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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stocks pairing modest losses holding their all time high. It's Christopher Own of Ben Fatiguis writing with the S and P five hundred rallying with such potency, there's also likely some value when identifying what is not exhibiting similar vigor. Chris joins us. Now for more, Chris corningicot see. I great to be here, and what is not exhibiting similar rigor?

00:00:54
Speaker 3: Well, I would say I'm balance. This has been a very good rally, certainly the last week, but just go back the last six, seven, eight weeks. They threw everything they could at this market, whether it was bond yields, whether it was oil, whether it was the war, and the best they could do was maybe a two or three percent draw down in the SMP extremely rotational tape. You know, we've been observing for weeks and weeks that the internals have been getting better, not worse. Here now there are some pockets of maybe the market that are a little bit squirming here the utilities as an example. I think there's a political crosswind that started to impact a number of those names, particularly in the power producer side, the cegs and the Talons and the vistras. But I'd say, on balance, you know, seventy five percent of the smpiece above the tun or day right now, that's about as broad as we've seen in two or plus years.

00:01:40
Speaker 2: Is this bun market close to becoming a promplum? Speaking of squarey, you know how it had funny curve in the last week. Go on, give me a thoughts.

00:01:46
Speaker 3: I'm going to tell you something that I think might surprise you here. So it's we're four hundred days since Trump two point zero started in January of twenty five. That four hundred day period, the range of the ten ure yields eighty five basis points. It's the low list four hundred day range in history, go back as long as you want. Bonvall is very very muted right here right. I think when you look at what the reaction function from Treasury or from the administration has been his or I think the goal is to limit Bonvall preserve optionality. And when you look at one of the tightest four hundred day ranges in history, I think that certainly speaks to that.

00:02:26
Speaker 1: Wouldn't you think, though, that less communication would introduced four vol.

00:02:30
Speaker 3: So you think so, But the market's response has been entirely different thus storm. I mean, even from the Fed last week, two year yield are lower and higher. Thirty year yield is flat. Double B corporate spreads, you know, talking about alphabet onto the bomb market. Why wouldn't you Double B corporate spreads are on the tights right now. So I think the things that we look at to kind of gauge the health of the economy, of the bomb market, and the equity market are still pretty much in I mean, every bank stock around the world's at new highs right now. Credit conditions everywhere are about as benign as it gets. I'm not saying those things can't change. But if you're looking at the landscape today and trying to evaluate in the present moment, our conditions still supportive, I think they are well.

00:03:15
Speaker 1: I think that the equity market is telling you that with the fastest kind of whipsaw back to oversold that we've seen in modern history, are one of.

00:03:20
Speaker 3: The fastest reversals.

00:03:22
Speaker 1: Bank for America's index says that we're now the most over solder over bullish in terms of sentiment going back to twenty twenty one. Is that a sell indicator to you the same way that it is to Michael Hartnett.

00:03:34
Speaker 3: I think you need bulls for both markets. So I'm not as convinced that you know, when you look at and you know we've dived into this for years and years and years, sentiment at tops is not very helpful. It's very helpful what loads right. Fear and panic is a much more actionable emotion than the greed that's often found at tops. So listen, We're very mindful that you know, as this market has made new highs, you have certainly, I think seen the attitudes get a little bit spicier here. I would yet to say that we're in that you know, everyone is completely all in and there's no buyers left. I don't think we're at that at that point yet when.

00:04:12
Speaker 4: You look at that narrow range on the ten year and you say that you know the reactionary function from the administration, is that the reactionary function that this bond market for this administration still remains the key. It's the biggest check on Trump and the Treasury.

00:04:25
Speaker 3: You know. I think it's interesting, and Marie, because you brought up Japan and yen, which I think certainly playing a role in some of this. You go about to look at the last two and a half three years on the end, char I mean, it's every time you're in this one sixty one, sixty two, and I know we pushed one sixty five a couple of weeks ago where you get kind of either boj or Treasury lil agitated here. And I think the actions of the last week or so certainly reflect that. But I would just make an observation. I think all these calls out there that higher JGB yild's are about to blow the world up are so hyperbole and so misleading.

00:05:04
Speaker 2: What are people getting wrong?

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Speaker 3: I think people are getting wrong that we're in a reflationary boom in Japan for the first time in thirty or forty years and.

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Speaker 2: So on that's so freaked out by what's happening.

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Speaker 3: I think it drifts with yields in Japan higher. I think it raises the floor on yields around the world. So I understand the adjective there. But as far as japan Japanese bank stocks trade grade, Japanese is short stocks trade grade. So if there was something truly systemic about higher JGB yields, I think it'd be showing up in those avenues. It hasn't.

00:05:33
Speaker 2: This sounds like more like a canceling session for the Japanese officials and scale best and that it does people on war straight. Because the concern that I've seen at the moment over the last month or so stems from the treasury and stems from Japanese authorities. I haven't actually heard too many people around this type will freak out about the situation in Japan.

00:05:49
Speaker 3: No. I think it's pretty remarkable, and we've said it off airs and Japanese tens are about to cross German tens for the first time in a very very long period of time. I mean, which economy is in better condition right here. I would argue what's happening in Japan is a massive departure and change from what we've seen from that economy in thirty years.

00:06:08
Speaker 1: Part of the problem is that you can talk to the ten year and how range bound it's been. The thirty year has not been range bound. And this reflationary boom is happening in the backdrop of massive capital rays. We talked about alphabet and the twenty five billion dollars of bond sales. I just wonder how much does that constrain some of what the Fed and Treasury can do. Speaking to a job was saying the concern about the reflationary boom that they're seeing in Japan.

00:06:31
Speaker 3: So nominal GDP is what six and a half? Where should thirty year yels be? With six and a half nominal, I think you could make a very valid case that you know, five point twenty is by no means extraordinary. You kind of go back and you look at the kind of great decade at the nineteen nineties. There wasn't a day in the nineteen nineties where the ten year yield was under five percent, right, So I just think we'd have to put this in a little bit of context, I've always been to the when you look at these kind of bubble like equity environments or melt up like environments, they tend to end with both equities going parabolic and bond yields going in parabolic. I think eighty seven it happened. In eighty nine in Japan, it happened. You had the Nikke double that year, JGB yields one from four to eight. In ninety nine, it happened. The Nasdaq clearly did what it did. But people forget us ten yere yeels in ninety nine, one from four to seven. So that's how these typically end. I don't think we're in that explosive bond environment just yet.

00:07:29
Speaker 2: To gendp right shows have changed. Yeah, we're running persistent six percent budget deficits even in good times. That's problematic. Clearly the Treasury is very uncomfortable about allowing people to monetize their double reserves at the moment. Based on the access that the Japanese have been given to a particular vehicle over the federal reserve, that would speak not used.

00:07:48
Speaker 3: I believe it hasn't been US hasn't been used ft reporters warning has not been used, but.

00:07:51
Speaker 2: It speaks to unease of the Treasury, and some people might say, for good reason, that these yields are getting away from them at the wrong time. When the bank drop for fixed income right now has changed. There are problems in Germany, there are problems in Japan that we didn't have to otherwise confront. And you know where I'm going with this, because fifteen years ago, when we would all sit around this table and people would complain about the deficit and you know, the supply concerns and a lot of those concerns were misplaced, but the bank drop for fixed income was so different. We had an anchor in Japan, we had an anchor in Germany, and the biggest companies in this country weren't issuing debt in quite the same way. There's competition for capital in a way that did not exist ten to fifteen years ago. We have to confront that the Treasury does too, and there's obviously a reluctance for them to turn out the debt as well. So you say this is normal, I don't think the Treasury thinks this is normal at all, which is why they won't extend duration at all, and they keep guiding the treasury market to expect the same kind of issuance because they're nervous about what's happening with long end.

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Speaker 3: Well, if you look historically, the issues on the short end are STI running below the long term average. And this is you know, it's really no different than how the own treasury funded the government. Here as well, I think what's interesting, and we use the term we're entering the alpha market, right, this is a market where you know, I think ambiguity is greater than people are used to. I think it's an environment where there's no free lunch. You have to pick stocks. This is no longer the kind of fifteen years of que and Fower guidance that everyone gets trophies. So I think it's an important shift and one will have to adjust. There are so many moving pieces here at the moment. You know, in this ten minute discussion, right, we've talked about treasury yields, We've talked about yen, we've talked about equities. I think you've really got to stay on your toes here, and I you know, I kind of liken this from the transition from the fifties into the sixties, where you had a very docile decade in the fifties. Bonnyields got to about five and a half or six in the early part of the sixties. You bounced around for the next six seven eight years. It was a decent decade for stocks, but you had multiple corrections, multiple better markets, multiple economic cycles. I think that's the environment we're in. Think about the equity market this year, it's been all e not pe right. PE's are down straight ease up a lot. That's inherently a more cyclical economy.

00:10:08
Speaker 2: I think it's one that we ought to get used to stay with US Multlmberg Savannan's coming up after this and the Savannahs this morning. A diplomatic deadlock in the Strato for.

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Speaker 5: Merse sort of open right now. You know, we have a thing called the blockade, headed up by the US Navy, and we control it. I think we're doing very well. I just you know, I'm involved in the negotiation. I think it's gonna end pretty soon. I don't think they can go much longer.

00:10:43
Speaker 2: So here's the lices this morning. The President claiming to have control of the Strato for mercs around six to bloc the US and is righty ships from transiting the critical waterway, and.

00:10:52
Speaker 4: There was also apparently some attacks as well at the opening of the Trader for Most yesterday, which is why you saw oil prices of higher. The fact of the matter is, the President said yesterday, it is sort of somewhat open. It sounds very much like concepts of a plan. They have an idea of how they can get traffic back through. But the fact of the matter is, if Iran is not going to allow US or as Rali ships, what Insuran is going to allow other ships even to want to transit through the straight up from Moose very very very messy situation.

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Speaker 2: It's a built on that. They form a city of US intelligence official Norman rule rights the following. The US around of conflict now has many fronts where violences in submits and but could flare up with strategic consequences. Norman joins us now for more. Norman, welcome back to the program, sir, How would you characterize this particular agreement, would you even call it an agreement?

00:11:41
Speaker 6: Good morning? Well, we certainly have a greater possibility of a diplomatic agreement now than any time in recent weeks. But the maximalist demands of Tehran and its use of intermittent regional violence is making the conclusion of the agreement unpredictable. Likewise, we should note that just execution of this agreement will require Treasury to issue rules as to how firms could pay. If fees are paid, and if fees are not paid, then we have to prepare for additional violence by Iran in the future. Iranian decision making is not unified on the need for concessions, and indeed there is no sign of a concession a pro concession party in Iran at this point.

00:12:27
Speaker 4: Norm how can treasuring green light these fees if Iran is not allowing US vessels to transit.

00:12:34
Speaker 6: That's an excellent point, and we should keep in mind it's US Israeli could be US or Israeli related. The definition of that concept could be quite significant. And in essence, what Iran is doing is not only keeping the US out, but dictating to Gulf states who can deliver their food, their energy, their trade partners. This would have a significant impact on global commerce, so it can't be conducted. We can't lot that this is just a negotiating threat by the Iranian parliament. It doesn't have a decision making authority, but there have been examples of Iranian parliament making decisions such as sixty percent enrichment that have been executed by the government when approved by the Supreme Leader and the National Security Council.

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Speaker 4: Norm there have been some golf countries that have been able to get oil and other products out, namely the UAE. How have they been able to do this?

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Speaker 6: Most of the golf countries that use the straight up removes have exported oil in recent weeks. They've done it quietly through the Oman channel, the in closed coordination with the US military and obviously the government of Oman. But Iran has intermittently used its degraded missile and drone capability to demonstrate that it has a capacity to strike some of this shipping, and that capacity has the greatest impact on LNG, which has essentially been shut down.

00:13:57
Speaker 1: In the golf norm we've heard about a toll being unacceptable not only to the US but other golf countries that are neighboring Iran.

00:14:05
Speaker 2: Is a service fee acceptable?

00:14:07
Speaker 1: A five to seven percent service fee is currently being proposed by Iran.

00:14:11
Speaker 6: Certainly not you can call it whatever you wish, but it's a shakedown, and that fee can be changed. Now, Iran is entitled to a compensation or charge if it we're to take care of a pollution issue, a security issue, rescue a ship in danger. That's not unreasonable that any country would ask for that. But Iran is providing no services. And to be clear, the last time anyone charged a fee in the straight up or moves was April sixteen, twenty two, and that was the Portuguese.

00:14:40
Speaker 1: How do you see this evolving given the fact that it seems like President Trump has some reluctance to engaging in kinetic warfare again. There's been a discourse about whether that's tied to the munition stockpiles, Questions around whether anything additional can be accomplished with airstrikes that hasn't already been accomplished. What do you see as a potential of travel should these negotiations not yield anything.

00:15:03
Speaker 6: Time tenacity by the diplomats and the intermediaries. The United States is certainly pursuing a diplomatic route along with the Gulf parties, but events may shape that into a different direction. The Huthi attack on Saudi Arabia, we'll have to see if the Saudi's follow through with retaliation. The reported attack that took place yesterday on shipping and will the US retaliate If we don't, Iran will continue these attacks, and it's not assure that diplomacy will succeed. But at the same time, the diplomatic path forward will require concessions from Iran. If that doesn't occur, we're in a new normal.

00:15:43
Speaker 4: Where has the US set de terrence then, because the IRGC is still going after vessels to the Strait of Hormus and at the same time the Huthis are now involved.

00:15:52
Speaker 6: Well, that is true, but the nature of the attacks are limited, they're infrequent, they're usually singular, they're not involving sature strikes. There is no question that Iran's and military capacity has been significantly degraded. But degraded does not mean eliminated, and that's really the question.

00:16:10
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Let's talk about a messy process developing in the Middle East, the Rum seeking to prevent US and is Rady ships from entering the Stratiform mers. A potential deal with a man could grant ten run tighter control of the waterway. The part of Los Angeles Executive director Gene Soroka, writing, regional instability continues to think global shipping by increasing fuel and transportation expenses. Those high costs ripple through the economy, ultimately affecting businesses and consumers alike. Geno places to say is with us here in New York, Chink and MORNINGO to see you.

00:16:50
Speaker 3: Good to see you, John.

00:16:51
Speaker 2: How has that instability changed your world in the last five months.

00:16:55
Speaker 7: It's been really unbelievable because while there is about ten percent of world what cargo that goes in and out of the Middle East, it's taking up ninety five percent of everyone's time in the supply chain. New base cases on prices of energy, new base cases on how waterborne deployment architecture is going to look on these big ships and where they're going, and how we're going to handle the cargo. Case in point was this summer you saw a lot of small to middle sized importers bringing in their cargo earlier because the fuel prices were going to go up. They lagged by about three months in the industry, and you had a target date of those tariffs, the Section one twenty twos going offline on July twenty fourth, So we saw an abnormal rise in cargo May June July, ahead of a traditional peak season.

00:17:42
Speaker 2: And we got problems in the rest. To say now as.

00:17:44
Speaker 7: Well, four years now, John, the suics Canal receipts are down eighty percent on average, which means the shipping lines take a longer route around the Cape of Good Hope of Africa, adding fourteen to seventeen maybe even twenty one days long are on transit time. Now with the price of bunker fuel up sixty percent since February twenty eighth, that means the spend on each one of those vessel voyages is so much higher.

00:18:11
Speaker 4: Our vessels and shipping companies just prepared to live through this. As you said, four years you've been doing the Red Sea. Are they prepared to live through the straight of her moves that's off and on like a light switch.

00:18:21
Speaker 3: Yeah.

00:18:21
Speaker 7: I don't think anybody is sitting back and Marie San you know this is just the way it's going to be. But the amount of time that's being invested in scenario analysis, whether it's the importer exporter shipping line three PO Logistics company has just been off the charts. What do I do if this happens? There are so many announcements once again emanating out of Washington. This whipsaw effect of information has got people just planning as much as they can and then executing to the best of their ability.

00:18:49
Speaker 4: How expensive is it to take these roots?

00:18:52
Speaker 7: These routes add so much time and the fuel burn at these elevated levels. You're talking about prices that are up sixty percent over the last six months on average, the transit time has increased by two and a half fold, and right now the fuel burn is about thirty to thirty five percent of the cost of a vessel voyage one ship sailing thirty thirty five percent is what you're looking at on the energy price.

00:19:18
Speaker 1: What I'm struck by is how we've had one supply shock after another, and people keep saying, well, at first it was transitory, the second one it was just inconvenient that one shock came after another. And now people are saying this is a new normal, that a lot of the old rules are breaking down, the sort of free traverse of the seas kind of dissipating. How do your clients think about the supply side shocks when it comes to the influence over their prices and how they plan for the future.

00:19:44
Speaker 7: The question really is to that how much more can we take? We go through COVID, we had one hundred and nine ships backed up in la and Long Beach because people were buying so much product and then sitting on it like a warehouse complex at the Port of Los Angeles. Then we go through the tariff policies and the reaction from overseas markets where we're now out of the ag sector, soybeans moving out of Brazil, Argentina, almonds from Australia, and then import shifting with windows of opportunity and folks just speeding product to market. So it's not consistent, and that's what many of the questions are. When will we get to a day where there's consistency, and if it's a new normal, at least put these policies in place where we can kind of predict what's going to happen.

00:20:27
Speaker 1: Well, like I said, if it's a new normal to some degree, or as people struggle to keep up, can they just raise prices?

00:20:33
Speaker 2: Is that a lever that.

00:20:34
Speaker 1: They can keep leaning on to offset the extra costs incurred by the inefficiencies and the disruptions.

00:20:40
Speaker 7: Not always, And I'll give you one example with the price of energy across the board going up. Diesel prices in southern California are up by about a third. Most of the truckers that do our business at the port, about two thirds of all the cargo moves in and out over the road. They're small to mid sized businesses. They can't absorb these price shops like others can, and they can't necessarily pass it on because they don't have the leverage. So there are different segments in this. The retailer passing it on, absorbing finding efficiencies in their supply chain better chance than some of these service providers that are really doing the business every day. Our first and last mile ambassadors.

00:21:17
Speaker 2: Jane just found a question. It's Pyros Friday, So we talked about the job states. What's the labor market movement look like in your industry at the moment things get intined to what's access to talent shaping up?

00:21:28
Speaker 7: Like, generally speaking, we're pretty good shape. These dock workers the best in the business moving all this cargo. Our daily stats have never looked better from an efficiency standpoint, how much cargoes moving it out. Even with the changes in commercial driver's license and truckers, we're still in very good shape for the seventeen thousand that are registered to do business.

00:21:48
Speaker 2: Now, time's imagining on the horizon, not.

00:21:49
Speaker 7: That I've seen oka, but even at elevated levels, you've got to do better with your gate appointments. You've got to make sure that you're loading these trains on DOC quickly and moving them through the alome to corridors. All about speed and efficiency, and so far we're staying ahead of the curve on that.

00:22:04
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, a gient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app