WEBVTT - Surveillance: Historic Times in FX 0:00:05.120 --> 0:00:09.200 Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keene. Along 0:00:09.200 --> 0:00:12.520 with the Jonathan Ferrill and Lisa A. Brownowitz jay Leie, 0:00:12.640 --> 0:00:16.160 we bring you insight from the best and economics, finance, 0:00:16.239 --> 0:00:22.440 investment and international relations. Find Bloomberg Surveillance and Apple Podcast SoundCloud, 0:00:22.800 --> 0:00:26.240 Bloomberg dot Com and of course on the Bloomberg terminal. 0:00:29.320 --> 0:00:31.400 John A. Guess now it's George Sara Phaelos Globe ahead 0:00:31.560 --> 0:00:35.560 of FX research over at Deutsche Bank. George, let's start 0:00:35.560 --> 0:00:38.400 with that dollar strength. What is the number one dominant 0:00:38.479 --> 0:00:41.440 driver of what's taking place not just in Europe but 0:00:41.479 --> 0:00:46.280 across Asia. Two? Hi, John, So it's it's clearly historic 0:00:46.320 --> 0:00:49.199 times in effects. And I'd say what's going on is 0:00:49.280 --> 0:00:53.559 that valuate valuation anchors are being lost. So you know, 0:00:53.800 --> 0:00:56.480 you take Europe for example, producer prices are now at 0:00:57.760 --> 0:01:00.680 over the last eighteen months. Um, what does that mean 0:01:00.760 --> 0:01:04.679 for purchasing power parity, for for how much competitiveness has 0:01:04.720 --> 0:01:08.240 been impacted? The market doesn't really know and is trying 0:01:08.240 --> 0:01:11.399 to grapple with with that question. Um, you mentioned the yen. 0:01:11.959 --> 0:01:14.119 The b o J has been doing the FED equivalent 0:01:14.160 --> 0:01:17.160 of a trillion of quem in recent months, it's now 0:01:17.200 --> 0:01:20.440 starting to pick up again. It's basically following a policy 0:01:20.440 --> 0:01:23.160 of neglect for the end. It hasn't spoken about the 0:01:23.319 --> 0:01:26.240 end m for for the last for the last two months. 0:01:26.959 --> 0:01:28.960 And I think if you add all these things together, 0:01:29.760 --> 0:01:33.040 the dollar is ending up as the safe haven of choice, 0:01:33.560 --> 0:01:36.120 but by default because there's all these issues in the 0:01:36.160 --> 0:01:38.319 rest of the world. And I think that the critical 0:01:38.360 --> 0:01:41.200 point is it becomes very difficult to understand and caliber 0:01:41.720 --> 0:01:44.880 fair value. Given these huge moves. We're seeing an energy 0:01:44.959 --> 0:01:49.960 prices um it changes in policy, for example out of Japan, 0:01:50.320 --> 0:01:53.120 and obviously we've got the COVID situation in China. When 0:01:53.120 --> 0:01:55.240 do we reach a breaking point? George and I speak 0:01:55.360 --> 0:01:58.559 as we start reaching levels that perhaps were last seen 0:01:58.760 --> 0:02:01.680 or the pace of which the last scene in two 0:02:01.680 --> 0:02:06.840 thousand twenty which prompted Federals are of intervention. Yeah, so 0:02:07.120 --> 0:02:10.000 there's some currencies we were even exceeding those And going 0:02:10.040 --> 0:02:15.200 back to to the nineteen eighties, the huge four overshoot 0:02:15.240 --> 0:02:19.680 back then kept going. It actually currencies back then, the 0:02:19.760 --> 0:02:23.440 couple from rates, even as Volker stopped. The dollar kept going, 0:02:23.600 --> 0:02:26.240 even as the US ecial accounts turned and it became 0:02:26.280 --> 0:02:29.399 a bit of a self fulfilling situation where where again 0:02:29.480 --> 0:02:32.200 valuation anchors were lost, and what it took to turn 0:02:32.320 --> 0:02:36.120 things was coordinated intervention and you had the fetes started 0:02:36.120 --> 0:02:38.239 to sound a bit more jittery, and then obviously the 0:02:38.360 --> 0:02:41.480 plaza called UM. I still think we're far away from that, 0:02:41.600 --> 0:02:44.440 not least because dollar strength at the moment is helping 0:02:44.480 --> 0:02:48.400 the US inflation story, and it is very likely the 0:02:49.200 --> 0:02:51.280 call goods inflation in the US, I think we'll move 0:02:51.280 --> 0:02:54.640 sharply lower UM. So one thing that will be able 0:02:54.639 --> 0:02:56.920 to shift things is if we get a FED pivot 0:02:57.280 --> 0:02:59.959 that's clearly too early, that's on the U S side, 0:03:00.360 --> 0:03:03.200 just an easing of these taflation fears. But then, of 0:03:03.240 --> 0:03:06.000 course we've got the issues outside of the US, both 0:03:06.000 --> 0:03:09.640 in Europe and Asia. It's very difficult over the next 0:03:09.720 --> 0:03:14.080 few months to see these fundamental issues, this uncertainty go away, 0:03:14.880 --> 0:03:17.720 and as such, I think it's very difficult to call 0:03:17.800 --> 0:03:20.760 for a big turn in the dollar as things stand well. 0:03:20.880 --> 0:03:23.839 Given that, George, what's going to stop the euro from 0:03:23.880 --> 0:03:27.639 going to ninety zero point nine on the dollar, what's 0:03:27.639 --> 0:03:29.960 going to stop the yen from going to one fifty? 0:03:30.040 --> 0:03:32.240 As we were talking about yesterday. What's going to be 0:03:32.720 --> 0:03:35.200 the pivot point for some of these currencies as there 0:03:35.280 --> 0:03:40.000 is not necessarily some sort of circuit breaker. So I 0:03:40.040 --> 0:03:43.720 think there's two things that can prevent extreme moves. Obviously, 0:03:43.760 --> 0:03:46.360 in Japan you are seeing extreme moves because the Bank 0:03:46.360 --> 0:03:50.040 of Japan vides policies actually encouraging yen weakness. But speaking 0:03:50.040 --> 0:03:53.800 of Europe, there's two things. Number one, the ECB becoming 0:03:53.840 --> 0:03:57.360 more aggressive, becoming more assertive talking about the currency. And 0:03:57.400 --> 0:03:59.760 I don't agree with this argument that if the ECB 0:04:00.000 --> 0:04:01.720 likes more it's going to be negative for the currency 0:04:01.760 --> 0:04:04.400 because it hurts growth. You are actually see the UR 0:04:05.000 --> 0:04:08.760 hold up much better than what one would have expected, 0:04:08.960 --> 0:04:12.520 given that we've now started to price seventy bits for example. 0:04:12.560 --> 0:04:14.440 So I think the e c B is one and 0:04:14.480 --> 0:04:17.719 the right fiscal policy response as far as the energy 0:04:17.760 --> 0:04:20.599 situation goes. And that's why the differences between the UK 0:04:20.920 --> 0:04:24.000 and the UR area become a bit more interesting. For example, Okay, 0:04:24.040 --> 0:04:26.640 so George is essentially what you're saying. The ECB can 0:04:26.680 --> 0:04:29.360 support the Euro by hiking, but that is not necessarily 0:04:29.400 --> 0:04:33.159 the case for the Bank of England. So the CB 0:04:33.320 --> 0:04:35.840 central banks can slow down the moves, but it's not 0:04:35.920 --> 0:04:38.600 interest rate differentials and not the dominant drivers. And we're 0:04:38.600 --> 0:04:42.400 seeing that the ECB is helping slow down the urine depreciation, 0:04:42.440 --> 0:04:44.480 but I think to see a big shift you need 0:04:44.520 --> 0:04:47.840 a resolution on the energy situation. Now if you if 0:04:47.880 --> 0:04:51.360 you go over to the UK, I'm still surprised by 0:04:51.360 --> 0:04:53.320 the lack of urgency from the Bank of England in 0:04:53.400 --> 0:04:56.600 terms of this communication of how much more they can do. 0:04:57.160 --> 0:05:00.559 You've got an inflation picture that's pretty much the worst 0:05:00.600 --> 0:05:03.680 in the developed world. We are very likely to get 0:05:04.080 --> 0:05:07.880 very very sizeable fiscal announcements in place that may help 0:05:07.920 --> 0:05:10.320 inflation in the near term, but they're also going to 0:05:10.320 --> 0:05:12.960 be highly stimulative. They're not going to allow for any 0:05:13.000 --> 0:05:16.200 correction on the demand side. So I worry in the 0:05:16.320 --> 0:05:20.240 UK policy alignment between the fiscal authorities and montre authorities 0:05:20.560 --> 0:05:25.240 is not there um and this in itself may be 0:05:25.440 --> 0:05:28.919 quite harmful for the currency. How harmful I mean, what 0:05:29.040 --> 0:05:34.640 probability would you put around cable at parody? So we 0:05:34.880 --> 0:05:37.440 wrote a report where we're looking at all these drivers, 0:05:37.480 --> 0:05:40.000 were looking at the balance of payments dynamics in the UK, 0:05:40.200 --> 0:05:42.840 and what stands out really is versus ten years ago 0:05:43.160 --> 0:05:45.880 the position is much more vulnerable. You've got a negative 0:05:46.120 --> 0:05:49.320 net international investment position, you've got a very large current 0:05:49.320 --> 0:05:52.400 account deficit, you've got real rates that are still very low. 0:05:53.000 --> 0:05:55.120 But for me, over the next two or three weeks, 0:05:55.160 --> 0:05:58.200 it's all about policy credibility and alignment. And if we 0:05:58.279 --> 0:06:01.960 go down the route of a very large, unfunded, untargeted 0:06:02.440 --> 0:06:05.720 fiscal stimulus and the Bank of England, for example, disappointing 0:06:05.760 --> 0:06:09.320 market expectations and not hiking by seventy five basis points, 0:06:09.320 --> 0:06:12.279 not showing a greater sense of urgency, I do worry 0:06:12.320 --> 0:06:15.800 the funding of this very large deficit um the UK 0:06:15.920 --> 0:06:18.200 has with the rest of the world can be challenged 0:06:18.240 --> 0:06:21.479 and you can see very extreme levels for the pound, 0:06:21.520 --> 0:06:23.640 as you have in the past when the UK has 0:06:23.640 --> 0:06:27.560 struggled to trap form financing. In the euroregion in particular, 0:06:27.960 --> 0:06:31.119 you were talking about how the appropriate fiscal policy could 0:06:31.120 --> 0:06:33.560 support the euro and I want to go back to that. 0:06:33.800 --> 0:06:36.800 What does the appropriate policy look like given the fact 0:06:36.880 --> 0:06:39.080 that a lot of households are really struggling. This is 0:06:39.120 --> 0:06:42.239 not like five dollars barrel of gasoline or five dollars 0:06:42.240 --> 0:06:44.400 a gallon gasoline in the United States. This is way 0:06:44.440 --> 0:06:47.880 more extreme way more punitive for households over in Europe. 0:06:48.600 --> 0:06:50.840 Can they not offset it at all, and if they do, 0:06:50.960 --> 0:06:53.120 is there something that's prudent that could still support the 0:06:53.120 --> 0:06:57.120 euro It's a really important question, and what I would 0:06:57.160 --> 0:07:00.560 say is it's a fine needle to threat, so to speak, 0:07:00.600 --> 0:07:03.279 in that Yes, you have to target polity in terms 0:07:03.400 --> 0:07:05.880 of preventing some of the pass through, especially for the 0:07:05.880 --> 0:07:08.640 lower income households, but at the same time you have 0:07:08.760 --> 0:07:11.800 to allow price signals to work and demand to drop. 0:07:12.320 --> 0:07:15.520 And I have to say I think the European policy 0:07:15.560 --> 0:07:18.160 response over the last few months has been quite impressive 0:07:18.160 --> 0:07:21.400 in that front, in that you have seen the situation 0:07:21.480 --> 0:07:23.720 is very extreme in terms of the price rises, but 0:07:23.840 --> 0:07:27.160 you are seeing demand management industrial demand in Germany for 0:07:27.160 --> 0:07:30.920 gases dropped by at the same time the re support 0:07:30.960 --> 0:07:33.640 for the low income households, but fiscal policy is not 0:07:33.680 --> 0:07:38.160 blowing out in terms of being completely unfunded. We've obviously 0:07:38.200 --> 0:07:42.440 got this very significant energy summit happening on Friday, But 0:07:42.520 --> 0:07:45.480 I would say ultimately the policy response that helps is 0:07:45.520 --> 0:07:48.400 one that allows the market signals to work but preventing 0:07:48.440 --> 0:07:51.760 some of the more extreme downside risks, and Europe is 0:07:51.760 --> 0:07:54.800 heading in that direction. Finally, George, if we could leave 0:07:54.840 --> 0:07:57.240 Europe and head back to Asia, because you've mentioned the 0:07:57.320 --> 0:07:59.920 Japanese then a few times, flirting with one forty five 0:08:00.000 --> 0:08:01.920 at the dollar this morning, the weakest level we have 0:08:01.920 --> 0:08:05.520 seen going back to August. And you've also alluded to 0:08:05.560 --> 0:08:07.880 the fact that the Bank of Japan is sticking with 0:08:07.920 --> 0:08:09.720 its motto We're going to keep it easy, We're going 0:08:09.760 --> 0:08:12.040 to keep yield curve control. Is there a level on 0:08:12.160 --> 0:08:14.920 dollary end that you think would represent a breaking point 0:08:15.200 --> 0:08:19.640 for Corona? I don't really think there is. I think 0:08:19.640 --> 0:08:22.560 from a policy making in a macro perspective, what matters 0:08:22.640 --> 0:08:25.400 is the speed um. So if if you get an 0:08:25.520 --> 0:08:29.000 extreme disorderly move, so to speak, then it becomes either 0:08:29.120 --> 0:08:32.160 easier to invoke the G seven and G twenty agreements 0:08:32.160 --> 0:08:35.600 on disorderly market moves. But the reality is, even though 0:08:35.600 --> 0:08:39.640 the end move has been extremely large this year, it's 0:08:39.679 --> 0:08:42.719 actually been fairly orderly, and it's been aligned at the 0:08:42.800 --> 0:08:44.120 end of the day with what the b o J 0:08:44.320 --> 0:08:47.520 has been doing, which is easy policy. So I find 0:08:47.559 --> 0:08:50.760 it very difficult to see a situation where any sort 0:08:50.800 --> 0:08:53.959 of intervention will be credible from a market perspective. At 0:08:54.000 --> 0:08:55.720 the end of the day, what's needed is for the 0:08:55.760 --> 0:08:59.080 b o J to pivot. Now that may happen um 0:08:59.160 --> 0:09:02.800 if Corona, for example, when his term expires, you get 0:09:02.800 --> 0:09:05.840 a governor that's I'm goin to slightly different approach, obviously 0:09:05.880 --> 0:09:08.640 backed by the government, but as things stand, I'm not 0:09:08.679 --> 0:09:11.960 sure intervention will be credible, and the bar for that 0:09:12.080 --> 0:09:14.840 happens is very high in the sense that the moves 0:09:14.880 --> 0:09:16.880 will need to be highly disorderly, and at the moment 0:09:16.920 --> 0:09:21.479 they're big, but they're not especially volatile. They're highly intuitive. 0:09:21.520 --> 0:09:23.480 It makes perfect sense, and that's why I think we're 0:09:23.480 --> 0:09:26.240 all struggling with this idea that the PJ has any 0:09:26.240 --> 0:09:28.720 grants to complain right now. George, George, thank you for 0:09:28.760 --> 0:09:30.680 your time and what a world you guys are in 0:09:30.760 --> 0:09:33.520 right now. And foreign exchange Jorge Saravelos there of Deutsche 0:09:33.559 --> 0:09:47.600 Bank joining us now. Is Maggie Battel sending, a portfolio 0:09:47.640 --> 0:09:51.040 manager at all Spring Global Investments. Margie, the Nest composites 0:09:51.080 --> 0:09:53.719 down almost nine pc over the last seven days, the 0:09:53.800 --> 0:09:56.439 last seven training days. The SMP five over the same 0:09:56.480 --> 0:09:59.040 period is down about seven percent. Are you ready to 0:09:59.040 --> 0:10:02.719 buy the secretary mark it yet? Well? No, I think 0:10:02.760 --> 0:10:05.920 actually what we've had is about reversal about fifty of 0:10:05.960 --> 0:10:08.600 the rise we've had in those indexes since they're lows 0:10:08.640 --> 0:10:11.400 in June. But I think we're really in a trading 0:10:11.520 --> 0:10:14.679 range with a doward bias because of the backdrop the 0:10:14.720 --> 0:10:17.800 FED is very much committed to raising rates. Globally, you 0:10:17.840 --> 0:10:20.640 can see economies all around the world are slowing down, 0:10:20.679 --> 0:10:22.960 and that's really not a market that says we're on 0:10:23.000 --> 0:10:26.760 the verge of a dynamic rebound inequities. So are you 0:10:26.800 --> 0:10:29.520 just moving more into cash? How do you manage in 0:10:29.679 --> 0:10:32.480 terms of some of this barishness at a time when 0:10:32.480 --> 0:10:35.480 there still is uncertainty and still a potential investment case. 0:10:37.120 --> 0:10:40.199 I don't think cash is really all that attractive at 0:10:40.200 --> 0:10:42.920 this level because there is a chance to FED might 0:10:43.080 --> 0:10:46.040 realize that they're being too aggressive, in my opinion, and 0:10:46.280 --> 0:10:48.880 that could change things. So really we're just trying to 0:10:48.880 --> 0:10:52.559 find companies that are reasonably priced that have the possibility 0:10:52.720 --> 0:10:55.199 of continued earnings growth, which I think will be pretty 0:10:55.200 --> 0:10:57.360 hard to find. Over the next year. We're thinking earnings 0:10:57.360 --> 0:11:00.640 are going to decelerate a lot, so p easier down. 0:11:00.920 --> 0:11:03.320 But with decelerating earnings that still says a lot of 0:11:03.320 --> 0:11:06.120 stocks could go down. So trying to to see where 0:11:06.160 --> 0:11:09.000 stocks still have a growth path and aren't too puffed 0:11:09.080 --> 0:11:12.400 up based on yesteryear's idea of how fast economy is 0:11:12.400 --> 0:11:14.280 going to grow, And how do you factor in the 0:11:14.320 --> 0:11:19.880 strength of the dollar into your thinking about these multinational companies. Um, 0:11:19.920 --> 0:11:22.360 you know, I've never really found that a big help 0:11:22.440 --> 0:11:25.240 in making money in stocks, because often the market will 0:11:25.240 --> 0:11:27.720 look through dollar strength. I think what it really tells 0:11:27.760 --> 0:11:29.800 you is that it reflects the strength of the US 0:11:29.840 --> 0:11:34.480 economy compared to Europe, compared to emerging markets, compared to China. 0:11:34.840 --> 0:11:36.680 So it says to me that we're still the best 0:11:36.679 --> 0:11:39.880 place to invest at the dollars really reflection of that. 0:11:39.960 --> 0:11:42.200 Even at our rates today, we still see money coming 0:11:42.200 --> 0:11:45.200 in from foreigners because we're probably still the best economy 0:11:45.200 --> 0:11:47.680 in the world. Buy. What does that become a headwin though, Markie, 0:11:47.679 --> 0:11:49.800 And this is something people are increasingly asking as they 0:11:49.840 --> 0:11:53.840 talk about coordinated intervention to some of the currency differentials. 0:11:53.880 --> 0:11:57.600 When does the dollar become a liability for US companies 0:11:57.640 --> 0:12:01.680 that are trying to sell their goods overseas? Uh? Well, 0:12:01.720 --> 0:12:03.600 I think that's really what you're seeing in a trend 0:12:03.640 --> 0:12:06.680 for slower growth and acknowledgements from any companies of where 0:12:06.720 --> 0:12:09.760 they saw rapid growth, say in emerging market, they're now 0:12:09.800 --> 0:12:11.840 seeing that scale back. So I think it's really part 0:12:11.880 --> 0:12:15.440 of the backdrop of earnings slowing down around the world, 0:12:15.800 --> 0:12:18.560 grow slowing down around the world. So therefore it's going 0:12:18.600 --> 0:12:20.319 to be you're gonna have to be more choosey and 0:12:20.400 --> 0:12:23.319 finding companies that can get through a period of very 0:12:23.360 --> 0:12:25.280 low growth. We haven't had that in quite a while, 0:12:25.320 --> 0:12:27.960 and here we have everything coming together. Uh, and they're 0:12:27.960 --> 0:12:30.560 really all negative as far as future growth. Monkey, the 0:12:30.600 --> 0:12:33.480 bulk of your portfolio is in equities. We used to 0:12:33.480 --> 0:12:36.040 talk to you almost exclusively about fixed income. I wanted 0:12:36.040 --> 0:12:38.000 to squeeze a little bit more in unfixed income if 0:12:38.040 --> 0:12:41.000 we can. We're seeing signs that sovereigns in Europe are 0:12:41.040 --> 0:12:44.800 willing to take on uncapped liability and transfer massive risk 0:12:44.840 --> 0:12:47.720 away from the consumer to offset some of the pain 0:12:48.040 --> 0:12:50.800 sparked by energy issues across the continent. What do you 0:12:50.840 --> 0:12:55.000 think the consequence of that are going to be? Well, 0:12:55.000 --> 0:12:57.800 when you have that kind of massive innovation, the result 0:12:57.880 --> 0:13:00.840 is always the saying, which is the policies have a 0:13:00.840 --> 0:13:03.640 way of backfiring. For example, I think in England they 0:13:03.640 --> 0:13:06.040 did have some price caps a few years ago under 0:13:06.080 --> 0:13:09.560 Theresa May. That hasn't worked down very well. Uh So, 0:13:09.600 --> 0:13:12.599 I think that it's really a negative for consumers and 0:13:12.720 --> 0:13:16.080 negative for those economies. Again, we're lucky enough that we 0:13:16.120 --> 0:13:18.560 don't have that here. Again, coming back to the case, 0:13:18.559 --> 0:13:22.000 our growth looks better than than worldwide. I've all sprint 0:13:22.000 --> 0:13:28.840 Global investments, thank you. So much of the inflation story 0:13:28.880 --> 0:13:31.040 has been oil and gas, and a lot of people 0:13:31.040 --> 0:13:33.840 have been calling for oil prices to surge to new 0:13:33.880 --> 0:13:36.760 record highs earlier this year. One person pushed against them. 0:13:36.880 --> 0:13:39.480 He said, you guys are all wrong. You underestimate the 0:13:39.520 --> 0:13:43.400 power of a lack of demand as the global economy slows. 0:13:43.440 --> 0:13:45.920 That one person was Ed Morrise, City Group, head of 0:13:45.960 --> 0:13:49.800 Commodities research for the for the World, and he came 0:13:49.800 --> 0:13:52.440 out and he said, no prices are going down. Ed Morris, 0:13:52.520 --> 0:13:54.360 you are correct. We have seen that, and we have 0:13:54.440 --> 0:13:58.120 seen it steadily going even with a potential supply cut 0:13:58.240 --> 0:14:02.640 from OPEC. Plus. How closely is this particular energy story 0:14:02.720 --> 0:14:06.200 tied to the slowdown that we're seeing in China. Well, 0:14:06.240 --> 0:14:07.880 it's got a lot to do with it, but a 0:14:07.880 --> 0:14:10.000 lot less to do with it than people really think, 0:14:10.000 --> 0:14:13.600 because Chinese demand was really peaking and we didn't expect 0:14:13.600 --> 0:14:16.000 it to go anywhere. This year we had a very 0:14:16.200 --> 0:14:19.440 low number of modest hundred das in validate UH increased 0:14:19.480 --> 0:14:22.400 in Chinese demand. They came back to where they had 0:14:22.440 --> 0:14:25.720 been through the recovery, and there was no place further 0:14:25.800 --> 0:14:28.320 to go. They had already cut back on diesel demand, 0:14:28.600 --> 0:14:32.280 on gasoline demand. That one bright spot was petrochemical pea stock, 0:14:32.560 --> 0:14:34.080 and as we know a lot of that comes from 0:14:34.120 --> 0:14:36.880 the natural gas liquid pool rather than from the oil 0:14:36.880 --> 0:14:40.320 pool or the refinery pool. UH. China has, however, really 0:14:40.360 --> 0:14:44.120 influenced the market. They are so concerned with energy security 0:14:44.160 --> 0:14:48.000 that they basically stopped exports and that has had reverberations 0:14:48.000 --> 0:14:50.880 around the planet. The one thing that that we missed 0:14:51.120 --> 0:14:53.280 UH and the world it's a whole missed was that 0:14:53.880 --> 0:14:56.480 when we have natural gas prices getting as high as 0:14:56.480 --> 0:14:59.680 they had gone on a content to be tou content 0:14:59.760 --> 0:15:03.200 bay is, prices for gas net gas are higher than 0:15:03.240 --> 0:15:06.200 prices for diesel at a time when the world was 0:15:06.280 --> 0:15:09.040 moving closer to diesel, we had demand up about a 0:15:09.040 --> 0:15:11.680 million barrels a day. As a result of that, switched. 0:15:11.840 --> 0:15:14.760 China cut off their exports of about seven barrels a 0:15:14.840 --> 0:15:17.680 day of diesel. They did that last September. They haven't 0:15:17.720 --> 0:15:20.240 lifted it at all. So we were having you know, 0:15:20.320 --> 0:15:22.720 some of what's happening in the planet is really result 0:15:22.760 --> 0:15:25.280 of China. But I say it's more China policy, that 0:15:25.400 --> 0:15:28.000 it is a Chinese command. And the fact that you 0:15:28.040 --> 0:15:30.120 say that is less to do with China than people 0:15:30.160 --> 0:15:33.040 think is a pretty dire statement with respect to economic 0:15:33.080 --> 0:15:36.200 activity in the United Kingdom, in the European Union, as 0:15:36.200 --> 0:15:38.760 well as the United States at a time when all 0:15:38.840 --> 0:15:42.160 regions are looking to support households as they continue to 0:15:42.280 --> 0:15:45.120 maintain their demand. So can you explain a little bit 0:15:45.120 --> 0:15:47.560 more why demand is falling off so much more than 0:15:47.560 --> 0:15:50.640 people seem to think from the data at hand. So 0:15:50.680 --> 0:15:52.440 on the we have we have the best day of 0:15:52.480 --> 0:15:55.440 the world from the United States. People started seeing, we 0:15:55.480 --> 0:15:58.040 started seeing at the end of March beginning of April 0:15:58.160 --> 0:16:00.920 that US demand really had come off and then come 0:16:00.960 --> 0:16:02.560 off as we got out of winter and as we 0:16:02.600 --> 0:16:05.320 got into the driving season, and week after week, and 0:16:05.360 --> 0:16:06.880 even if you do it on a four week moving 0:16:06.920 --> 0:16:11.360 average basis, from March to today, US demand has gotten 0:16:11.600 --> 0:16:14.120 lower and lower than it was a year ago. Total 0:16:14.160 --> 0:16:16.080 demand in the month of August was close to two 0:16:16.080 --> 0:16:20.280 million barrels a day lower than it was in auguste on. 0:16:20.440 --> 0:16:22.160 One million barrels a day. Of that was in the 0:16:22.160 --> 0:16:25.880 transport fuel business, three hundred thousand in diesel, which reflects 0:16:25.960 --> 0:16:29.520 what's happening volumetrically in the retail market. The rest the 0:16:29.600 --> 0:16:32.360 remaining seven hundred thousand a day was in the gasoline market, 0:16:32.400 --> 0:16:35.280 and that's because people simply decided to drive less. And 0:16:35.360 --> 0:16:38.600 we have survey data that proved that vehicle miles traveled 0:16:38.840 --> 0:16:42.400 have gone down. So you know, get high prices and 0:16:42.480 --> 0:16:46.400 people react to that by not buying as much, and 0:16:46.440 --> 0:16:49.480 that's that's kind of a lesson potentially for Europe. We've 0:16:49.480 --> 0:16:53.920 seen effectively conservation working as a result of consumer response 0:16:54.240 --> 0:16:58.440 to high prices across across the United States without a 0:16:58.480 --> 0:17:01.280 recession other than a technical recession. But you know, we're 0:17:01.320 --> 0:17:04.760 seeing growth in the labor market that's pretty formidable. And 0:17:04.840 --> 0:17:08.240 even so with more money in people's pockets people driving less, 0:17:08.280 --> 0:17:10.200 that is a lesson. If you let the market work 0:17:10.280 --> 0:17:13.400 to some degree, people are going to conserve. So one 0:17:13.440 --> 0:17:16.440 of the big experiments that the world. Europe in particular, 0:17:16.520 --> 0:17:19.359 is could precting is how much will people be allowed 0:17:19.400 --> 0:17:22.879 to conserve? The other experiment is what's going to happen politically, 0:17:23.000 --> 0:17:26.639 is people get more concerned about inflation in their pocketbook 0:17:27.040 --> 0:17:31.239 and jobs than they do about Russia and Ukraine. We 0:17:31.280 --> 0:17:33.360 have some elections coming up in a couple of weeks, 0:17:33.440 --> 0:17:35.720 we have an election in Italy and we'll see what 0:17:35.840 --> 0:17:40.080 the consumer rebellion might be against where these high consumer 0:17:40.119 --> 0:17:43.879 prices are. Just as you're speaking, we're hearing from the 0:17:43.960 --> 0:17:46.919 EU Commissioned President Ursula v Underline talking about how the 0:17:46.920 --> 0:17:49.680 EU is going to propose a mandatory target for reducing 0:17:50.040 --> 0:17:54.960 peak electricity. Clearly the kind of response from government you're 0:17:55.000 --> 0:17:58.560 alluding to here. Yet, as Europe faces this winter, there 0:17:58.640 --> 0:18:00.399 is a sense that this isn't just going to be 0:18:00.520 --> 0:18:04.040 a this winter problem. We could see years of restricted 0:18:04.080 --> 0:18:06.400 supply in Europe. So when you're trying to model out 0:18:06.800 --> 0:18:09.120 natural gas prices and what they could look like, how 0:18:09.200 --> 0:18:13.000 persistently higher could they be and is that something ultimately 0:18:13.040 --> 0:18:16.320 that the consumer is just going to have to tolerate. Yes, 0:18:16.440 --> 0:18:18.520 the question is not whether they're going to say these 0:18:18.520 --> 0:18:20.560 prices are going to stay higher, but how much higher 0:18:20.800 --> 0:18:24.399 will they stay. Europe is moving back to therm of 0:18:24.520 --> 0:18:29.160 to two fossil fuels, both to natural gas and coal um. 0:18:29.200 --> 0:18:31.560 They've had a double hit this summer because a lot 0:18:31.600 --> 0:18:34.320 of nuclear reactors, particularly in France, had to be shut 0:18:34.400 --> 0:18:37.640 because of a lack of water for cooling the nuclear plants. 0:18:37.920 --> 0:18:41.199 Those will almost certainly be coming back. But as we 0:18:41.280 --> 0:18:43.800 look at europe move back to natural gas and the 0:18:43.920 --> 0:18:47.360 world's response, it will be somewhere between twenty twenty five 0:18:47.359 --> 0:18:52.480 and that will see the prices in Europe coming back 0:18:52.480 --> 0:18:55.440 to where they were at the beginning. One and one 0:18:55.440 --> 0:18:59.440 of the major difficulties that Europe is confronting is that 0:18:59.560 --> 0:19:02.280 it's done only seeing consumers hit in the pocketbook, but 0:19:02.320 --> 0:19:06.120 as seeing job losses in energy intensive industries. And we're 0:19:06.119 --> 0:19:09.880 seeing those energy intensive industries migrating. Where are they migrating 0:19:09.920 --> 0:19:13.119 to places in the world where energy costs so lower? 0:19:13.119 --> 0:19:15.720 It mainly the United States. You've seen the migration of 0:19:15.800 --> 0:19:19.080 fertilizes into the U S from Europe, and we're seeing 0:19:19.080 --> 0:19:23.520 other energy intensive industries like zinc and aluminum smelting slowing 0:19:23.520 --> 0:19:26.720 down and closing all together. Well. But to that point, 0:19:26.800 --> 0:19:29.240 at about migrating to the United States. What is the 0:19:29.320 --> 0:19:32.400 risk that these higher energy prices in Europe, the crisis 0:19:32.440 --> 0:19:34.800 there is going to bleed through in a material way 0:19:34.800 --> 0:19:38.600 to prices here in the United States. Well, the risk 0:19:38.720 --> 0:19:41.000 is not on the net gas slode directly, it's actually 0:19:41.040 --> 0:19:44.400 through thermal coal and what's happening thermal coal prices. When 0:19:44.440 --> 0:19:47.080 we got to nine dollar and close at a ten 0:19:47.080 --> 0:19:50.600 dollar natural gas prices, again, it wasn't because of our production, 0:19:50.640 --> 0:19:53.720 It wasn't because of our imports from Canada. It was 0:19:53.760 --> 0:19:57.479 because the price of coal had shot up as Europe 0:19:57.480 --> 0:20:00.359 bought more coal as trying to brought more coal. And 0:20:00.440 --> 0:20:04.040 the nine dollar price of natural gas now eight dollars, 0:20:04.040 --> 0:20:07.080 but that was equivalent to where thermal coal prices were. 0:20:07.080 --> 0:20:09.960 And now we're seeing the thermal coal prices coming off 0:20:10.000 --> 0:20:12.600 again for a variety of reasons, and with that, US 0:20:12.680 --> 0:20:15.439 NAT gas, so US not gas is going to be 0:20:15.520 --> 0:20:19.400 seeing a significant increase in supply. We're gonna see some 0:20:19.480 --> 0:20:22.159 boost in our l m G exports, but those are 0:20:22.240 --> 0:20:25.480 cat You can only produce as much of LG as 0:20:25.480 --> 0:20:29.000 you have liquid faction capacity, and it doesn't grow overnight. 0:20:29.240 --> 0:20:32.240 And that's the reason why Europe's gonna have to wait 0:20:32.280 --> 0:20:34.960 till admit or later in the decade to get to 0:20:35.000 --> 0:20:37.440 the point where it will be enough NAT gaests, particularly 0:20:37.480 --> 0:20:39.960 from the US and guitar that's going to be able 0:20:40.000 --> 0:20:43.040 to replace that Russian natural gas. We also have to 0:20:43.080 --> 0:20:46.400 remember that the Russian game plan is not completely over. 0:20:46.440 --> 0:20:49.359 It's not the second guess what Mr Prutin will do 0:20:49.480 --> 0:20:53.159 he said specifically said what they're doing on oil and gas, 0:20:53.200 --> 0:20:56.119 but particularly gas at the moment is a reflection of 0:20:56.160 --> 0:20:59.840 price caps being discussed. Um, Russia is going to be, 0:21:00.400 --> 0:21:03.840 you know, running out of prices to sell gas pretty soon. Uh. 0:21:04.160 --> 0:21:08.840 European destination of gas from Russia, other than a bit 0:21:08.840 --> 0:21:12.879 obliquefied natural gas can't go anywhere else in the world. 0:21:12.880 --> 0:21:17.080 There's only a certain modest level of switching they can 0:21:17.080 --> 0:21:20.480 do to sell gas by pipeline to other countries, so 0:21:20.600 --> 0:21:24.399