Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. I promised you Phil Orlando,
Speaker 1: and we will bring you Phil Orlando. He's the chief
Speaker 1: equity market strategist and ahead of client portfolio management at
Speaker 1: Federated Hermes. And what an insane weekend, Phil Um. You know,
Speaker 1: do you have to look at at the playbook, rip
Speaker 1: it up, throw it away, right up a new one
Speaker 1: when you see this kind of volatility and commodities, well,
Speaker 1: for for sure. First of all, Matt, thank you very
Speaker 1: much for having me back on um. You know, we
Speaker 1: we had this longer term view going back. I guess
Speaker 1: a year and a half ago that oil at thirty
Speaker 1: or thirty five dollars a barrel was low and was
Speaker 1: probably gonna work higher. But we we've just seen a
Speaker 1: forty five percent increase in two weeks, going from ninety
Speaker 1: dollars a barrel to a hundred and thirty dollars a barrel,
Speaker 1: you know earlier today, I mean that's insane, um and um.
Speaker 1: The implication on inflation data, I think it is something
Speaker 1: that that we're sort of focused on. So we're going
Speaker 1: to get an update on the consumer price index later
Speaker 1: this week. So the consumer price index in January was
Speaker 1: up seven and a half percent. That's a forty year high.
Speaker 1: That number is expected to go to seven point nine
Speaker 1: percent in February, but none of that is going to
Speaker 1: reflect this forty five percent spike we just saw an
Speaker 1: energy So as bad as the inflation data is today
Speaker 1: and as bad as it's going to be when we
Speaker 1: see this update a couple of days, you know, March April,
Speaker 1: those numbers are going higher because we don't have an
Speaker 1: answer to what's going on right now. I'm wondering if Phil,
Speaker 1: you know, if you look at the year ahead, how
Speaker 1: ad kind of get for the everyday consumer feeling these
Speaker 1: price increases. I'm looking at a note from David Kelly
Speaker 1: over at JP Morgan, and he says, if oil prices
Speaker 1: stay at a barrel for the rest of the year,
Speaker 1: gasoline will average close to four twenty for the year,
Speaker 1: adding more than a thousand dollars. Sweet goodness. But you know, Phil,
Speaker 1: I'm wondering, you know, if you are just kind of
Speaker 1: the everyday person in the US, how is this impacting you.
Speaker 1: It's impacting you significantly. My wife and I put gas
Speaker 1: in the car yesterday and it dawned on us that
Speaker 1: that and we bought, you know, at a cheap gas station.
Speaker 1: Place of gas has gone up fifty cents in the
Speaker 1: New York area in the last week or two. Um.
Speaker 1: You look at and Dr Kelly, I think is one
Speaker 1: of the most brilliant economists in the game today. So
Speaker 1: I'm not going to disagree with anything that David said.
Speaker 1: But we've done some analysis on this too, and every
Speaker 1: one penny change at the pump impacts consumers spending by
Speaker 1: about one point two billion dollars. Well, we've just doubled
Speaker 1: the price of gasoline over the last year or so.
Speaker 1: We've gone from two dollars eleven cents, we're now up
Speaker 1: to what you say, four dollars and twenty cents. That
Speaker 1: that's going to take a significant amount of firepower out
Speaker 1: of the consumer. We've already seen confidence levels go down
Speaker 1: to eleven year lows with the Michigan Sentiment. We've already
Speaker 1: seen the savings rate come down to an eight year
Speaker 1: low of six six point four percent. UM, that's going
Speaker 1: to start to have a deletarious impact in our view
Speaker 1: on UH, consumption, economic growth and and UH. And I'm
Speaker 1: not sure that we can fully appreciate right now because
Speaker 1: this thing is sort of exploding right in front of us.
Speaker 1: But you know, we took our GDP estimate for the
Speaker 1: first quarter down at our macro policy meeting last week.
Speaker 1: I'm sure a lot of other firms are doing the
Speaker 1: same thing. Um, you've got to reflect the fact that
Speaker 1: we have done a poor job managing the situation. Energy
Speaker 1: prices are up, inflations up, and that's can impact economic
Speaker 1: rowth well. And of course there's a war, right UM,
Speaker 1: that that changes everything. We had some incredible tail winds though. UM.
Speaker 1: Matt Winkler came out with a column today talking about, Yes, UM,
Speaker 1: consumers outlook is poor, but CEOs outlook is incredibly strong.
Speaker 1: The Business Roundtable had their quarterly Economic Outlook Index at
Speaker 1: an all time high at the end of last year.
Speaker 1: If you look at the first quarter earning season, three
Speaker 1: hundred companies in the SMP five hundred say they're gonna
Speaker 1: hire more people this year than at any point during
Speaker 1: the past three decades. UM, So capex plans are off
Speaker 1: the charts. I mean, corporate America is still so strong.
Speaker 1: Does this, um, you know, volatility due to war reflect
Speaker 1: or or give you some kind of buying opportunity. So,
Speaker 1: met you said something very interesting, which was that the
Speaker 1: CEO meeting was was was held at the end of
Speaker 1: last year. And if you look at the job's data
Speaker 1: we've seen and we just got an update on Friday,
Speaker 1: the labor market is very strong. You know, we've been
Speaker 1: averaging what five six seven hundred thousand highers a month
Speaker 1: over the last six months or so. So the labor
Speaker 1: markets not the problem. Manufacturing is very strong. UM. We're
Speaker 1: we've got inventory or stocking going on. Uh. There there's
Speaker 1: a significant deficit that manufacturers are trying to fill that
Speaker 1: part of the market strong. What what we were talking
Speaker 1: about a few minutes ago was the consumer that UM,
Speaker 1: putting food on the table, putting gas in your car,
Speaker 1: heating your home uh is costing a lot more today
Speaker 1: than it was a year ago. And and that's going
Speaker 1: to begin to have a negative impact on the consumer.
Speaker 1: And if you look at you know, economic growth, corporate
Speaker 1: earnings growth. UM. The peak of the cycle was the
Speaker 1: second quarter a year ago. We're we're not going into
Speaker 1: a recession tomorrow, but but we are back on a
Speaker 1: you know, a significant glide path to something that's a
Speaker 1: lot slower. All right, Phil, great to get some time
Speaker 1: with you. Thanks so much for joining us. Really appreciate
Speaker 1: your insight. Phil Orlando is the chief equity market strategist
Speaker 1: and the head of client portfolio Management at Federated Hermes Um.
Speaker 1: We do see Hinnali stocks that have bounced backed, or
Speaker 1: we did see stocks that bounced back to some extent
Speaker 1: in Europe. Um, they're now back down in the red.
Speaker 1: The CAT is now off one percent, the Dacks is
Speaker 1: down one and a half percent. Here in the US,
Speaker 1: we're seeing the indexes fall further. Maybe as we heard
Speaker 1: Phil talk um, he seemed a little bit not constructive,
Speaker 1: and maybe that's why the DOWN now is down four
Speaker 1: hundred thirty points, the SMP off one point four percent.
Speaker 1: We're gonna talk to pre Amisser right now, Managing director,
Speaker 1: Global head of Rate Strategy over TV Securities. Pre Um,
Speaker 1: really looking forward to getting your take. What is this
Speaker 1: rising price of oil, you know, the the insane amount
Speaker 1: of I guess uncertainty caused by the war in Ukraine.
Speaker 1: Mean for your outlook, sure, thanks for having me, Matt.
Speaker 1: So you know we're in a stack flationary shock. We're
Speaker 1: living through the shock right now. Plus as you said, uncertainty.
Speaker 1: So the market prices in the risk that this could
Speaker 1: get worse and prices could continue to rise. I don't
Speaker 1: think an overall Russia embargo of the oil is priced in.
Speaker 1: So I do think if there's an announcement that the
Speaker 1: US or globally or or US and you are putting
Speaker 1: forth the s embargo, I think you're going to see
Speaker 1: for the rise and commodity prices. And so the the
Speaker 1: rates market is really struggling right now with pricing in
Speaker 1: higher inflation, but as the stagflation aspect of it as well,
Speaker 1: and which is why real rates are declining. At the
Speaker 1: same time, you have the FED that signal that inflation
Speaker 1: was high before the war and therefore they're going to
Speaker 1: start lift off. So it's all about I think the
Speaker 1: you know, next week's psyche is Priceton and the market
Speaker 1: percent price for it. We've taken fifty basis points off,
Speaker 1: but it's really what's after that. Do you think that
Speaker 1: the FED will start to raise more slowly given all
Speaker 1: of these very serious concerns that are out there about
Speaker 1: the direction of inflation here. Yeah, So I think there
Speaker 1: was a big debate before the war within FED officials
Speaker 1: then in the macro community. Should the FED start with
Speaker 1: a bang and then they have to do less later on,
Speaker 1: or do they go gradual? And you could tell every
Speaker 1: FED official was in one camp or the other at
Speaker 1: the margin the war. Absolutely, we should push more FED
Speaker 1: officials into the gradual camp. I think chare powerless in
Speaker 1: that camp, and so we do think that they start
Speaker 1: with but I think they're likely to continue to raise
Speaker 1: in consecutive twenty five basis point increments till year end.
Speaker 1: We have them going five more times after March to
Speaker 1: get close to the one seventy five WI range, which
Speaker 1: is where you're in the realm of neutral. I didn't
Speaker 1: going above neutral, which I don't think the FED wants
Speaker 1: to communicate. That would be really negative because you've got
Speaker 1: the consumer reeling under higher prices plus restrictive policy. But
Speaker 1: right now we're just moving off to Z and so
Speaker 1: you know, circulation is never fun. But if the economy
Speaker 1: has momentum, which it does this wage inflation, we think
Speaker 1: the consumer will be able to handle gradual piece of
Speaker 1: rate increases as well as of course higher prices. You know,
Speaker 1: I'm looking at the f R A O I A
Speaker 1: spread that sounds wonky, but what really it is, Yes,
Speaker 1: and the reason I'm looking at it is is an
Speaker 1: airport in Germany on the show. Alright, alright, you learn
Speaker 1: something new every day. But the thing is, if you
Speaker 1: look at it, it is really blown out. And what
Speaker 1: it means normally is that there are some stresses underneath
Speaker 1: the financial system that the average person isn't necessarily seeing
Speaker 1: that much. I'm wondering what it says to you and
Speaker 1: overall financial stability. Yeah, you know this. And then when
Speaker 1: you say fray, I actually do think of library right away,
Speaker 1: not the airport. So it is a big deal for
Speaker 1: the rates market. And the last week the frau way
Speaker 1: or the library Ois spread is indicating into bank funding issues,
Speaker 1: and you know that that does tighten financial conditions. This
Speaker 1: was the only topic we were talking about last week.
Speaker 1: Of course, now it's shifted to oil, which is also
Speaker 1: tightening conditions. But what's happening is I think the market's
Speaker 1: nervous that does the war result in the lack of
Speaker 1: availability of funding, in which case, now you've got a
Speaker 1: funding you've already credit issues, and now do you have
Speaker 1: a funding crisis. I would actually now I'm a little
Speaker 1: less worried about the funding side. There's a lot of
Speaker 1: money in the system. Banks have excess reserves, um you know,
Speaker 1: money market funds have not seen massive increases on the
Speaker 1: prime side, which is what we had going into the
Speaker 1: COVID crisis. We just lived through the COVID sort of
Speaker 1: deleveraging EPI, so I don't think there has been more
Speaker 1: leverage built up. So is the cost of funding going up? Absolutely,
Speaker 1: and that's what that library spread is showing you. But
Speaker 1: we've got um, you know, liquority in the system, and
Speaker 1: we've got center bank facilities and they're not getting tapped.
Speaker 1: So right now, the way things stand, I think there
Speaker 1: is higher cost, but it's still not systemic enough where
Speaker 1: the FED needs to step in or where we have
Speaker 1: to get concerned that somebody doesn't get funding. I think
Speaker 1: the need for funding is lower, but credit risk is
Speaker 1: absolutely getting repriced higher, and that should show up in
Speaker 1: wider front end as well, as you know longer dated
Speaker 1: credit spread, we only have thirty seconds, so ask a
Speaker 1: gigantic question. Um, we were looking at the librar or
Speaker 1: spread last week because of his old and pos are
Speaker 1: and then on I think people kind of dismissed that
Speaker 1: alarmist warning that we got from him on last weekend.
Speaker 1: But then he had a great podcast with Joe Wisenhal
Speaker 1: and Tracy Alloway talking about the dollar as a world
Speaker 1: reserve currency. Is that going to change range due to
Speaker 1: this war? So if we're talking long term, would um,
Speaker 1: you know, people outside the US want an alternative show,
Speaker 1: but is there an alternative? I have to say, like
Speaker 1: the liquidity, the size, the rule of law, certain things
Speaker 1: that work for the dollars a reserve currency, I would
Speaker 1: struggle to find an alternative. So you know it's a
Speaker 1: desire there, yes, but I don't know if the dollar
Speaker 1: will be replaced anytime soon. It's the same question you
Speaker 1: can make with swift and the the reason the dollar
Speaker 1: works that everyone uses it, so there's that network effect.
Speaker 1: So I'm a little less concerned that, you know, lack
Speaker 1: of alternatives will mean that that the dollar actually stays
Speaker 1: a reserve acid. It's a question we're asking renewed now
Speaker 1: that Visa, MasterCard, and MX have all um stopped their
Speaker 1: business in Russia and now everyone on that side of
Speaker 1: the Iron curtain, if I can use that phrases, looking
Speaker 1: for UM is looking for a solution again. Pretty great.
Speaker 1: Talking to your preamisra There, managing director and the global
Speaker 1: head of rate strategy at TV Securities. Everett Milman joins
Speaker 1: US chief market analystic Gainesville Coins to talk about commodities,
Speaker 1: and I guess we'll start specifically, Everett with gold. We
Speaker 1: saw it run up past two thousand dollars for a
Speaker 1: little while today. UM, if Russian bullion is effectively banned
Speaker 1: new gold out of Russia's band, how important is that?
Speaker 1: How important is their production? Well, they are um one
Speaker 1: of the major holders of gold, and they certainly make
Speaker 1: up some large proportion of global demands. But the main
Speaker 1: impact of that move that I would be looking for
Speaker 1: is banning Russian gold from you know, London and access
Speaker 1: to Western trade really does push them into the arms
Speaker 1: of Shanghai. And there are a few other global exchange
Speaker 1: exchanges where Russia could theoretically get its gold to market.
Speaker 1: So in some sense, in the short term, yes, it
Speaker 1: it is a negative for Russian gold, but ultimately, in
Speaker 1: the long run it may change some of the kind
Speaker 1: of alliances and um, the trade of gold in the
Speaker 1: east to west. We may see Russia really turned more
Speaker 1: to Beijing into Shanghai for its goal. By the way,
Speaker 1: how how important is gold as a reserve currency store
Speaker 1: of wealth? As we see you know, central banks around
Speaker 1: the world telling a large autonomous nation you can no
Speaker 1: longer have access to the dollars that we were holding
Speaker 1: for you, you know, effectively hitting the green back as
Speaker 1: a world reserve currency pretty hard, right. UM. I think
Speaker 1: it is still crucial, although gold is often overlooked because
Speaker 1: it is seen as his barbarous relic that we no
Speaker 1: longer directly back our money with gold, of course, UM.
Speaker 1: But as you said, central banks around the world hold
Speaker 1: many many tons of gold. UM. And we've been seeing
Speaker 1: that on the COMEX, in the l B m A
Speaker 1: that there have been outflows. There's been quite a bit
Speaker 1: of gold kind of taken out of the over the
Speaker 1: counter trading markets. UM. And that implies that oftentimes there
Speaker 1: are large sovereign buyers behind those moves. So given that, UM,
Speaker 1: not just Russia, but anyone who's willing to do business
Speaker 1: with Russia could be cut off from Western finance and
Speaker 1: from Western banking. That does perhaps highlight gold role in
Speaker 1: the future that it is UM still a zero risk
Speaker 1: asset that has the same characteristics as a reserve currency,
Speaker 1: even though UM I don't believe any of this directly
Speaker 1: threatens the dollar status. All right, Everett, thanks so much
Speaker 1: for joining us every moment in their chief market analyst
Speaker 1: at Gainesville Coins. Hopefully get spent a little bit more
Speaker 1: time with you later. I'm looking at the SMP right now,
Speaker 1: Seale breaking it down by industry group. You gotta look
Speaker 1: at sp X L one or L two or L three.
Speaker 1: It's kind of a pain. You don't do that with
Speaker 1: the toxics D but I'll look at it level one.
Speaker 1: I'm trying to see how chips have done. I guess
Speaker 1: you've got to break it down to infotech. I suppose
Speaker 1: I could just look at the Socks Index, right is
Speaker 1: that the Philly Socks Index to see UM how chips
Speaker 1: have done in terms of semiconductors. Or I could look
Speaker 1: at the eye shares e t F to see how
Speaker 1: they've done year to date. Because we've been talking about
Speaker 1: the supply chain problem and chip shortage for so long, UM,
Speaker 1: but the industry has lost a lot of market cap
Speaker 1: since two began. Let's bring in Lincoln Clark to talk
Speaker 1: about what's going on and why. He's a partner of KPMG,
Speaker 1: but he's also the global leader of their semiconductor practice. Lincoln,
Speaker 1: thanks so much for joining us. UM. How is the
Speaker 1: semi conductor industry faring right now? There's such as we
Speaker 1: all have discovered, such a crucial part of the manufacturing
Speaker 1: process for almost everything that we buy in you is UM,
Speaker 1: but they haven't been rallying this year. Good morning, Matt,
Speaker 1: thank you for making some time. And uh yeah, the
Speaker 1: semi conductor industry, you're right if you you were talking
Speaker 1: about the socks tracker, they're certainly some market cap has
Speaker 1: been taken out of it. But we undertook a survey
Speaker 1: of semiconductor executives in the fourth quarter so October November
Speaker 1: last year, looking out to two, and the confidence that
Speaker 1: is at an all time high. UM. You know, we're
Speaker 1: focused on not just revenue growth, but capex, head count,
Speaker 1: R and D and profitability. So notwithstanding the market cap
Speaker 1: changes that you're referring to, their the executives themselves are
Speaker 1: very very positive this. This is a great point and
Speaker 1: I don't know if you've seen it, Yeah, but Matt Winkler,
Speaker 1: or Editor in Chief emeritus, wrote an opinion piece this
Speaker 1: morning about um C suite confidence. Basically, then the CEOs
Speaker 1: of companies, not just in semi inductors, but across the
Speaker 1: SMP five D are really optimistic for future growth, really
Speaker 1: optimistic for profits, adding more employees than they have at
Speaker 1: any time over the last decade. UM is the semiconductor
Speaker 1: industry ramping up um the same way. I mean, we've
Speaker 1: seen so many Capex reports in terms of investment. Are
Speaker 1: they hiring people? Are they bringing production back home? Well,
Speaker 1: the we've been doing this confidence index for seventeen years
Speaker 1: with the Global Semi Conductor Alliance, and the confidence that
Speaker 1: they exhibited in twenty two was the highest it's been.
Speaker 1: If you think about the drivers that are behind the
Speaker 1: semi conductor, as you mentioned, it's become very visible to
Speaker 1: everybody that semi conductors are in pretty much everything that
Speaker 1: might impact our work life, personal life. But the drivers
Speaker 1: of that. You know a lot of businesses are going
Speaker 1: from work from home to now a hybrid of work
Speaker 1: from office and home. That's gonna you know, drive demand
Speaker 1: for relooking at the office, infrastructure, cloud and digitization continues.
Speaker 1: And then you know automotive, which has become i think
Speaker 1: very visible and industrial. You know, they still have a
Speaker 1: desperately seeking semi conductor's mentality, I think. And then you
Speaker 1: have your you know, wireless vi G and gaming that continues.
Speaker 1: Profitability I think is going to be a little bit
Speaker 1: more stressed this year. As um Our survey would say that,
Speaker 1: you know, thirty four percent of our executives think their
Speaker 1: revenue is growing to grow over but you know, nearly
Speaker 1: seventy say that they think the profitability might only grow
Speaker 1: in the sort of want to ten percent. So some
Speaker 1: of the costs of production, logistics, transportation, you know, that's
Speaker 1: playing through a little bit on profitability. But top line,
Speaker 1: very very confident, high growth. I mean, how does this
Speaker 1: global geopolitical story really play into things here? It just
Speaker 1: sounds like a lot of these executives are speaking, um,
Speaker 1: you know, before Russia's invasion of Ukraine. Yeah, its Sonali,
Speaker 1: thank you. I mean, the you know, the pandemic and
Speaker 1: some of the geopolitical um pieces of the semiconductor industry
Speaker 1: had you been going on for a period of time.
Speaker 1: So I think executives have had that in the back
Speaker 1: of the mind as the setting strategy. Clearly, the you know,
Speaker 1: the situation of the last two or two and off
Speaker 1: weeks or so here just creates and continues to create
Speaker 1: more uncertainty, just just going to exacerbate the supply chain
Speaker 1: issues that the semiconductor and many industry other industries to
Speaker 1: be fair or going to face. Having said that, Lincoln,
Speaker 1: how important is how important are Russia and Ukraine to
Speaker 1: semiconductor production? I mean, um, do they supply you know, wafers, silicon,
Speaker 1: anything that you need. Russia doesn't have any substantial or
Speaker 1: Ukraine any substantial leading edge wafer capacity. Um. You know
Speaker 1: there are some core elements though that you know, filter
Speaker 1: into semic production and you've probably seen some just qushing
Speaker 1: around palladium for example. But said, yes, that's reacting a
Speaker 1: little bit. Um, So if if a semi conductor company,
Speaker 1: you know, I had that supplier in that neighborhood as
Speaker 1: a you know the first source, obviously you know the
Speaker 1: second and said sources. But I think we'll be driving
Speaker 1: a lot of proteoma activity right now. Lincoln, great to
Speaker 1: get some time with you. Thanks so much for joining
Speaker 1: us on such an important issue. Lincoln Clark is a
Speaker 1: partner at KPMG. He is also KPMG's global leader of
Speaker 1: the Semiconductor practice. Thanks for listening to the Bloomberg Markets podcast.
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
Speaker 1: on Twitter at Matt Miller, vree on Fall Sweeney I'm
Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
Speaker 1: always catch us worldwide at Bloomberg Radio.