WEBVTT - Surveillance: Bullard on a Soft Landing 0:00:05.160 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best an economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.119 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.640 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:31.280 the Bloomberg Terminal, and the Bloomberg Business App. Now in 0:00:31.360 --> 0:00:35.400 conversation with James Bullard, the former Saint Louis FED President, R. 0:00:35.440 --> 0:00:37.800 Michael McKee, Well, thank you all very much, and we'd 0:00:37.800 --> 0:00:39.720 like to thank Jim Bullard for coming in and joining 0:00:39.800 --> 0:00:42.360 us today. I would have called you mister President, but 0:00:42.440 --> 0:00:44.240 now why do we call you Dean Bullard? 0:00:44.280 --> 0:00:46.880 I guess you can call you Jim will. 0:00:47.040 --> 0:00:50.159 Jim is the dean of the Daniels School of Business 0:00:50.200 --> 0:00:53.560 now at Purdue University, and we thank you for joining 0:00:53.640 --> 0:00:57.080 us today. I want to start with the dot plot. 0:00:57.080 --> 0:00:59.200 I think we have a picture of the dot plot 0:00:59.200 --> 0:01:02.280 that we can put up for those of you on radio. 0:01:02.320 --> 0:01:05.640 You can look up the dot plot on the fed's website. 0:01:05.680 --> 0:01:09.160 But basically, in June, the last time we put out 0:01:09.160 --> 0:01:13.000 a forecast, there was one lonely dot way at the top, 0:01:13.400 --> 0:01:19.560 saying six and a quarter percent. You left that dot's gone. 0:01:19.880 --> 0:01:22.920 How would you have voted if you were if you 0:01:22.959 --> 0:01:24.760 were there yesterday. 0:01:25.240 --> 0:01:27.399 I thought this was a pretty good decision on the 0:01:27.440 --> 0:01:32.240 part of the Fed here. The higher for longer message 0:01:32.319 --> 0:01:36.399 I think is consistent with the rhetoric we've been hearing 0:01:36.440 --> 0:01:38.760 from the Committee. 0:01:38.720 --> 0:01:39.800 Earlier this year. 0:01:39.880 --> 0:01:43.000 There was widespread prediction that there would be a recession, 0:01:43.080 --> 0:01:45.959 and in the second half of twenty twenty three that 0:01:46.040 --> 0:01:47.800 recession isn't materializing. 0:01:48.400 --> 0:01:50.200 So to the extent you thought that. 0:01:50.480 --> 0:01:56.600 A recession would produce extra downward pressure on inflation that 0:01:56.680 --> 0:01:58.560 had to be taken back out, so you got you 0:01:58.640 --> 0:02:00.840 ended up with a higher for longer message here. 0:02:01.160 --> 0:02:02.880 I think that makes a lot of sense. 0:02:02.960 --> 0:02:05.600 So we don't need higher rates at this point. 0:02:07.120 --> 0:02:11.520 Well, the Committee left the additional rate hike this year 0:02:11.639 --> 0:02:15.800 in the dot plot. I think that may be a 0:02:15.800 --> 0:02:19.000 good thing to do as insurance to make sure that 0:02:19.080 --> 0:02:23.480 core inflation, especially continues to come down at an appropriate 0:02:23.520 --> 0:02:25.720 pace so that the Committee can get back to two 0:02:25.720 --> 0:02:28.040 percent inflation and a reasonable timeframe. 0:02:29.320 --> 0:02:31.360 I think the risks are building. 0:02:31.040 --> 0:02:35.720 That inflation could hang up at a higher level or 0:02:35.800 --> 0:02:39.280 even go higher based on the idea of a reacceleration 0:02:39.400 --> 0:02:43.519 in the US economy. So you have to take account 0:02:43.520 --> 0:02:46.320 of that probability when you're making policy. 0:02:46.360 --> 0:02:47.880 I think the Committee has done that here. 0:02:48.120 --> 0:02:48.440 Well. 0:02:48.639 --> 0:02:51.799 One of the interesting questions is about the forecast. 0:02:52.680 --> 0:02:54.200 John was just talking about it. 0:02:54.639 --> 0:02:58.079 You've got the Fed saying their growth forecast has doubled, 0:02:58.120 --> 0:03:02.799 their unemployment forecasts been cut significantly, and yet they're also 0:03:02.960 --> 0:03:06.440 predicting that PCEE core inflation is going to go down. 0:03:07.680 --> 0:03:08.560 How does that work? 0:03:09.400 --> 0:03:14.120 Well, I think you will get disinflation with you know, 0:03:14.200 --> 0:03:17.359 that's the base case. The question is how fast will 0:03:17.400 --> 0:03:22.400 that disinflation occur. If it's a very slow disinflation, you're 0:03:22.440 --> 0:03:25.280 going to want to keep policy rate higher in order 0:03:25.320 --> 0:03:27.160 to put more pressure on so you get back to 0:03:27.240 --> 0:03:30.880 two percent sooner. And there's a little bit of probability 0:03:30.919 --> 0:03:34.639 that inflation would distallup completely at the current levels, which 0:03:34.680 --> 0:03:39.440 would be unacceptable. It's you know, core inflation has a 0:03:39.480 --> 0:03:41.800 handle depending on how you measure it. You know, in 0:03:41.840 --> 0:03:45.760 the four range is still double or more than double the. 0:03:47.400 --> 0:03:48.120 FEDS target. 0:03:48.200 --> 0:03:50.640 So you've got a long ways to go here, and 0:03:50.680 --> 0:03:54.160 I think you want insurance on the side of making 0:03:54.200 --> 0:03:56.560 sure that you get back to two percent inflation. On 0:03:56.600 --> 0:03:58.640 the real side of the economy, things look pretty good. 0:03:59.120 --> 0:04:03.840 You've got summary acceleration the third quarter here it looks 0:04:03.920 --> 0:04:07.560 like we've talked about it before, and unemployment still with 0:04:07.600 --> 0:04:09.200 the three handle looking very good. 0:04:09.640 --> 0:04:11.600 Jay Powell wouldn't say the words, but it looks like 0:04:11.640 --> 0:04:13.640 the forecast is saying soft landing. 0:04:14.800 --> 0:04:15.000 Yeah. 0:04:15.040 --> 0:04:17.520 I think the prospects for soft landing are very good. 0:04:18.760 --> 0:04:21.240 But you haven't landed until you get inflation back to 0:04:21.279 --> 0:04:23.760 two percent, So you're only part way through this process, 0:04:24.520 --> 0:04:26.120 but prospects are looking good. 0:04:26.440 --> 0:04:30.640 If that's the case, then the question becomes higher for longer? 0:04:31.279 --> 0:04:34.400 How much longer? The Fed took away. 0:04:34.320 --> 0:04:37.520 Fifty basis points of cuts from their forecast for next year, 0:04:37.920 --> 0:04:40.320 But how long do you think you need to lean 0:04:40.360 --> 0:04:44.200 against inflation to have an effect. 0:04:44.760 --> 0:04:47.160 Well, it'll be data dependent on that, but I think 0:04:47.200 --> 0:04:50.960 this idea that you'd have five percent policy rate or 0:04:51.040 --> 0:04:55.480 higher over the next eighteen months or so, I think 0:04:55.520 --> 0:05:00.200 that's significant and shows you resolve on the part of 0:05:01.520 --> 0:05:03.800 Chair Powell and the rest of the committee to get 0:05:03.800 --> 0:05:04.680 inflation lower. 0:05:04.760 --> 0:05:06.520 So that's quite a while. 0:05:06.680 --> 0:05:09.160 I think once you get out beyond that the end 0:05:09.160 --> 0:05:11.120 of twenty four, you get into twenty twenty five. 0:05:11.160 --> 0:05:12.560 Nobody knows at this point. 0:05:12.720 --> 0:05:17.239 Well, that raises the question of lags and how long 0:05:17.360 --> 0:05:21.400 the legs might be if he takes eighteen months to 0:05:21.560 --> 0:05:22.240 bring it down. 0:05:23.920 --> 0:05:26.280 Yeah, I don't know. I haven't liked the long and 0:05:26.360 --> 0:05:30.080 variable lags story for the modern era as much. I 0:05:30.120 --> 0:05:33.760 think a lot of the transmissional monetary policy occurs pretty 0:05:33.839 --> 0:05:37.400 rapidly through financial markets in a way that was not 0:05:37.560 --> 0:05:40.880 the case in the nineteen sixties and fifties that when 0:05:41.200 --> 0:05:44.200 Friedman was talking about long and variable legs. So I 0:05:44.240 --> 0:05:50.080 think I think the economy has changed. Information moves much faster, 0:05:50.440 --> 0:05:52.920 decisions are made, much faster than they would have been 0:05:54.320 --> 0:05:56.680 in the world's more forward looking than they would have. 0:05:56.760 --> 0:05:57.240 Been in. 0:05:58.880 --> 0:06:02.960 The sixties and fifties. So I think. 0:06:04.440 --> 0:06:08.240 You should look for impact today, or more impact today 0:06:08.240 --> 0:06:11.359 than you would have in that earlier era. And so 0:06:12.600 --> 0:06:15.040 by keeping the policy rate high right now, I think 0:06:15.080 --> 0:06:17.880 you can get disinflation to happen now, it's not really 0:06:18.400 --> 0:06:20.400 so much two years from now. 0:06:20.760 --> 0:06:23.200 Well, what kind of economy will we have two years 0:06:23.240 --> 0:06:25.760 from now? We get the pandemic distortions in the economy 0:06:25.760 --> 0:06:28.720 out supply and demand maybe come back into better balance. 0:06:28.760 --> 0:06:31.839 But do we have a new economy do we have 0:06:32.160 --> 0:06:33.360 an old economy? 0:06:33.400 --> 0:06:36.040 Where do you think neutral is We're going back into 0:06:36.560 --> 0:06:40.440 a rate regime that is higher than we were used 0:06:40.480 --> 0:06:42.280 to in the two thousands. 0:06:43.080 --> 0:06:46.320 Yeah, I think we've talked about it before. But one 0:06:46.320 --> 0:06:49.479 of the historical examples that you want to look at 0:06:49.520 --> 0:06:53.039 here is the nineteen ninety four tightening cycle, which was 0:06:53.120 --> 0:06:57.760 not as big as this one, but set up the 0:06:57.920 --> 0:07:01.360 US economy for a stellar second half of the nineteen nineties, 0:07:01.400 --> 0:07:05.320 one of the best periods in US macroeconomic history. So 0:07:05.360 --> 0:07:07.720 if you can get inflation to continue to come down 0:07:07.800 --> 0:07:11.120 here with a pretty strong economy, you could set the 0:07:11.120 --> 0:07:14.680 economy up for a productivity boom and a very strong 0:07:14.720 --> 0:07:19.280 period in the twenty twenties here. So hopefully that's what 0:07:19.320 --> 0:07:21.560 will happen. I think we're only part way through that 0:07:21.600 --> 0:07:24.240 process at this point. But if you really do get 0:07:24.240 --> 0:07:26.480 a soft landing, then you could look at a period 0:07:26.640 --> 0:07:32.480 of good growth, strong labor markets, high productivity growth. So 0:07:33.800 --> 0:07:36.880 I'm not saying that that's definitely going to happen, but 0:07:36.920 --> 0:07:38.600 that's certainly one of the possibilities. 0:07:38.880 --> 0:07:39.480 What happens. 0:07:40.680 --> 0:07:43.960 We'll have only about one question left here, but what 0:07:44.040 --> 0:07:47.440 happens with the labor market going forward? Are we going 0:07:47.480 --> 0:07:51.560 to see ongoing wage pressures because there just aren't enough 0:07:51.600 --> 0:07:53.720 people to fill the jobs out there. 0:07:54.160 --> 0:07:57.280 Yeah, I think the labor supply is somewhat diminished from 0:07:57.320 --> 0:08:01.240 where it would have been a pre pen pandemic or earlier. 0:08:01.920 --> 0:08:04.600 I think you have older workers less willing to come 0:08:04.640 --> 0:08:07.080 back into the workforce, so they're kind of a marginal 0:08:08.560 --> 0:08:12.120 worker type and they're not coming in as much. Their 0:08:12.320 --> 0:08:17.600 nest eggs are pretty pretty robust here with high housing 0:08:17.680 --> 0:08:20.480 prices and relatively high equity prices. 0:08:21.960 --> 0:08:24.440 So I also think. 0:08:27.040 --> 0:08:31.280 Daycare has been kind of decimated by the pandemic, so 0:08:31.360 --> 0:08:31.840 this has. 0:08:31.760 --> 0:08:35.760 Changed arrangements for parents with young children. 0:08:35.960 --> 0:08:39.040 And so you just have a subdued labor supply compared 0:08:39.080 --> 0:08:42.000 to what you would have had pre pandemic, and this 0:08:42.040 --> 0:08:46.080 is leading to continued tightness in the labor market. 0:08:46.480 --> 0:08:47.720 Well, we thank you for coming in. 0:08:47.800 --> 0:08:49.880 We're going to send you back now Tode to graduate 0:08:49.960 --> 0:08:51.400 some more engineers so. 0:08:51.360 --> 0:08:55.040 We can fill those empty labor slots. Jim Bullard, thank 0:08:55.360 --> 0:08:58.080 you for joining us today. We'll send it back to 0:08:58.120 --> 0:08:59.319 you in London. 0:09:00.480 --> 0:09:02.200 He Mike, can you just squeeze one extra question? 0:09:02.240 --> 0:09:02.360 Then? 0:09:02.400 --> 0:09:04.280 Can you ask Jim if there's no value in the 0:09:04.280 --> 0:09:07.160 forecast why they still producing them after that performance from 0:09:07.160 --> 0:09:08.240 Sham and Pow yesterday. 0:09:08.320 --> 0:09:09.679 Can you ask him quickly, Mike. 0:09:10.520 --> 0:09:14.040 Sure, John is asking if there's no value in the forecast, 0:09:14.080 --> 0:09:15.720 then why do they keep producing them? 0:09:17.080 --> 0:09:20.079 Well, it's what we do, I think. 0:09:20.840 --> 0:09:23.960 Yeah, you know, forecasts are useful, but only up to 0:09:24.000 --> 0:09:24.360 a point. 0:09:24.440 --> 0:09:26.960 There's a certain amount of ambient noise in the economy. 0:09:26.960 --> 0:09:30.559 You can't get away from that. But so you you know, 0:09:31.040 --> 0:09:33.000 you can't live with them and you can't live without them. 0:09:33.000 --> 0:09:34.320 I guess that's the way you would say that. 0:09:35.160 --> 0:09:37.520 Thank you very much, John. I hope that answers your question. 0:09:37.640 --> 0:09:41.360 Thanks Mike, just about Mike, appreciate it, buddy, fantastic work, 0:09:41.400 --> 0:09:43.199 just one of the best as always, and bringing performance 0:09:43.200 --> 0:09:45.160 in the news conference from Mike McKay yesterday as well, 0:09:45.360 --> 0:09:48.760 sitting down with the foremast and Lewis FED President Jim billat. 0:09:52.320 --> 0:09:56.160 With Aberdeen SRI Coach of Govidian joins us this morning, 0:09:56.160 --> 0:10:00.280 your senior research economists. The growth issue there is just 0:10:00.480 --> 0:10:04.400 absolutely tangible and Germaine into a shop like Aberdeen as well. 0:10:04.480 --> 0:10:07.880 Are you calling for a recession when you see the 0:10:08.920 --> 0:10:11.640 split of that, the tension of a five to four decision. 0:10:12.320 --> 0:10:14.480 I think that's right. We are looking for a recession 0:10:14.520 --> 0:10:17.600 later this year, actually in one that continues well into 0:10:17.679 --> 0:10:21.640 next year, possibly the first two quarters as well. Now, 0:10:21.679 --> 0:10:23.520 if we look at the data that we've seen recently, 0:10:23.559 --> 0:10:26.760 obviously there can be some revisions in the GDP data. 0:10:27.000 --> 0:10:30.120 We saw quite a contraction in July. Now we are 0:10:30.240 --> 0:10:33.040 expecting perhaps there are some quirks in the data that 0:10:33.120 --> 0:10:36.560 we haven't seen as much industrial action recently, and there 0:10:36.559 --> 0:10:39.040 could be some technical issues and a rebound. But I 0:10:39.080 --> 0:10:41.440 think the outlook for the rest of this year is 0:10:41.559 --> 0:10:43.720 quite weak and we see that as you've mentioned in 0:10:43.760 --> 0:10:47.800 the PMI surveys, both manufacturing and services moving into contraction. 0:10:47.920 --> 0:10:49.240 Let's talk about the market response. 0:10:49.280 --> 0:10:51.440 You are seeing a weaker pound in response to this, 0:10:51.520 --> 0:10:54.559 as many people expected it would. At what point are 0:10:54.559 --> 0:10:56.480 they between ahurakh and a hard place at the Bank 0:10:56.520 --> 0:10:59.160 of England if they don't hike the pound weekends it 0:10:59.240 --> 0:11:02.160 increases in FLA and even as growth slows, how much 0:11:02.240 --> 0:11:04.000 is this going to be a real consideration for them 0:11:04.040 --> 0:11:04.600 going forward? 0:11:05.080 --> 0:11:08.280 I think Obviously imported prices are going to be a consideration. 0:11:08.400 --> 0:11:11.320 But what we saw earlier this yesterday in terms of 0:11:11.320 --> 0:11:14.679 the inflation data was very promising, and I think one 0:11:14.679 --> 0:11:16.840 of the key metrics that they focus on what really 0:11:16.880 --> 0:11:21.280 changed was that core services data. We saw a deceleration 0:11:21.400 --> 0:11:24.960 there as well, but I think it's still very elevated. 0:11:25.160 --> 0:11:27.679 We are still seeing another key metric of wages are 0:11:27.720 --> 0:11:30.640 still very high, and hence this signaling through the split 0:11:31.160 --> 0:11:34.480 and the announcement of PUT. Something that we've been expecting 0:11:34.480 --> 0:11:37.120 for a while is that they will increase the pace 0:11:37.240 --> 0:11:39.080 the run rate, but they've done that today, and I 0:11:39.080 --> 0:11:40.560 think that's an interesting communication. 0:11:41.559 --> 0:11:43.679 What is the signal right from the split other than 0:11:43.679 --> 0:11:46.000 they're just divided. It is a difficult moment. What is 0:11:46.040 --> 0:11:47.840 the signal that you can take away as an economist 0:11:47.880 --> 0:11:49.120 coming up with your own projections. 0:11:49.360 --> 0:11:51.440 I think really what we're seeing is they are worried 0:11:51.480 --> 0:11:54.280 about the recession, They are worried about weaker growth, and 0:11:54.320 --> 0:11:56.800 they think that perhaps going into the rest of this year, 0:11:57.040 --> 0:11:59.760 inflation is likely to continue to decelerate. So what we 0:11:59.760 --> 0:12:03.360 say is the lagged impact of fairly aggressive monetary tightening 0:12:03.600 --> 0:12:06.679 really starting to bite and they're probably thinking right that 0:12:06.720 --> 0:12:08.480 here is a time to pause, but we don't want 0:12:08.520 --> 0:12:11.080 to get too complacent. There are still a lot of 0:12:11.120 --> 0:12:14.000 inflationary pressures ahead and there's a long way to go 0:12:14.040 --> 0:12:15.560 before we go anywhere near target. 0:12:15.800 --> 0:12:18.000 Sree help us understand the bond market move in the 0:12:18.040 --> 0:12:20.920 guilt market right now, Tenure guilt yields higher on the 0:12:20.960 --> 0:12:23.559 session near session highs, up about seven basis points. 0:12:23.559 --> 0:12:24.480 Does that stack up for you? 0:12:25.640 --> 0:12:27.720 I think it's a knee jerk reaction. Perhaps you know 0:12:27.760 --> 0:12:31.840 there is the hawkish signal there is really being the focus, 0:12:31.920 --> 0:12:34.719 I think, But what we will say is, even though 0:12:34.760 --> 0:12:38.480 we are very close to the peak, we do expect 0:12:38.679 --> 0:12:41.520 rates to remain elevated, and we're thinking more matter horn 0:12:41.920 --> 0:12:45.120 rather sorry, more table mountain than matter horn. Really so 0:12:45.280 --> 0:12:47.840 really on hold elevated for a long period of time, 0:12:48.320 --> 0:12:49.240 well into next day. 0:12:49.280 --> 0:12:51.520 Off for an explanation, do you think to some extent 0:12:51.559 --> 0:12:54.000 this might be a Bank of England that's starting to 0:12:54.000 --> 0:12:57.320 become more concerned about growth over inflation and a bond 0:12:57.360 --> 0:12:58.920 market is starting to pick up on the scent of that. 0:12:59.520 --> 0:13:01.520 I think there is a shift. 0:13:01.640 --> 0:13:01.960 I was. 0:13:02.520 --> 0:13:04.319 It was a very very close call, and I think 0:13:04.320 --> 0:13:08.440 that information number really sort of tipped tip this decision. 0:13:09.360 --> 0:13:13.120 There are some other disinflationary pressures with food prices are 0:13:13.160 --> 0:13:16.319 likely to continue to drag down inflations a year end, 0:13:17.000 --> 0:13:20.959 but as you say, we're still nowhere near targets and 0:13:21.000 --> 0:13:23.480 I think that growth, the growth priority has started to 0:13:23.480 --> 0:13:23.800 pick up. 0:13:23.920 --> 0:13:26.520 You Beck, your work at Queen Mary in London. Do 0:13:26.559 --> 0:13:30.680 you find it more beneficial to have a highly visible 0:13:30.840 --> 0:13:35.120 dissenting nuance to split vote like at the Bank of 0:13:35.160 --> 0:13:38.000 England or is it more Are you more able to 0:13:38.080 --> 0:13:41.959 make theory and forward looking views over the we are 0:13:42.000 --> 0:13:44.200 the world, We're all in it together view of the Fed. 0:13:46.000 --> 0:13:50.000 I think the split is part of the signaling. I 0:13:50.000 --> 0:13:52.880 think that's actually quite a useful single and I can 0:13:52.920 --> 0:13:55.439 see that in the bomb markets they're taking this as 0:13:55.480 --> 0:14:00.120 a hawkish pause and that's actually what is necessary in 0:14:00.120 --> 0:14:03.560 a sense in order to continue on this path of disinflation. 0:14:03.840 --> 0:14:06.679 We need to unfortunately, we need a recession to really 0:14:07.120 --> 0:14:09.600 correct some of those imbalances that are quite particular to 0:14:09.640 --> 0:14:10.520 the UK economy. 0:14:10.600 --> 0:14:13.840 No change isn't boring TK in London. No change is 0:14:13.840 --> 0:14:14.280 not boring. 0:14:14.720 --> 0:14:15.240 Full split. 0:14:15.520 --> 0:14:18.400 I'm fascinated by it, and you know, to know the 0:14:18.440 --> 0:14:21.800 heritage of Catherine Mann at MIT and Megan Green at Oxford. 0:14:21.840 --> 0:14:26.000 And these are huge decisions, folks. This is not a 0:14:26.040 --> 0:14:28.000 small matter. And I go back to the real yield 0:14:28.080 --> 0:14:30.840 is Kit Jukes is all over that in this morning 0:14:30.880 --> 0:14:31.480 note as well. 0:14:31.680 --> 0:14:35.440 So thank you Streektch you Governdant of Aberdeen. 0:14:45.200 --> 0:14:48.320 An expert on Saudi Araba. Edward Morris holds court at 0:14:48.360 --> 0:14:51.800 City Group, Global head of Commodity Research and always takes 0:14:51.800 --> 0:14:56.280 a geopolitical look. He has been brilliant over the last 0:14:56.280 --> 0:14:59.480 two years of saying everyone calmed down, we're going to 0:14:59.520 --> 0:15:04.040 see law. There were oil prices, more sustained seventy eighty 0:15:04.080 --> 0:15:08.680 dollars prices, and then things have changed. At Morse what 0:15:09.000 --> 0:15:12.840 changed to elevate oil to one hundred dollars a barrel? 0:15:14.280 --> 0:15:16.760 It was quite simple. A bunch of countries that had 0:15:17.040 --> 0:15:21.040 a lot of surplus capacity decided to rein it in 0:15:21.160 --> 0:15:23.040 and pull back. If you look at the oil market, 0:15:23.360 --> 0:15:26.200 there is no more market. There's no more oversupplied market 0:15:26.200 --> 0:15:29.800 in the world based on supply and demand. But those 0:15:29.840 --> 0:15:32.120 that have the supply have pulled it back, and they 0:15:32.160 --> 0:15:34.120 pulled it back because they didn't like the revenue that 0:15:34.120 --> 0:15:38.640 they were getting So there's a big difference between oil 0:15:38.680 --> 0:15:41.359 and copper and oil and a lot of other commodities 0:15:41.400 --> 0:15:45.360 in terms of the fundamental availability of supply in that market. 0:15:45.560 --> 0:15:48.560 All Right, we were making fun and just of the 0:15:48.800 --> 0:15:53.920 orb and that is of course President Trump visiting Saudi Arabia. 0:15:54.000 --> 0:15:58.440 What is the US relationship now with oil producing Saudi 0:15:58.480 --> 0:16:00.480 Arabia changed? 0:16:01.400 --> 0:16:05.200 Yes, it certainly has changed, and it's changed dramatically. Part 0:16:05.200 --> 0:16:07.880 of the change relates to the geopolitics of the area. 0:16:08.640 --> 0:16:10.760 We saw one element of the change at the G 0:16:10.880 --> 0:16:15.280 twenty meeting when a number of countries that in India 0:16:15.680 --> 0:16:18.840 include countries in the Middle East, including Israel, include the 0:16:18.840 --> 0:16:23.960 European Union decided to build the physical you know, their 0:16:24.000 --> 0:16:27.520 own Belton Road initiative, and they excluded China and the 0:16:27.560 --> 0:16:30.280 excluded Russia from it. But the US is very much 0:16:30.280 --> 0:16:34.200 a part of it. We're talking about Westinghouse technology going 0:16:34.240 --> 0:16:39.800 into Saudi nuclear power, We're talking about guarantee on the 0:16:39.800 --> 0:16:44.080 security side. We're talking about oil markets and common and 0:16:45.320 --> 0:16:48.720 differences among them. But it is a different relationship from 0:16:48.760 --> 0:16:52.040 the more sour one with which the Biden administration began 0:16:52.120 --> 0:16:53.760 its self in office. 0:16:53.640 --> 0:16:56.360 Ed earlier in the year you are the lone caller 0:16:56.560 --> 0:16:58.720 for some sort of lower oil pricing. 0:16:58.800 --> 0:17:00.000 You were absolutely correct. 0:17:00.360 --> 0:17:02.320 Now you're coming out and pushing against people who are 0:17:02.320 --> 0:17:04.800 really upgrading their forecasts for oil in light of some 0:17:04.880 --> 0:17:08.080 of the Saudi Arabian production cuts. How can you be 0:17:08.200 --> 0:17:11.200 so sure this time around if this is essentially Saudi 0:17:11.240 --> 0:17:14.280 Arabia searching for ninety to one hundred dollars a barrel 0:17:14.320 --> 0:17:16.280 of oil for their financial wellbeing. 0:17:16.600 --> 0:17:18.840 Sure well, I think there are three or four factors 0:17:18.880 --> 0:17:21.560 just overwhelming. One of them happens to be what we 0:17:21.640 --> 0:17:25.760 call the Fragile Five countries. They are Iran, A, rat Libya, Nigerian, Nigeria, 0:17:25.760 --> 0:17:28.600 and Venezuela. Their countries out in nineteen ninety eight were 0:17:28.600 --> 0:17:31.840 growing really rapidly in their production. People thought they were 0:17:31.880 --> 0:17:33.800 going to be adding a million barrels a day a year. 0:17:34.480 --> 0:17:37.360 Five years after nineteen ninety eight, they were producing less 0:17:37.400 --> 0:17:39.840 than they were in ninety eight. The world scrambled to 0:17:39.840 --> 0:17:41.919 find new supply and the price of oil went up. 0:17:42.320 --> 0:17:45.879 These countries are adding supply in surprising ways. If you 0:17:45.920 --> 0:17:49.119 look at June versus June twenty twenty three versus twenty 0:17:49.160 --> 0:17:52.320 twenty two, these countries added over a million barrels a 0:17:52.400 --> 0:17:54.760 day to oil supply. If you look at where they 0:17:54.760 --> 0:17:56.879 are now and just look at Iran and a rat 0:17:56.880 --> 0:17:59.560 the chances are that the two of them together are 0:17:59.560 --> 0:18:01.240 going to be adding close to a billion barrels a 0:18:01.320 --> 0:18:04.120 day of production between now and a year from now. 0:18:04.800 --> 0:18:08.800 That very much that big change, and the change is 0:18:08.800 --> 0:18:10.440 not just among the two of them. If you look 0:18:10.480 --> 0:18:14.880 at nigeria'sin so recent elections, they went for the monthly 0:18:15.080 --> 0:18:17.280 average of one to one point two million barrels a 0:18:17.320 --> 0:18:20.040 day to now one point five to one point seven 0:18:20.040 --> 0:18:22.720 million barrels a day. They're at one point seven right now. 0:18:22.800 --> 0:18:26.120 So those fragile clive countries are not under the control 0:18:26.440 --> 0:18:29.359 of the leadership of OPEK plus, and they intend to 0:18:29.359 --> 0:18:32.320 put more oil in the market. A second really massive 0:18:32.359 --> 0:18:36.359 factor is China. China has, yes, an economy that is 0:18:36.400 --> 0:18:39.879 more commodity dependent than any other country in the world. 0:18:39.960 --> 0:18:43.160 But what China has done since the Great Financial Crisis 0:18:43.200 --> 0:18:47.600 and condone it consistently is by low, by low, and 0:18:47.680 --> 0:18:51.320 sell high. So they accumulate an incredible amount of inventory. 0:18:51.320 --> 0:18:54.680 The inventory that they've grown has been from just under 0:18:54.840 --> 0:18:58.359 a billion barrels at the beginning of the pandemic not 0:18:58.520 --> 0:19:02.600 very long ago to billion four hundred million barrels. In 0:19:02.640 --> 0:19:05.119 our judgment right now, with a capacity to go to 0:19:05.680 --> 0:19:09.280 two billion barrels, a billion four hundred million means they 0:19:09.280 --> 0:19:11.359 have one hundred and thirty or one hundred and forty 0:19:11.440 --> 0:19:16.760 days of forward supply in their inventory system. The IEA, 0:19:17.240 --> 0:19:20.760 if its wisdom, says ninety days of forward supply is ample. 0:19:20.840 --> 0:19:23.240 So they're in a position to do what they're now 0:19:23.320 --> 0:19:27.400 doing buying less oil in the market. They had four 0:19:27.440 --> 0:19:30.240 months in which they were buying twelve and a half 0:19:30.240 --> 0:19:32.280 million barrels a day. They have four and a half 0:19:32.280 --> 0:19:35.360 million of their own production. They had months in which 0:19:35.400 --> 0:19:38.080 they had seventeen million of supply. They don't refine more 0:19:38.119 --> 0:19:41.119 than fourteen eight, fourteen nine. They put it in an inventory, 0:19:41.440 --> 0:19:44.920 and now that prices are very high, what are they doing. 0:19:44.960 --> 0:19:48.959 They're selling, and they're selling incrementally an awful lot of 0:19:49.000 --> 0:19:52.760 diesel into a market which is diesel poor and where 0:19:52.800 --> 0:19:55.879 diesel cracks are overwhelming. So they're making money by not 0:19:55.960 --> 0:19:58.480 buying and by selling high on the product side. And 0:19:58.520 --> 0:20:01.959 then we still have a ample production growth from non OPEC. 0:20:02.280 --> 0:20:05.400 Our judgment is that demand is going to be slow 0:20:05.480 --> 0:20:08.200 because of all the macroeconomic trends you guys have been 0:20:08.200 --> 0:20:11.080 talking about for the last fifteen minutes. We don't think 0:20:11.240 --> 0:20:13.280 demand is going to be growing, you know, more than 0:20:13.280 --> 0:20:17.040 a million two maybe barrels a day next year, and 0:20:17.160 --> 0:20:19.800 non OPEC alone can fill that without even thinking about 0:20:19.800 --> 0:20:22.600 the Fragile five or what China is doing. So I 0:20:22.640 --> 0:20:24.000 think you know the way to look at the way 0:20:24.000 --> 0:20:26.200 we look at the trends, it's going to be weaker market. 0:20:26.440 --> 0:20:28.600 Just quickly here ed in the interest of time. 0:20:28.640 --> 0:20:30.520 What you basically said is that China's building its own 0:20:30.560 --> 0:20:32.480 spr that's much bigger than the US, as the US 0:20:32.560 --> 0:20:35.760 was trading their own their own spr How much is 0:20:35.880 --> 0:20:39.160 Saudi Arabia going to keep production low simply because they 0:20:39.200 --> 0:20:41.000 know China is not going to be a big buyer. 0:20:41.440 --> 0:20:44.119 You know, I don't know. I don't know how to 0:20:44.119 --> 0:20:46.600 read the she leaves on it. There was an article 0:20:46.720 --> 0:20:51.160 in Arab News involving a conversation between the Crown Prince 0:20:51.720 --> 0:20:55.400 and the Prime Minister of India at the G twenty meeting, 0:20:55.840 --> 0:21:00.840 and the Crown Prince is quoted in a Saudi newspaper. Therefore, 0:21:00.840 --> 0:21:04.560