1 00:00:00,120 --> 00:00:02,920 Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in 2 00:00:03,000 --> 00:00:07,840 Speaker 1: local communities, economies and a sustainable future. That's a power 3 00:00:08,080 --> 00:00:12,360 Speaker 1: of global connections. Mary Lynch, Pierce Fenner and Smith Incorporated 4 00:00:12,760 --> 00:00:27,400 Speaker 1: member s I p C. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:27,840 --> 00:00:31,520 Speaker 1: I'm Tom Keene with David Gura. Daily we bring you 6 00:00:31,560 --> 00:00:36,600 Speaker 1: insight from the best in economics, finance, investment and international relations. 7 00:00:37,000 --> 00:00:41,600 Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 8 00:00:41,680 --> 00:00:49,480 Speaker 1: of course on the Bloomberg. We've got a productive morning 9 00:00:49,560 --> 00:00:53,239 Speaker 1: with Edward Morris of City Group talking about various and 10 00:00:53,360 --> 00:00:58,000 Speaker 1: sundry on oil. UH. To get started here, and I 11 00:00:58,000 --> 00:01:00,040 Speaker 1: know Francine has got some other themes to speak of 12 00:01:00,160 --> 00:01:03,920 Speaker 1: as well. There is this word in economics elasticity, or 13 00:01:03,960 --> 00:01:08,200 Speaker 1: the responsiveness of oil with a new technology. And with 14 00:01:08,280 --> 00:01:11,880 Speaker 1: American oil was shell and all the rest wracking and 15 00:01:12,240 --> 00:01:17,560 Speaker 1: all that. What is our elasticity of Americans supply of oil? 16 00:01:17,720 --> 00:01:20,680 Speaker 1: How different is it from our ute? Well, if you 17 00:01:20,760 --> 00:01:24,720 Speaker 1: look at deep water projects, it takes ten years from 18 00:01:24,720 --> 00:01:27,840 Speaker 1: the time you decide to explore a few successful and 19 00:01:27,959 --> 00:01:31,720 Speaker 1: UH and then produce oil from the deep water shale 20 00:01:31,800 --> 00:01:35,039 Speaker 1: is particularly now that we have significant infrastructure and the 21 00:01:35,080 --> 00:01:39,080 Speaker 1: producing basins is really a six month to nine month lack. 22 00:01:39,240 --> 00:01:42,479 Speaker 1: So you you make a decision to drill, you get 23 00:01:42,520 --> 00:01:44,800 Speaker 1: everything together, you hedge it out, and we want to 24 00:01:44,800 --> 00:01:47,080 Speaker 1: talk about the hedging part of it. Um and and 25 00:01:47,160 --> 00:01:48,880 Speaker 1: six months later oil comes out of the ground. So 26 00:01:48,920 --> 00:01:51,000 Speaker 1: how do you hedge? Let's get right to it. So 27 00:01:51,400 --> 00:01:54,160 Speaker 1: there's massive hedging that's taking place. I wouldn't be surprised 28 00:01:54,160 --> 00:01:56,760 Speaker 1: when the data come in that the fourth HOARDA would 29 00:01:56,760 --> 00:02:00,560 Speaker 1: have seen the largest amount ever uh. And the producers 30 00:02:00,560 --> 00:02:03,040 Speaker 1: have a fifty dollar trigger point. We can talk as 31 00:02:03,120 --> 00:02:06,880 Speaker 1: much as we want about break even prices. Fifty dollars 32 00:02:06,920 --> 00:02:10,000 Speaker 1: brings the producers into hedge uh and they hedge a lot, 33 00:02:10,200 --> 00:02:12,080 Speaker 1: and then it doesn't really matter where the price of 34 00:02:12,080 --> 00:02:14,320 Speaker 1: oil is going for the next two years. But that 35 00:02:14,600 --> 00:02:19,600 Speaker 1: always always always ends ugly when you overhdge in commodities 36 00:02:19,600 --> 00:02:22,200 Speaker 1: as a point where it's great, great, great great great 37 00:02:22,280 --> 00:02:27,320 Speaker 1: grade Oops. This is a cyclical business, and the turning 38 00:02:27,360 --> 00:02:30,520 Speaker 1: points happen faster than you think. They're hard to plan on. 39 00:02:31,120 --> 00:02:36,079 Speaker 1: You've got, particularly in the US, independent producers making independent 40 00:02:36,280 --> 00:02:38,960 Speaker 1: decisions of one another. They may be independent but it 41 00:02:39,080 --> 00:02:42,639 Speaker 1: is a herd mentality of work. UH. There's no mastermind 42 00:02:42,919 --> 00:02:45,040 Speaker 1: orchestrating all of this, and it's really hard to turn 43 00:02:45,080 --> 00:02:47,280 Speaker 1: it off once they get once, once it really gets 44 00:02:47,280 --> 00:02:49,960 Speaker 1: turned on and going ed. Will U S crewed stockpiles 45 00:02:50,040 --> 00:02:54,239 Speaker 1: change under Trump's administration because of his energy policy? Well, 46 00:02:54,280 --> 00:02:57,239 Speaker 1: ironically U S crewed stockpiles are on the way down 47 00:02:57,320 --> 00:03:00,919 Speaker 1: in terms of strategic stocks that started in the Obama administration, 48 00:03:00,960 --> 00:03:03,720 Speaker 1: it's likely to continue in the Trump administration. You simply 49 00:03:03,800 --> 00:03:07,440 Speaker 1: don't need seven hundred million barrels of oil and inventory 50 00:03:07,960 --> 00:03:10,120 Speaker 1: uh in order to ward off an emergency when you're 51 00:03:10,120 --> 00:03:13,440 Speaker 1: moving towards self sufficiency and maybe even the US becoming 52 00:03:13,440 --> 00:03:16,840 Speaker 1: a net hydrocarbon exporter and in that and net oil export. 53 00:03:17,000 --> 00:03:21,000 Speaker 1: So strategic stock policy may have an uh AN overhaul 54 00:03:21,520 --> 00:03:24,760 Speaker 1: before the end of this administration. The administration does have 55 00:03:24,800 --> 00:03:26,640 Speaker 1: an energy policy, it's more and more and more and 56 00:03:26,680 --> 00:03:31,080 Speaker 1: more with less environmental control. Does Mexico have an energy 57 00:03:31,160 --> 00:03:34,480 Speaker 1: policy or is it just triage month to month, quarter 58 00:03:34,600 --> 00:03:37,640 Speaker 1: to quarter. They have a dual energy policy. One is 59 00:03:37,680 --> 00:03:40,880 Speaker 1: to streamline pemmics and get it to be competitive. Hard 60 00:03:40,920 --> 00:03:43,840 Speaker 1: to do given the amount of labor they have to 61 00:03:43,880 --> 00:03:48,400 Speaker 1: employ under various national programs. So it's hard to to 62 00:03:48,640 --> 00:03:51,680 Speaker 1: tame a state monopoly other than depriving it of cash. 63 00:03:52,040 --> 00:03:54,680 Speaker 1: And they deploted of cash, and they've invited foreigners in 64 00:03:55,160 --> 00:03:57,640 Speaker 1: to orchestrate new supplies. So that's a big change in 65 00:03:57,680 --> 00:04:01,200 Speaker 1: policy influencing. The backdrop of this for our global audience 66 00:04:01,280 --> 00:04:05,080 Speaker 1: is not one but two Trump Cabinet secretaries are in 67 00:04:05,160 --> 00:04:08,280 Speaker 1: Mexico City as we speak, the Secretary of State and 68 00:04:08,320 --> 00:04:12,360 Speaker 1: the Secretary of Homeland Security. Remarkable, Yeah, it's absolutely remarkable. 69 00:04:12,360 --> 00:04:15,040 Speaker 1: And you're probably one of the most optimistic when it 70 00:04:15,040 --> 00:04:20,080 Speaker 1: comes to the oil price. What do the bears get wrong? Well, 71 00:04:20,200 --> 00:04:23,920 Speaker 1: the bears may get timing wrong. We are entering a 72 00:04:24,040 --> 00:04:29,520 Speaker 1: just new world of oil where, um, we're getting incremental 73 00:04:29,560 --> 00:04:33,599 Speaker 1: supply from countries that used to be massive imports of 74 00:04:33,760 --> 00:04:37,280 Speaker 1: supply from other parts of the world. We're having changes 75 00:04:37,279 --> 00:04:40,279 Speaker 1: in the demand structure of the world. The growth of 76 00:04:40,400 --> 00:04:44,640 Speaker 1: production from Brazil, from Canada in the US over the 77 00:04:44,640 --> 00:04:48,360 Speaker 1: past seven years, even with the US falling back as 78 00:04:48,400 --> 00:04:51,200 Speaker 1: part of the short cycle nature of response to low prices, 79 00:04:51,279 --> 00:04:54,800 Speaker 1: but these three countries have transformed the Atlantic basin from 80 00:04:54,880 --> 00:04:59,360 Speaker 1: being a supply deficit arena to a supply supply surplus arena, 81 00:04:59,680 --> 00:05:02,640 Speaker 1: one that is moving oil as we speak to the 82 00:05:02,680 --> 00:05:05,600 Speaker 1: Far East. UH. And this is a big challenge for 83 00:05:05,680 --> 00:05:09,760 Speaker 1: all other oil producing countries, whether Russia or whether Saudi Arabia. 84 00:05:10,640 --> 00:05:14,240 Speaker 1: We're seeing only one place in the world where demand 85 00:05:14,320 --> 00:05:18,719 Speaker 1: is growing, and it's a very enhanced competitive market. A 86 00:05:18,800 --> 00:05:21,440 Speaker 1: truce that's been called between the OPEC and an OPEC 87 00:05:21,480 --> 00:05:24,960 Speaker 1: countries can't last long when we're going to see more 88 00:05:25,560 --> 00:05:30,000 Speaker 1: North American South American Atlantic Basin crewed heading into the 89 00:05:30,040 --> 00:05:33,880 Speaker 1: Pacific Basin. And you don't think you're underestimating the impact 90 00:05:34,080 --> 00:05:36,520 Speaker 1: and the strength of shale. I don't know if it's 91 00:05:36,640 --> 00:05:39,599 Speaker 1: ever possible. I know they're bitty and they have different 92 00:05:39,640 --> 00:05:43,000 Speaker 1: break even points that all of these shale producers actually 93 00:05:43,040 --> 00:05:46,120 Speaker 1: come together to really form some kind of force. Well, 94 00:05:46,120 --> 00:05:50,080 Speaker 1: you know we were all talking earlier about about where 95 00:05:50,120 --> 00:05:55,359 Speaker 1: oil prices are in real terms. UH. The uh. The 96 00:05:55,480 --> 00:05:59,799 Speaker 1: remarkable feature of the market is that after a five 97 00:06:00,040 --> 00:06:04,560 Speaker 1: ten year period of unbelievable cost inflation, we're seeing cost 98 00:06:04,600 --> 00:06:09,839 Speaker 1: deflation at work. UH. Costs of production have have dramatically fallen. 99 00:06:09,920 --> 00:06:12,520 Speaker 1: Let me give you one good example, please, there's this 100 00:06:12,680 --> 00:06:17,080 Speaker 1: Johann's Fedrick project in Norway discovered made uh ten years ago. 101 00:06:17,720 --> 00:06:21,560 Speaker 1: It was called off by stat Oil, the operator, when 102 00:06:21,600 --> 00:06:24,400 Speaker 1: they saw that the break even fully cost accounting price 103 00:06:24,760 --> 00:06:27,520 Speaker 1: was sixty dollars of barrel, and they relaunched it in 104 00:06:27,960 --> 00:06:32,440 Speaker 1: saying last winter that the break even prices come down 105 00:06:32,440 --> 00:06:35,360 Speaker 1: to substantially below forty in the late spring. They said 106 00:06:35,400 --> 00:06:38,680 Speaker 1: it was thirty in this past fall. So going from 107 00:06:38,760 --> 00:06:42,880 Speaker 1: six is an incredible example of cost inflation and we 108 00:06:42,880 --> 00:06:45,440 Speaker 1: don't see much on the horizon to reverse that anytime. 109 00:06:45,480 --> 00:06:48,279 Speaker 1: So let me read the scripture you mentioned Norway and 110 00:06:48,320 --> 00:06:50,240 Speaker 1: to help our London noughties, good morning to all of 111 00:06:50,240 --> 00:06:53,719 Speaker 1: you in London listening Um Bloomberg Radio. Give us an 112 00:06:53,760 --> 00:06:56,640 Speaker 1: update on north oil. I remember sitting in Edinburgh with 113 00:06:56,960 --> 00:06:59,960 Speaker 1: Alex Sandmon of the SMP, and he's got some oil 114 00:07:00,000 --> 00:07:02,840 Speaker 1: abilities in his work at RBS years ago. And there 115 00:07:02,920 --> 00:07:06,039 Speaker 1: was a north Sea story ten twenty years ago. Is 116 00:07:06,040 --> 00:07:10,480 Speaker 1: there a north Sea story for two thousand twenty? Probably 117 00:07:10,680 --> 00:07:12,680 Speaker 1: the North Sea will still be there, and it may 118 00:07:12,920 --> 00:07:14,800 Speaker 1: well be that they're going to be producing more than 119 00:07:14,800 --> 00:07:17,160 Speaker 1: they are today. The project that I talked about, when 120 00:07:17,160 --> 00:07:20,120 Speaker 1: it starts up in twenty nine is expected to deliver 121 00:07:20,160 --> 00:07:23,560 Speaker 1: six d and sixty barrels a day of oil equivalent, 122 00:07:23,600 --> 00:07:25,960 Speaker 1: mostly oil, a little bit of gas. That's not going 123 00:07:26,000 --> 00:07:29,520 Speaker 1: to be the only offshore rough water project that's gonna 124 00:07:29,920 --> 00:07:32,480 Speaker 1: start up, because once you get one, then the then 125 00:07:32,520 --> 00:07:35,120 Speaker 1: the play is open to others. So, uh, north Sea 126 00:07:35,200 --> 00:07:36,640 Speaker 1: is not going to go away. It doesn't play the 127 00:07:36,760 --> 00:07:39,880 Speaker 1: role it played at the beginning of the century, but 128 00:07:40,160 --> 00:07:42,640 Speaker 1: it's still an important one. And I know you see 129 00:07:42,640 --> 00:07:45,000 Speaker 1: oil between forty and sixty five dollars this year. Is 130 00:07:45,000 --> 00:07:47,560 Speaker 1: there a danger that if they pulled back a lot 131 00:07:47,560 --> 00:07:49,960 Speaker 1: of these oil majors, if they're putting too much back 132 00:07:49,960 --> 00:07:52,960 Speaker 1: on investment, that we then see oil shoe back up 133 00:07:53,000 --> 00:07:55,440 Speaker 1: to a hundred to three years from now. Yeah, well 134 00:07:56,320 --> 00:07:59,640 Speaker 1: sixty is really sixty five is really a five year horizon, 135 00:07:59,680 --> 00:08:02,400 Speaker 1: not at this year horizon. I wouldn't be surprised if 136 00:08:02,440 --> 00:08:04,640 Speaker 1: there were a sell off in the market, given the 137 00:08:04,760 --> 00:08:08,560 Speaker 1: length of managed money in the market today. I wouldn't 138 00:08:08,600 --> 00:08:12,040 Speaker 1: be surprised to see prices falling to fifty or forty 139 00:08:12,120 --> 00:08:14,720 Speaker 1: nine for a few instances. But we're not going to 140 00:08:14,800 --> 00:08:17,520 Speaker 1: see that kind of price volatility this year. We don't 141 00:08:17,560 --> 00:08:21,280 Speaker 1: imagine that's that that's more in the distance and saying 142 00:08:21,320 --> 00:08:26,119 Speaker 1: that if OPEC really we're trying to destroy the non 143 00:08:26,160 --> 00:08:28,400 Speaker 1: opaque market, what they should do is work for a 144 00:08:28,440 --> 00:08:32,960 Speaker 1: world of enhanced volatility, not stability. If you want volatility 145 00:08:33,040 --> 00:08:36,400 Speaker 1: to stop the capex from coming into the market, stability 146 00:08:36,520 --> 00:08:39,760 Speaker 1: is there, stated friend, but it's their worst enemy. Edward 147 00:08:39,760 --> 00:08:41,720 Speaker 1: Morris with us. I know friend scene in London wants 148 00:08:41,720 --> 00:08:43,640 Speaker 1: to go to OPEC. I agree they're strongly on this. 149 00:08:44,040 --> 00:08:47,080 Speaker 1: If you were to write the acclaimed at Moore's article 150 00:08:47,200 --> 00:08:49,800 Speaker 1: for Foreign Affairs Magazine, and I'm gonna give you the 151 00:08:49,840 --> 00:08:54,040 Speaker 1: title of We're gonna go to Baroness Thatcher expect the unexpected. 152 00:08:54,400 --> 00:08:56,520 Speaker 1: So that's a title of your article for CEE IFR 153 00:08:56,640 --> 00:09:00,320 Speaker 1: and Foreign Affairs Magazine. What's he expect? The onex spect 154 00:09:00,360 --> 00:09:03,360 Speaker 1: died in the oil business. When you look at OPEC 155 00:09:03,440 --> 00:09:06,040 Speaker 1: and non OPEC, well, I think they unexpected is that 156 00:09:06,080 --> 00:09:09,720 Speaker 1: OPEC and not OPEC won't be terms that are gonna 157 00:09:09,840 --> 00:09:13,080 Speaker 1: be useful in explaining anything. We're moving toward a world 158 00:09:13,120 --> 00:09:16,560 Speaker 1: in which there are three giant oil producing countries, the 159 00:09:16,720 --> 00:09:20,400 Speaker 1: U S, Saudi Arabia and Russia, and the interplay geo 160 00:09:20,400 --> 00:09:23,000 Speaker 1: politically among the three of them and with markets I 161 00:09:23,000 --> 00:09:26,280 Speaker 1: think will be the most significant set of factors in 162 00:09:26,320 --> 00:09:29,600 Speaker 1: the market over the next ten years. And what do 163 00:09:29,600 --> 00:09:32,640 Speaker 1: we need misunderstand about OPEC? I remember covering it fifteen 164 00:09:32,720 --> 00:09:35,440 Speaker 1: sixteen years ago, and these guys used to arrive at 165 00:09:35,480 --> 00:09:38,480 Speaker 1: the Intercontinental in Vienna that used to say one thing 166 00:09:38,760 --> 00:09:41,160 Speaker 1: and the market would shoot up or go down by 167 00:09:41,240 --> 00:09:44,960 Speaker 1: three dollars. Will they ever regain that again? They've regained 168 00:09:44,960 --> 00:09:47,400 Speaker 1: it a little bit only because they drove out a million, 169 00:09:47,440 --> 00:09:50,560 Speaker 1: two thousand barrels that they have US production. Uh, they 170 00:09:50,600 --> 00:09:53,560 Speaker 1: wanted to drive out more. They didn't succeed in doing that. 171 00:09:53,920 --> 00:09:57,520 Speaker 1: The pain got great enough that in one last gasp, 172 00:09:58,000 --> 00:10:01,840 Speaker 1: they orchestrated a twenty four country agreement that in itself 173 00:10:01,880 --> 00:10:04,720 Speaker 1: by definition, is fragile. You can't have a twenty four 174 00:10:05,080 --> 00:10:07,760 Speaker 1: country agreement in a world where the market is really 175 00:10:07,880 --> 00:10:11,680 Speaker 1: increasingly competitive. And I think the big difference for OPEQ 176 00:10:11,840 --> 00:10:15,560 Speaker 1: is not just the rise of competition from outside on 177 00:10:15,600 --> 00:10:19,440 Speaker 1: a permanent basis, but also transparency. YopE could rule the 178 00:10:19,520 --> 00:10:22,400 Speaker 1: roost when the world wasn't transparent, when you didn't know 179 00:10:22,559 --> 00:10:25,720 Speaker 1: really how much oil was going to be produced, when 180 00:10:26,120 --> 00:10:29,240 Speaker 1: you had to rely on the rhetoric of key OPEC 181 00:10:29,280 --> 00:10:32,000 Speaker 1: countries in the world just gotten to transparent. The world 182 00:10:32,040 --> 00:10:35,160 Speaker 1: knows whether OPEC and non Opequ countries are agreeing. They 183 00:10:35,160 --> 00:10:39,079 Speaker 1: can track vessels at sea, they can look at loadings 184 00:10:39,160 --> 00:10:42,839 Speaker 1: from satellites that are orbiting the planet um and they 185 00:10:42,840 --> 00:10:46,200 Speaker 1: don't control the flow of information any longer. Do they 186 00:10:46,240 --> 00:10:48,680 Speaker 1: no longer cheats And if it is, does it smell 187 00:10:48,679 --> 00:10:52,840 Speaker 1: of desperation? Well, if they quote cheated, the world would 188 00:10:52,960 --> 00:10:55,520 Speaker 1: know it. Uh. They have a production agreement. You can 189 00:10:55,559 --> 00:11:01,000 Speaker 1: measure supply. Uh. Cheating is more critic going when countries 190 00:11:01,040 --> 00:11:02,920 Speaker 1: can cheat than when they can cheat. So one of 191 00:11:02,960 --> 00:11:07,920 Speaker 1: the factors in this agreement is that basically nobody can 192 00:11:07,960 --> 00:11:11,560 Speaker 1: add more production to the market. We had significant growth 193 00:11:11,600 --> 00:11:14,920 Speaker 1: of some six d barrels a day from Iraq in 194 00:11:14,960 --> 00:11:18,800 Speaker 1: twenty fifteen. We had eight hundred thousand barrels a day 195 00:11:18,800 --> 00:11:23,480 Speaker 1: from Iran, and actually inventories didn't budge very much. They 196 00:11:23,559 --> 00:11:27,760 Speaker 1: grew between in the beginning of twenty sixteen by huge 197 00:11:27,760 --> 00:11:31,080 Speaker 1: amount of good six hundred million barrels of crude oil, 198 00:11:31,120 --> 00:11:35,160 Speaker 1: petroleum products, natural gas liquids. That that number came down 199 00:11:35,200 --> 00:11:40,040 Speaker 1: a bit in despite the no OPEQ non Opeque agreement, 200 00:11:40,080 --> 00:11:43,200 Speaker 1: and despite uh and added eight hundred thousand barrels a 201 00:11:43,240 --> 00:11:45,760 Speaker 1: day from Iran. But nobody's there to add a lot 202 00:11:45,840 --> 00:11:49,240 Speaker 1: to this market, right, can actually Opaque regain control even 203 00:11:49,240 --> 00:11:52,440 Speaker 1: if fresh And doesn't play ball? Uh. The short answer 204 00:11:52,480 --> 00:11:55,800 Speaker 1: to that is would really be hard. The higher price 205 00:11:55,960 --> 00:11:58,720 Speaker 1: that you get, the less control they have over the 206 00:11:58,760 --> 00:12:00,480 Speaker 1: rest of the world. That that that would include Russia and 207 00:12:00,559 --> 00:12:05,880 Speaker 1: Russian Russian production the Saudi's anticipated when they went into 208 00:12:05,920 --> 00:12:10,120 Speaker 1: a market share strategy. They thought that Russia was going 209 00:12:10,160 --> 00:12:12,800 Speaker 1: to see a three hundred to five hundred thousand barrel 210 00:12:12,800 --> 00:12:15,680 Speaker 1: a day decline, So did the Russian government, and Russian 211 00:12:15,679 --> 00:12:17,880 Speaker 1: production kept growing. Let me get one more question and 212 00:12:17,920 --> 00:12:20,680 Speaker 1: you'll bring it back to Oklahoma. Ta Boon Pickens out 213 00:12:20,760 --> 00:12:23,920 Speaker 1: front with the T. Boon Pickens plan on natural gas? 214 00:12:24,080 --> 00:12:28,400 Speaker 1: Can T Boons Pickens prosper with that gas transportation in 215 00:12:28,400 --> 00:12:32,680 Speaker 1: a ed Morse world. The problem with the Tea Boon 216 00:12:32,679 --> 00:12:36,440 Speaker 1: Pickens confronted is that, well, he thought that natural gas 217 00:12:36,480 --> 00:12:39,160 Speaker 1: prices would be competitive with oil prices. He thought they 218 00:12:39,200 --> 00:12:41,920 Speaker 1: were both going to be higher. So the Pickens plan 219 00:12:42,080 --> 00:12:47,119 Speaker 1: was based effectively on a high carbo hydrocarbon price environment. 220 00:12:47,520 --> 00:12:50,200 Speaker 1: And we're not seeing that we're seeing US NAT gas 221 00:12:50,960 --> 00:12:54,960 Speaker 1: as even more abundant than US oil, and the US 222 00:12:55,240 --> 00:12:58,920 Speaker 1: is growing. It's already gone from being where the expectations 223 00:12:58,920 --> 00:13:02,200 Speaker 1: when the book is pimp pickinspend came into effect was 224 00:13:02,720 --> 00:13:05,440 Speaker 1: that the U. S gas market was going to remain tight. 225 00:13:05,760 --> 00:13:09,640 Speaker 1: And we've got in Appalachia, of all places, if apple 226 00:13:09,760 --> 00:13:12,120 Speaker 1: Chia were an independent area, would be the third largest 227 00:13:12,200 --> 00:13:16,559 Speaker 1: natural gas producing country in the world. That's big difference. 228 00:13:16,720 --> 00:13:20,600 Speaker 1: And under Trump, building pipelines will get that gas in 229 00:13:20,600 --> 00:13:23,480 Speaker 1: increasing volumes into the market more than General said Moris, 230 00:13:23,520 --> 00:13:25,880 Speaker 1: Thank you so much for City Group, folks. That was fabulous. 231 00:13:25,920 --> 00:13:28,520 Speaker 1: The idea of yeah oil price is not jubbed but 232 00:13:28,640 --> 00:13:33,320 Speaker 1: earlier at Moore suggesting that uh getting back the real 233 00:13:33,400 --> 00:13:37,400 Speaker 1: oil valuations is a tangible and feasible thing. That was 234 00:13:37,440 --> 00:13:48,640 Speaker 1: one at Mores of City Group, brought you by Bank 235 00:13:48,679 --> 00:13:52,720 Speaker 1: of America. Mary Lynch dedicated to bringing our clients insights 236 00:13:52,720 --> 00:13:56,360 Speaker 1: and solutions to meet the challenges of a transforming world. 237 00:13:56,840 --> 00:14:01,080 Speaker 1: That's the power of global connections. Marylynch pre fenneran Smith 238 00:14:01,480 --> 00:14:09,200 Speaker 1: Incorporated member s I p C. It is always a 239 00:14:09,240 --> 00:14:13,480 Speaker 1: good time to speak with Michael Mayo on banking, but 240 00:14:13,600 --> 00:14:16,960 Speaker 1: it is particularly appropriate on this perfect spring day, was 241 00:14:17,040 --> 00:14:20,960 Speaker 1: c l s A because there is a bank reset 242 00:14:21,400 --> 00:14:26,600 Speaker 1: going on, Mike, to get my attention, JP Morgan shares 243 00:14:26,960 --> 00:14:30,760 Speaker 1: is and you would suggest plus pop two hundred and 244 00:14:30,800 --> 00:14:34,000 Speaker 1: two out in the vicinity. What will be the catalyst 245 00:14:34,400 --> 00:14:37,720 Speaker 1: for Mr Diamond to meant more money? Well, Tom, as 246 00:14:37,760 --> 00:14:41,160 Speaker 1: you know, we call JP Morgan the Ron James of 247 00:14:41,160 --> 00:14:45,120 Speaker 1: banking because they're good at both offense and defense. JP 248 00:14:45,160 --> 00:14:48,280 Speaker 1: Morgan really for the last decade through the financial crisis 249 00:14:48,480 --> 00:14:51,440 Speaker 1: has gotten the job done through defense, and we think 250 00:14:51,480 --> 00:14:54,480 Speaker 1: they're on the cusp of showing greater offense. After showing 251 00:14:54,520 --> 00:14:57,480 Speaker 1: flat revenues this decade, we think those are poised to 252 00:14:57,520 --> 00:15:00,640 Speaker 1: increase one fourth over the next three years. Mike, within 253 00:15:00,720 --> 00:15:03,000 Speaker 1: this and this is critical, folks, is and this is 254 00:15:03,000 --> 00:15:04,880 Speaker 1: what Mayo is so good at. He can go granular 255 00:15:05,000 --> 00:15:08,160 Speaker 1: on individual stocks and then look at the industry as well. 256 00:15:08,560 --> 00:15:13,240 Speaker 1: Are we set now for a tangible book ratio reset 257 00:15:13,800 --> 00:15:17,680 Speaker 1: where finally we get a jump condition and book valuations 258 00:15:17,720 --> 00:15:20,600 Speaker 1: of the various banks. Well, that's a great question, Tom, 259 00:15:20,640 --> 00:15:22,400 Speaker 1: And I know you're a cf A, so you asked 260 00:15:22,400 --> 00:15:25,080 Speaker 1: the right questions, but it's not so much it's back 261 00:15:25,080 --> 00:15:28,160 Speaker 1: to the future. We're not you know, paving new ground here. 262 00:15:28,240 --> 00:15:31,200 Speaker 1: This is just going back to where banks historically have 263 00:15:31,360 --> 00:15:35,520 Speaker 1: been when they've created value, when they've had double digit rs, 264 00:15:35,560 --> 00:15:39,280 Speaker 1: and that's where banks are likely to hit. Michael, looks 265 00:15:39,360 --> 00:15:41,120 Speaker 1: cheap right now. I'm looking at a price to book 266 00:15:41,200 --> 00:15:44,920 Speaker 1: ratio for SNP financial, the sector they are compared to 267 00:15:44,960 --> 00:15:48,280 Speaker 1: European stocks, and you guys are way above us. Uh. 268 00:15:48,320 --> 00:15:51,560 Speaker 1: You know the big differences. US banks are likely to 269 00:15:51,640 --> 00:15:55,520 Speaker 1: create value that in financial terms, that generate returns above 270 00:15:55,560 --> 00:15:58,760 Speaker 1: the costa capital, where that's less true for the European banks, 271 00:15:58,760 --> 00:16:00,400 Speaker 1: and that makes all the difference in the That's our 272 00:16:00,400 --> 00:16:03,120 Speaker 1: whole theme. Our theme is back in black, meaning banks 273 00:16:03,400 --> 00:16:05,520 Speaker 1: are on the doorstep of creating value. And when you 274 00:16:05,560 --> 00:16:09,400 Speaker 1: create value, you have another different valuation than banks that 275 00:16:09,480 --> 00:16:12,200 Speaker 1: don't create value. Right, So how do they change that? 276 00:16:13,640 --> 00:16:17,000 Speaker 1: How do they change the how do they start creating value? Well, 277 00:16:17,040 --> 00:16:19,600 Speaker 1: you create value two ways. Number one is you improve 278 00:16:19,640 --> 00:16:22,480 Speaker 1: your returns, and we think the US banks will improve 279 00:16:22,520 --> 00:16:25,960 Speaker 1: the returns through the you know, over half the business 280 00:16:25,960 --> 00:16:29,240 Speaker 1: that's traditional lending higher interest rates are very good, maybe 281 00:16:29,240 --> 00:16:31,920 Speaker 1: an acceleration and loan growth, and the other half of 282 00:16:31,920 --> 00:16:34,720 Speaker 1: the business a little bit more of a risk on 283 00:16:34,880 --> 00:16:37,280 Speaker 1: when it comes to capital markets. The other way to 284 00:16:37,440 --> 00:16:40,920 Speaker 1: create value, which I think is very underappreciated, is to 285 00:16:40,960 --> 00:16:43,880 Speaker 1: reduce your risk. And banks have increased the risk, especially 286 00:16:44,080 --> 00:16:46,120 Speaker 1: in the United States where the balance sheets are the 287 00:16:46,160 --> 00:16:50,200 Speaker 1: strongest in a generation, and so better returns for less 288 00:16:50,320 --> 00:16:54,520 Speaker 1: risk also deserves a higher valuation. But money is still cheap. 289 00:16:54,800 --> 00:16:59,040 Speaker 1: With a good view of Michael Mayo, with tangible book expansion, 290 00:16:59,720 --> 00:17:02,920 Speaker 1: with the enthusiasm over the Trump bump, as you write 291 00:17:02,920 --> 00:17:06,639 Speaker 1: in your research report, is a time for dinosaurs mating. 292 00:17:06,720 --> 00:17:09,919 Speaker 1: Is this where the regional banks become less regional and 293 00:17:09,960 --> 00:17:14,880 Speaker 1: we get more superregionals below the two big defails? Well, 294 00:17:14,920 --> 00:17:18,120 Speaker 1: you frame the question correctly. The largest banks are prohibited 295 00:17:18,200 --> 00:17:21,439 Speaker 1: from buying other banks, so you don't have acquisitions with 296 00:17:21,480 --> 00:17:25,040 Speaker 1: City Group, JP, Morgan, Bank America, and Wells Fargo. Certainly 297 00:17:25,080 --> 00:17:28,720 Speaker 1: below that top level, there's the potential for additional acquisitions, 298 00:17:29,000 --> 00:17:31,399 Speaker 1: and the benefit of acquisitions is scale, and I do 299 00:17:31,480 --> 00:17:34,639 Speaker 1: think on the retail banking side you are seeing the 300 00:17:34,640 --> 00:17:37,960 Speaker 1: benefits of scale. Look at Bank America. Bank America has 301 00:17:38,000 --> 00:17:43,040 Speaker 1: a level of deposit transactions through mobile devices equal to 302 00:17:43,200 --> 00:17:46,199 Speaker 1: over eight hundred branches you could separate that out and 303 00:17:46,240 --> 00:17:48,480 Speaker 1: you have your own regional bank just with mobile bank. 304 00:17:48,520 --> 00:17:51,199 Speaker 1: It's brilliant. I mean within that, Mike, and this is 305 00:17:51,240 --> 00:17:54,119 Speaker 1: that's a brilliant observation. The idea of a of a 306 00:17:54,160 --> 00:17:57,440 Speaker 1: digital bank within a traditional bank goes back to the 307 00:17:57,520 --> 00:18:01,080 Speaker 1: further technological advancement here. I'm gonna ask the question I've 308 00:18:01,119 --> 00:18:04,200 Speaker 1: asked you fourteen times, when did the branch banks go away? 309 00:18:04,440 --> 00:18:07,000 Speaker 1: They're all I mean near the PR Hotel, You're there's 310 00:18:07,080 --> 00:18:10,080 Speaker 1: five banks on one corner. How could do that? But 311 00:18:10,160 --> 00:18:13,160 Speaker 1: they do it in New York? When's it? When's it disappear? Yeah, 312 00:18:13,400 --> 00:18:16,000 Speaker 1: it's it's crazy. I mean, ever since my kids don't 313 00:18:16,000 --> 00:18:18,760 Speaker 1: even like ever since they changed they you know, an 314 00:18:18,760 --> 00:18:21,760 Speaker 1: ice cream store into a bank branch. They realized that 315 00:18:22,320 --> 00:18:25,280 Speaker 1: there's eighty seven thousand branches the United States. We think 316 00:18:25,320 --> 00:18:28,399 Speaker 1: that gets reduced by ten thousand over the next several years. 317 00:18:28,560 --> 00:18:30,760 Speaker 1: But if you had a level similar to the nineteen fifties, 318 00:18:30,760 --> 00:18:34,120 Speaker 1: that would instead of beating eighty seven thousand, fifty two thousand. 319 00:18:34,560 --> 00:18:38,560 Speaker 1: But as customers have greater acceptance of mobile banking, which 320 00:18:38,720 --> 00:18:41,479 Speaker 1: they're doing, I mean, this is a tipping point. You 321 00:18:41,560 --> 00:18:43,840 Speaker 1: are going to see banks closed more branches. You've seen 322 00:18:43,920 --> 00:18:47,439 Speaker 1: several announcements the one laggard on those branch closures, as 323 00:18:47,480 --> 00:18:49,840 Speaker 1: well as Fargo, which is hanging out. There was six 324 00:18:49,880 --> 00:18:53,720 Speaker 1: thousand branches compared to um, you know, Bank America, which 325 00:18:53,760 --> 00:18:57,679 Speaker 1: is you know, one fourth less. Mike, I don't know 326 00:18:57,720 --> 00:18:59,640 Speaker 1: how old your kids are, so I don't know if 327 00:19:00,119 --> 00:19:03,080 Speaker 1: they'll bank with the City or Bank America, any of those. 328 00:19:03,160 --> 00:19:04,880 Speaker 1: But when are we going to see a Facebook bank 329 00:19:05,000 --> 00:19:08,440 Speaker 1: or one of these names that actually speak to millennials 330 00:19:08,520 --> 00:19:11,520 Speaker 1: And can they go through it with regulation actually get 331 00:19:11,520 --> 00:19:15,119 Speaker 1: market share? You know, there's been a lot of talk, 332 00:19:15,400 --> 00:19:18,919 Speaker 1: Um think back to the nine nineties when it's it was, 333 00:19:19,560 --> 00:19:23,159 Speaker 1: you know, clicks for bricks, and you had internet hype 334 00:19:23,160 --> 00:19:25,160 Speaker 1: at that time. It got a little excessive at the time. 335 00:19:25,640 --> 00:19:28,480 Speaker 1: And who's going to dethrow in the banks? But I 336 00:19:28,520 --> 00:19:31,840 Speaker 1: think the winners with digital banking, it's going to be 337 00:19:31,880 --> 00:19:33,359 Speaker 1: the major banks. And by the way, if you have 338 00:19:33,400 --> 00:19:36,399 Speaker 1: a small startup that's doing well, a large banks probably 339 00:19:36,400 --> 00:19:38,919 Speaker 1: going to buy them. And you're seeing that the traction 340 00:19:39,000 --> 00:19:41,119 Speaker 1: with the large banks right now, so and you are 341 00:19:41,119 --> 00:19:43,879 Speaker 1: seeing millennials bank with some of the larger banks. It 342 00:19:43,920 --> 00:19:47,920 Speaker 1: doesn't mean that startups can't get you know, those customers 343 00:19:47,960 --> 00:19:50,880 Speaker 1: who are disenfranchised with the large banks, or doesn't mean 344 00:19:51,040 --> 00:19:54,120 Speaker 1: startups and smaller players, you know, can't get the crumbs. 345 00:19:54,160 --> 00:19:57,360 Speaker 1: But the winners in digital banking, it's it's an easy call. 346 00:19:57,640 --> 00:20:00,040 Speaker 1: It's going to be the largest banks. They have the 347 00:20:00,080 --> 00:20:02,879 Speaker 1: technology budget to bend or or even buy some people. 348 00:20:03,080 --> 00:20:04,879 Speaker 1: All right, give me names. It's not it can't be 349 00:20:04,920 --> 00:20:08,120 Speaker 1: all of the large banks, right, you're ruthless. So European 350 00:20:08,200 --> 00:20:12,280 Speaker 1: a well. Now in retail banking, you're seeing traction. Uh 351 00:20:12,320 --> 00:20:14,320 Speaker 1: you know at a Bank of America. I mean it's 352 00:20:14,359 --> 00:20:17,320 Speaker 1: happening in front of us, and the cost to deliver 353 00:20:17,480 --> 00:20:22,760 Speaker 1: is declined um and so I think JP, Morgan, Wells Fargo. 354 00:20:23,480 --> 00:20:27,680 Speaker 1: These are the big banks getting it done for retail banking. Mike, 355 00:20:27,760 --> 00:20:31,520 Speaker 1: help me here. With free I mean, I guess operating income. 356 00:20:31,600 --> 00:20:34,800 Speaker 1: It's a terrible story of woe folks coming out of 357 00:20:34,880 --> 00:20:38,760 Speaker 1: Lehman to excuse me, five billion free cash flow at 358 00:20:38,800 --> 00:20:41,920 Speaker 1: Bank of America. Now it's only twenty four billion. It's 359 00:20:41,960 --> 00:20:45,000 Speaker 1: gone from five billion to four billion. We've got a 360 00:20:45,080 --> 00:20:48,639 Speaker 1: model at Bloomberg got the thirty billion a few years out. 361 00:20:48,880 --> 00:20:50,520 Speaker 1: What are they gonna do with all that cash? Is 362 00:20:50,560 --> 00:20:53,600 Speaker 1: it a double digit dividend grower for some of these 363 00:20:53,640 --> 00:20:58,320 Speaker 1: cash generators. We see total CATH return and that would 364 00:20:58,320 --> 00:21:02,600 Speaker 1: be dividends and by banks increasing for the industry from 365 00:21:02,640 --> 00:21:05,920 Speaker 1: seventy billion to over a hundred billion over the next 366 00:21:06,000 --> 00:21:09,080 Speaker 1: three to four years. So the pace of cap return 367 00:21:09,240 --> 00:21:11,560 Speaker 1: at banks is going to be one of the most 368 00:21:12,480 --> 00:21:15,840 Speaker 1: highest paces among major industries. I mean, I mean, folks. 369 00:21:15,840 --> 00:21:19,240 Speaker 1: And to be clear here Mr Mayo couldn't say there yet, Tom, 370 00:21:19,240 --> 00:21:21,800 Speaker 1: it's gonna be double digit because his compliance people would 371 00:21:21,800 --> 00:21:23,840 Speaker 1: gouge his eyes out. But I'll say it for you. 372 00:21:24,040 --> 00:21:27,560 Speaker 1: Seventy to a hundred over a worst case five years. 373 00:21:28,119 --> 00:21:30,919 Speaker 1: Maybe mikel get you out near double digit, doesn't it? Well, no, 374 00:21:31,400 --> 00:21:33,840 Speaker 1: we and we can certainly say it's in our our research, Tom. 375 00:21:33,880 --> 00:21:37,080 Speaker 1: And so double digit growth and return of capital at 376 00:21:37,160 --> 00:21:39,680 Speaker 1: banks over the next four years at the same time 377 00:21:39,720 --> 00:21:42,439 Speaker 1: you get better expense controlled by controlling branches. At the 378 00:21:42,560 --> 00:21:45,720 Speaker 1: same time you have accelerating top line growth. Michael Mayo, 379 00:21:45,800 --> 00:21:48,600 Speaker 1: single best buy please, you know we're still going with 380 00:21:48,800 --> 00:21:51,439 Speaker 1: City Group because it's been a laggered You asked a 381 00:21:51,480 --> 00:21:53,960 Speaker 1: few minutes ago, you know what's cheap they're certainly cheap, 382 00:21:54,359 --> 00:21:59,120 Speaker 1: they're restructuring, they're not moving as quickly as they should. Um, 383 00:21:59,160 --> 00:22:00,840 Speaker 1: so we're gonna keep the restaur on them toime, we'll 384 00:22:00,880 --> 00:22:02,919 Speaker 1: go to the annual meeting. But they should have the 385 00:22:02,960 --> 00:22:06,200 Speaker 1: biggest increase in r E over the next four years. 386 00:22:06,320 --> 00:22:08,280 Speaker 1: Michael Mayo, thank you so much. With c ls A 387 00:22:09,000 --> 00:22:13,040 Speaker 1: on American banking, boy, Francine, is that a different discussion 388 00:22:13,080 --> 00:22:16,520 Speaker 1: than what you and I have with the banking staffing 389 00:22:16,640 --> 00:22:20,119 Speaker 1: of continental Europe and the United Kingdom? It is, It's 390 00:22:20,160 --> 00:22:23,399 Speaker 1: it's almost night and day because in Europe we just 391 00:22:23,480 --> 00:22:27,080 Speaker 1: need to, you know, keep at it, overhaul, change, boost 392 00:22:27,119 --> 00:22:29,440 Speaker 1: capital to make sure that we're in a strong position 393 00:22:29,440 --> 00:22:30,760 Speaker 1: like the US. But then, but then a lot of 394 00:22:30,800 --> 00:22:33,480 Speaker 1: people say, look, European banks look cheap. I go back 395 00:22:33,520 --> 00:22:36,879 Speaker 1: to what David Rubinstein said with great force Davos on 396 00:22:37,000 --> 00:22:42,119 Speaker 1: the nationalism of European banking. That was real, That was 397 00:22:42,119 --> 00:22:44,760 Speaker 1: a real tangible moment. Yeah, and I know you're you're 398 00:22:44,880 --> 00:22:47,200 Speaker 1: very focused on M and A, but it's difficult when 399 00:22:47,200 --> 00:22:49,120 Speaker 1: you have one regulator who doesn't want to take systemic 400 00:22:49,200 --> 00:23:04,600 Speaker 1: risk on exactly Francy Laqua in London and Tom Keen 401 00:23:04,760 --> 00:23:06,440 Speaker 1: in New York and joining us. It has been way 402 00:23:06,480 --> 00:23:09,159 Speaker 1: too long since we had a conversation with the King 403 00:23:09,200 --> 00:23:13,240 Speaker 1: of Granularity, John Herman. John, let's do two topics today. 404 00:23:13,640 --> 00:23:15,639 Speaker 1: The yield curve, which I'll get to a second, and 405 00:23:15,640 --> 00:23:18,879 Speaker 1: then Francie and I'll talk about g d P with you. 406 00:23:19,480 --> 00:23:22,200 Speaker 1: The yield. The yield curve which I've showed four two 407 00:23:22,240 --> 00:23:27,040 Speaker 1: times on Bloomberg surveillance television, Trump boom curve steeping in. 408 00:23:27,160 --> 00:23:29,800 Speaker 1: We've been in a tight, tight trading zone. Let's begin. 409 00:23:29,920 --> 00:23:33,480 Speaker 1: Which way are we gonna break steeper or flatter on 410 00:23:33,520 --> 00:23:36,760 Speaker 1: the two tents spread. I think what's what's gonna happen 411 00:23:37,000 --> 00:23:39,160 Speaker 1: is uh, you know, this is a very delicate call 412 00:23:39,200 --> 00:23:42,320 Speaker 1: because actually two tends right now is sort of mid range. 413 00:23:43,119 --> 00:23:45,760 Speaker 1: Last year we were in the two tents flatter. We 414 00:23:45,800 --> 00:23:49,040 Speaker 1: got in at the November. We wrote it like a 415 00:23:49,080 --> 00:23:52,080 Speaker 1: broken pony, right through the summer into the into the 416 00:23:52,080 --> 00:23:55,479 Speaker 1: early autumn, green spans, old fashioned quit ratio. He used 417 00:23:55,480 --> 00:23:58,680 Speaker 1: to talk about seven and I'll kind of that thing 418 00:23:58,880 --> 00:24:02,679 Speaker 1: flashed all into crazy signals in early October of twenty 419 00:24:02,800 --> 00:24:07,000 Speaker 1: saying get out of the every and we jumped in. 420 00:24:07,160 --> 00:24:09,960 Speaker 1: We we closed, we orderly closed out of the flatters 421 00:24:10,040 --> 00:24:12,119 Speaker 1: jumped into the step room about two weeks before Trump 422 00:24:12,160 --> 00:24:14,800 Speaker 1: came in, and then it just broke crazy, this difference 423 00:24:14,840 --> 00:24:17,840 Speaker 1: in yield between the tenure and the two year. Is 424 00:24:17,880 --> 00:24:21,440 Speaker 1: it about Washington and Trump economics or there's something else 425 00:24:21,480 --> 00:24:26,120 Speaker 1: going on. It's it's a uh, it's it's basically uh, 426 00:24:26,160 --> 00:24:28,399 Speaker 1: you know, it's a FED view on the one hand, 427 00:24:28,640 --> 00:24:31,159 Speaker 1: and how the Fed will conduct things, uh, you know, 428 00:24:31,200 --> 00:24:33,680 Speaker 1: in terms of policy normalization and so on. So it's 429 00:24:33,680 --> 00:24:36,560 Speaker 1: a FED thing on the front end. On the back end, 430 00:24:36,800 --> 00:24:41,480 Speaker 1: it's a story about underlying growth. Can the stimulus, you know, 431 00:24:41,520 --> 00:24:44,359 Speaker 1: the fiscal stimulus, get the economy going again, get it 432 00:24:44,359 --> 00:24:46,800 Speaker 1: going faster, back to three and that kind of stuff, 433 00:24:46,840 --> 00:24:50,680 Speaker 1: return inflation back two percent or higher? Can the stimulus 434 00:24:50,720 --> 00:24:52,840 Speaker 1: do that? And then on the other hand, it's also 435 00:24:53,160 --> 00:24:55,800 Speaker 1: kind of this big global positioning thing because as you know, 436 00:24:56,240 --> 00:25:00,760 Speaker 1: we're in Mitsubishi MUFG Banking Group and we have you know, 437 00:25:01,040 --> 00:25:04,919 Speaker 1: tremendous number of clients in all through Southeast Asia and 438 00:25:04,960 --> 00:25:07,320 Speaker 1: all to Japan and so on, and uh, you know, 439 00:25:07,600 --> 00:25:10,399 Speaker 1: central banks there are all some of our bigger clients, 440 00:25:10,480 --> 00:25:13,800 Speaker 1: and they have been massive buyers of dips for the 441 00:25:13,880 --> 00:25:17,120 Speaker 1: last three to four years, every pricing dip in ten 442 00:25:17,200 --> 00:25:19,760 Speaker 1: years or in seven years, they came in and bought 443 00:25:19,760 --> 00:25:23,239 Speaker 1: that sector and so now you know the because they 444 00:25:23,240 --> 00:25:26,720 Speaker 1: can't get the yield elsewhere. So uh so, now the 445 00:25:26,800 --> 00:25:30,640 Speaker 1: question is you have those three factors FED, how you know, 446 00:25:30,840 --> 00:25:33,280 Speaker 1: and like we watched the minute yesterday, how ready are 447 00:25:33,320 --> 00:25:36,080 Speaker 1: the is the committee to start amping up and moving 448 00:25:36,160 --> 00:25:38,800 Speaker 1: up the policy and tightening and so that's one thing. 449 00:25:38,880 --> 00:25:40,520 Speaker 1: And then and then it's can we get the growth 450 00:25:40,560 --> 00:25:43,600 Speaker 1: going again? And then will our foreign guys step away 451 00:25:43,680 --> 00:25:45,359 Speaker 1: and then wait to remote or what will they do? 452 00:25:45,520 --> 00:25:49,200 Speaker 1: Let's bring Yeah, John, what do you make of when 453 00:25:49,359 --> 00:25:51,879 Speaker 1: the FED will actually hike? So I'm looking at Mohammadaria 454 00:25:51,880 --> 00:25:54,000 Speaker 1: and his latest piece, his latest tweet, and he says, look, 455 00:25:54,040 --> 00:25:57,160 Speaker 1: the market are definitely definitely getting this wrong. The markets 456 00:25:57,160 --> 00:26:00,960 Speaker 1: implied probably of a march rate increase Arch love Yeah, yeah, 457 00:26:00,960 --> 00:26:02,880 Speaker 1: I would, uh we would, we would agree with that. 458 00:26:03,280 --> 00:26:05,960 Speaker 1: So our our view, you know, the minutes are very 459 00:26:06,000 --> 00:26:08,480 Speaker 1: interesting because you know, you have to know where the 460 00:26:08,520 --> 00:26:10,840 Speaker 1: mindset of the minute of the committee is and what 461 00:26:11,000 --> 00:26:13,760 Speaker 1: kind of signals they're trying to communicate. So what's really 462 00:26:13,880 --> 00:26:18,080 Speaker 1: unusual is the participants again we're more hawkish than the committee. 463 00:26:18,200 --> 00:26:21,159 Speaker 1: So the participants, the non you know, the the total 464 00:26:21,200 --> 00:26:23,600 Speaker 1: group which includes non voters, they came out and said 465 00:26:23,680 --> 00:26:27,240 Speaker 1: many of them saw, you know, a basis for raising 466 00:26:27,520 --> 00:26:30,000 Speaker 1: the FED funds rate fairly soon. But then when it 467 00:26:30,119 --> 00:26:33,920 Speaker 1: came to the committee, the voting the voting committee, they 468 00:26:33,960 --> 00:26:38,000 Speaker 1: said only one was thinking relatively soon. And they said 469 00:26:38,119 --> 00:26:41,680 Speaker 1: many members, many of the voters, thought that they had 470 00:26:41,760 --> 00:26:45,400 Speaker 1: ample time to respond to inflation pressures because they only 471 00:26:45,400 --> 00:26:47,399 Speaker 1: think inflation is going to come back to two percent 472 00:26:47,800 --> 00:26:50,600 Speaker 1: gradually and over the medium term. Our models are saying 473 00:26:50,640 --> 00:26:52,800 Speaker 1: no, no no, no, no, you're gonna be over two percent 474 00:26:52,880 --> 00:26:56,400 Speaker 1: and inflation by early May. So whether you so may, 475 00:26:56,600 --> 00:26:59,040 Speaker 1: the May meetings should be in play. And if Greenspan 476 00:26:59,119 --> 00:27:01,200 Speaker 1: were running the Fed, you know, we were all sort 477 00:27:01,200 --> 00:27:03,280 Speaker 1: of groomed on green Span and so on. So if 478 00:27:03,320 --> 00:27:06,119 Speaker 1: green Span was running the Fed, his quit ratio pointing 479 00:27:06,160 --> 00:27:09,520 Speaker 1: to stronger wage bro this year, next year and into nineteen, 480 00:27:09,960 --> 00:27:12,800 Speaker 1: that's flashing signals saying, you know, you should start moving 481 00:27:12,800 --> 00:27:15,000 Speaker 1: the market up. Uh, and green Span always like to 482 00:27:15,040 --> 00:27:18,199 Speaker 1: move sooner or not later. John, you just talked about models. 483 00:27:18,240 --> 00:27:21,520 Speaker 1: Give me a model for GDP. If nothing bad happens 484 00:27:21,560 --> 00:27:24,680 Speaker 1: and GDP with the trade war against China. Okay, so 485 00:27:24,960 --> 00:27:27,800 Speaker 1: were we were thinking, uh, you know, this was a 486 00:27:27,880 --> 00:27:30,199 Speaker 1: very unusual election, and you know, if you just to 487 00:27:30,240 --> 00:27:31,719 Speaker 1: step away and kind of look at it the way 488 00:27:31,720 --> 00:27:35,240 Speaker 1: an investor would if if we were poised to grow 489 00:27:35,359 --> 00:27:39,120 Speaker 1: at two point one two this year, if Hillary one, 490 00:27:39,520 --> 00:27:42,440 Speaker 1: so regardless of what your viewpoint was or anything, because 491 00:27:42,520 --> 00:27:45,040 Speaker 1: we were due for we had to restock inventories, business 492 00:27:45,080 --> 00:27:48,879 Speaker 1: capex was turning around, underlying you know, momentum and housing market, 493 00:27:48,880 --> 00:27:51,640 Speaker 1: consumer everything. Was saying we're growing to one to two 494 00:27:51,720 --> 00:27:54,439 Speaker 1: this year if Trump. If Trump doesn't win, and if 495 00:27:54,520 --> 00:27:56,520 Speaker 1: Hillary is in and she does more of her income 496 00:27:56,640 --> 00:27:58,840 Speaker 1: transfers and song, we're still growing two one two two 497 00:27:58,880 --> 00:28:03,280 Speaker 1: this year and probably around two to to one. Now 498 00:28:03,320 --> 00:28:08,960 Speaker 1: you've got some promises of tax reform and fiscal infrastructure spending, which, 499 00:28:08,960 --> 00:28:11,959 Speaker 1: by the way, we desperately need to spend the weakest 500 00:28:12,000 --> 00:28:18,560 Speaker 1: spending recovery on government spending. But that then then you're 501 00:28:18,560 --> 00:28:20,960 Speaker 1: looking at two point five two point six this year 502 00:28:21,119 --> 00:28:23,920 Speaker 1: and to nine next year. Okay, I like the way 503 00:28:23,960 --> 00:28:26,159 Speaker 1: you friended. Let me go back to the mathiness of 504 00:28:26,200 --> 00:28:31,720 Speaker 1: this consumption investment, government throwing net export, which partial differential 505 00:28:32,440 --> 00:28:36,479 Speaker 1: matters to you and getting to a better economy for 506 00:28:36,520 --> 00:28:40,280 Speaker 1: all Americans if you just goose more consumtion, if you no, no, no, 507 00:28:40,320 --> 00:28:43,840 Speaker 1: I wouldn't because consumer has actually, of all the components 508 00:28:43,880 --> 00:28:47,840 Speaker 1: of GDP, of domestic demand, consumer has been the outperformer, 509 00:28:48,360 --> 00:28:52,000 Speaker 1: so uh and and housing market has been pretty decent. 510 00:28:52,320 --> 00:28:56,880 Speaker 1: What has been so horribly weak has been business. As 511 00:28:57,200 --> 00:29:00,080 Speaker 1: chairman green former chairman green Side, it's business spending on 512 00:29:00,200 --> 00:29:04,920 Speaker 1: long term plant and equipment which directly product global It's 513 00:29:04,960 --> 00:29:07,960 Speaker 1: it's gone, it's it's definitely moved away because it's you 514 00:29:07,960 --> 00:29:11,520 Speaker 1: look at the capex on equipment, extremely weak recovery, this 515 00:29:11,560 --> 00:29:16,280 Speaker 1: recovery Mexico free recoveries. It's it's Asia and Mexico. It's 516 00:29:16,320 --> 00:29:19,640 Speaker 1: also elsewhere in world, so very very weak there. The 517 00:29:19,680 --> 00:29:23,040 Speaker 1: second thing is business spending on plant, on factory, on 518 00:29:23,160 --> 00:29:26,200 Speaker 1: office space, also extremely weak. So, as Greenspan says, the 519 00:29:26,240 --> 00:29:28,440 Speaker 1: key question is is to ask policy makes should be 520 00:29:28,480 --> 00:29:32,520 Speaker 1: asking why are businesses unwilling to make these long term 521 00:29:32,560 --> 00:29:35,160 Speaker 1: commitments to America but they're willing to spend the money abroad. 522 00:29:35,480 --> 00:29:37,920 Speaker 1: That's what Greenspan argues, and I think he's right. Well, 523 00:29:38,040 --> 00:29:40,400 Speaker 1: and they may discussed out of Mexico City today, folks 524 00:29:40,400 --> 00:29:44,040 Speaker 1: are Michael McKee there, I've got time for one more question. 525 00:29:44,080 --> 00:29:48,280 Speaker 1: There is a number of houses who suggests the tenure 526 00:29:48,400 --> 00:29:51,280 Speaker 1: will be where it is, even go higher and then 527 00:29:51,400 --> 00:29:56,080 Speaker 1: roll over to a new low. Dis Yes, I would 528 00:29:56,080 --> 00:29:58,600 Speaker 1: be honored if you would comment on that. Okay, I think, 529 00:29:58,680 --> 00:30:00,360 Speaker 1: you know, I think that the thing is, you know, 530 00:30:00,400 --> 00:30:02,920 Speaker 1: we're gonna, we're gonna, we're gonna look at things from 531 00:30:03,000 --> 00:30:05,480 Speaker 1: you know, we've we've for the last several years, last 532 00:30:05,520 --> 00:30:08,440 Speaker 1: seven or eight years, we've looked at things structurally and 533 00:30:08,640 --> 00:30:11,160 Speaker 1: cyclically and the cycle we thought was gonna be as 534 00:30:11,280 --> 00:30:15,600 Speaker 1: an abnormally soft cycle, and structurally we kept seeing all 535 00:30:15,720 --> 00:30:17,680 Speaker 1: these problems in the labor force. We still see the 536 00:30:17,680 --> 00:30:20,120 Speaker 1: problems in the challenge in labor force very difficult to solve. 537 00:30:20,600 --> 00:30:22,520 Speaker 1: Some of them are aging, some of them are education. 538 00:30:22,880 --> 00:30:24,840 Speaker 1: Lots of things at all that we've got a whole segment. 539 00:30:25,240 --> 00:30:28,960 Speaker 1: But so structurally but cyclically, if we just get things going, 540 00:30:29,280 --> 00:30:31,600 Speaker 1: you know, uh, and it doesn't take much, you know 541 00:30:31,720 --> 00:30:34,680 Speaker 1: to do the the GDP couculs doesn't take much to 542 00:30:34,680 --> 00:30:36,080 Speaker 1: get us to two and a half to three percent 543 00:30:36,160 --> 00:30:38,280 Speaker 1: g D. It really doesn't take much. You could just 544 00:30:38,360 --> 00:30:41,480 Speaker 1: do infrastructure spending. So we would think yells would move up, 545 00:30:41,560 --> 00:30:43,400 Speaker 1: but I did. I did. One of my co workers 546 00:30:43,600 --> 00:30:45,480 Speaker 1: from my my old days back in Meryl, I just 547 00:30:45,520 --> 00:30:46,880 Speaker 1: sent you used to sit next to We had a 548 00:30:46,960 --> 00:30:48,920 Speaker 1: rate lab group there and I just sent them something. 549 00:30:48,960 --> 00:30:50,760 Speaker 1: I said, Walter, I said, you know you're the tech 550 00:30:50,800 --> 00:30:52,360 Speaker 1: guy you sat next to me. I did this stuff. 551 00:30:52,400 --> 00:30:54,560 Speaker 1: We had this crazy group. We were good and it's like, 552 00:30:54,600 --> 00:30:56,560 Speaker 1: you know, you know where. You think it's gonna go 553 00:30:56,680 --> 00:30:58,760 Speaker 1: low there, but there are people who are thinking tenure 554 00:30:58,800 --> 00:31:00,840 Speaker 1: heels could go back to one point three. I think 555 00:31:00,880 --> 00:31:04,840 Speaker 1: it's gonna be hard unless you get something crazy and 556 00:31:05,000 --> 00:31:11,080 Speaker 1: make it. Thank you so much, with UH with Mitsubishi 557 00:31:11,200 --> 00:31:21,920 Speaker 1: u f J. Thanks for listening to the Bloomberg Surveillance Podcast. 558 00:31:22,280 --> 00:31:27,400 Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever 559 00:31:27,520 --> 00:31:31,960 Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene. 560 00:31:32,040 --> 00:31:35,840 Speaker 1: David Gura is at David Gura. Before the podcast, you 561 00:31:35,880 --> 00:31:52,160 Speaker 1: can always catch us worldwide. 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