to traders every day. And
Speaker 10: back in twenty twenty one, so this is years ago,
Speaker 10: there were some rumblings, Hey, you know, there's some shipments
Speaker 10: that aren't going to Pakistan.
Speaker 8: They should be going to Pakistan.
Speaker 10: They're being canceled and Pakistan has a gas shortage. And
Speaker 10: this was happening in late, you know, twenty twenty one,
Speaker 10: even before the war in Ukraine began, and you could
Speaker 10: really see the start of the energy crisis. But prices
Speaker 10: were rising at the end of twenty twenty one to basically,
Speaker 10: you know, near record levels in Asian, record levels in Europe,
Speaker 10: and there was this view that you know, perhaps some
Speaker 10: of this LERG was being sold into the spot market
Speaker 10: and not going to Pakistan because Pakistan's long term contracts
Speaker 10: are at a more you know, set rate that's several
Speaker 10: times lower than where spot lergy prices are, and so
Speaker 10: taking the LERG away from the contract and selling into
Speaker 10: the spot market can be a lucrative arbitrage, and it
Speaker 10: can also be you know, legally acomplished because the contract
Speaker 10: terms allow for cancelations. There are terms in there for
Speaker 10: force masure if you're having production problems. So all that
Speaker 10: kind of came together, and as I was watching what
Speaker 10: was happening, it was really interesting to also see what
Speaker 10: was happening on the ground in Pakistan because they were
Speaker 10: starting to really curtail gas supply to households, to industries.
Speaker 10: There was a sort of economic impact, and I was
Speaker 10: able to because of the sourcing that I have in
Speaker 10: the way that I cover the market. Almost for every
Speaker 10: canceled shipment, I would track it one by one and
Speaker 10: see when Pakistan would come back into the market to
Speaker 10: buy it, buy some replacement leerng to help you stop
Speaker 10: their shortage. They were able to do so sometimes but
Speaker 10: at a very high price. And then after the war began,
Speaker 10: prices got really high in twenty twenty two and Pakistan's
Speaker 10: credit rating got worse. Suddenly, they weren't able to buy
Speaker 10: LNG anymore. And I was on the forefront of that
Speaker 10: story as well. They were failing to purchase any more
Speaker 10: shipment store place their gas.
Speaker 8: They were really struggling.
Speaker 10: Fertilizer plants were shutting down for for months on end,
Speaker 10: so it was becoming a food issue as well. It
Speaker 10: was really fascinating to watch, and it's fantastic jol that
Speaker 10: BusinessWeek as well had interest in the store, and I
Speaker 10: could do it in a big way.
Speaker 9: To pat myself in the back there, Stephen, bring us
Speaker 9: to the beginning of a contract like this, right, because
Speaker 9: the other important thing to mention here, despite maybe feeling
Speaker 9: like a little icky, there's nothing necessarily illegal as far
Speaker 9: as our reporting shows here. But there was a contract
Speaker 9: that was signed between these trading firms and Pakistan. So
Speaker 9: talk to us about what Pakistan thought it was going
Speaker 9: to get out of this.
Speaker 10: Yeah, I mean, Pakistan signed a contract that was pretty
Speaker 10: normal for a developing nation. They signed it back in
Speaker 10: twenty seventeen at a tender in two the sixteen, which
Speaker 10: is basically like a public call for offers to supply
Speaker 10: them L and G for five years and fifteen years
Speaker 10: Gunvore in any the Italian company applied the lowest offers
Speaker 10: for the five year and fifteen year contracts respectively, and
Speaker 10: there was some scrutiny, of course during the tendering process,
Speaker 10: but in the end, you know, they signed a contract
Speaker 10: in twenty seventeen that at the time, you know, in
Speaker 10: twenty seventeen, when there was abundant leg when people weren't
Speaker 10: talking about you know, record level LNG prices, this was
Speaker 10: a pretty solid contract because it had terms and said, hey,
Speaker 10: if you don't deliver our gas, you have to pay
Speaker 10: a thirty percent penalty.
Speaker 8: We get thirty percent of that money back.
Speaker 10: And when spot prices are just a little bit a
Speaker 10: smidge over or maybe a smidge under long term you
Speaker 10: know LNG rates, that thirty percent is enough to keep suppliers,
Speaker 10: you know, sending the LNG to where it's supposed to go.
Speaker 10: But of course, you know, COVID happened, so prices dropped
Speaker 10: to a record low pacice and even considered scrapping the
Speaker 10: contracts on those suppliers because it was cheaper to source
Speaker 10: energy from the spot market.
Speaker 8: But then it flipped around.
Speaker 10: When you know, as we saw quickly economies bounce back,
Speaker 10: there was a shortage of gas around the world, and
Speaker 10: in the terms of the contract, if you pay a
Speaker 10: thirty percent penalty, then you can cancel the shipment to Pakistan.
Speaker 10: And when LNG is for spot LNG is four times
Speaker 10: higher than a contracted rate. You're paying just a few
Speaker 10: million dollars versus you know what you can make in
Speaker 10: the spot market, which is upwards of one hundred and
Speaker 10: fifty million dollars for a single shipment, So that arbitrage
Speaker 10: exists as well. Force masures, I mean the LNG industry
Speaker 10: using a force majority to cancel a number of shipments
Speaker 10: had been seen before, but I think until the market
Speaker 10: got really tight in twenty twenty two, it just wasn't
Speaker 10: very common because LNG is a smallish industry. It's not
Speaker 10: like oil where there are tons of players. LNG is
Speaker 10: just a handful of suppliers, buyers and middlemen. So if
Speaker 10: you burn one buyer, suddenly you know you have a
Speaker 10: smaller pool to sell to So it was sort of
Speaker 10: unheard of before twenty twenty two to burn a buyer
Speaker 10: a supplier, but that's sort of what happened.
Speaker 4: So who were these traders that made these fortunes and
Speaker 4: how much money are we actually talking about here?
Speaker 10: Yeah, I mean so one of them is a gun
Speaker 10: War their Geneva base. They're one of the biggest commodity
Speaker 10: trading houses in the world. They had the contract with Pakistan,
Speaker 10: and when just the amount of money is large, it's
Speaker 10: in the hundreds of millions how much they were able
Speaker 10: to make by diverting supply from the Pakistan contracts into
Speaker 10: the spot market, according to the sources that we've spoken with.
Speaker 10: But of course there was one instance where Pakistan had
Speaker 10: a contract with Gunvor. They had five shipments left, which
Speaker 10: is quite a bit of gas for a country like Pakistan,
Speaker 10: for delivery from March after March April to July twenty
Speaker 10: twenty two, and when Gunvor canceled the contract, they were
Speaker 10: able to siphon that gas into the spot market. Of course,
Speaker 10: Gunbar had dispute over a payment with Pakistan. That's what
Speaker 10: they used to cancel cancel the contract. But if they
Speaker 10: sold those five shipments to Pakistan, they would have made
Speaker 10: about two hundred million dollars that's the cost or that
Speaker 10: that's the price that they have gotten on the revenue.
Speaker 10: But by selling into the spot market they made six
Speaker 10: hundred million. So already you're seeing there's that four hundred
Speaker 10: million dollar charge that they or increase in value that
Speaker 10: they can get by just selling into the spot market.
Speaker 8: On top of that.
Speaker 10: So you look at all the yeah, exactly, all the
Speaker 10: other shipments that you could make, you know that those
Speaker 10: five shipments were just part of this larger story. There
Speaker 10: were many more cancelations, many more diversions. There's one LNG
Speaker 10: cargo that Gunvar sent to Pakistan, were only part of
Speaker 10: the shipment was unloaded at their port and the rest
Speaker 10: of it went to Turkey where they received three times
Speaker 10: the price that they have gotten from Pakistan.
Speaker 8: So gun War is one of the interesting characters.
Speaker 2: As you know, in the piece of single LNG tanker
Speaker 2: provides enough gas to run Pakistan's entire industrial sector for
Speaker 2: about five days. So when we're talking a tanker here,
Speaker 2: that's a significant amount of fuel, especially for an economy
Speaker 2: that is so dependent on industry and one that is
Speaker 2: trying to grow at least until it ran out of fuel.
Speaker 2: Talk a little bit about the implications of a country
Speaker 2: like Pakistan losing out on a contract like this.
Speaker 10: Yeah, I mean it's huge. So Pakistan already has. The
Speaker 10: whole reason why they're importing LNG is because their domestic
Speaker 10: gas supplies have been dwindling. They were basically gas rich
Speaker 10: after the nineteen fifties. They found some really great gas
Speaker 10: fields and they built their economy around natural gas. But
Speaker 10: in the two thousand's early twenty tens, they realized that
Speaker 10: they're gas supplies they weren't producing as much as it
Speaker 10: would need to, and it actually production was being to decline.
Speaker 10: That was partly because of mismanagement, partly because of the fields,
Speaker 10: you know, kind of deteriorting over time, and then also
Speaker 10: because they weren't investing enough to keep up with with
Speaker 10: their increase in demand. And so to fill that gap,
Speaker 10: they said, hey, we'll import energy. Look finantial gas, which
Speaker 10: had become more available in the market in the twenty tens.
Speaker 8: So there's now losing a shipment. Yeah, no, go ahead.
Speaker 10: So yeah, losing a shipment suddenly gas isn't going to
Speaker 10: household so they're curtailing gas for most of the day.
Speaker 10: Households only get gas to cook or to heat for
Speaker 10: sometimes two hours for breakfast, three hours for lunch, and
Speaker 10: then two hours for dinner, compared to you know the
Speaker 10: rest of the world where you can you know, flip
Speaker 10: a switch and turn on your stove. Industries as well,
Speaker 10: there are a lot of factories that are had to
Speaker 10: shut down because they weren't getting the gas, or they
Speaker 10: had to switch to other fuels they had to use
Speaker 10: use dirtier fuels like diesel to power their plant, or
Speaker 10: they're rushing to kind of set up a biomass plant,
Speaker 10: which what I saw was just them burning a bunch
Speaker 10: of sticks.
Speaker 9: There is this kind of I think I call it
Speaker 9: icky earlier obviously capitalism that we think that they're within
Speaker 9: the bounds of the law. But I'm curious, just in
Speaker 9: your reporting, was there any sort of moral compass that
Speaker 9: you ran across in anyone here or was it just
Speaker 9: dollars and cents and this is how it played out.
Speaker 10: I mean, I think traders in general look at markets
Speaker 10: in a way that how can we be as efficient
Speaker 10: as possible, how can we move these supplies to where
Speaker 10: you know they're needed? And a lot of the time
Speaker 10: it goes to the to the highest bidder, and so
Speaker 10: you know, I've not I got into a bit of
Speaker 10: this story, but in previous stories, a lot of the
Speaker 10: gas was going to richer places. So in Europe they
Speaker 10: were able to continue operating without you know, pipeline supplies
Speaker 10: from Russia because they had so much more LNG and
Speaker 10: sometimes at l and G came at the expense of
Speaker 10: shipment's not going to emerging nations. And so I think
Speaker 10: traders often look at, you know, how can we how
Speaker 10: can we make sure that these capitalist markets work as
Speaker 10: efficiently as possible? And and they fill that role right
Speaker 10: that these traders is are are doing the job that
Speaker 10: they're hired to do, and they're working within the contracts
Speaker 10: and the realm that they're that they have to of course,
Speaker 10: uh you know when when you when you talk about
Speaker 10: ethics and and things like that, it's hard for them
Speaker 10: to I think sometimes kind of opine about it because
Speaker 10: at the end of the day, they have a job
Speaker 10: to do, they're under pressure to do that job.
Speaker 8: And and and they're there to do it.
Speaker 10: And what's interesting is when we talk to people in Pakistan,
Speaker 10: they they don't really blame the traders that much. They
Speaker 10: they say, hey, you know, these are the contracts that
Speaker 10: we signed. We didn't sign a good one and people
Speaker 10: are gonna try to make money. That that's that's the
Speaker 10: way it goes. And we have you know, a quote
Speaker 10: in the story like that.
Speaker 9: And so where does that leave Pakistan as we head
Speaker 9: toward a yet another winter here?
Speaker 10: Yeah, I mean they're not in a great spot now.
Speaker 10: They were able to resume buying LERG from the spot market.
Speaker 10: Of course, energy spot prices have dropped significant flight from
Speaker 10: last year. The energy crisis has eased a bit, but
Speaker 10: they're still buying elgi you at a very high price.
Speaker 10: They still have a gas shortage. There is still gas
Speaker 10: curtailed to households. And as it gets colder, yes, not
Speaker 10: all pack of thing is cold in the winter, but
Speaker 10: there are parts of the country that can get quite frigid,
Speaker 10: demand will go up and they're going to have shortages
Speaker 10: and they might have to curtail more gas to the households.
Speaker 8: They might have to protail more.
Speaker 10: Gas to factories and industries, and they might have to
Speaker 10: try to buy more LNG from the spot market, which
Speaker 10: again is very expensive for them compared to their long
Speaker 10: term contracts will add to their debt and cause more problems,
Speaker 10: especially as they're entering an election.
Speaker 8: Year next year.
Speaker 2: Well, it is a fantastic story. It's the cover of
Speaker 2: Bloomberg Business Week this week. You can check it out
Speaker 2: on the Bloomberg terminal at Bloomberg dot com and of
Speaker 2: course on newstands right now. A big thank you to
Speaker 2: Steven step Chansky, senior energy reporter at Bloomberg News, joining
Speaker 2: us just now in zoom from Japan. Also the editor
Speaker 2: of Bloomberg BusinessWeek, Joe Weber. Here in our Bloomberg Interactive
Speaker 2: Brokers studios. This is Bloomberg BusinessWeek, a journal.
Speaker 3: Yeah about you let me drive?
Speaker 2: Oh no, no, no, no, honey, please, I'll do gravel. I
Speaker 2: want to drive. It's a good question. This is the
Speaker 2: drive to the Clothes for music. Well don on Blueberg Radio,
Speaker 2: Well here we go is We just heard from Bill
Speaker 2: Maloney choppy session. But we are broadly in the green
Speaker 2: at least on the Dow. Jones up three tenths of
Speaker 2: a percent. We just heard the numbers from Charlie to
Speaker 2: the S and P up more than one tenth of
Speaker 2: a percent. The nasdak can posit up seven one hundred percent. Right. Now,
Speaker 2: let's get to the drive to the clothes. We got
Speaker 2: with us. Andrew cry the co CIO of Crescent Grove Advisors,
Speaker 2: he's here with us in the Bloomberg Interactive Brokers studio.
Speaker 2: I want to start with fixed income with you, because
Speaker 2: what these moves that we are seeing when it comes
Speaker 2: to especially you know, the tenure, given that roughly a
Speaker 2: month ago we're at five percent on the tenure. Now
Speaker 2: we're wow, what sub four percent? Wow?
Speaker 8: It's extraordinary.
Speaker 2: Did you see this coming? I would say we honest, we.
Speaker 11: Had started to inch out on duration because you start
Speaker 11: to get the five percent, and clients we work with,
Speaker 11: in particular tax sensitive municipals start to become very interesting
Speaker 11: on a taxable equivalent basis. If you can lock in
Speaker 11: longer duration seven eight percent taxable equivalent yields, Right, that's
Speaker 11: really attractive, particularly from where we came from, going back
Speaker 11: to the twenty tens your interest rate policy, et cetera. Right,
Speaker 11: So we'd started to inch out, but we weren't fully there, right,
Speaker 11: I mean, we weren't full up on duration. And I
Speaker 11: think this move has just been so dramatic. And now
Speaker 11: the bond map gets pretty interesting at this point in
Speaker 11: the sense that your cash rate five and a half,
Speaker 11: you know, or five point three whatever you want to
Speaker 11: pick your number of money market fund type rate relative
Speaker 11: to going in today at least a brand new dollar
Speaker 11: going to work at three point nine percent to ten year,
Speaker 11: you're really expecting some additional price appreciation to make up
Speaker 11: that gap, or pretty significant rate cuts, which is perhaps
Speaker 11: where the market is headed at this point in terms
Speaker 11: of thinking about Fed policy. You know, the six cuts
Speaker 11: now being priced in in twenty twenty four.
Speaker 4: I mean, where did treasure yield even go from here?
Speaker 4: It was interesting. I was talking to a number of
Speaker 4: colleagues and we were looking at outlooks, and some outlooks said, oh,
Speaker 4: by the end of twenty twenty four, we'll see the
Speaker 4: tenure at four percent. And that move has already been
Speaker 4: done in just twenty four hours. So what's next. What
Speaker 4: are we actually going to see in twenty twenty four.
Speaker 11: Yeah, the poor folks that have to go back and
Speaker 11: rewrite all these outlooks at this point because of what's
Speaker 11: happened within the rates market with inequities now at price
Speaker 11: targets that people were talking about twelve months out. Again,
Speaker 11: extraordinary moves that we've seen now over the course of
Speaker 11: the last couple of days, let alone, you know, the
Speaker 11: last sort of six to eight week period. Look, I
Speaker 11: think we've probably come a little bit too far, too fast.
Speaker 11: That's our view. Just if you look at six rate
Speaker 11: cuts for next year and sort of how that feeds
Speaker 11: into the ten year pricing and the overall sort of
Speaker 11: soft landing thesis that people or really you know, it's
Speaker 11: underpinning that move. We just tend to think that it's
Speaker 11: gonna be a little bit choppier than that. And there's
Speaker 11: actually there's a great piece this morning from when your
Speaker 11: colleagues Cameron christ talking about the FED cutting because they
Speaker 11: think they can, as opposed to because they have to
Speaker 11: in this environment. They feel like they've got scope to
Speaker 11: take down rates because they're seeing the soft landing play
Speaker 11: out when they do that. I tend to think of
Speaker 11: more incrementalist approach is warranted as opposed to being so dramatic,
Speaker 11: you know, the flip side of what we saw perhaps
Speaker 11: going into the rate hiking cycle where they felt like
Speaker 11: they really had to catch up, they were behind the curve.
Speaker 11: So I don't think they feel like they, you know,
Speaker 11: they're forced into a position where the economy is really
Speaker 11: deteriorating at this point, they're going to have to take big,
Speaker 11: chunky moves in an accelerated fashion. If that's the case,
Speaker 11: then why not play it out a little bit more slowly,
Speaker 11: a little bit more gradually. So we tend to think
Speaker 11: six is too many. You know, probably three that the
Speaker 11: Fed is talking about is more appropriate in terms of expectations.
Speaker 2: So when you say that you think we've come too far,
Speaker 2: too faster, you're referring specifically to you rate cut expects
Speaker 2: Are you referring to what we see in the bond
Speaker 2: market right now? Are you referring to just this rally
Speaker 2: that we've seen over the last seven weeks in the
Speaker 2: equity market.
Speaker 11: I would say all the above, Yeah, just in terms
Speaker 11: of the move, the dramatic amount of sort of repricing
Speaker 11: that we've seen across the curve really but in particular
Speaker 11: the ten year if you want to point to that
Speaker 11: as being again an extraordinary Keep coming back to that
Speaker 11: word move that we've seen, the rate cut expectations that
Speaker 11: we're seeing next year, and then the repricing of equities
Speaker 11: sort of alongside that, you know that rubber bands being
Speaker 11: stretched pretty far at this point, we think, and ultimately,
Speaker 11: you know, you come back. It's a supply and demand game.
Speaker 11: At some point, the incremental buyer just sort of peters
Speaker 11: out right. We've seen such a rapid move off the
Speaker 11: lows eight weeks ago, roughly speaking, we just think that
Speaker 11: probably a little bit of a breather is warranted in
Speaker 11: that scenario.
Speaker 4: What about for stocks? Do you think the Fed put
Speaker 4: is back?
Speaker 11: It certainly seems like they are. They've tilted the balance
Speaker 11: towards being a little bit more accommodative going forward, or
Speaker 11: they're willing to step in right if they start to
Speaker 11: see a little bit of economic deterioration. Clearly they're still
Speaker 11: keyed in on inflation, but they've changed the balance, they've
Speaker 11: changed the narrative at this point. I think as we
Speaker 11: look at stocks going into next year, really today, it'd
Speaker 11: probably be a microcosm of what we would think about
Speaker 11: going into twenty twenty four, meaning a rotation out of
Speaker 11: some of the really big winners, the megacap tech names,
Speaker 11: and into things that would sort of represent a catch
Speaker 11: up trade, if you will, small caps, more value, you know,
Speaker 11: cyclically sensitive types of names across the market that have
Speaker 11: been left behind in this period where the Magnificent seven
Speaker 11: we're outperforming so dramatically. So again we would look at
Speaker 11: again a day like today and just say this is
Speaker 11: probably what we'd expect into twenty twenty four. Not to
Speaker 11: say the tech's going to be bad, but we just
Speaker 11: think the relative value trade is now on.
Speaker 2: If one of your clients missed out on this rally,
Speaker 2: maybe they were hesitant to put money in because they said,
Speaker 2: wait a second, I'm getting a little nervous that inflation
Speaker 2: is going to be sticky, and suddenly there's this RiPP
Speaker 2: or face off rally over the last seven eight weeks.
Speaker 2: What's the opportunity left for them?
Speaker 11: Well, here's what I would say for and foremost is
Speaker 11: that the opportunity cost of that is not what it
Speaker 11: was back in the twenty tens, Meaning if you're in cash,
Speaker 11: if you're in short term fixed income instruments, you're still
Speaker 11: you know, earning five to six percent. If you you know,
Speaker 11: went out into a little bit of credit, let's say,
Speaker 11: or short duration maybe or even make a marketing fun right, right,
Speaker 11: So I think that for us gives us a little
Speaker 11: bit of comfort and you feel like, again, the opportunity
Speaker 11: cost wasn't what it was in the past. So that's
Speaker 11: one thing at this point going forward. You know, if
Speaker 11: you miss this, we wouldn't necessarily chase it. Based on
Speaker 11: everything we've kind of talked about thus far, I don't
Speaker 11: think we'd be inclined to really jump in. Maybe you
Speaker 11: start to nibble it some of the things that I
Speaker 11: talked about that offer more of a relative value story
Speaker 11: small caps non US.
Speaker 2: But then when could you see opportunity to get back in.
Speaker 11: Well, so I think in terms of larger cap stocks,
Speaker 11: that's where we'd be a little bit more cautious. We
Speaker 11: think going into the beginning of next year, at some
Speaker 11: point there's going to have to be a little bit
Speaker 11: of a recalibration. Again, just go back to pure supply
Speaker 11: demand dynamics. You're going to exhaust the demand side of
Speaker 11: the equation in terms of who's the incremental buyer point.
Speaker 11: We think whether it's five percent, ten percent, whatever, that
Speaker 11: sort of corrective reset phase looks like is going to
Speaker 11: offer the opportunity then to get a little bit more bullish,
Speaker 11: you know, into the balance of twenty twenty four.
Speaker 4: You said today's action was a microcosm of what's going
Speaker 4: to happen. So we're seeing small caps rally, but we
Speaker 4: just have a minute left. We're also seeing some speculative
Speaker 4: tech rally Kathywood's Arc Innovation ETF, some of the most
Speaker 4: shorted stocks in the market up six percent. Are we
Speaker 4: going to see that kind of animal spirits continue as well?
Speaker 11: I think you could see, you know, broadly speaking, if
Speaker 11: the soft landing narrative continues to play out, that bodes
Speaker 11: really well for risk assets. And I think that could
Speaker 11: bring people back to the table with some of those
Speaker 11: more speculative names, some of the things again that have
Speaker 11: been left behind now over the last twelve to eighteen months,
Speaker 11: we're beat up so badly as rates were moving to
Speaker 11: the upside. I think this exuberance, you know, as rates
Speaker 11: potentially start to move to the downside, could kick back in.
Speaker 11: I think it's I think it's definitely something you could
Speaker 11: see going forward.
Speaker 5: Uh.
Speaker 11: The other thing would be, you know, if you look
Speaker 11: even at like private markets companies that we're waiting to ipo,
Speaker 11: you know, the IPO window opens rounds. That's the other
Speaker 11: big question waiting to christ right because of risk appetite.
Speaker 11: Andrew cry Co cioa Crescent Grove Advisors here in the
Speaker 11: Bloomberg Interactive Brokers Studios.
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