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Speaker 2: Angel Zino with the CFII Research on Technology. Angel Paul's
Speaker 2: been preparing all morning smart questions. Let me ask you
Speaker 2: the question, do we understand the depreciation trail of all
Speaker 2: this capex? Is it six months or is it six years?
Speaker 3: So, Tom, and thanks for having me.
Speaker 4: So, I think it depends right on the actual asset
Speaker 4: we're talking about, and realistically it could be anywhere from
Speaker 4: three to fifteen years in many respects. But on average,
Speaker 4: when you're depreciating most of these assets, you're talking about
Speaker 4: five and a half six years is the average you know,
Speaker 4: depreciation depreciating time for these assets, you know, these servers
Speaker 4: and what have you, Which is you know, where most
Speaker 4: of the capex dollars go into. Obviously, if we start
Speaker 4: talking about the land and what have you, you're you're
Speaker 4: looking closer to fifteen year time horizon. But when you
Speaker 4: start thinking about you know, some of the concerns out
Speaker 4: there about depreciation and you know whether or not we're
Speaker 4: probably probably you know, properly accounting for earnings and what
Speaker 4: have you. I'd say, at this point in time, you know,
Speaker 4: things look pretty good in this sense that you know,
Speaker 4: all the capex that's been spent, you can go back to,
Speaker 4: you know, these legacy type of GPUs that are out there.
Speaker 4: Pricing still remains very firm. So from me a depreciation perspective,
Speaker 4: it's not as if, you know, we're inflating the earnings
Speaker 4: at least at this point.
Speaker 5: In time, Angela, it appears that the market's trying to
Speaker 5: differentiate between who can generate better returns on all these
Speaker 5: huge capital spending investments. And what did you take away
Speaker 5: from last night? Because I am seeing Meta shares trading
Speaker 5: down pretty sharply here this morning, what does that tell
Speaker 5: you about Meta's strategy?
Speaker 2: Yeah, I think that at.
Speaker 4: Least for today and the street has it right, I mean,
Speaker 4: going into the print, I'd say the most confidence for
Speaker 4: from us, and I think from the street was on
Speaker 4: Alphabet at least four Q one.
Speaker 3: And again, I mean we.
Speaker 4: Saw some great results out of Alphabet. You saw a
Speaker 4: doubling of the backlog. You kind of saw it. You know,
Speaker 4: they're getting into the actual hardware business in terms of selling.
Speaker 3: Those those TPUs.
Speaker 4: But the cat that you can see the visibility in
Speaker 4: terms of the cat that spend and where that's going
Speaker 4: in terms of the backlog and that revenue trajectory of
Speaker 4: the next couple of years. With Meta, it is a
Speaker 4: little bit different, right. You got the they tweak the
Speaker 4: number higher, which I don't think is necessarily an issue,
Speaker 4: you know, relatively in line. I mean, you're talking about
Speaker 4: one hundred and forty five billion at the high end
Speaker 4: of ten billion. But that being said, I think you
Speaker 4: know more importantly is Zuckenberg had a chance, I think
Speaker 4: on miss earnings call to really tell.
Speaker 3: A better story about the AI.
Speaker 4: Strategy they just announced and you sparked this month, they're
Speaker 4: going to roll that out, ramp it up. What kind
Speaker 4: of products do they have on the horizon as you
Speaker 4: get into the second half of here into twenty twenty seven,
Speaker 4: How is that AI spend going to be monetized?
Speaker 3: And they just didn't tell the story.
Speaker 4: It doesn't necessarily mean that there's not a story, but
Speaker 4: the problem is that investors don't know what the story
Speaker 4: is at this point in time where were at least
Speaker 4: can place a trajectory in terms of the spend. I
Speaker 4: think the good thing for MATA, at least at this
Speaker 4: point in time is when you look at the growth
Speaker 4: rate thirty three percent of this quarter, you know another
Speaker 4: twenty five percent year of year next quarter. At least
Speaker 4: for the time being, the core business remains extremely strong
Speaker 4: and they are leveraging AI in that core business.
Speaker 5: Angela, The CAPEX numbers are just extraordinary. That for the
Speaker 5: big four companies there that reported last night, Amazon, Microsoft, Google,
Speaker 5: and Facebook seven hundred and twenty five billion dollars in
Speaker 5: CAPEX just in twenty twenty six alone. We've never seen
Speaker 5: those kinds of numbers. Really, where are we in the
Speaker 5: investment cycle? Is this the peak investment in AI? Or
Speaker 5: is there more to come?
Speaker 4: I mean, based on what we heard last night, it
Speaker 4: looks like there's there's more to come, right. I mean,
Speaker 4: Alphabet basically came out and said, you know, twenty twenty
Speaker 4: seven is going to be much higher than twenty twenty six.
Speaker 3: If you're Microsoft, then you look at that backlog.
Speaker 4: And you like, you kind of just heard from what
Speaker 4: they've had to say, you would think that they're going
Speaker 4: to provide a higher CAPEX number as well.
Speaker 3: Maybe the unknown at this point in time is meta.
Speaker 4: My guess, just knowing how Zuckerberg works, he's not going
Speaker 4: to pull back on the capex either, and potentially.
Speaker 3: Could see a deceleration, but you know.
Speaker 2: He's not given up, and so I gotta I gotta
Speaker 2: go Apple. They're like the non capex, aren't they?
Speaker 3: Yeah? Yeah, I mean, and it's worked in their favor.
Speaker 4: You know, the capital intensity level about three percent and
Speaker 4: has been over the last decade. And you look at
Speaker 4: how the revenue trajectory is looking now, I mean, it's
Speaker 4: it's very strong.
Speaker 3: China is finally working for them.
Speaker 4: Really, the story is going to be AI at the
Speaker 4: Developer's conference and whether or not they get foldables right
Speaker 4: this fall. If they get those two stories right, you're
Speaker 4: talking of a very good revenue trajectory going into twenty
Speaker 4: twenty seven with upside potential in the areas life services.
Speaker 4: And again that stuff isn't necessarily baked into the estimates
Speaker 4: at this point in time. If you get that, we
Speaker 4: think there's some nice upside on both the free cash
Speaker 4: flow and earning side.
Speaker 2: Great prive. Angela Angela Zino, thank you so much for
Speaker 2: ce if right now, futures up twenty two. Paul and
Speaker 2: I are watching oil. It continues to send a one
Speaker 2: fourteen handle down twelve dollars from the peak one six
Speaker 2: jan Murray with the CIO, NFJA investments in studio with this,
Speaker 2: which is always a good thing. Do you overweight meg seven,
Speaker 2: say boy, I'm glad I own it at a lower price,
Speaker 2: or do you I hate this word rebalance and rebalance
Speaker 2: out of Meta, rebalance out of Amazon.
Speaker 6: You know the mag seven. I think it all comes
Speaker 6: down to what's going on with Capex. Earnings are pretty good,
Speaker 6: but it's really about Capex, and I would delineate Capex.
Speaker 6: I'll answer your question, but I'll delineate it in two ways.
Speaker 6: You've got maintenance capecks. Everyone has to spend money, right,
Speaker 6: They got to spend money on something. But then you
Speaker 6: have growth Capex. Okay, this is AI cappex. If you
Speaker 6: can textualize this, Okay, Capex pre AI for these companies
Speaker 6: was around ten to fifteen percent of revenue. It's not
Speaker 6: double that, Okay, thirty percent of their revenue is going
Speaker 6: to Capex as a percentage. Okay, this is the largest
Speaker 6: capex cycle we've seen in modern history. This is equivalent
Speaker 6: to what happened in the eighteen hundreds of the railroad, so.
Speaker 2: Like when the Cowboys rebuilt. Like when the Cowboys rebuilt.
Speaker 6: So the way I would answer this is, I think
Speaker 6: you have to be there because this is the biggest
Speaker 6: infrastructure build out we've ever seen in modern history.
Speaker 7: And so it's very unique.
Speaker 2: I love when he comes in. I know, these phrases
Speaker 2: are great. It is.
Speaker 6: It really isn't. In fact, I'll take it a step further.
Speaker 6: Let's contextualize this as a percentage of GDP.
Speaker 7: It's it's roughly seven.
Speaker 6: Hundred billion dollars with a b okay, that's two or
Speaker 6: three percent of GDP. So you think about this, You're like,
Speaker 6: why are the earnings going crazy on the semi stocks?
Speaker 6: Why are they going crazy on the memory stocks? You
Speaker 6: have massive American companies there for the first time ever,
Speaker 6: are really putting their balance sheets to work in growth form,
Speaker 6: and they're spending money, and so it's unique, and I
Speaker 6: think you got to be therefore, and a lot of
Speaker 6: the multiples aren't even not high on the big tech names,
Speaker 6: to be honest.
Speaker 5: So you're so just to put a ball on this one.
Speaker 5: You're in this AI trade across the technology substance. I
Speaker 5: mean you you have to have to be.
Speaker 7: You have to be.
Speaker 6: And it's touching every part of the economy. Yes, so
Speaker 6: you know whether it's industrials, it's going to trickle into
Speaker 6: financials it already is. It's going to touch every component.
Speaker 6: So I think you have to be there. I think
Speaker 6: the real question, the big, big, big question. We know
Speaker 6: what the spend is, but we don't know what the
Speaker 6: return is.
Speaker 7: When I look at.
Speaker 6: Earnings today, that's reflecting.
Speaker 2: It's too complicated for me. Okay, I'm getting over how
Speaker 2: bad the Mets are. They're worse than the Red sixe.
Speaker 2: Those are baseball team John up here in the Northeast.
Speaker 2: Stay with us. More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
Speaker 1: Applecarplay and Android Auto with the Bloomberg Business app, or
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Speaker 2: Jonathan Gowob is with US Chief Factulty Strategies. Seaport advises,
Speaker 2: I mean reading your note and the way you write it,
Speaker 2: Meg seven. Is this island of prosperity. Is it MAG
Speaker 2: seven and everything else catches up? Or is it MEG
Speaker 2: seven alone?
Speaker 8: I actually think it's AI Semiconductors is alone and the
Speaker 8: rest of the market is something different. If you look
Speaker 8: at the hyper scalers or the you know what have you,
Speaker 8: their earnings growth looks like about two percent this quarter,
Speaker 8: and the semiconductors right now predicted ninety nine percent year
Speaker 8: over year growth and is expected to stay something close
Speaker 8: to that all year long. So there's there's a lot
Speaker 8: of haves and have nots in that group.
Speaker 5: Just broadly defined for this market. Here, we're kind of
Speaker 5: getting into the teeth of the earning season, really bit
Speaker 5: busy week this week. What have you seen from earnings
Speaker 5: and is the earnings picture for a corporate America enough
Speaker 5: to support this market?
Speaker 7: Do you think?
Speaker 2: Yeah?
Speaker 8: I mean, if if you take a look year to date,
Speaker 8: the earnings are up and the PE is down. So
Speaker 8: when people see a stock market that's that's doing okay,
Speaker 8: they just assume, well, stocks are more expensive. But if
Speaker 8: your earnings are rising faster than your price is going up,
Speaker 8: stocks are on sale. And I think that the narrative
Speaker 8: doesn't capture.
Speaker 5: That what's screening well for you guys these days. I
Speaker 5: mean it's easy for us to just kind of pour
Speaker 5: into the text dot trade because that seems to be
Speaker 5: working recently. How Else, what's the conversation you're having with
Speaker 5: your clients these days?
Speaker 8: So you almost have to look at the market in
Speaker 8: little pocket. So let's take a look at we're seeing
Speaker 8: this quarter. Financials are having a terrific earning story, and
Speaker 8: there's a couple of parts of the story.
Speaker 2: The one is that.
Speaker 8: In the lead up to the war, and it was
Speaker 8: really in the lead up rather than during the war,
Speaker 8: the amount of repositioning portfolios was high and trading profits
Speaker 8: were really strong across the board. And normally when that happens,
Speaker 8: you also see that bankstop lending money and companies are struggling,
Speaker 8: and they weren't. So the lending activity was fine, the
Speaker 8: faults were down, and trading was higher. However, all the
Speaker 8: trading happened in February, and it's been quiet in March
Speaker 8: and April, which means that the really great first quarter
Speaker 8: probably doesn't carry forward in that space.
Speaker 2: I look at where we are and it's simple, do
Speaker 2: I buy the growthiness, do I do nothing, or do
Speaker 2: I buy value? Which is it?
Speaker 8: Oh, you have to buy the you have to buy
Speaker 8: the growthiness. If you look at the AI related especially
Speaker 8: the semiconductions. But if you look at the AI related companies,
Speaker 8: they're trading at a market multiple of twenty and their
Speaker 8: expected growth in the next twelve months is sixty percent.
Speaker 2: I allowed to say you have a favorite? Do you
Speaker 2: have a single best idea? Why don't I?
Speaker 8: You know, if you look at I mean, I'll talk
Speaker 8: about you know, if I look at the names, the
Speaker 8: the Evogos, the in Vidias, the A M d s,
Speaker 8: the difference between their growth rate and their valuation is
Speaker 8: just shocking.
Speaker 5: Jonathan Dollid, Chief Equity Strategists Seaport Advisors Joints is here
Speaker 5: in our Bloomberg Interactive Brokers Studio FED chairman J. Poum.
Speaker 5: He's sticking around, what do you make of that?
Speaker 8: You know, I'm not really sure it matters that much.
Speaker 8: We've done a bunch of work on what stocks care about.
Speaker 8: They care about credit and it spreads because that really
Speaker 8: represents a downside tail risk. They care and they don't
Speaker 8: really care that much about the short read, even though
Speaker 8: that's what everybody obsesses on and.
Speaker 9: What's it mean to thank you?
Speaker 2: Thank you, thank you?
Speaker 8: And you know, Tom, you were talking about before. The
Speaker 8: credit spread is lower today than it was before the war.
Speaker 8: The vis now is lower than it was before the war.
Speaker 8: The cost of hedging downside risk is lower than it
Speaker 8: was before the war. And stocks have to be able.
Speaker 2: Let's do gallup charm here, folks on the other day,
Speaker 2: and folks, this is all I used Google Gemini. I
Speaker 2: used to perplexity. You don't I use Google Gemini religiously
Speaker 2: here with the Bloomberg ask me as well, Okay, John
Speaker 2: gottim I went back and looked at like six wars,
Speaker 2: and in the middle of the war, the stock market
Speaker 2: starts and always goes up because of the stimulus and
Speaker 2: just you know, the energy that you get out of
Speaker 2: the tragedy of a word, that's what we're living right now.
Speaker 2: I mean, there's stimulus out there. The corporations are doing
Speaker 2: business and they're creating revenue, and what I believe is
Speaker 2: a five percent nominal GDB space.
Speaker 8: Just there's something first of if you look at again,
Speaker 8: getting back to corporate profits right now, the market's expecting
Speaker 8: eight percent profits this year in the SMP, which is
Speaker 8: a crazy number before the war was fourteen and a half.
Speaker 8: Profit growth went up by three and a half. No,
Speaker 8: the big delta on that, The big difference is that
Speaker 8: energy profits were expected to go up. But what we
Speaker 8: used to think is when energy profits go up, you're
Speaker 8: going to crush the consumer, You're going to crush companies,
Speaker 8: and that has not happened. There's been no down downward
Speaker 8: pressure on corporate youre talking about corporate spending patterns in
Speaker 8: today's GDP, You're not seeing that. And until you do,
Speaker 8: things are fine.
Speaker 2: This is key. Alexis, I think mentioned this claims, Yeah,
Speaker 2: eighty nine thousand, YEP.
Speaker 5: Consensus was, you know, two hundred and twelve thousand. So
Speaker 5: came in much better there, Jonathan. We saw late last
Speaker 5: year kind of a rotation maybe out of some of
Speaker 5: those high growth tech names into some maybe some more value,
Speaker 5: some small and mid cap stocks. But boy, there's tech
Speaker 5: stocks that come ripping back here. So how has that
Speaker 5: rotation has that been? Was that just a short term
Speaker 5: trade or is that something that can play out?
Speaker 8: I think the rotation is a bit misunderstood. So if
Speaker 8: you think things are going to go bad, what you
Speaker 8: do is you sell things that are more cyclical and
Speaker 8: you go into defensive stocks. That is not what happened.
Speaker 8: What this really was was a risk reduction trade in
Speaker 8: the hedge fund community. So let's say your overweight stock
Speaker 8: A and your underway stock B. The war happens, and
Speaker 8: they don't pull out of the market. They just take
Speaker 8: all their bed sizes down and they readjust them. And
Speaker 8: when you do their overweights, all of a sudden, they're
Speaker 8: selling them. Their underrates are buying. And you see this
Speaker 8: like wicked rotation. And so tech had been out of
Speaker 8: favor at the beginning of the year when you had
Speaker 8: this software sell up, so when they readjust it snaps back.
Speaker 5: But it's really more a technical thing.
Speaker 2: What's retail doing and I don't mean retail like robin
Speaker 2: Hood and Meme stocks in that we're just adding to
Speaker 2: our four rowin case, is that the behavior you see.
Speaker 8: I'm not seeing a lot of I'm not seeing a
Speaker 8: lot of pressure. I mean, there there is a Meme
Speaker 8: basket of companies and upmarket like this that are doing
Speaker 8: really well. Last year was a great year for for
Speaker 8: those kind of companies. But there's there's really few signs
Speaker 8: that are that are telling that individual investor to be cautious.
Speaker 5: What's screening wall for you guys these days? Is there
Speaker 5: a certain industries, Is there a certain factor that you
Speaker 5: guys are focusing on these days.
Speaker 8: Yeah, there's there's a number of areas. We do a
Speaker 8: lot of work on this idea where where are the
Speaker 8: company fundamentals breaking down from the stock price action. And
Speaker 8: some of these are short ideas, some of these are
Speaker 8: long ideas. I'll give you an example restaurants, leisure, and
Speaker 8: and and and gaming. The fundamentals have largely deteriorated. And
Speaker 8: there's a whole bunch of stocks that are doing really well.
Speaker 9: And so when we're.
Speaker 8: Talking to the hedge found community, we're saying, these are
Speaker 8: companies the the the businesses are are are are rolling over,
Speaker 8: the stocks are moving up to profits. In that in
Speaker 8: the energy space, there's a whole bunch of companies that
Speaker 8: the earnings for the group look really well. So there's
Speaker 8: a lot of positive price action. And there's individual names
Speaker 8: where the fundamentals are not keeping up.
Speaker 2: So there are disruptions.
Speaker 8: One group that in particular, it's been a bloodbath in
Speaker 8: software and the good and bad are being taken down together.
Speaker 8: There's probably more opportunity on individual names in software than
Speaker 8: any other group in the market.
Speaker 2: I was looking at this John, and what I don't understand.
Speaker 2: I love the enthusiasm, and of course it's Seaport Advisors.
Speaker 2: The note is clarity. Look to Seaport Advisors, folks for
Speaker 2: the gallob research. Not he does it daily. It's really
Speaker 2: quite something that he calculates out where we are. But
Speaker 2: the X axis your enthusiasm, like, do you have a
Speaker 2: clarity on August? Do you have a clarity on your end?
Speaker 2: Can dare I say you model into two thousand twenty seven?
Speaker 9: What's what's been happening?
Speaker 2: Tom?
Speaker 8: I mean, you guys know this is that analysts are
Speaker 8: always an enthusiastic bunch. They start with their smiths do I,
Speaker 8: and over time they normally come down the last three
Speaker 8: years tech company, which which normally the estimates would fall
Speaker 8: steadily all year long because enthusiasm. It's reality, the numbers
Speaker 8: are going higher and higher and higher, and it's really
Speaker 8: broad and this is not something that I've seen in
Speaker 8: my career. And so the when when analysts underestimate, and
Speaker 8: this is about as optimistic group as you have, that
Speaker 8: that usually means that there's there's a lot more upside
Speaker 8: left in the mid.
Speaker 2: Paul helped me out here. Alex Reid working in the
Speaker 2: dark and dark and inferious Bloomberg Intelligence tech Space, Microsoft
Speaker 2: Capex Boost could be bond sale precursor. Yep, just like
Speaker 2: we're we're seeing with Meta this morning. Are bond issuances
Speaker 2: by meg seven's Are they good for their stocks? You know?
Speaker 8: Seaport Global is we're talking for the biggest private credit
Speaker 8: shopping in the world. And I talk a lot to
Speaker 8: our our credit clients. They are really concerned on fifteen
Speaker 8: year bonds, on data centers and things like that. I'm
Speaker 8: not talking with the job I'm talking about our client base.
Speaker 8: Because we have so little visibility and so much capex.
Speaker 8: We are going to see the users of this, not
Speaker 8: the chip makers, but the people who build data centers,
Speaker 8: like roughly zero profits this quarter, and those profits are
Speaker 8: going to be under pressure for several years. I know
Speaker 8: you were talking about this on an earlier slot because
Speaker 8: they haven't even begun to depreciate a lot of the
Speaker 8: data center expenditures.
Speaker 2: Okay, I gotta leave it there. Going on, Are you
Speaker 2: based in New York?
Speaker 9: I'm based in New York.
Speaker 2: I can come by any times. Jean Gollib He's on
Speaker 2: his way to a teacher's conference right now. John Gollib
Speaker 2: with us, folks with Seaport Advisors. Stay with us. More
Speaker 2: from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
Speaker 1: Apple Karplay and Android Otto with the Bloomberg Business app,
Speaker 1: or watch us live on YouTube.
Speaker 2: You get lucky. That's what happens in this business. He
Speaker 2: was booked ages ago and then we said, well, we
Speaker 2: can't talk to Professor Hers at the University of Houston
Speaker 2: unless we blow up opek boom. There it was yesterday
Speaker 2: with us in the studio, folks. And this is the
Speaker 2: heritage of surveillance. Ed Morris at City Group and now
Speaker 2: at Hartree, Jeff Curry out of Chicago, and Golden Sachs,
Speaker 2: Francisco Blanche and all the academics across this nation. This
Speaker 2: is the foundational guy out of Yale University and all
Speaker 2: of us work at the University of Houston. Ed Hers
Speaker 2: joins this morning. We're so honored to have you here.
Speaker 2: Were you surprised to see Abu Dhabi and Dubai and
Speaker 2: the other three tribes of the UA, the Trucial States.
Speaker 2: Were you surprised to see them walk away from OPEK, No,
Speaker 2: not at all.
Speaker 10: They've been kind of leading the band of cheaters within OPEC,
Speaker 10: and as former oil minister Alonaomi of Saudi Arabia said.
Speaker 7: We cheat. Now that's what cartel behavior is all about.
Speaker 2: Right, Okay, that's cartel behavior. Is this nineteen eighty six?
Speaker 2: Where is he a plunge in it? Or is it
Speaker 2: bigger than that where we see a plunge in price
Speaker 2: X the war and then they can't rebuild the cartel.
Speaker 7: That's a great question.
Speaker 10: And we're not going to know until we find out
Speaker 10: exactly how much damage has been done to the oil
Speaker 10: production facilities above the blockade. We know Kuwait to shut in,
Speaker 10: We know that the Saudi facilities have been hit. Although
Speaker 10: they're able to get a lot of oil out via
Speaker 10: the pipeline. You know, the Emirates is having issues getting
Speaker 10: to market. If they're able to restore production, this is
Speaker 10: not going to be a big event for them. And
Speaker 10: some countries abide by the cartel rules, some don't. They
Speaker 10: pay attention. One of the great things with the Saudis
Speaker 10: is the swing producers. They can actually cut production by
Speaker 10: a million barrels a day and because of the price
Speaker 10: elasticity of demand for crude oil, make more money.
Speaker 5: Is there a scenario or what is the scenario where
Speaker 5: we get the Straight where it was before the war
Speaker 5: effectively open, because without it, it seems like this is
Speaker 5: where we are higher for longer.
Speaker 10: This is the mystery. I mean, we know the Trump
Speaker 10: administration ignored the fact that Iran has been telling us
Speaker 10: for decades they would close this straight. This is astonishing.
Speaker 10: We've written about it, We begged people to pay attention
Speaker 10: to it. Gave a talk at the na Will War College,
Speaker 10: the Staff College about this fifteen twenty years ago. And
Speaker 10: so this was job one in any kind of Middle
Speaker 10: East war, make sure the Strait remains open. And you know,
Speaker 10: now we're in trouble. We've also got Ukraine helping knock
Speaker 10: down the Russian production and exports. So maybe five to
Speaker 10: seven million barrel day are currently off the market. In total,
Speaker 10: the releases from the SPRS, the four hundred plus million
Speaker 10: that the International Energy Agency is releasing, of which one
Speaker 10: hundred and seventy two was ours, that's going to run
Speaker 10: out over the summer. And that's what I'm thinking we're
Speaker 10: seeing right now with the uptick in WTI. The June
Speaker 10: contract started trading this week. That's why we're seeing the
Speaker 10: traders looking at the physical market in June and seeing
Speaker 10: it to be much tighter.
Speaker 5: Our good friends Dan in your neck of the woods,
Speaker 5: in the oil patch, they're not necessarily doing what they
Speaker 5: used to do, which is ramp up production and take
Speaker 5: advantage to these higher prices. Why is that and should
Speaker 5: we expect that to?
Speaker 10: We got a couple of things going on. One is
Speaker 10: a lot of them entered into swaps before President Trump
Speaker 10: took office and oil was about at eighty dollars a
Speaker 10: barrel in early January of twenty five. The swaps or
Speaker 10: a double edged because swap at seventy five a swap
Speaker 10: at eighty, well, that means you don't get to participate
Speaker 10: in the upside. In two thousand and eight, when the
Speaker 10: price of oil went to one hundred and forty seven
Speaker 10: dollars a barrel, Anna Darko came within minutes of having
Speaker 10: to file bankruptcy. They were only getting one twenty three
Speaker 10: at the net in their basin.
Speaker 2: At the Derby, at the Derby, at the shop whatever
Speaker 2: in Houston, the shop club in Houston. The executive is
Speaker 2: that you bounce off you and read your every word.
Speaker 2: What are they doing or thinking? Now? Are they drill,
Speaker 2: baby drill? Or are they just hunkering down trying to
Speaker 2: figure out what the Texans do?
Speaker 10: They're kind of whistling past the graveyard right now if
Speaker 10: they didn't go into swaps and essentially miss this upside.
Speaker 10: They are looking to work over wells. They are looking
Speaker 10: to do more gas because that's where the demand is
Speaker 10: right now. But gas, I don't know where it is today.
Speaker 10: It's been less than three dollars in mcf for most
Speaker 10: of the past month. That's where the future is. The
Speaker 10: transition is going to continue, and gas is the stepping
Speaker 10: stone to get there.
Speaker 5: So do we care or to what extent do we
Speaker 5: care about what OPEK is doing these days because we are,
Speaker 5: as you mentioned for the first time, in net exporter
Speaker 5: work quasi energy independent. I guess what do we think
Speaker 5: about OPEC Now?
Speaker 10: It's an open market. Obviously the producer in Texas is
Speaker 10: selling to the global market. We're selling about four and
Speaker 10: a half million barrels a day of the light suite
Speaker 10: that comes out of the Permian basin. For example, we're
Speaker 10: self sufficient to the extent that we look at North
Speaker 10: America altogether. We get about four million barrels a day
Speaker 10: from our close friends and allies in Canada.
Speaker 7: That's what makes up the difference.
Speaker 10: We imported in twenty five about six point two million
Speaker 10: barrels a day, of which only four hundred and ninety
Speaker 10: thousand barrels a day came from.
Speaker 2: I think the Canada stories wind a person more things
Speaker 2: than here. It's too important, Professors, As we look at
Speaker 2: this Texas leeds and renewables, yep, talk to the Republican
Speaker 2: Party about how Texas is leading in renewables. But Republicans
Speaker 2: don't like renewables and climate stuff.
Speaker 10: Yeah, So take a look at the ERCOT dot com website.
Speaker 10: This is the Electric Reliability Council of Texas. During the day,
Speaker 10: and you're going to see more than fifty percent of
Speaker 10: the electricity being generated by solar and wind batteries have
Speaker 10: gone from essentially nothing three years ago to now providing
Speaker 10: over eighteen gigawatts of short duration a couple of hours,
Speaker 10: just enough to get us through the transition periods in
Speaker 10: the morning and in the evenings. This is fantastic growth.
Speaker 10: Is the grid perfectly safe from a freeze like we
Speaker 10: had in twenty one?
Speaker 7: Not yet.
Speaker 10: There's not enough dispatchable generation on the grid to cover
Speaker 10: the demand in Texas.
Speaker 2: Was Rebecca phil Cone of Landman? Was she in your class?
Speaker 2: Do you watch Landman?
Speaker 7: I have watched a couple of episodes.
Speaker 2: Is it real?
Speaker 10: The real world? And I'm a partner in oil company
Speaker 10: is much worse than Landmark in what way? There is
Speaker 10: no intrigue with with with murders and shooting and bombings
Speaker 10: and things blowing up. Nobody wants to do that, but
Speaker 10: the skullduggery. Think back to the TV show Dallas and JR.
Speaker 7: Ewing. Now we're talking, you can go What was it.
Speaker 2: Like as a kid reading Jurgen's The Prize? Everybody had it?
Speaker 2: Very few read it all. We walked around campus. We
Speaker 2: have the Prize, It's eight hundred pages. What was that likes?
Speaker 10: It's a great history, you know, in terms of the
Speaker 10: basic economics.
Speaker 7: Maybe maybe not.
Speaker 10: As as detailed as it could be. You know, I
Speaker 10: was in school in the seventies with guys that were
Speaker 10: this administration, that administration. We were all concerned about shortfalls
Speaker 10: and oil transitioning.
Speaker 7: We were running out of natural gas. This is prefracking.
Speaker 10: Keep in mind, hydraulic fracturing gives about one hundred and
Speaker 10: fifty million dollars of consumer surplus to the American public
Speaker 10: every year. This is generated one point five two trillion
Speaker 10: dollars in the last fifteen years.
Speaker 2: Yep, this has been wonderful. Can you come back again?
Speaker 2: Are you in New York like every five years or is.
Speaker 7: It like well more frequently? Have family up parents.
Speaker 2: I mean Houston is a Gulf street. I mean University
Speaker 2: of Houston. They yeah, everyone does.
Speaker 5: Basketball team is back, baby, They're back. They're good every year.
Speaker 2: Now the Red Sox, I think play the Astros. It's
Speaker 2: going to be ugly football.
Speaker 10: I think we're down to our double A club now
Speaker 10: with all the entries we've had.
Speaker 2: Professor, thanks so much. He is iconic. His name is
Speaker 2: Ed Harrier's hi rs of the University Houston. That folks
Speaker 2: was a clinic. Stay with us. More from Bloomberg Surveillance
Speaker 2: coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: The Mets are so bad they don't let anybody leave
Speaker 2: the office.
Speaker 5: Let's not go there.
Speaker 2: Sofia Dross and the timing your folks, I can't convey
Speaker 2: how lucky I am this morning, having sophia drosis with
Speaker 2: all of our international economics skill out of ann Urburt
Speaker 2: University of Michigan. What is the mood like, like, do
Speaker 2: you have like Mets cupcakes at point seven to or
Speaker 2: are you forced to go to games since no one
Speaker 2: will go?
Speaker 11: So good morning and thanks for having me. I would
Speaker 11: say that it's been a disappointing start to the season,
Speaker 11: but you know, I'm an optimist.
Speaker 9: So it's still April.
Speaker 2: That sounds like you went to a compliances.
Speaker 9: It's still April.
Speaker 11: There's a lot of talent on the team, and I
Speaker 11: think it's just a matter of time.
Speaker 2: Robinstein's not doing this at Carlisle. He's not forcing people
Speaker 2: to go to the Orioles at kimd Well.
Speaker 11: No one has to force me. I like going to Cityfield.
Speaker 11: I like supporting the team, and I hope I give
Speaker 11: them some good vibes. So maybe this presence here in
Speaker 11: our discussion will give them the good juju.
Speaker 2: That thing I mean, good morning to stee Cole all
Speaker 2: Ero point seven two Sophiodorus. This is legendary. I'm looking
Speaker 2: at currency dynamics. The Japanese said enough this morning, we
Speaker 2: went in four big figures, stronger yen. First thing I did.
Speaker 2: I looked at generic ten year, generic twenty year. Japan
Speaker 2: is busting out lower price, higher yields within the fiction
Speaker 2: of their economic experiment of twenty years. Should our listeners
Speaker 2: and viewers in America study and be concerned about the
Speaker 2: fragilities of Japan.
Speaker 11: Well, Japan, I think is caught in a very difficult
Speaker 11: situation right now. Certainly they've battled deflation for decades, finally
Speaker 11: exiting deflation and at a time when the economy was
Speaker 11: garnering momentum.
Speaker 7: Now we have.
Speaker 11: This oil price shock, which is a big deal for Japan,
Speaker 11: which is an oil importer, and I think that the
Speaker 11: currency weakness in this context is a lot more pernicious.
Speaker 11: So it was really interesting to me to see, you know,
Speaker 11: the final warning come last night, the price action come
Speaker 11: this morning, and when I take a step back and
Speaker 11: I think about it, you know, Historically, some people think
Speaker 11: that Japanese authorities are tolerant of currency weakness because they're
Speaker 11: an export driven economy, but they also import raw materials,
Speaker 11: and so we're in an inflationary environment globally, we're having
Speaker 11: a weak currency is not really beneficial.
Speaker 5: What do you make of what appears to be just
Speaker 5: judging by the redder for the last twelve to twenty
Speaker 5: four hours, higher energy for longer. I don't see either
Speaker 5: side backing down here. So the straight looks closed that's
Speaker 5: reflected in the energy markets. Has that impacted your GDP outlooks,
Speaker 5: your views?
Speaker 11: Well, we're certainly keeping an eye on it, and I
Speaker 11: do believe that it creates some downside risks for consumption.
Speaker 11: Consumption's coming off of strong levels of the last few years.
Speaker 11: We saw the GDP data this morning, a sequential moderation
Speaker 11: in consumption, and if energy prices and gasoline prices stay elevated,
Speaker 11: some downside risks to the second quarter as well.
Speaker 2: Well, I'll get another one in here. I got any
Speaker 2: questions fun.
Speaker 5: We also gott some consumer data today, the consumer spending,
Speaker 5: consumer income, spendings above the level of income here, so
Speaker 5: the consumer seems to be still out there spending, and
Speaker 5: I guess one of things we've learned is you can
Speaker 5: really shouldn't underestimate the strength of the US consumer out there.
Speaker 11: How do you think about the consumer, Well, the consumer
Speaker 11: has been surprisingly resilient, and it is at odds with
Speaker 11: the consumer confidence data that we're seeing. So people are
Speaker 11: very nervous, say from the Great University of Michigan NC
Speaker 11: double a National champs, let me squeeze that in so I.
Speaker 2: Have a shortstop for the METS.
Speaker 11: So with the consumer, the consumer, I think the income
Speaker 11: gains over the last few years, and also there's a
Speaker 11: lot of inertia with consumption. People are kind of reluctant
Speaker 11: to pull back unless they absolutely need to. We are
Speaker 11: seeing some of those signs of strain in lower income consumers.
Speaker 11: Higher income consumers can continue to spend, and we'll need
Speaker 11: to see what happens over the next couple of quarters, because,
Speaker 11: as you said, the oil price shock is pretty meaningful.
Speaker 2: Extraordinary day of conversations here across America, around the world,
Speaker 2: Sophia Drosis with US point as seven to two is just
Speaker 2: an extraordinary career wrapped around international economics and foreign exchange,
Speaker 2: all sorts of ways to go you're including your past work,
Speaker 2: Morgan Stanley, What in God's name is the chief dealer
Speaker 2: at the New York Fed Are you the one that
Speaker 2: orders pizza? Oh?
Speaker 9: If it were only.
Speaker 2: Us a snapshot into that, Yeah sure, all this mystery
Speaker 2: is yeah sure, and that you're rope on like seventh
Speaker 2: eighth floor. And what do you do as a chief dealer?
Speaker 5: Yeah?
Speaker 11: Well, as a chief dealer at the Federal Reserve, you're
Speaker 11: responsible for overseeing the transactions, particularly the foreign currency interventions.
Speaker 11: And so I back in the day before we all
Speaker 11: had Bloomberg on our phones, I would have like an
Speaker 11: FX alert beeper and it would tell me at any
Speaker 11: given moment twenty four to seven where currencies were trading.
Speaker 11: So typically we would have some insight into maybe one
Speaker 11: of our G seven partners would like to intervene and
Speaker 11: would like the support of the United States or would
Speaker 11: like US monetary authorities to execute the transaction on their behalf.
Speaker 9: So that was me.
Speaker 11: I would be on the other side of these trades,
Speaker 11: either on the phone or electronically executing.
Speaker 2: I got eight ways to go with that, beautiful explanations, Sophia.
Speaker 2: Right now, the United airb Emirates is walking away from OPEC,
Speaker 2: the Chrucial states with all the history clearly looking to
Speaker 2: America and they want some form of swap line because
Speaker 2: they're broken because of the war. Explain like that conversation,
Speaker 2: if it's happening.
Speaker 11: Yeah, So traditionally the swap lines happened between the central banks,
Speaker 11: and it's an opportunity for other central banks to ask
Speaker 11: the FED to provide them with dollar reserves dollar currency
Speaker 11: in exchange for the home currency of the other country.
Speaker 11: And typically we see this during times of stress. So
Speaker 11: we saw the expansion of the swap lines that the
Speaker 11: FED has during any kind of market crisis, but very
Speaker 11: recently during the pandemic. And also I think the FED
Speaker 11: does have these ongoing swap lines and cooperations with other
Speaker 11: major central banks, but it is one way to get
Speaker 11: dollar liquidity. What was interesting about the UAE is that
Speaker 11: they had the conversation with the US Treasury, and so
Speaker 11: that typically isn't the standard protocol. Usually it is between
Speaker 11: central banks, but it shows that on a contingency basis,
Speaker 11: at least that's what the UAE and the US Treasury
Speaker 11: have said. It's a contingency to think about ensuring that
Speaker 11: they have meaningful dollar liquidity should they need it.
Speaker 2: So Washington Nationals they did okay against some mett yesterday.
Speaker 2: I think probably you're going this afternoon one, two, ten pm.
Speaker 2: I'm sure you're sitting with mister Cohen to enjoy further slaughter.
Speaker 2: Is you gaze upon the game, He's going to turn
Speaker 2: to you and say, what's your unknown unknown? Right now?
Speaker 2: What is sophia drosis? Is unknown? Unknown?
Speaker 11: There's a lot actually, Well, the first thing is that
Speaker 11: we just don't have visibility on how this conflict in
Speaker 11: Aran is going to end, either in terms of like
Speaker 11: the timeframe or the type of additional dislocation uh it
Speaker 11: could create in markets. I'm also very you know, concerned
Speaker 11: about what could be happening on the cyberfront. Every day
Speaker 11: I wake up there are some very alarming headlines. So
Speaker 11: I think that these are a lot of things that
Speaker 11: could be on the radar, could be affecting markets, and
Speaker 11: it's just really hard to get a lot of visibility.
Speaker 2: Right, Alexis is going to Europe is going to be
Speaker 2: a one to twenty euro or a one thirteen year.
Speaker 11: Oh, Alexis, I hope that you go to our motherland, Greece.
Speaker 9: So I race it with your presence.
Speaker 4: Yeah.
Speaker 5: Actually, and my motherland is Cyprus.
Speaker 2: Oh Greek nuts.
Speaker 11: Oh yeah, the last we vote for each other in
Speaker 11: the Eurovision content.
Speaker 7: Absolutely, I love it.
Speaker 2: I got thirty seconds the Greek Matt Weigler's written brilliantly
Speaker 2: about this. The Greek recovery is the untold story Europe. Oh.
Speaker 5: Absolutely, it is like Poland.
Speaker 2: Now.
Speaker 9: I would say that they were forced.
Speaker 11: To make some tough choices, but the choices they made
Speaker 11: have really improved the productivity of the economy.
Speaker 2: And yes, I had an idea. We could do a
Speaker 2: remote from Athos or some island there Santorini, bring along
Speaker 2: Sophia and Alexis. It'll be like a Greek moment and
Speaker 2: we could take Steve Cohen's golf stream.
Speaker 1: Nice.
Speaker 7: It's perfect, It's perfect.
Speaker 2: Sophia Drosis, thank you so much for joining us the studio. Seriously,
Speaker 2: to have her any here with the Japanese job owning
Speaker 2: today was really important.
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