Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Faroe and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, financing, investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app. So I'm
Speaker 1: gonna get right to it. With Jobs Day coming up
Speaker 1: on Friday, ism statistics today, all of it coming back
Speaker 1: down to fellow reserve policy and what is so important
Speaker 1: understand and folks, this is out at the Arch of
Speaker 1: Saint Louis on the Mississippi River. It's important when you
Speaker 1: are a Saint Louis Cardinal and you're on injured reserve.
Speaker 1: So Adam Wainwright of the Saint Louis Cardinals saying the
Speaker 1: Star Spangled banner on opening Day for the Cardinals, which
Speaker 1: clearly sets us up for next year. On opening day,
Speaker 1: Michael McKee, we expect James Bullard of the Saint Louis
Speaker 1: fed to sing Opening Day for the Cardinals. Well, I
Speaker 1: suppose I could make that my first question Tom to
Speaker 1: Jim Bullard. He is the president of the Saint Louis
Speaker 1: FED and he joins us now good morning, Jim. Tom
Speaker 1: wants to know if you're going to sing the national
Speaker 1: anthem on opening day next half. I have no plans
Speaker 1: to do that. Well, as Rosanne Rosenta dat I used
Speaker 1: to say on Saturday Night Live, it's always something. We
Speaker 1: were in the middle of a quote unquote banking crisis
Speaker 1: and now we've got another oil shock this morning. Everybody
Speaker 1: waking up to headlines and say maybe we go to
Speaker 1: one hundred dollars. So, as a FED official, when you
Speaker 1: see that, how are you reacting well on the financial stress?
Speaker 1: I think you know this is a post Dodd Frank world,
Speaker 1: and I do think that the reaction to the banking
Speaker 1: problems was swift and was appropriate and both here in
Speaker 1: the US and overseas, and so I think you know
Speaker 1: the idea that there are macro predential tools that you
Speaker 1: can use in that kind of situation to calm things down.
Speaker 1: That seems to have worked so far. You never know
Speaker 1: if there's further things happening, but if if there are,
Speaker 1: we can react with macro predential tools again. And then
Speaker 1: on the policy the monetary policy side, we can still
Speaker 1: proceed to fight inflation and get inflation down during twenty
Speaker 1: twenty three and twenty twenty four back to targets. So
Speaker 1: I think you know this idea that you can walk
Speaker 1: and chew gum at the same time. You've got the
Speaker 1: macro predential tools for financial stress and you've got monetary
Speaker 1: policy to fight inflation. We can do both as long
Speaker 1: as the financial stress doesn't morph into something much larger.
Speaker 1: And so far, so good. But knock on wood, you're
Speaker 1: never sure what's going to be around the corner. But
Speaker 1: does one hundred dollars oil or the idea at least
Speaker 1: of this oil shock complicate your job? Yeah, well, of
Speaker 1: course oil is always the oil prices is always important.
Speaker 1: I would have expected somewhat higher oil prices anyway, with
Speaker 1: China coming back sooner than expected during the first half
Speaker 1: here of twenty twenty three, and with Europe scurring recession,
Speaker 1: so both of those and strong data in the US,
Speaker 1: all of those are pretty bullish factors I would say
Speaker 1: for the oil market. This was a surprise, that OPEC decision,
Speaker 1: but whether it will have a lasting impact, I think
Speaker 1: is an open question. Now you had already moved up
Speaker 1: your estimate of where the Fed funds rate needed to
Speaker 1: be to bring down inflation. You were talking an effective
Speaker 1: radar around five point six percent. Does this change that
Speaker 1: calculation at all? And can you explain why you think
Speaker 1: we need to go that high to hit the terminal rate?
Speaker 1: I think, well we will need I think we'll need
Speaker 1: to get over five percent. The committee says that the
Speaker 1: median person on the committee says a little over five percent.
Speaker 1: I'm a little higher than that. I think inflation will
Speaker 1: be stickier. And you know, I'd look mostly at the
Speaker 1: core measures of inflation, like PC core inflation or the
Speaker 1: Dallas Fed trim mean, which really hasn't come down very
Speaker 1: much at all, still in the four percent range, so,
Speaker 1: you know, four point six or something like that. So
Speaker 1: so we're still talking about a lot of inflation, more
Speaker 1: than double our inflation target on that basis, and oil
Speaker 1: prices fluctuated around it's hard, it's hard to track exactly
Speaker 1: some of that might feed into inflation and make our
Speaker 1: job a little bit more difficult. Just north of us
Speaker 1: this morning, in Oakbrook, Illinois, McDonald's has told its corporate
Speaker 1: officials to stay home this week because they're going to
Speaker 1: start notifying people that they're being laid off. How concern
Speaker 1: are you with all these headlines about layoffs coming in
Speaker 1: that you may go too far? Yeah, the labor market
Speaker 1: is super strong still, many more job openings, and there
Speaker 1: are unemployed workers. I think if a worker does get
Speaker 1: disrupted today that they should, you know, let's hope and
Speaker 1: pray for them that they'll be able to get a
Speaker 1: new job. But it's still a very robust labor market
Speaker 1: with three point eight percent unemployment. You know, the Kansas
Speaker 1: City FEDS Labor Market Conditions Index still at a super
Speaker 1: high level. Jobs reports have been very very strong in
Speaker 1: twenty twenty three here, so you're really not seeing much
Speaker 1: ebbing in the labor market. I think there's structural issues
Speaker 1: where labor supplies running under labor demand, and that's going
Speaker 1: to take quite a while to settle down. What are
Speaker 1: you expecting for Friday the job's reporting? I don't I
Speaker 1: don't have a number for you, but anecdotal information seems
Speaker 1: to indicate that their firms are still scrambling for workers.
Speaker 1: They're doing some other things that are strategies that might
Speaker 1: slow this down a little bit. There's substituting capital for labor.
Speaker 1: That makes a lot of sense in this situation, but
Speaker 1: I just think that on the whole, they still need workers. Well,
Speaker 1: if they still need workers and supply is running below demand,
Speaker 1: that has to complicate the idea of monetary policy, because
Speaker 1: that's not what's supposed to happen when you're raising rates
Speaker 1: as much as you have. That's true, although I'm not
Speaker 1: as oriented towards the Phillips curve as many, But I
Speaker 1: think the way I would state it is that the
Speaker 1: strong labor market gives us headroom to fight inflation. It's
Speaker 1: a good time to be fighting inflation and trying to
Speaker 1: get inflation back to target while the labor market is
Speaker 1: as strong as it is, and even workers that get
Speaker 1: disrupted hopefully will be able to find a new job
Speaker 1: and maybe a better job. In this situation, you have
Speaker 1: critics around the country and certainly on Capitol Hill. That's
Speaker 1: say workers are finally getting their share, wages are going up,
Speaker 1: not quite keeping up with inflation, but much better than
Speaker 1: they had been, and here comes the Fed wants to
Speaker 1: squash them down again and cut the wage increases in
Speaker 1: order to bring down inflation. What do you say to
Speaker 1: those people, Well, what are they talking about? Real wages
Speaker 1: have gone down for most people, so the inflation is
Speaker 1: hurting them. So inflation is hurting the average worker. So
Speaker 1: you don't think the FED has a perception problem with
Speaker 1: America these days. You'd like to get rid of the
Speaker 1: inflation so that people can get there, get a better
Speaker 1: labor market outcome, and be able to afford the goods
Speaker 1: that they have to purchase. So I think there's been
Speaker 1: a lot of confusion around this issue. It's true that
Speaker 1: some workers and some categories got more than the increase
Speaker 1: in wages that more than made up for inflation, but
Speaker 1: for many workers that hasn't been the case. They've been
Speaker 1: lagging behind in real wages. And that's why you'd like
Speaker 1: to bring inflation under control and get a better outcome
Speaker 1: for the labor market. Markets have been struggling this morning
Speaker 1: to figure out what's going to happen going forward with
Speaker 1: the oil price headlines. But going into this weekend they
Speaker 1: were pricing four rake cuts over the coming year. Why
Speaker 1: are you when wall streets so far apart in what
Speaker 1: you say is likely to happen, They should listen to me.
Speaker 1: So here's what I think. I think I put eighty
Speaker 1: percent probability that the financial stress will decline, and then
Speaker 1: make that your base baseline forecast. I think that's for
Speaker 1: low growth, but growth continued, pretty strong labor market and
Speaker 1: inflation coming down. That's got eighty percent probability. Maybe now
Speaker 1: I'd go to eighty five percent probability or something. And
Speaker 1: then the other branch where financial stress gets worse, you know,
Speaker 1: then we'll have to bring out more macroprudential tools and
Speaker 1: it'll be a stressful situation, and all bets are off
Speaker 1: in that situation. The problem with Wall Street is they've
Speaker 1: got too much probability on that branch and not enough
Speaker 1: probability on the other branch. So I think they're going
Speaker 1: to reprice to the slow growth scenario, and so I
Speaker 1: think we'll see this change in the weeks. I had
Speaker 1: here go back to the banks for a second. In February,
Speaker 1: the staff at the Open Market Committee presented on the
Speaker 1: idea of these asset mismatches on bank balance sheets. So
Speaker 1: you were kind of aware that this could be a problem.
Speaker 1: Was there something that the Fed missed or didn't do,
Speaker 1: or should have done to keep the bank situation, we'll
Speaker 1: call it from developing as it has. I can't talk
Speaker 1: about what was presented at their home c ME, so
Speaker 1: I will neither confirm nor deny that. But my own
Speaker 1: staff here was certainly well aware of issues with banks.
Speaker 1: We talked to bankers all the time. We're a regulator
Speaker 1: of banks, and so we knew that there were issues
Speaker 1: about let's say, some deposits running off to non bank
Speaker 1: entities that wanted to pay a higher rate. That's occurring,
Speaker 1: but I think at a rate that's certainly manageable for
Speaker 1: at least for the banks that we talked to. They've
Speaker 1: got some securities holdings that have lost value as interest
Speaker 1: rates have gone up, but that also I think is
Speaker 1: manageable for nearly all institutions. So that you know, they're
Speaker 1: running businesses and they've got challenges, but they've also they're
Speaker 1: also petitive, and they'll they figure out ways to manage
Speaker 1: the situation. I would also say anecdotally that most banks
Speaker 1: say loan demand is strong, and they actually haven't sentives
Speaker 1: to make loans at the higher interest rates. If they
Speaker 1: can in order to offset some of the older loans
Speaker 1: that they have that are that are at lower interest rates, well,
Speaker 1: we got to send it back to Tom. But given
Speaker 1: how Tom introduced us, you've got predictions for interest rates,
Speaker 1: growth GDP, the end of the year Cardinals prediction. I'm
Speaker 1: sure it'll be a great year for the Cardinals. I
Speaker 1: think they'll win the division and I'll do very well.
Speaker 1: Another victory yesterday, so excellent. All right, Tom Keane, we'll
Speaker 1: send it back to you and the folks in New
Speaker 1: York given the fact that Jim Bullard is so optimistic
Speaker 1: about the Cardinals, will take that as a good sign
Speaker 1: for the economy, we hope. And we like the pictures
Speaker 1: clock as well. Michael McKee, thank you so much for
Speaker 1: getting back to a National League baseball Here. James Bullard
Speaker 1: of the FED, our John G. Wilson and Don lem
Speaker 1: report here an update on the Blackstone Real Estate Income Trust.
Speaker 1: And they're talking about the liquidity the redemptions as well
Speaker 1: that we're seeing. And to put this in scale, this
Speaker 1: trust was up eight percent last year. I want to
Speaker 1: make clear, even with the withdrawal requests they're seeing, they're
Speaker 1: seeing some rent stability within the Blackstone Real Estate Income Trust.
Speaker 1: Stay with us. This is Bloomberg Now with the latest
Speaker 1: news from New York City and around the world. Here's
Speaker 1: Michael Barr that high to hit the terminal rate, I think,
Speaker 1: well we will need I think we'll need to get
Speaker 1: over five percent. The committee says that the median person
Speaker 1: on the committee says a little over five percent. I'm
Speaker 1: a little higher than that. I think inflation will be stickier,
Speaker 1: And you know, I'd look mostly at the core measures
Speaker 1: of inflation, like PC core inflation or the Dallas Fed
Speaker 1: trim mean, which really hasn't come down very much at all,
Speaker 1: still in the four percent range, so you four point
Speaker 1: six or something like that. So so we're still talking
Speaker 1: about a lot of inflation, more than double our inflation
Speaker 1: target on that basis, and oil prices fluctuated around it's
Speaker 1: it's hard to track exactly some of that might feed
Speaker 1: into inflation and make our job a little bit more difficult.
Speaker 1: Just north of us this morning, in Oakbrook, Illinois, McDonald's
Speaker 1: has told its corporate officials to stay home this week
Speaker 1: because they're going to start notifying people that they're being
Speaker 1: laid off. How concerned are you with all these headlines
Speaker 1: about layoffs coming in that you may go too far? Yeah,
Speaker 1: the labor market is super strong. Still many more job openings,
Speaker 1: and there are unemployed workers. I think if a worker
Speaker 1: does get disrupted today that they should you know, let's
Speaker 1: hope and pray for them that they'll be able to
Speaker 1: get a new job. But it's still a very robust
Speaker 1: labor market with three point eight percent unemployment. Uh, you know,
Speaker 1: the Kansas City FEDS Labor Market Conditions Index still at
Speaker 1: a super high level. Jobs reports have been very, very
Speaker 1: strong in twenty twenty three here, so you're really not
Speaker 1: seeing much ebbing in labor market. I think there are
Speaker 1: structural issues where labor supplies running under labor demand, and
Speaker 1: that's going to take quite a while to settle down.
Speaker 1: What are you expecting for Friday the jobs reporting? I
Speaker 1: don't have an I don't have a number for you,
Speaker 1: but anecdotal information seems to indicate that their firms are
Speaker 1: still scrambling for workers. They're doing some other things that
Speaker 1: are strategy. Gee, it might slow this down a little bit.
Speaker 1: There's substituting capital for labor that makes a lot of
Speaker 1: sense in this situation. But I just think that on
Speaker 1: the whole, they still need workers. Well, if they still
Speaker 1: need workers and supply is running below demand, that has
Speaker 1: to complicate the idea of monetary policy, because that's not
Speaker 1: what's supposed to happen when you're raising rates as much
Speaker 1: as you have. That's true, although I'm not as oriented
Speaker 1: towards the Phillips curve as many, But I think the
Speaker 1: way I would state it is that the strong labor
Speaker 1: market gives us headroom to fight inflation. It's a good
Speaker 1: time to be fighting inflation and trying to get inflation
Speaker 1: back to target while the labor market is as strong
Speaker 1: as it is, and even workers that get disrupted hopefully
Speaker 1: will be able to find a new job and maybe
Speaker 1: a better job. In this situation, you have critics around
Speaker 1: the country and certainly on Capitol Hill. That's say, workers
Speaker 1: are finally getting there or share wages are going up,
Speaker 1: not quite keeping up with inflation, but much better than
Speaker 1: they had been, and here comes the FED wants to
Speaker 1: squash them down again and cut the wage increases in
Speaker 1: order to bring down inflation. What do you say to
Speaker 1: those people, Well, what are they talking about? Real wages
Speaker 1: have gone down for most people, so the inflation is
Speaker 1: hurting them. So inflation is hurting the average worker. So
Speaker 1: you don't think the FED has a perception problem with
Speaker 1: America these days? You'd like to get rid of the
Speaker 1: inflation so that people can get there, get a better
Speaker 1: labor market outcome, and be able to afford the goods
Speaker 1: if they have to purchase. So I think there's been
Speaker 1: a lot of confusion around this issue. It's true that
Speaker 1: some workers and some categories got more than the increase
Speaker 1: in wages that more than made up for inflation, but
Speaker 1: for many workers that hasn't been the case. They've been
Speaker 1: lagging behind in real wages. And that's why you'd like
Speaker 1: to bring inflation under control and get a better outcome
Speaker 1: for the labor market. Markets have been struggling this morning
Speaker 1: to figure out what's going to happen going forward with
Speaker 1: the oil price headlines. But going into this weekend they
Speaker 1: were pricing four rake cuts over the coming year. Why
Speaker 1: are you when wall streets so far apart in what
Speaker 1: you say is likely to happen? They should listen to me.
Speaker 1: So here's what I think. I think I put eighty
Speaker 1: percent probability that the financial stress will decline and then
Speaker 1: make that your base baseline forecast. I think that's for
Speaker 1: low growth, but growth continued, pretty strong, labor market and
Speaker 1: inflation coming down. That's got eighty percent probability. Maybe now
Speaker 1: I'd go to eighty five percent probability or something, and
Speaker 1: then the other branch where financial stress gets worse. Then,
Speaker 1: you know, then we'll have to bring up more macro
Speaker 1: prudential tools and it'll be a stressful situation, and all
Speaker 1: bets are off in that situation. The problem with Wall
Speaker 1: Street is they've got too much probability on that branch
Speaker 1: and not enough probability on the other branch. I think
Speaker 1: they're going to reprice to the slow growth scenario, and
Speaker 1: so I think we'll see this change in the weeks.
Speaker 1: I had here go back to the banks for a second.
Speaker 1: In February, the staff at the Open Market Committee presented
Speaker 1: on the idea of these asset mismatches on bank balance sheets.
Speaker 1: So you were kind of aware that this could be
Speaker 1: a problem. Was there something that the FED missed or
Speaker 1: didn't do, or should have done to keep the bank situation,
Speaker 1: we'll call it from developing as it has. I can't
Speaker 1: talk about what was presented at their homes, so I
Speaker 1: will neither confirm nor deny that. But my own staff
Speaker 1: here was certainly well aware of issues with banks. We
Speaker 1: talked to bankers all the time, where a regulator of banks,
Speaker 1: and so we knew that there were issues about let's say,
Speaker 1: some deposits running off to non bank entities that wanted
Speaker 1: to pay a higher rate. That's occurring, but I think
Speaker 1: at a rate that's certainly manageable for at least for
Speaker 1: the banks that we talked to. They've got some securities
Speaker 1: holdings that have lost value as interest rates have gone up,
Speaker 1: but that also, I think is manageable for nearly all institutions.
Speaker 1: So that you know, they're running businesses and they've got challenges,
Speaker 1: but they've also they're also competitive, and they'll they figure
Speaker 1: out ways to manage the situation. I would also say
Speaker 1: anecdotally that most banks say loan demand is strong and
Speaker 1: they actually have incentives to make loans at the higher
Speaker 1: interest rates if they can in order to offset some
Speaker 1: of the older loans that they have that are that
Speaker 1: are at lower interest rates. Well, we got to send
Speaker 1: it back to Tom. But given how Tom introduced us,
Speaker 1: you've got predictions for interest rates growth GDP, the end
Speaker 1: of the year Cardinals prediction. I'm sure it'll be a
Speaker 1: great year for the Cardinals. I think they'll win the
Speaker 1: division and they'll do very well. Another victory yesterday, so excellent.
Speaker 1: All right, Tom Keane, we'll send it back to you
Speaker 1: and the folks in New York. Given the fact that
Speaker 1: Jim Bullard is so optimistic about the Cardinals, will take
Speaker 1: that as a good sign for the economy. And we
Speaker 1: like the pitcher's clock as well. Michael McKee, thank you
Speaker 1: so much for getting back to a National League baseball.
Speaker 1: Here James Bullard of the Fed. Right now, the big
Speaker 1: deal is to speak with John Writing. He's a chief
Speaker 1: economic advisor at Breen Capital, and there's any number of
Speaker 1: ways ago here to go here, John, I want to
Speaker 1: talk with James Bullard of Saint Louis. I'm going to
Speaker 1: say you have been in the camp with Bullard looking
Speaker 1: for some form of not sustained inflation, but that the
Speaker 1: inflation worry won't go away. Bullard making clear we're putting
Speaker 1: too much focus on the banking crisis and not enough
Speaker 1: a monetary policy. One oh one. Do you agree? I
Speaker 1: do agree. I think it's very important to you just
Speaker 1: realize that the US is a very strong capital markets
Speaker 1: and banking system, and it's a very different situation than
Speaker 1: back in two thousand seven, two thousand and eight, and
Speaker 1: the financial crisis that took down bear Stearns, Lehman Brothers, AIG.
Speaker 1: It's a it's a very different world. So I think
Speaker 1: there is too much focus on that. The responses have
Speaker 1: been very swift, very strong. We can argue what the
Speaker 1: r origins of this is, but we do know that
Speaker 1: in effect there's an implicit guarantee of all deposits, regardless
Speaker 1: of deposit insurance. There's some reform that needs to be
Speaker 1: considered later, but that was essentially what Powell promised the
Speaker 1: last FMC press conference. We're going to rip up the
Speaker 1: script here with John writing, who lived the bear Stearns crisis.
Speaker 1: I would say one of the great themes right now, John,
Speaker 1: is it James Diamond standing out front of your bear
Speaker 1: Stearns headquarters on that tumultuous day. His hindsight is he
Speaker 1: made a massive mistake. Are we repeating the foibles of
Speaker 1: bear Stearns and Lehman Brothers or we learned our lessons
Speaker 1: over fifteen years? Well, I think we've learned some lessons.
Speaker 1: There's no doubt about it that the higher capital levels,
Speaker 1: the stress tests have done a lot to strengthen the
Speaker 1: underlying banking system. But you have to have significant questions
Speaker 1: about how that was implemented by supervisors, because if you
Speaker 1: look at the case of Silicon Valley Bank, they had
Speaker 1: over fifteen billion dollars of losses in their health to
Speaker 1: maturity portfolio, which doesn't get run through the P and
Speaker 1: L statement, doesn't get scored against their capital, so they
Speaker 1: had almost all of their capital. The size of their
Speaker 1: capital was almost the same magnitude as the size of
Speaker 1: their losses in the health to maturity portfolio. Now, you
Speaker 1: can only hold something to maturity if you have the
Speaker 1: funding to hold things to maturity. And that's where there
Speaker 1: is a similarity to two thousand and eight, which and
Speaker 1: in many ways what happened there was so much faster.
Speaker 1: But we know how to fix bank runs. Deposit insurance
Speaker 1: fixes bank runs, and we've had that. We've had some
Speaker 1: stabilization in the situation there, and the banking system as
Speaker 1: a whole looks very different rims of the size of
Speaker 1: their health to maturity losses against the overall capital. I
Speaker 1: only get back on script here because the time is
Speaker 1: so important, folks for just joining us on the radio,
Speaker 1: John writing and bring capital with us this morning. And John,
Speaker 1: I've got a dovetail two themes this week, and one
Speaker 1: was Adam Two's is phenomenal essay in the ft, alluding
Speaker 1: to the delusion or the imagery, the illusion that nominal
Speaker 1: GDP gives us. You've written about this for years and
Speaker 1: I pull it over to Dominic constant X credit suite
Speaker 1: now maszooo and the idea of we've got an odd
Speaker 1: nominal GDP because inflation is set high, we have a
Speaker 1: certain form of restriction. And then the Constant's phrase, are
Speaker 1: we super restrictive right now? All the dynamics that are
Speaker 1: going on? Does Powell have a restriction he didn't expect. Well,
Speaker 1: let's start with one definition restrictive, which is do we
Speaker 1: have restrict in monetary policy? And I don't think that
Speaker 1: you know, the fetch seeking that sufficiently restrict level of policy.
Speaker 1: I don't think they're there, ye, I mean, Jim rightly,
Speaker 1: rightly pointed out that the underlying inflation rate is in
Speaker 1: the force, and he cited the Dallas fed all the
Speaker 1: other measures pretty firmly in the mid four percents, which
Speaker 1: means that interest rates, the policy rate adjusted for inflation,
Speaker 1: that's only barely turned positive. Now there is a question
Speaker 1: how much does a credit tightening have an impact here
Speaker 1: and does that substitute for additional rate hikes. But Jim
Speaker 1: also said that loan demand has been strong, so we
Speaker 1: have to see how that plays out. But when I
Speaker 1: said we've you know, the USC's twin markets, where that
Speaker 1: if the banking system has issues, there's still the capital markets.
Speaker 1: In many ways, this is the reverse of the long
Speaker 1: term capital episode back in nineteen ninety eight, where the
Speaker 1: capital markets froze up and the banking system was there
Speaker 1: to lend. So we do have to remember that there
Speaker 1: were banks as well as small banks. The big banks
Speaker 1: will get bigger out of this as they did out
Speaker 1: to the less financial crisis. They'll be i think, willing
Speaker 1: to lend, willing to take market share. And then there's
Speaker 1: also the capital market. So let's look at things like
Speaker 1: the NFIB survey and see if the availability of credit
Speaker 1: becomes a constraining issue on businesses. It hasn't been up
Speaker 1: until this point major concern for them. We don't have
Speaker 1: to turn us into a history lesson Steve Leesman with
Speaker 1: a great essay He's over the death Star. Steve Leesman
Speaker 1: with a great essay years ago. Neo Viccellian theory and
Speaker 1: we don't need to go back to nineteen ten nineteen
Speaker 1: twenty theory. But what we have here is a whole
Speaker 1: body of people, John, who have never lived in a
Speaker 1: normalized interest rate environment. I want you to speak to
Speaker 1: our audience on radio and television that have never lived Oh,
Speaker 1: that's the way the yield curve should look. Oh, we're
Speaker 1: going to get out to the oddity of a normal
Speaker 1: rate environment. What's going to be like? You know, it's
Speaker 1: very funny referring to Steve Leesman's essay because that came
Speaker 1: out of a conversation that I had with Steve and
Speaker 1: we were talking about Vixcel before it became popularized. This
Speaker 1: concept of the natural rate of interest. Now, the FED
Speaker 1: has argued coming I'd work from John Williams for a
Speaker 1: long time, that that natural interest rate of interest has
Speaker 1: been depressed and became very low secular stagnation. Yet if
Speaker 1: you look now in the markets, the markets are saying
Speaker 1: real interest rates are going to be positive at a
Speaker 1: significant level for the next decade. We got as high
Speaker 1: as one point seven percent. That was maybe a bit high.
Speaker 1: We were around one on a quarter percent at the
Speaker 1: end of last week. So if you have a real
Speaker 1: rate of one on a quarter percent, and you got
Speaker 1: to get inflation down. But right now you're talking inflation
Speaker 1: running underlying terms of four and a half percent. Where
Speaker 1: does that long term rate of interest belong right now?
Speaker 1: The where does it below? Would We're gonna run out
Speaker 1: of time? And this is critical Ken Rogoff's in the
Speaker 1: camp with you versus what Olivia is saying. We're gonna
Speaker 1: talk to Olivia Blanchard at the IMF meetings here in
Speaker 1: ten days or so. With that said, where is your
Speaker 1: new two percent level? Does it have to be elevated higher?
Speaker 1: As Adam Posen says, well, what I think the Fed
Speaker 1: has to raise its long term neutral rate of interest
Speaker 1: from half a percent adjusted for inflation to something more
Speaker 1: like one one at a quardum percents where the markets are.
Speaker 1: I would say that as a long term interest rate,
Speaker 1: allowing for inflation and certainty, probably should be thinking four percent.
Speaker 1: You're a four percent anchor for the ten year um,
Speaker 1: and I'm probably for the funds rate going forward. This
Speaker 1: idea that two and a half percent so are long
Speaker 1: run neutral rate of interest? I think it is an
Speaker 1: outdated concept. Okay, John writing with us today, very good
Speaker 1: let us move on into the second quarter of two
Speaker 1: thousand and three. In the equities base. We do that
Speaker 1: with Laurie Kelvacine ahead of US Equity Strategy at RBC
Speaker 1: Capital Market. It's a sensitive kelvas you know, over the
Speaker 1: weekend saying that the stock market is healing. We're all healing, Laurie,
Speaker 1: how injured were we and how are we healing right now?
Speaker 1: So look, I think that what happened with SBB was
Speaker 1: a shock. I mean, and that's obviously you know, what
Speaker 1: everybody said at the time. But you know, those companies
Speaker 1: in particular were very well owned over time in the
Speaker 1: small and MidCap community. There are a lot of longer
Speaker 1: leading reactors that need those companies quite well, you know,
Speaker 1: sort of prior to the crypto era, prior you know,
Speaker 1: to the kind of most recent version of the tech bubble.
Speaker 1: And I think it was just an unanticipated, you know,
Speaker 1: kind of mini black Swan event, and you've had a
Speaker 1: lot of investors to sort of staying quiet, digging in
Speaker 1: their heels, doing work. And what we know is that
Speaker 1: sentiment indicators were already pretty depressed starting to recover a bit.
Speaker 1: And if you look at AAII for example, it shot
Speaker 1: right back down and kind of went close to GFC
Speaker 1: type levels. Now, the brunt of the pain was obviously
Speaker 1: taken in the banks. Small caps were one of the babies,
Speaker 1: I think essentially thrown out with the bathwater because of
Speaker 1: their cyclicality and because of that bank's exposure. And what
Speaker 1: we saw over the past week was that the banks
Speaker 1: and the small caps performance really stabilized. And I think
Speaker 1: that's important because the banks are the problem child essentially
Speaker 1: of this crisis. If you look back to two thousand
Speaker 1: and two, what we saw was at the NASTAC one
Speaker 1: hundred really started to stabilize after the World Com bankruptcy.
Speaker 1: And that's very different from what we're like banks to
Speaker 1: the problem child at the GFC n O eight after
Speaker 1: the different bankruptcies and collapses there. So I think the
Speaker 1: market is telling you that investors are starting to exhale
Speaker 1: a bit, even if they're not breathing easy just yet.
Speaker 1: What's critical here, Laurie, is if I take three groups
Speaker 1: of MidCap small cap I got the growthiness crew, very
Speaker 1: small group, I've got everybody else, and I've got the
Speaker 1: value trap of banks. Where do I put new money today?
Speaker 1: Do I buy the banks? Is a value proposition or
Speaker 1: are they a trap. I think time is going to
Speaker 1: tell on the banks themselves. I think if you talk
Speaker 1: to Gerard and if you talk to ARC, they would
Speaker 1: tell you there's longer term value being created. But we
Speaker 1: do need to see a little bit more time to
Speaker 1: see the dust settle. I think if you look in
Speaker 1: small cap, though, banks were not the only things that
Speaker 1: were cheap. Energy was very cheap on a relative basis
Speaker 1: to both the R two and the big cap names.
Speaker 1: A consumer discretionary was something else that really jumped down
Speaker 1: a dust in recent months as being very undervalued in
Speaker 1: a small cap space, but still looking quite expensive frankly
Speaker 1: in the large cap space. So it might be more
Speaker 1: of the time now to be a stockpicker in small
Speaker 1: cap as opposed to buying the index. But I do
Speaker 1: think there are bargains down there to be had, especially
Speaker 1: if GDP data and earnings data continue to forecast a recovery.
Speaker 1: In twenty twenty four, Laurie, after we got Silicon Valley
Speaker 1: banks demise and some of the other banks that really
Speaker 1: ran into trouble, a lot of people said this is
Speaker 1: a game changer. It potentially does shift the narrative quite significantly.
Speaker 1: Is the OPEC plus news that we got over the
Speaker 1: weekend similar. You know, it's interesting I was thinking about
Speaker 1: that at this morning, Lisa. You know, especially in regards
Speaker 1: to the inflation narrative, I think that they are sort
Speaker 1: of offsetting forces with one another in terms of the
Speaker 1: inflation debate right now, whereas SBB may have, you know,
Speaker 1: sort of put cuts back on the table in a
Speaker 1: bigger way. We obviously saw interest rate expectations ratchet down.
Speaker 1: Now you may see those, you know, kind of come
Speaker 1: back up a little bit, probably not to the same degree,
Speaker 1: but if you sort of put those aside, I'm not
Speaker 1: sure that there has been a lot of change in
Speaker 1: terms of other issues right now on the inflation debate.
Speaker 1: We know the services sector is weakening. We know that
Speaker 1: layops are probably gonna keep wage growth in check. We
Speaker 1: know that CFOs from the Duke survey last week are
Speaker 1: talking about how prices and wage growth are both going
Speaker 1: to come down this year and next year. Their optimism
Speaker 1: is really waiting for both this and next year. So
Speaker 1: I feel like the sources of inflation are generally on
Speaker 1: the mend. And now we've kind of got these two
Speaker 1: other big issues that are offsetting each other. I'm not
Speaker 1: sure I would call each of them game changer, but
Speaker 1: maybe major detours. So what is you here at the
Speaker 1: beginning of the second quarter? What are your twelve months
Speaker 1: lifting equities? So we don't do twelve month forecast, but
Speaker 1: we've still got our year end target for December thirty first,
Speaker 1: and that we've still got forty one hundred, and we
Speaker 1: feel like that's a nice base case in here. We
Speaker 1: have done some valuation work which suggests there could be
Speaker 1: some upside from that. I think to really get downside
Speaker 1: from that, you've got to assume that there's a recession
Speaker 1: that bleeds into twenty twenty four, and I don't think
Speaker 1: the case has been made for that yet. Laurie Chalvasina,
Speaker 1: thank you so much, greatly appreciate it. With RBC Capital
Speaker 1: Markets this morning and Ed Morris Press this morning, Ed
Speaker 1: you divide into west of Suez Canal. In East of
Speaker 1: Suez Canal, I want you to talk about the power
Speaker 1: of this coalition around Saudi Arabia with the Strait of
Speaker 1: Hermus and onto the Straits of Malacca in Singapore. What
Speaker 1: power do they hold? Well, the power that they hold
Speaker 1: is an ability to cut and an ability to add
Speaker 1: oil to the market. And that's pretty incredible because it's
Speaker 1: a group they have shut in capacity that's well over
Speaker 1: two million dollars a day, and they're coming off a
Speaker 1: banning here in terms of revenue generation. That's it's something
Speaker 1: they want to keep. And if they want to cut
Speaker 1: million dollars a day, they've just shown that they have
Speaker 1: the power to do it. I literally have on my
Speaker 1: coffee table at at home another firms analysis to over
Speaker 1: one hundred dollars a barrel, which centers on em recovery
Speaker 1: and China recovery. You were brilliant in calling for lower
Speaker 1: quissent Brent crude prices. Do you need to reverse this
Speaker 1: morning and to begin to consider one hundred a barrel oil? Well,
Speaker 1: we're considering higher prices than we otherwise had. And yes,
Speaker 1: there is a scenario of one hundred dollar barrel oil,
Speaker 1: but I don't think we're anywhere near that yet. To
Speaker 1: get to one hundred dollars oil, we'd have to have
Speaker 1: significantly more taken out of the market and have a
Speaker 1: lot of uncertainty based on that oil taken out of
Speaker 1: the market. That is to say, it would come from
Speaker 1: a destruction to supply in countries such as rand Iraq, Libyan,
Speaker 1: Nigeria altogether at at the same time, and we would
Speaker 1: have no sense because of the domestic situation in those
Speaker 1: countries of when that oil could come back into the market.
Speaker 1: We have what we consider to be an effort to
Speaker 1: prevent the repeat of twenty twenty eight nine, when we
Speaker 1: had oil prices collapsing from one hundred and forty seven
Speaker 1: to the low forties before getting to a normalized level
Speaker 1: of ninety dollars a barrel. It took about a year
Speaker 1: and a half to have all of that display work out,
Speaker 1: given financial flows and given the uncertainties in the market.
Speaker 1: We have the financial flows now and we don't have
Speaker 1: quite that level of uncertainty. We know that supply is
Speaker 1: definitely coming into the market. I believe strongly that the
Speaker 1: increase in prices that we've already had is going to
Speaker 1: place a US production on a higher path to growth
Speaker 1: than we otherwise might have had. And we think we're
Speaker 1: thinking that on first plus, looking at everything at the
Speaker 1: moment overnight, that we're going to have a fairly balanced
Speaker 1: market of market that's going to be plus or minus
Speaker 1: a couple hundred thousand bars a day, no big inventory build,
Speaker 1: no big inventory draw and on the demand picture that
Speaker 1: you were looking at, I have to say we flatly disagree.
Speaker 1: We think we're in a period of time when we're
Speaker 1: seeing demands last hurrah. We're seeing, to be sure, growth
Speaker 1: in China that's formidable. It basically makes up for the
Speaker 1: loss of demand growth demand decline in China a year ago.
Speaker 1: And we don't think after this increase in demand from
Speaker 1: China we're going to see a Chinese demand ratcheting up
Speaker 1: much further. Yes, there is em growth and India leads,
Speaker 1: but that's that's going to be in the three or
Speaker 1: four hundred thousand barli day range, not a million bari
Speaker 1: day range. Ed. Can you frame out then how much
Speaker 1: of a surprise this cut was, which was on died
Speaker 1: and comes at a time where some people are speculating
Speaker 1: that it was politically motivated to send a message to
Speaker 1: Washington and to possibly boost oil prices, meaning more cuts
Speaker 1: down the road if it doesn't work. Now, I think
Speaker 1: it was definitely designed to boost oil prices. They countries
Speaker 1: will just looking at sixty dollars oils straight on and yes,
Speaker 1: they've seen a rally based on a whole bunch of
Speaker 1: things that they consider to be temporary, not permanent, And yes,
Speaker 1: they want higher oil prices. Or the countries that we
Speaker 1: were looking at, particularly Saudi Arabia has a significantly higher
Speaker 1: pistol break even than a lot of other countries, and
Speaker 1: they're more comfortable with oil certainly with an eighty dollars base,
Speaker 1: and not bad with a ninety dollars base. They didn't
Speaker 1: see too much in the way of damage to the
Speaker 1: global economy at ninety dollars of barrow last year. I
Speaker 1: don't think we're staring in the face of one hundred.
Speaker 1: We're certainly flirting with a market which could see a
Speaker 1: more demand in the spring and summer than we otherwise
Speaker 1: thought might be. But I think the price is going
Speaker 1: to cap demand and we're going to see you know,
Speaker 1: we were looking at a world of around add one
Speaker 1: point four one point five million varil to day demand. Yes,
Speaker 1: OPEC at a higher level than that, and there was
Speaker 1: some political factor I think involved in their own very
Speaker 1: type or a supply demand balance. Even in their last report,
Speaker 1: this goes against that and says, hey, there's something going on,
Speaker 1: and I think it's a defense that's going on. They
Speaker 1: want the higher oil prices. They need it in order
Speaker 1: to revamp and reinvest in their economies as rapidly as possible.
Speaker 1: But they have no better interest than a hundred dollars
Speaker 1: oil than most other countries too. They don't want to
Speaker 1: see a demand decline. They want to prevent the drop
Speaker 1: of one hundred dollars that we saw, or a drop
Speaker 1: of more than fifty percent in today's market that they
Speaker 1: saw in two thousand and eight, but quickly, but quickly,
Speaker 1: just based on what you're saying. If they want higher prices,
Speaker 1: and perhaps eighty dollars is the floor, maybe ninety dollars,
Speaker 1: then what's to stop OPEC plus from cutting further and
Speaker 1: further or even as the economy slows. There are a
Speaker 1: couple of things that stopped it. One is that the
Speaker 1: economies would slow a lot faster than they're now slowing,
Speaker 1: and they don't want that to happen. They understand fully
Speaker 1: well that Chinese growth is not exploding the way people
Speaker 1: thought it was. You look at the numbers. Yes, there
Speaker 1: was a million barrels a day of growth, but that
Speaker 1: was Chinese New Year, and that always happens. There's nothing
Speaker 1: about this particular rebounded in China that you can get
Speaker 1: reinforced in your view by what happened. They're really concerned
Speaker 1: about a drop in oil prices. They just looked at
Speaker 1: a drop to the sixties and they're looking back at
Speaker 1: two thousand and eight nine, and I think they made
Speaker 1: a terrible judgment on that. They think they'll find out
Speaker 1: that that judgment was terrible because this is not two
Speaker 1: thousand and eight nine. In multiple ways, do you give
Speaker 1: an okay score to the Biden administration? They seem to
Speaker 1: be a pinata, even pro anti oil whatever. Everybody's beaten
Speaker 1: up on our president's energy policy. Are you piling on?
Speaker 1: Are you beating up on President Biden's energy policy? Well, yes, certainly,
Speaker 1: and certainly. At the beginning of the administration, there was nobody,
Speaker 1: virtually nobody in the administration that came out of the
Speaker 1: markets anywhere in the world. There are all people coming
Speaker 1: from academia, people coming from a very strong pro environmental,
Speaker 1: anti fossil fuel bias, and they didn't really understand markets.
Speaker 1: They were forced to understand markets. They've gained a lot
Speaker 1: better understanding of markets. We've just seen a reopening of
Speaker 1: bids on federal lands. This legislation that's going to assure that,
Speaker 1: and they know in the White House that they don't
Speaker 1: want to see a higher gasoline prices. And the way
Speaker 1: to do that is by having the USB the strong
Speaker 1: power that it is. As by the way, now the
Speaker 1: world's largest GROS exporter of oil at a country where
Speaker 1: demand has already softened tremendously, where a demand is down
Speaker 1: well over a million barrels a day year on year,
Speaker 1: in our economy is not in bad shape. So we're
Speaker 1: seeing a transformation at all where we've become kind of
Speaker 1: a critical swing supplier, and Saudi Arabia is very very
Speaker 1: sensitive and aware of that. Ed thank you so much
Speaker 1: for joining us. Edward Morris a city group here on
Speaker 1: the Shock announcement from OLDPEC Plus. Subscribe to the Bloomberg
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