Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you
Speaker 1: along with my co host Lisa Brahma Waits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. We are seeing the repo rate
Speaker 1: that got a lot of people all bent out of
Speaker 1: shape a couple of days ago come down further as
Speaker 1: a New York Fed engages in a third day of
Speaker 1: its repo facility, trying to inject calm into this basic
Speaker 1: plumbing of the financial system. Here joining us, Tom Kennedy,
Speaker 1: Global head of Macro and fixed Income Strategy at JPMorgan
Speaker 1: Private Bank. Here in our Bloomberg and Active Broker Studios. Tom,
Speaker 1: I'm wondering if we could start talking about the takeaways
Speaker 1: from this whole episode. Does this mean that the Federal
Speaker 1: Reserve allowed its balance sheet to just get too small
Speaker 1: as it allowed it to shrink with quantitative tightening? Yes, yes,
Speaker 1: all right, So why why the amount of liquidity that
Speaker 1: a very dynamic US economy needs is impossible to know
Speaker 1: in exact real time. You can see it and see
Speaker 1: indicators of a certain amount of excess reserves, which I'm
Speaker 1: gonna call liquidity for the sake of this discussion, um
Speaker 1: that you need for the economy to function. The analogy
Speaker 1: is that I use this in my own personal life.
Speaker 1: When I was in college, didn't have a job, wasn't
Speaker 1: really spending much. My checking account could have relatively small
Speaker 1: balance in it. It was very small. Trust me. Fast forward,
Speaker 1: you have a family, you have a job, you have debt,
Speaker 1: you have more liability needs, and you need to have
Speaker 1: more cash in your checking checking account. Same analogy can
Speaker 1: be applied to the US economy. This economy has grown
Speaker 1: remarkably over the last ten years, and the repo market
Speaker 1: signals this week are telling us about one point three
Speaker 1: trillion in reserves. Is just not enough liquidity. And I'm
Speaker 1: fully aware of the the technical issues of the supply
Speaker 1: and demand that happened over the last couple of weeks,
Speaker 1: But I think we can, for for most people out there,
Speaker 1: smooth through that and say there's just not enough liquidity
Speaker 1: in the system. Despite the popular belief that liquidity is
Speaker 1: a wash in the system and repo markets. This this week,
Speaker 1: I've been telling us that the FED comes out with
Speaker 1: temporary operations. They're just putting cash and liquidity into the system.
Speaker 1: They this is a temporary fix for a permanent problem.
Speaker 1: They are going to need eventually to have the balance
Speaker 1: sheet continue to Expand that's not QUEI, that's just to
Speaker 1: make sure there's enough liquidity in the system. Shouldn't be inflationary.
Speaker 1: If it's not, que how do they do it? Yeah?
Speaker 1: The good pointly so that the mechanics are the same,
Speaker 1: but the objective and the end goal are different. In
Speaker 1: a place where you need to make sure there's enough liquidity,
Speaker 1: you're injecting just enough to make sure markets function shouldn't
Speaker 1: be inflationary because you're just making sure you're checking account
Speaker 1: for the sake of this example, has enough to meet
Speaker 1: your demands. QUEI is by even more bonds that are
Speaker 1: that are necessary for liquidity in the in the attempt
Speaker 1: to really pull you lower and stimulate inflation. Different objective,
Speaker 1: same mechanical um implementation that needs to be done. What
Speaker 1: if the FED decides doesn't agree with you and decides
Speaker 1: this is just a short term blip. We don't need
Speaker 1: to do really anything. We don't have to grow this
Speaker 1: balance too much. Repo rates will continue to remain high.
Speaker 1: And I mean this week, overnight repo traded north of
Speaker 1: nine percent for a period of time. It's quite simple
Speaker 1: to realize that if you're receiving a yield on an
Speaker 1: instrument that you own. Let's just say it's a ten
Speaker 1: year treasury that holds a coupon of two, and to
Speaker 1: finance that security at nine percent, obviously that's a negative
Speaker 1: carry position and can't go on for very long. So
Speaker 1: levered players in a system, if the FED doesn't address this,
Speaker 1: will not be able to function. So the FED currently
Speaker 1: has one point three trillion dollars of non treasury or
Speaker 1: mortgage backed securities debt that is liquidity for this purpose
Speaker 1: corrects the excess reserves on the liability on the liability side,
Speaker 1: or is about one point three one point three trillion dollars?
Speaker 1: How much should it be? I don't know. I don't
Speaker 1: think that they know either. I think that all they're
Speaker 1: realizing is it's not enough right now. And this is
Speaker 1: this is kind of the This is where the art
Speaker 1: of central banking meets what I think is perceived science.
Speaker 1: Um the economy is so dynamic. They don't know the
Speaker 1: dot on this dot on this day, we need one
Speaker 1: point four chilion. They don't know, so they have to
Speaker 1: feel it a little bit, and the repo market is
Speaker 1: sending them a signal they don't have enough. Okay, So
Speaker 1: the consequences are pretty dire, right that we could end
Speaker 1: up with a liquidity crunch, even a downturn or some
Speaker 1: sort of seizure. You know, levered players could get blown
Speaker 1: out of the water. UH could pull back. This is
Speaker 1: a private debt, private equity, you know, all sorts of
Speaker 1: levered currency funds um Looking at that right, I'm wondering
Speaker 1: on the flip side, the fasure serve comes out starts
Speaker 1: to buy a lot more bonds that we're just trying
Speaker 1: to manage the situation. How do they distinguish that from
Speaker 1: trying to ease financial conditions. The communication there's a communication
Speaker 1: challenge with this. This hasn't been a part of their
Speaker 1: tool kit for ten years. They over the next six
Speaker 1: eight weeks ahead of the actor re meaning there's gonna
Speaker 1: you're gonna hear lots of education from them to distinguish
Speaker 1: the two UH, and that's gonna be vitally important. There
Speaker 1: is no one in the United States better position to
Speaker 1: do this than the New York FED. They're gonna do
Speaker 1: a great job doing it, but there's there needs to
Speaker 1: be more education on this, and I expect them to
Speaker 1: start that as soon as possible. Did you hear anything
Speaker 1: from Chairman Pal yesterday on that issue? Yeah? I think he.
Speaker 1: I read him as saying we're gonna learn a lot
Speaker 1: over the next six weeks as they try to feel
Speaker 1: where the level of access reserves is required. Um and
Speaker 1: I also interpreted him as they're going to do a
Speaker 1: lot of work on how much the balance sheet needs
Speaker 1: to grow. And my expectation out of yesterday is that
Speaker 1: they're going to come up with an announcement in October
Speaker 1: about how to start expanding the balance sheet again to
Speaker 1: meet these liquidity needs. Just not do kuwie, just real quick.
Speaker 1: Giving your experience at the New York FED, do you
Speaker 1: think that they will get it right eventually or do
Speaker 1: you think that this will remain a real problem. Confident
Speaker 1: they're gonna get it right. The team there can do it.
Speaker 1: I think the art of doing this is is what's
Speaker 1: important here. They had to feel where the stress points
Speaker 1: were I think it caught and by surprise, quite candidly,
Speaker 1: this came a lot sooner than than myself and I
Speaker 1: thought then. I think they thought as well, and Powell
Speaker 1: more or less admitted that yesterday. Um, but they're gonna
Speaker 1: fix it, and these temporary market operations are vital and
Speaker 1: they're doing them. But again it's a temporary fix. They
Speaker 1: need the permanent fix. Uh, and they'll give it to us.
Speaker 1: Tom Kennedy thinks so much for joining us. Tom Kennedy's
Speaker 1: global head of macro and fixing come strategy at JP
Speaker 1: Morgan Private Bank. Educating us and our listeners on the
Speaker 1: repo market clearly a challenge head for the Federal Reserve
Speaker 1: to manage that part of the yield curve is people
Speaker 1: doubt with our Saudi Arabia really will be able to
Speaker 1: bring all their production back online all that soon. The
Speaker 1: question is how much higher will it go? Joining us now,
Speaker 1: we are so pleased to say, Bob Ryan, she's trying
Speaker 1: to just focused on commodity and energy strategy for b
Speaker 1: c A research. Bob, where do you think the price
Speaker 1: of oil is going? I'm looking at crude on then
Speaker 1: IMEX right now at fifty and sly three cents of barrel. Yeah,
Speaker 1: thank you for having me. UM. That's tough to say. UM.
Speaker 1: You know, we're UM right now trying to figure out
Speaker 1: how fast storage is going to be drawn while Saudia
Speaker 1: is repairing Opcake. Mostly we did some scenario analysis just
Speaker 1: at the margin, not saying this is where UM prices
Speaker 1: are going to go. But you know, the marginal impact
Speaker 1: of UM delays in bringing these facilities back online UM
Speaker 1: could push you, you know, through eighty dollars UH in
Speaker 1: the first half of next year. So UM. That's not
Speaker 1: to say it will happen. UM. What most likely happens
Speaker 1: is commercial inventory keeps drawing down and at a certain point,
Speaker 1: if you know, we see the forward curves in crude oil,
Speaker 1: the Brent and the w t I start to really backwardate, UM,
Speaker 1: that'll be a signal or an indication that UM spr
Speaker 1: barrels are probably going to be needed. UM. And you
Speaker 1: know it wouldn't surprise me at all if the d
Speaker 1: o E in the US is keeping track of that. UM.
Speaker 1: You know what's happening to the evolution of the curve.
Speaker 1: You know, if I'm looking at Brent right now, it
Speaker 1: looks like the curve is steepening just a little bit
Speaker 1: as the market works through this. So I think that's
Speaker 1: the big thing to start keeping track of m as
Speaker 1: we go to the end of September, when you know,
Speaker 1: the Aramco folks have been saying that, um, you know,
Speaker 1: the repair should be mostly done. You know, markets waiting
Speaker 1: and waiting to see what happens. But my expectations we
Speaker 1: do see storage start to draw, prices move up backwardation,
Speaker 1: Uh Stevens, So, Bob, what is what do you think
Speaker 1: the market is kind of discounting today about maybe an
Speaker 1: escalation even of tensions between Iran and Saudi Arabian perhaps
Speaker 1: the U S. I know it's you know, almost impossible
Speaker 1: to handicap, but do you think the market is expecting
Speaker 1: this thing to get maybe even a little bit worse
Speaker 1: it could? Um, you know, our our assumption is is
Speaker 1: that the Trump administration is going to more than likely
Speaker 1: retaliate in some form militarily, but not in a way
Speaker 1: that escalates this to a full out you know war
Speaker 1: between the US and Iran or between the US and
Speaker 1: it's GCC allies and Iran. UM more than likely. Um,
Speaker 1: you know, it's it's going to be a message it's
Speaker 1: not going to be um, you know, a declaration of war. Um.
Speaker 1: It's interesting also the Iranian foreign minister I saw a
Speaker 1: headline going across was saying that any attack on Iran
Speaker 1: itself would be or would result in all out war.
Speaker 1: So that you know, both sides are are as. We
Speaker 1: that in our morning meeting this morning. Um, you know,
Speaker 1: there's there's a lot of loud barking on both sides,
Speaker 1: but um, we don't think it escalates to that extent.
Speaker 1: But you don't know. I mean that the big thing
Speaker 1: with these kinds of confrontations is that, um, you know,
Speaker 1: they could spin out. You know, you could have inadvertent
Speaker 1: um uh you know, consequences that quickly get out of
Speaker 1: control and and and the hard thing is containing it. Uh,
Speaker 1: you know, once you set something in motion. Well, so
Speaker 1: let's talk about sort of the asymmetric risks associated with
Speaker 1: a potential conflict over the escalation that we've seen with Iran.
Speaker 1: How high could oil prices go versus decline if there
Speaker 1: is no conflict, if it gets resolved, if Saudi Arabia
Speaker 1: gets the production on board, and things just chug along
Speaker 1: the way they had been. Um, you know, prices would
Speaker 1: be probably fairly well contained, and then you know, you'd
Speaker 1: go back to the OPEQ plus or what we call
Speaker 1: OPEC two point oh UM managing production trying to you know,
Speaker 1: get control of the storage levels globally. UM. The eighth
Speaker 1: symmetry is if you do get something, um, you know,
Speaker 1: some kinetic activity between uh, you know, the US and Iran,
Speaker 1: just as an example, that threatens the street of hor moves,
Speaker 1: then markets would really start to price in you know,
Speaker 1: large price moves to the upside. UM. If we uh
Speaker 1: see this thing resolved and you know, we go back
Speaker 1: to status quo ante as it were, UM, you know,
Speaker 1: we probably come back down to you know, holding around
Speaker 1: this year, you know, maybe into the seventies next year. UM.
Speaker 1: You know, a lot of it depends on what happens
Speaker 1: to the UM production management of OPEC plus and the
Speaker 1: impact on demand. UM. As we move forward, high prices
Speaker 1: will oil sequel h more than likely start destroying demand,
Speaker 1: particularly if you get a dollar rally on the back
Speaker 1: of that, you know, everybody uh flies to safe havens,
Speaker 1: the US dollar being one of them. That'll effectively raise
Speaker 1: the local currency cost of oil around the world outside
Speaker 1: the US, and UM, you'll get demand destruction on the
Speaker 1: back of that. So you'll have high absolute prices in
Speaker 1: US dollars, but you will also have high local currency prices,
Speaker 1: and that will start to a road demand and and
Speaker 1: the higher goes the more significant that erosion will become. So,
Speaker 1: but before the attacks on the Saudi facility, I think
Speaker 1: the narrative in the in the oil market was people
Speaker 1: really focusing on demand and what a slowing global economy
Speaker 1: means for oil putting some pressure on on crude. What
Speaker 1: does your demand model say, you know, you know, x
Speaker 1: out some of the concerns in the Middle East. Yeah,
Speaker 1: if we just you know, take our base case, you know,
Speaker 1: exactly as you say, X that out. Um, you know,
Speaker 1: our expectation is that demand this year grows on average
Speaker 1: like one point two million barrels a day, So we're
Speaker 1: a little above the I E A. And I think
Speaker 1: the E I A is probably at about one million
Speaker 1: a day. Next year, we're at one point four one
Speaker 1: point five all l sequel, Right, you know, we we
Speaker 1: get this massive fiscal and monetary stimulus globally. Um, you know,
Speaker 1: it revives demand, it starts to it not starts to
Speaker 1: it undoes a lot of the uh tightness and financial
Speaker 1: conditions that were brought on by the FED tightening cycle
Speaker 1: last year, as well as the d leveraging campaign in
Speaker 1: China which took a lot of liquidity from the system.
Speaker 1: So those two things we're just starting to show up
Speaker 1: or had started to show up, you know, in second
Speaker 1: half of last year, first half of this year. That
Speaker 1: should be undone with all that stimulus coming into the system.
Speaker 1: So we would be much more bullish demand growth next
Speaker 1: year as all the stimulus comes in. But you know,
Speaker 1: we are in uncertain territory here. Yeah, very good, Bob,
Speaker 1: Thanks so much for joining us. Bob Bryan, chief Strategist
Speaker 1: Commodity and Energy Strategy for bc A Research, giving us
Speaker 1: his thoughts on the global oil market. Obviously a tremendous
Speaker 1: amount of volatility experienced over the last week or so
Speaker 1: given the attack on the Saudi facility and what that
Speaker 1: means for the supply side of the equation. So to
Speaker 1: get some more data there, we welcome our next guest,
Speaker 1: automan A Zilder, Senior Director Economics and Global Research Chair
Speaker 1: at the Conference Board. Automan he joined us in our
Speaker 1: Bloomberg Interactive Broker Studio. Thanks so much for coming in
Speaker 1: what is your data telling you? I know you've reported
Speaker 1: the data for August. Good morning, great to be here,
Speaker 1: thanks for having me. And um, the ALII for August
Speaker 1: just came out, and as your viewers listeners now that
Speaker 1: the ALII is a forward looking gauge of the economy,
Speaker 1: and in August it remained unchanged. So what's the implication,
Speaker 1: I mean, is that good, bad, or just basically just
Speaker 1: don't even think about it now? So the ALII trends
Speaker 1: have been kind of flattening, um, and they're still rising
Speaker 1: around the same level as earlier in the year, but
Speaker 1: not as fast as we had seen in the previous years.
Speaker 1: So that just tells me that we are settling into
Speaker 1: a slower growth economy. Uh, kind of going back to
Speaker 1: the long term trend? What is the long term trend?
Speaker 1: Kind of from your perspective. So at the conference board,
Speaker 1: we estimate that long term trend to be right around
Speaker 1: two percent growth. Okay, So right now, as we look
Speaker 1: at the economy, look at all the data that's coming
Speaker 1: out and even some of the micro data we see
Speaker 1: from companies and earnings and so on and so forth,
Speaker 1: the US economies seems to be a story of Okay,
Speaker 1: manufacturing not so good and maybe even worrisome not so good,
Speaker 1: but the consumer is still very strong. Is that kind
Speaker 1: of what your data is showing you. That's essentially what
Speaker 1: we see in the leading indicators to when you look
Speaker 1: at the households and consumers, they're kind of holding up
Speaker 1: the economy. But when you look at manufacturing, new orders
Speaker 1: and manufacturing, especially for capital goods, there's a lot more
Speaker 1: weakness that's kind of holding the index down. One thing
Speaker 1: that's kind of interesting, we keep getting a positive reads
Speaker 1: on housing data today. Another one with used sales, used
Speaker 1: home sales coming in stronger than expected and as one
Speaker 1: part of the leading economic indicator. That is one area
Speaker 1: that's that was sort of a big positive, right, a
Speaker 1: big contributor. Yeah, housing permits made a positive contribution to
Speaker 1: the index, and that is good news for the economy
Speaker 1: because housing overall is a leading sector for the overall
Speaker 1: US economy. But jobless claims was a negative contributor. And
Speaker 1: I want you to talk about that since we do
Speaker 1: talk at the consumer kind of holding up the entire
Speaker 1: expansion here, is that sort of a warning sign, right,
Speaker 1: So the consumer of obviously is uh supported by the
Speaker 1: good jobs growth and where we would be worried if
Speaker 1: that's going to be changing. And the leading indicators for
Speaker 1: employment have started to soften, and unemployment claims is one
Speaker 1: of those. So it's not really surprising to see some
Speaker 1: softening in the labor market um, but employment is still
Speaker 1: growing and that's supporting jobs, income and consumer spending. When
Speaker 1: do you when does your data, you're leading economic indicator
Speaker 1: start flashing a red sign to you when you see
Speaker 1: multiple months of declines, is it is what's kind of
Speaker 1: the big flash point for your indicator exactly. So what
Speaker 1: I'm looking for in the leading indicators is where whether
Speaker 1: it's falling consistently over several months, it's a gauge of
Speaker 1: future economic activity that's six to nine months ahead. And
Speaker 1: the peak in the leading index forms on average about
Speaker 1: twelve months ahead of the economy turning down. So that
Speaker 1: is the leading relationship and uh, so far we're not
Speaker 1: really seeing that sort of a peak forming in the
Speaker 1: leading indicators. So I'm looking right now and many Roman,
Speaker 1: the CEO of PIMCO, said that he expects US growth
Speaker 1: to hover slightly above one percent for the first half
Speaker 1: of which is substantially lower than it is currently do
Speaker 1: you think that's plausible based on these indicators. So the
Speaker 1: indicators are really consistent with the economy slowing um just
Speaker 1: around two percent, So that's a little more pessimistic than
Speaker 1: what we're seeing in sort of the fundamentals of the economy.
Speaker 1: A lot of people are nervous about the future because
Speaker 1: they look at interest rates yield spreads, but that's really
Speaker 1: only one part of the leading indicators, uh, and it's
Speaker 1: not really widespread across other components. So it's perhaps a
Speaker 1: little bit more pessimistic than what the leading economic indicators
Speaker 1: may show. Adamana Aziel Durham, thank you so much for
Speaker 1: being with us, Senior director of Economics and Global Research
Speaker 1: at the conference board, joining us here in our Bloomberg
Speaker 1: Interactive Broker Studios. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney,
Speaker 1: I'm on Twitter at pt Sweeney, I'm Lisa Abram Woyd's
Speaker 1: I'm on Twitter at Lisa abram woits one before the podcast.
Speaker 1: You can always catch us worldwide on Bloomberg Radio.