WEBVTT - Wall Street’s Shale Mania Is Like The First Dotcom Bubble 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.560 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money. Whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:27.040 Podcast on United States oil growth in oil production in 0:00:27.160 --> 0:00:31.000 Texas and the Permian and Bakan geological regions. They have 0:00:31.080 --> 0:00:35.000 now put US total oil production ahead of Russia for 0:00:35.000 --> 0:00:41.200 the first time since You can credit technology, the shale revolution, 0:00:41.479 --> 0:00:44.680 and lots of money with this advancement. Here to tell 0:00:44.760 --> 0:00:47.440 us more about it is Bethanie McClain, the author and 0:00:47.520 --> 0:00:50.040 contributing editor to Vanity Fair and the author of a 0:00:50.080 --> 0:00:54.200 new book entitled Saudi America, The Truth about Fracking and 0:00:54.240 --> 0:00:57.120 How It's Changing the World. Bethany, thank you very much 0:00:57.120 --> 0:01:01.360 for coming in. Just start off by explaining to people 0:01:02.120 --> 0:01:06.840 what you learned as you made all of the investigations 0:01:06.920 --> 0:01:08.920 to do this book. Because there's been a lot of 0:01:08.920 --> 0:01:14.360 headlines about fracking, the shale revolution, the technology. What did 0:01:14.360 --> 0:01:18.280 you find out after you did all of your investigational work. 0:01:18.920 --> 0:01:21.240 So the thing that obsessed me, the question that obsessed 0:01:21.280 --> 0:01:23.600 me was how it could be true that fracking could 0:01:23.600 --> 0:01:26.920 be changing the world and it is. It's reshaping geopolitics. 0:01:27.120 --> 0:01:29.480 You just saw the numbers you cited, but that the 0:01:29.520 --> 0:01:33.560 industry doesn't make money, that it's on this shaky financial footing, 0:01:33.560 --> 0:01:36.200 and how could both things be true at once? And 0:01:36.280 --> 0:01:38.600 so that's the question I set out to answer. I 0:01:38.600 --> 0:01:41.760 guess what I learned. I came to this broader realization 0:01:41.840 --> 0:01:44.400 that this whole concept of energy and dependence, which has 0:01:44.400 --> 0:01:47.560 been pushed by every president since the nineties seventies, is 0:01:47.600 --> 0:01:51.360 this exalted grand goal we needed to achieve, that it's 0:01:51.360 --> 0:01:54.400 somewhat of a of a fraud today. Um, it doesn't 0:01:54.480 --> 0:01:57.880 make sense as a broad goal. I have to wonder. 0:01:58.240 --> 0:02:01.320 You wrote the first skeptical art goal about Enron back 0:02:01.320 --> 0:02:05.920 in two thousand one. Of course, Enron collapsed under accounting fraud. 0:02:06.240 --> 0:02:10.440 Is there something that is similar about the way that 0:02:10.480 --> 0:02:15.600 the shale story is being told today? It's an interesting question. 0:02:15.880 --> 0:02:19.239 I don't. I suppose there's a certain lack of transparency 0:02:19.560 --> 0:02:22.160 in in shale, but I think you can you can 0:02:22.280 --> 0:02:24.560 figure it out if you delve into the details. I 0:02:24.600 --> 0:02:26.840 actually think it might be the opposite and that the 0:02:26.840 --> 0:02:29.160 problems with the industry are right there on the surface. 0:02:29.480 --> 0:02:31.840 It's pretty easy to tell that the industry doesn't make 0:02:31.880 --> 0:02:34.200 any money. It's just that it's not something we want 0:02:34.200 --> 0:02:36.320 to take into account as we think about it. So 0:02:36.320 --> 0:02:38.079 it's so interesting. We've been talking about this. They used 0:02:38.080 --> 0:02:41.560 to cover debt markets very very closely, and we were 0:02:41.600 --> 0:02:44.120 talking about just this explosion of shale debt that got 0:02:44.120 --> 0:02:49.519 absolutely punished in two thousand two sixteen. Uh, And now 0:02:49.520 --> 0:02:52.400 people are saying, well, the existing companies are in good shape, 0:02:52.400 --> 0:02:54.280 because it was sort of, you know, this was like 0:02:54.480 --> 0:02:56.640 a sort of a sweep of all bad ones and 0:02:56.639 --> 0:02:58.960 the ones that are remaining are strong and healthy. Do 0:02:59.000 --> 0:03:00.720 you think that's true or do you think there's still 0:03:00.760 --> 0:03:02.880 is a lot of fragility. I think there's some truth 0:03:02.960 --> 0:03:05.720 to it. But the wipeout wasn't what it would have 0:03:05.800 --> 0:03:09.240 been because Wall Street was there. Wall Street remained willing 0:03:09.240 --> 0:03:12.480 to finance these companies. Banks remained willing to restructure debt. 0:03:12.760 --> 0:03:14.720 Part of that has to do with the dynamics that 0:03:14.760 --> 0:03:17.480 are keeping the industry going, which is the flood of 0:03:17.520 --> 0:03:20.919 pension fund money into private equity firms and credit hedge funds, 0:03:20.919 --> 0:03:23.560 and the credit hedge funds then invested in the distress 0:03:23.639 --> 0:03:26.640 debt of these of these energy companies, so the money 0:03:26.760 --> 0:03:29.639 was still there, it didn't go away, And I think 0:03:29.680 --> 0:03:32.240 the the the final answer to what you just said 0:03:32.280 --> 0:03:34.720 is that the industry still isn't making money. Um. The 0:03:34.760 --> 0:03:37.240 most recent analysis I saw was a Wall Street Journal 0:03:37.240 --> 0:03:39.040 analysis I think it was either the first or the 0:03:39.080 --> 0:03:41.840 second quarter of two thousand eighteen that only five companies 0:03:42.200 --> 0:03:47.800 produced positive cash flow. Energy companies that specialize in fracking. 0:03:48.880 --> 0:03:53.080 They're valued on how much acreage they have, right, how 0:03:53.160 --> 0:03:56.760 much acreage they have plus how much production they have, 0:03:57.360 --> 0:04:01.119 not on how profitable they are how did we get there? 0:04:02.440 --> 0:04:05.000 So people have been willing to fund shale based on 0:04:05.040 --> 0:04:07.840 this belief that it's going to be profitable one day, 0:04:07.920 --> 0:04:10.720 and so in the absence of real profits, they've come 0:04:10.800 --> 0:04:12.920 up with other ways to value it, which has been 0:04:13.080 --> 0:04:16.440 multiples of acreage looking at production growth. To me, it's 0:04:16.560 --> 0:04:19.599 very reminiscent of the first dot com boom boom, when 0:04:19.680 --> 0:04:22.640 dot com companies were valued as a multiple of eyeballs. 0:04:22.680 --> 0:04:26.200 Because in the absence of traditional measures of profitability, if 0:04:26.240 --> 0:04:27.960 you want to value things, you have to turn to 0:04:28.160 --> 0:04:32.440 non traditional and you have to find something that's positive, right, 0:04:32.640 --> 0:04:35.839 But that's enabled this whole mechanism to work. And it's 0:04:35.880 --> 0:04:38.400 too cynical to call it a daisy chain, but it's 0:04:38.440 --> 0:04:41.360 meant that you can build fat private equity, can fund 0:04:41.440 --> 0:04:44.039 a fracking company and take it public or sell it 0:04:44.080 --> 0:04:47.840 to an already public company, and everybody can make money. 0:04:47.880 --> 0:04:50.679 But that extract money along the way, But that doesn't 0:04:50.760 --> 0:04:53.800 mean in the end that the industry is making money. 0:04:54.000 --> 0:04:58.000 The industry's net debt in was two hundred billion dollars. 0:04:58.000 --> 0:05:01.640 It's increase from two thous five This is according to 0:05:01.920 --> 0:05:05.400 some Columbia University professor's statistics that you cited in a 0:05:05.680 --> 0:05:07.520 recent story that you wrote for The Times. For the 0:05:07.520 --> 0:05:10.200 New York Times, I'm just wondering, can you fast forward 0:05:10.200 --> 0:05:13.200 for us? What is the consequence of the fact that 0:05:13.279 --> 0:05:15.960 these private equity and private debt funds are financing and 0:05:16.080 --> 0:05:19.800 industry that is held up with great esteem from a 0:05:19.839 --> 0:05:23.000 policy perspective, but has not made any money. So I 0:05:23.040 --> 0:05:25.200 think there are two answers to that. One is a 0:05:25.200 --> 0:05:28.440 financial answer, and it worries me. Pension funds around the 0:05:28.440 --> 0:05:31.599 country are in dire shape. They in the absence of 0:05:31.600 --> 0:05:35.360 any returns in traditional fixed income markets. They've started putting 0:05:35.360 --> 0:05:38.760 their money into private equity firms. If the returns aren't 0:05:38.760 --> 0:05:40.720 there at the end of the day, and if the 0:05:40.760 --> 0:05:45.520 daisy chain stops in the private equity portfolios, that's problematic 0:05:45.560 --> 0:05:48.039 for pension funds around around the country, and that's a 0:05:48.080 --> 0:05:51.400 real issue given that they are underfunded anyway. I think 0:05:51.440 --> 0:05:53.480 the broader question, though, is sort of more of an 0:05:53.480 --> 0:05:57.120 existential one, even beyond the financial repercussions of this, which 0:05:57.160 --> 0:05:59.560 is that we're beating our chest about energy and dependence 0:05:59.600 --> 0:06:01.600 and how rate it is that we're now the biggest 0:06:01.640 --> 0:06:04.479 producer of oil, ahead of Russia and Saudi Arabia. But 0:06:04.560 --> 0:06:08.120 what does that really mean if there's a risk to production, 0:06:08.400 --> 0:06:12.480 if the capital dries up and energy is Energy is 0:06:12.520 --> 0:06:15.960 the foundation of national security. World wars have been one 0:06:16.000 --> 0:06:19.680 and lass based on access to energy. It's incredibly important, 0:06:20.120 --> 0:06:24.880 and I don't like seeing short term, short term policy 0:06:24.920 --> 0:06:28.120 and the absence of long term thinking. Just to pick 0:06:28.200 --> 0:06:30.599 up on the figure, Lisa that you mentioned, the two 0:06:31.000 --> 0:06:33.479 billion dollars worth of debt that has been raised in 0:06:33.600 --> 0:06:38.320 order to support the fracking industry. Based on your research, 0:06:38.560 --> 0:06:42.680 would that two billion dollars be better served if it 0:06:42.800 --> 0:06:48.880 was spent investigating new sources of renewable energy. That is 0:06:48.920 --> 0:06:51.919 a really hard question to answer, because I do think 0:06:52.000 --> 0:06:54.880 that unleashing our supply of oil and natural gas has 0:06:54.880 --> 0:06:58.360 had some positives. UM, it's given us leverage, it gives 0:06:58.400 --> 0:07:01.520 Europe leverage, and negotiating with Russia over its supply of 0:07:01.600 --> 0:07:05.200 natural gas. I think that natural gas is actually more 0:07:05.520 --> 0:07:09.400 real than oil is. Um it's it's more economically viable 0:07:09.480 --> 0:07:11.840 than producing oil is. And so there's some really good 0:07:11.840 --> 0:07:13.960 things about this. But one other thing I was really 0:07:13.960 --> 0:07:15.880 struck by and doing this book, where the number of 0:07:15.920 --> 0:07:19.400 smart investors I talked to who are not investing in 0:07:19.440 --> 0:07:22.760 oil and gas anymore because the age of renewables is coming. 0:07:22.800 --> 0:07:25.320 The only question is when, and once we know the 0:07:25.360 --> 0:07:28.080 answer to when, the price of oil will go into 0:07:28.120 --> 0:07:31.040 a cyclical into a secular decline and never recover. That's 0:07:31.080 --> 0:07:33.400 what happened with coal. And so for us to fall 0:07:33.480 --> 0:07:36.840 behind in the race to develop renewables is for us 0:07:36.880 --> 0:07:38.840 to look at the world as it is and not 0:07:38.920 --> 0:07:40.840 the world as it's going to be, and perhaps seed 0:07:40.880 --> 0:07:44.840 American leadership in the world of the future. Bethany McLean, 0:07:44.840 --> 0:07:47.480 thank you so much for coming in really fascinating. Bethany 0:07:47.560 --> 0:07:50.760 McLean is an author and contributing an editor at Vanity Fair. 0:07:51.120 --> 0:07:54.400 Her new book is Saudi America, The Truth about Fracking 0:07:54.440 --> 0:07:57.880 and how It's Changing the World. And she was the 0:07:57.920 --> 0:08:01.280 one who wrote the first skeptical article about and Ron. 0:08:01.360 --> 0:08:03.960 I just want to bring you some breaking headlines Goldman 0:08:04.000 --> 0:08:07.960 Sacks confirming Stephen's share as chief financial officer, also saying 0:08:08.120 --> 0:08:12.440 that they are going to name John Waldron as president. 0:08:12.640 --> 0:08:15.760 This according to The Wall Street Journal. We will bring 0:08:15.760 --> 0:08:19.240 you more throughout the day as that unfold. Coming up 0:08:19.280 --> 0:08:23.000 Bloomberg Politics, Policy, power and Law. I'm Lisa Bramwitz along 0:08:23.040 --> 0:08:29.360 up co host Pim Fox, and this is Bloomberg. Commercial 0:08:29.400 --> 0:08:33.440 Banking in the United States, particularly in the Northeastern regions, 0:08:33.559 --> 0:08:35.920 is our focus. And Don McCree is the vice chairman 0:08:35.920 --> 0:08:39.040 and the head of commercial banking for Citizens Financial Group. 0:08:39.320 --> 0:08:42.320 They're based in Providence, Rhode Island. But Don joins us 0:08:42.360 --> 0:08:45.480 here in our eleven three oh studios, Donn, I gotta 0:08:45.520 --> 0:08:49.120 ask your thirty year veteran of JP Morgan, Right, that's right, 0:08:49.200 --> 0:08:51.959 What what caused you? What is Citizens Bank? For a 0:08:52.000 --> 0:08:54.680 lot of people don't know about Citizens Bank. They know 0:08:54.720 --> 0:08:57.520 about maybe the changes that went on inside the banking 0:08:57.520 --> 0:09:00.640 industry in general. But tell us about Since Bank and 0:09:00.679 --> 0:09:02.520 why you decided that this is where you want to 0:09:02.559 --> 0:09:05.160 hang your hat. So Citizens Bank has been around for 0:09:05.200 --> 0:09:08.480 a very long time. UH in recent years. It was 0:09:08.520 --> 0:09:11.920 part of Royal Bank of Scotland, big British bank, which 0:09:11.960 --> 0:09:16.360 actually experienced difficulty in the financial crisis. It ultimately resulted 0:09:16.360 --> 0:09:18.880 in Citizens Bank going public about four and a half 0:09:18.960 --> 0:09:21.920 years ago. UM. When I looked at the situation at 0:09:22.040 --> 0:09:26.200 at citizens what I saw was an exciting opportunity to 0:09:26.240 --> 0:09:28.520 be part of a ground floor build of a brand 0:09:28.559 --> 0:09:32.680 new independent financial institution. UM. The strategy we've been employing, 0:09:32.800 --> 0:09:35.280 and the strategy that was exciting to me is a 0:09:35.320 --> 0:09:39.319 growth strategy. It's an expansion strategy in terms of client base. 0:09:39.720 --> 0:09:42.120 It's an opportunity to deploy what has been a very 0:09:42.120 --> 0:09:45.199 healthy level of capital UM and it really was an 0:09:45.200 --> 0:09:48.560 opportunity to provide a service level to clients that we 0:09:48.600 --> 0:09:51.480 think is is quite different and quite differentiating. It's an 0:09:51.520 --> 0:09:54.520 interesting time to be in banking right now. I'm just 0:09:54.559 --> 0:09:59.079 thinking about yesterday's Global Financial Service Services Conference hosted by 0:09:59.120 --> 0:10:02.240 Barclays in New York, and it did create a lot 0:10:02.240 --> 0:10:04.600 of concern that perhaps there wouldn't be the same kind 0:10:04.600 --> 0:10:07.040 of loan growth going forward that there has been in 0:10:07.040 --> 0:10:09.720 the past, and this could be a headwind profitability. What's 0:10:09.720 --> 0:10:12.120 your take on that. So, I think the topic of 0:10:12.200 --> 0:10:14.640 loan growth has been in the forefront for for several 0:10:14.720 --> 0:10:17.480 quarters and maybe several years now. Um, there's a lot 0:10:17.480 --> 0:10:21.199 of optimism coming off the tax cuts that the administration 0:10:21.559 --> 0:10:23.559 rolled out almost a year ago now, and a lot 0:10:23.559 --> 0:10:26.640 of expectation that loan growth would be quite robust. It's 0:10:26.679 --> 0:10:30.280 it's been relatively benign. We we actually been growing much 0:10:30.360 --> 0:10:32.839 quicker on the loan line than most of the competition, 0:10:32.880 --> 0:10:36.440 and that's been a result of geographic expansion and client expansion, 0:10:36.480 --> 0:10:38.280 and you have to lower standards as a result. No, 0:10:38.720 --> 0:10:40.319 you know, we really haven't. And I think one of 0:10:40.360 --> 0:10:42.680 the things that every banker will always balance is that 0:10:42.800 --> 0:10:46.720 question of credit and structure and terms and loan growth. 0:10:46.720 --> 0:10:49.679 And we're we have a very disciplined process at the 0:10:49.720 --> 0:10:52.240 bank and we pass on a lot and and yet 0:10:52.280 --> 0:10:53.839 we've been able to grow. So I think what you 0:10:53.960 --> 0:10:57.160 heard at of Barclays yesterday is a continuation of a 0:10:57.240 --> 0:11:00.600 theme which is a real question around how quickly, loans 0:11:00.600 --> 0:11:02.640 are gonna are going to continue to grow in the 0:11:02.720 --> 0:11:06.240 in the marketplace, speak about mergers and acquisitions and how 0:11:06.280 --> 0:11:08.640 companies face the issue of whether they're going to grow 0:11:08.760 --> 0:11:11.920 organically or whether they're going to make acquisitions, and also 0:11:12.000 --> 0:11:16.040 about the abundance or lack there of of suitable candidates 0:11:16.040 --> 0:11:20.960 at a suitable value. So that's a incredibly uh interesting 0:11:21.000 --> 0:11:23.640 story for us. I was on one of your shows 0:11:23.640 --> 0:11:26.560 about six months ago talking about an acquisition that we did, 0:11:26.840 --> 0:11:29.320 which was a company called Western Reserve Partners, which is 0:11:29.360 --> 0:11:33.360 a middle market oriented mergers and acquisition firm. Uh and 0:11:33.360 --> 0:11:37.720 and just a baseline, are client base is about three 0:11:37.760 --> 0:11:41.319 quarters middle market private companies or maybe maybe maybe some 0:11:41.600 --> 0:11:44.079 uh a little bit less than that. UH and R 0:11:44.200 --> 0:11:46.080 M and A practice is really aimed at both the 0:11:46.080 --> 0:11:49.720 private equity firms and those midsized companies. Now in the 0:11:49.760 --> 0:11:53.400 midsize company space, there is extremely robust M and A 0:11:53.559 --> 0:11:56.440 right now, and which where it really drives it is 0:11:56.559 --> 0:11:59.559 the opportunity to grow, as you say, expand someone's business 0:11:59.600 --> 0:12:02.439 by combining with a like trind company. But it's often 0:12:02.559 --> 0:12:05.079 a change of control transaction where a private family is 0:12:05.120 --> 0:12:08.640 selling out of their ownership position. We see a very 0:12:08.760 --> 0:12:11.800 robust POPE pipeline in our business, and we in fact 0:12:11.800 --> 0:12:15.800 do a survey every year of CEOs of our client base, uh, 0:12:15.840 --> 0:12:17.959 and it's kind of spiked at the highest it's ever 0:12:18.000 --> 0:12:21.480 been in terms of desire to transact, buy and sell 0:12:21.960 --> 0:12:23.960 UM Now, M and A obviously takes a long time. 0:12:24.320 --> 0:12:27.000 It's it's it's a you know, often a year long 0:12:27.080 --> 0:12:29.600 process as a company prepares and then sells itself. But 0:12:29.920 --> 0:12:31.600 what we see in our in our business is a 0:12:31.640 --> 0:12:33.760 lot of activity in our pipelines are quite strong. You 0:12:33.800 --> 0:12:36.880 said there, it's a lot of competition. And for your business, 0:12:36.920 --> 0:12:39.800 given the clients that you are targeting, who is your 0:12:39.800 --> 0:12:44.120 biggest competition it's everybody, uh, non banks, non banks and 0:12:44.360 --> 0:12:48.120 large banks firms in other words, because targeting think about 0:12:48.320 --> 0:12:51.760 loan funds, non non bank providers of loan capital UM. 0:12:51.840 --> 0:12:55.240 So it's like direct lending absolutely. And and you know, 0:12:56.200 --> 0:12:58.120 I've been in this business, as you guys said, for 0:12:58.160 --> 0:13:00.760 thirt or five years. There has always been us competition 0:13:01.240 --> 0:13:05.560 UM and it comes in various forms and sizes um 0:13:05.640 --> 0:13:08.520 at at at different points in the cycle. But I 0:13:08.559 --> 0:13:12.520 think you can always combat competitive environments by providing high 0:13:12.600 --> 0:13:15.959 quality service and attention topliance. Is this time difference somehow, 0:13:16.679 --> 0:13:18.240 I don't. I really don't think so. I think I 0:13:18.240 --> 0:13:22.240 think what is a little bit um different UM is 0:13:22.360 --> 0:13:25.120 there is a lack of demand, as you said, for 0:13:25.320 --> 0:13:28.640 capital um in the form of loans across the board. 0:13:28.720 --> 0:13:32.040 So so new money financing is has been running relatively 0:13:32.040 --> 0:13:34.400 low for many years now, So there's a supply and 0:13:34.480 --> 0:13:39.720 demand disequilibrium which is basically creating the more intense competitive environment. 0:13:40.360 --> 0:13:42.280 Speak if you count a little bit about the lending 0:13:42.280 --> 0:13:44.839 that you're doing, particularly when it comes to real estate. 0:13:44.880 --> 0:13:48.640 I note, for example, the chocolate factory in Mansfield in 0:13:48.760 --> 0:13:53.000 mass You've been loaning money also for affordable housing projects. 0:13:53.120 --> 0:13:55.199 Talk a little bit about that side of the business. 0:13:55.200 --> 0:13:57.839 So our real estate businesses is a little over ten 0:13:57.840 --> 0:13:59.920 percent of our overall business right now. I was actually 0:14:00.000 --> 0:14:02.959 with real estate clients in Washington, d C. Yesterday. UM. 0:14:03.000 --> 0:14:05.760 Our approach to real estate is really twofold. One is, 0:14:05.880 --> 0:14:08.080 as you say, we do a lot of community lending 0:14:08.480 --> 0:14:11.800 around our community reinvestment activities, and that's a big part 0:14:11.800 --> 0:14:14.719 of every bank's activities. And then on our mainstream real 0:14:14.800 --> 0:14:18.520 estate business. Our our approaches really to select very strong 0:14:18.679 --> 0:14:22.200 sponsors and very strong developers and travel with those developers 0:14:22.200 --> 0:14:24.920 across the country. So we've been expanding our real estate 0:14:24.920 --> 0:14:26.800 in different parts of the country and it's a business 0:14:26.800 --> 0:14:28.600 we we quite like. It's there's a little bit of 0:14:28.640 --> 0:14:31.840 pressure right now given tariffs and the cost of raw materials. 0:14:31.880 --> 0:14:34.160 But uh, the feedback I got, at least in the 0:14:34.240 --> 0:14:37.520 d C yesterday area yesterday was quite strong. Thank you 0:14:37.560 --> 0:14:39.240 so much for being with us. We'll have to have 0:14:39.320 --> 0:14:41.560 you back in to talk about the confidence and why 0:14:41.640 --> 0:14:45.800 there hasn't been more demand for loans from the private sector. 0:14:45.840 --> 0:14:48.200 Don McCree, vice chairman and head of Commercial Biking, its 0:14:48.240 --> 0:14:50.800 Citizens Financial Group and Providence Rhode Island, but he made 0:14:50.800 --> 0:14:53.920 the trackdown here to New York and our eleven three 0:14:53.920 --> 0:14:57.520 oh studios here at Bloomberg and least Abramoy. It's along 0:14:57.560 --> 0:15:00.960 with my co host Pim Fox is his bomber markets. 0:15:04.640 --> 0:15:09.720 The Turkish Central Bank raises overnight repo rates to pent 0:15:09.880 --> 0:15:12.520 in order to forestall a decline and the value of 0:15:12.520 --> 0:15:15.760 the Turkish lira. Here to tell us more about emerging 0:15:15.840 --> 0:15:20.920 market assets and the ramifications is Vincent Signerella, our global 0:15:20.920 --> 0:15:24.400 market strategist for Bloomberg. He joins us here in our 0:15:24.400 --> 0:15:27.280 eleven three oh studios, Vincent, it's always a pleasure to 0:15:27.320 --> 0:15:29.800 have you here. Is this going to be enough to 0:15:29.880 --> 0:15:35.680 forestall continued declines in value of the Turkish lyra? I mean, 0:15:35.720 --> 0:15:38.040 come on, who's who's kidding? Who is it? This is 0:15:38.080 --> 0:15:40.960 window dressing now always a pleasure as well, Pim, Uh No, 0:15:41.120 --> 0:15:44.560 it's not so much window dressing. This is actually very 0:15:44.640 --> 0:15:47.080 calming for the markets. There was concerned that the central 0:15:47.080 --> 0:15:51.000 bank would back off under pressure from President Urdwan, who 0:15:51.040 --> 0:15:53.080 previously made a statement that race should be going down, 0:15:53.160 --> 0:15:56.400 that up and actually through the market. Really a curve 0:15:56.440 --> 0:15:59.760 ball with that one. And then essentially, uh we had 0:16:00.000 --> 0:16:04.080 a consensus, a very loose consensus, for three fifty basis points. 0:16:04.160 --> 0:16:07.880 So this move to this level is calming for the moment. 0:16:08.280 --> 0:16:10.280 The real question is going to come in the future 0:16:10.520 --> 0:16:13.960 when inflation begins to pick up again. Will the central 0:16:13.960 --> 0:16:18.200 bank respond in the future, because which obviously sounds high 0:16:18.200 --> 0:16:21.080 to us, didn't sound high to me in the eighties. Yeah, 0:16:21.200 --> 0:16:22.720 but you know, I want to go exactly to what 0:16:22.800 --> 0:16:25.400 you just said. What was that all about with everyone 0:16:25.640 --> 0:16:27.520 coming out and saying they should drop rates and then 0:16:27.960 --> 0:16:31.080 just hours minutes after that the central Bank came out 0:16:31.120 --> 0:16:34.680 and so that they were raising rights. I can't honestly 0:16:34.720 --> 0:16:37.000 go into what the President of Turkey was thinking at 0:16:37.000 --> 0:16:41.400 the moment, into his mind. You can't no idea. All right, Well, 0:16:41.400 --> 0:16:43.400 what I do want to ask you about is how 0:16:43.480 --> 0:16:45.960 much is this a turning point or potential turning point 0:16:46.040 --> 0:16:49.360 for the entire complex of em currencies, Because we are 0:16:49.400 --> 0:16:52.080 seeing a rally today, for example, in the South African rand, 0:16:52.160 --> 0:16:54.800 which a lot of people were pointing to as suffering 0:16:54.800 --> 0:16:57.560 the contagion effects of the Turkish larra falling out of bed. 0:16:58.000 --> 0:17:00.720 So is this sort of a sign in Turkey is 0:17:00.760 --> 0:17:05.080 taking its currency crisis seriously and perhaps people will start 0:17:05.119 --> 0:17:06.840 to be a little more confident with emerging markets or 0:17:06.920 --> 0:17:08.880 is that going too far? I think confidence is probably 0:17:08.920 --> 0:17:12.720 a little too far. I think it's definitely a pause. Um, 0:17:13.000 --> 0:17:15.960 Like you said, the czar is higher up one, but 0:17:16.000 --> 0:17:18.320 we're still seeing pressure around the Argentine pay so that's 0:17:18.359 --> 0:17:23.040 down one. Brazil is off the lows of the day, 0:17:23.080 --> 0:17:26.280 but but still down three tents of a percent. But 0:17:26.960 --> 0:17:29.320 we're definitely seeing a little bit of pressure backing off 0:17:29.400 --> 0:17:32.639 that it came back on a touch after Trump's tweet 0:17:32.760 --> 0:17:35.000 that the Wall Street Journal had it wrong that we 0:17:35.080 --> 0:17:37.320 don't need to make a deal with China. China needs 0:17:37.359 --> 0:17:39.760 to make a deal with US, and and some are 0:17:39.800 --> 0:17:44.000 basically looking at this situation with the tariffs is hard 0:17:44.040 --> 0:17:46.879 to believe if you want to bring manufacturing jobs back 0:17:46.920 --> 0:17:48.439 to the United States that these are going to be 0:17:48.480 --> 0:17:51.080 of a temporary nature. They need to be far longer 0:17:51.119 --> 0:17:54.760 and lasting, so that could continue to weigh and and 0:17:54.840 --> 0:17:57.879 potentially continue to weigh on e M. I think, Vincent, 0:17:57.920 --> 0:18:00.919 do you remember the movie Patent? Yeah, okay, you remember 0:18:00.960 --> 0:18:04.719 that scene where Omar Bradley, you know, he's arguing with 0:18:04.800 --> 0:18:06.960 George Patton and he says, you know, I can read 0:18:07.000 --> 0:18:10.200 a map when you look at what Turkey just did 0:18:10.760 --> 0:18:14.560 raising interest rates at the same time that they are 0:18:14.560 --> 0:18:19.000 now requiring companies in Turkey in order to transact all 0:18:19.040 --> 0:18:22.720 of their business in Turkish lira. Doesn't this mean that 0:18:22.760 --> 0:18:25.560 if you want to borrow money in Turkey it now 0:18:25.680 --> 0:18:28.520 costs you a lot more. How does that help the 0:18:28.600 --> 0:18:32.840 underlying economy? Well, it really doesn't help the underlying economy 0:18:32.840 --> 0:18:35.760 in the short term. What what the hope is and 0:18:35.800 --> 0:18:38.000 this is, you know, if if you think back to 0:18:38.080 --> 0:18:41.040 the US and our inflation situation in the eighties. The 0:18:41.359 --> 0:18:43.560 hope is actually to slow the economy. I mean by 0:18:43.560 --> 0:18:47.199 slowing the economy is slow inflation. The idea is you 0:18:47.320 --> 0:18:51.200 need to crush this very steep inflation every trend, even 0:18:51.240 --> 0:18:53.240 if it means to slow the economy down, because you 0:18:53.280 --> 0:18:56.160 can go back to lower rates to stimulate the economy 0:18:56.160 --> 0:18:58.560 in the future. I understand, how is that going to 0:18:58.600 --> 0:19:01.120 make it possible for these comp needs to repay their 0:19:01.160 --> 0:19:04.240 dollar denominated debts and how is that going to make 0:19:04.240 --> 0:19:08.720 it possible for Turkish banks to continue to operate if 0:19:08.760 --> 0:19:12.640 they've extended all these loans to these Turkish companies. Well, 0:19:12.640 --> 0:19:15.200 with the currency improving, it does help the dollar denominated 0:19:15.240 --> 0:19:18.760 debt because the depreciation and the currency is what affected 0:19:18.800 --> 0:19:21.639 that that sovereign And actually, as you mentioned the corporations, 0:19:21.680 --> 0:19:24.360 that's a good point because it's the corporate debt that's 0:19:24.400 --> 0:19:27.320 the issue in Turkey, not as much as the sovereign situation. 0:19:27.600 --> 0:19:31.119 So the the local companies really did need a break 0:19:31.240 --> 0:19:34.160 with the currency in order to help repay that dollar debt. 0:19:34.359 --> 0:19:37.720 The question is doesn't continue the line. Goldman Sactor has 0:19:37.760 --> 0:19:40.920 put out a piece They're looking at five and they say, 0:19:41.000 --> 0:19:44.360 this is the sixty one retracement from the highs of August. 0:19:45.080 --> 0:19:47.520 So if we don't get back below the levels of 0:19:47.560 --> 0:19:50.440 basically six double O and we continue to hold there, 0:19:51.080 --> 0:19:53.800 the markets are likely to try the upside again and 0:19:53.800 --> 0:19:56.159 put some pressure on the government. Vince, you're a former trader. 0:19:56.359 --> 0:19:58.560 You talk with a lot of traders. How many of 0:19:58.560 --> 0:20:01.760 them do you hear actually saying all I'm going into Turkey. No, 0:20:02.680 --> 0:20:05.120 not really, you're like, none of that? Really that many? 0:20:05.119 --> 0:20:07.119 I mean when you when you look at the overall picture, 0:20:07.480 --> 0:20:11.840 you know, the equity indexes UM that track emerging markets, Uh, 0:20:11.960 --> 0:20:15.080 they're better on the day, but still within a down trend. 0:20:15.160 --> 0:20:17.359 That the ticker that I like to look at his 0:20:17.600 --> 0:20:20.880 m x e f UM that's that's up a touch 0:20:20.920 --> 0:20:24.640 on the day, not substantially, and the MSCI Emerging MSCI 0:20:24.680 --> 0:20:28.440 Emerging Market UM stock in this it's off the lows, 0:20:28.520 --> 0:20:30.359 it's taken a bit of a breather, but it's still 0:20:30.480 --> 0:20:33.040 in a nice down channel. So we really need a 0:20:33.080 --> 0:20:36.120 trend break, a nice down channel. In other words, it's 0:20:36.119 --> 0:20:38.320 headed for more losses. Yeah. I don't think unless we 0:20:38.720 --> 0:20:42.680 totally a nice, nice down channel. Me and someone's getting 0:20:42.680 --> 0:20:48.400 their face this year. There you go, Vincent Cignarella. Vincent Signarella, 0:20:48.440 --> 0:20:51.000 thank you so much for joining us. As always, we 0:20:51.080 --> 0:20:54.480 love having you on global markets trategisty for Bloomberg, a 0:20:54.520 --> 0:20:57.879 squawker on the other side, as well as a longtime 0:20:57.920 --> 0:21:01.760 trader who really has that perspective um and has had 0:21:01.760 --> 0:21:06.320 some very astute commentary over the past few months in particular, 0:21:06.359 --> 0:21:09.000 so thank you. Definitely looking at a little bit of 0:21:09.000 --> 0:21:11.960 a bounce, but it is far from calling game over 0:21:12.119 --> 0:21:16.520 on the sell off in e M. We turn our 0:21:16.520 --> 0:21:20.480 attention now to the land of groceries. Shares of Kroger 0:21:20.480 --> 0:21:22.600 down a little bit more than nine. This is the 0:21:22.600 --> 0:21:26.880 biggest decline in six months the supermarket chain, missing analyst 0:21:26.960 --> 0:21:31.520