WEBVTT - Surveillance: Economic Cycle With Crescenzi 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:30.440 dot Com and of course on the Bloomberg Terminal. Tony 0:00:30.480 --> 0:00:33.240 presents you joining us now markets stryingagist and portfolio manager 0:00:33.520 --> 0:00:37.560 at Pimco. Tony, this cyclist moving so quickly, that's the story, 0:00:37.640 --> 0:00:39.199 the epicenter of your round. Look with you in the 0:00:39.240 --> 0:00:40.920 team right now, can you just walk us through how 0:00:41.000 --> 0:00:44.280 you thinking about the world around us at the moment? Well, 0:00:44.320 --> 0:00:46.440 we we When we talk like to talk about the 0:00:46.520 --> 0:00:49.400 Yiel curve and Yel curve movement speaks this idea of 0:00:49.400 --> 0:00:52.360 a fast moving cycle. Does seem like the economic cycle 0:00:52.479 --> 0:00:55.000 is moving at warp speed. Think about it. We're probably 0:00:55.040 --> 0:00:59.280 at mid cycle, meaning look at the unemployment rate. Fo 0:00:59.640 --> 0:01:03.520 what is a late cycle condition. Of course, a nonemployer 0:01:03.640 --> 0:01:06.560 rate that's lower, and that lower rate could be achieved 0:01:06.640 --> 0:01:09.720 the full employment next year. So that's a fast moving cycle. 0:01:09.760 --> 0:01:12.520 In fact, the Federal Reserve is projecting that the unemployment 0:01:12.600 --> 0:01:14.720 rate will be in the mid threes by the end 0:01:14.720 --> 0:01:16.880 of next year. So for investors, it's important to be 0:01:17.480 --> 0:01:19.880 on your toes. It's the simple way you're saying. It's 0:01:19.880 --> 0:01:23.480 important to be active with the portfolio management, to be 0:01:23.600 --> 0:01:30.400 thinking more about security selection a region, regional selections, etcetera, uh, etcetera. 0:01:30.720 --> 0:01:32.920 But then it is a fast mood recycle. One final 0:01:32.959 --> 0:01:36.560 note that the gield curve again, it's it has flattened recently, 0:01:36.840 --> 0:01:39.360 and that's something that happens later in the cycle because 0:01:39.360 --> 0:01:41.760 the Federal Reserve is raising the short term rate, which 0:01:41.800 --> 0:01:44.679 pushes up it yield relative to the long term rate flattening. 0:01:45.040 --> 0:01:46.800 That's where I want to go to Ston spread this morning. 0:01:47.240 --> 0:01:50.040 Eighteen basis points, Tony. Where it is a two year 0:01:50.160 --> 0:01:53.240 yield that matters to you? Were at zero point four 0:01:53.360 --> 0:01:57.000 four percent? Just you're just in your mind, Tony. Where's 0:01:57.000 --> 0:02:00.400 the two year yield a tip point or a critical point? 0:02:00.480 --> 0:02:04.440 For Chris Enzi, Well, the two year relative to other 0:02:04.520 --> 0:02:07.040 yields matters a lot, and it's just that the two 0:02:07.120 --> 0:02:10.040 year will tell us about the two year window. And 0:02:10.080 --> 0:02:13.079 we know that the markets looking at shorter term interest 0:02:13.200 --> 0:02:16.880 rates and forward interest rates like Euro dollar futures is 0:02:16.919 --> 0:02:19.880 projecting at the Federal Serve will increase its policy rates 0:02:19.880 --> 0:02:23.400 sometime next year, perhaps as early as June. The markets 0:02:23.440 --> 0:02:26.480 penning in several interest rate types. But the other these 0:02:26.560 --> 0:02:29.519 two extraordinary things about the two year to ten years spread. 0:02:30.120 --> 0:02:32.240 One is the fact that the spread started to flatten 0:02:32.320 --> 0:02:34.960 earlier in the cycle than we have seen since the 0:02:35.040 --> 0:02:37.840 nineteen eighties. And then in the last three cycles, the 0:02:37.919 --> 0:02:40.760 last three recessions, the spread between the two and the 0:02:40.800 --> 0:02:44.640 tenure no was is why these three basis points. In 0:02:44.639 --> 0:02:49.000 other words, the markets were patient about the idea of 0:02:49.200 --> 0:02:51.959 Federal Reserve interest rate hikes. It thought that industrate highs 0:02:52.000 --> 0:02:54.960 were somewhere on the distant horizon, and so long term 0:02:55.040 --> 0:02:59.480 yields had stayed high. Um But now so this this 0:02:59.560 --> 0:03:01.919 is the peak. This time was one fifty, so it's 0:03:01.919 --> 0:03:04.839 half the level of the previous cycles. Was to cut 0:03:04.880 --> 0:03:07.919 to the chase. The second part of the extraordinary part 0:03:07.960 --> 0:03:10.240 of about the yield curve two cents spread is that 0:03:10.919 --> 0:03:13.519 the tenure yield it's projected to be low, and on 0:03:13.639 --> 0:03:16.880 Bloomberg of function through new Bloomberg uses f w c 0:03:17.160 --> 0:03:20.880 M it shows forward interest rates and you see the 0:03:20.960 --> 0:03:25.840 market is saying that there's a benign story to evolved 0:03:26.440 --> 0:03:29.520 unfold over time, that interest rates probably won't get up 0:03:29.520 --> 0:03:32.080 two and a half presented as far out in these forewers, 0:03:32.120 --> 0:03:34.160 as I look at the table calling it ten years 0:03:34.160 --> 0:03:36.360 plus well but tony just to sort of tie this 0:03:36.440 --> 0:03:39.560 all together, then what is the message from the yield curve? 0:03:39.760 --> 0:03:42.560 Is it that the market that the economy can't necessarily 0:03:42.600 --> 0:03:45.920 handle too much tightening from central banks? Or is it 0:03:45.960 --> 0:03:49.000 just that the margin is going to naturally be narrower 0:03:49.080 --> 0:03:53.480 because of this ceiling on longer term yields? He said, 0:03:53.520 --> 0:03:56.720 those are probably the conclusions that most would draw from 0:03:56.760 --> 0:04:00.400 it now. But perhaps forward interest rates are wrong. Perhaps 0:04:00.960 --> 0:04:05.480 the market, the consensus and that's uh embedded in these 0:04:05.600 --> 0:04:09.280 forward rates is wrong and thinking that the twenty tens 0:04:09.400 --> 0:04:12.400 uh it will be uh repeated in the twenties. But 0:04:12.440 --> 0:04:16.320 the twenty tents is probably the wrong analog for the twenties. 0:04:16.360 --> 0:04:19.960 There's a lot going on in pimco's secular outlook. We 0:04:20.000 --> 0:04:23.719 talk about speak to transformations, for example, becoming more digital, 0:04:23.839 --> 0:04:27.280 more inclusive, more green. Those are the three major transformations 0:04:27.320 --> 0:04:30.000 we see. All those things could We're not saying they 0:04:30.040 --> 0:04:33.840 will result in faster growth, and simply doing the math, 0:04:33.920 --> 0:04:36.000 if if economic growth is four percent, as the FED 0:04:36.040 --> 0:04:39.000 projects next year and PIMCO projects as well, then looking 0:04:39.000 --> 0:04:40.840 at the next five years, even if growth is two 0:04:40.839 --> 0:04:44.560 percent of subsequent four we'll still have a rate that's 0:04:44.640 --> 0:04:46.000 about two and a half. So that would be a 0:04:46.080 --> 0:04:49.280 lot better than the twenty tens, simply just by that math. 0:04:49.360 --> 0:04:51.440 And so it's possible the growth is faster and these 0:04:51.480 --> 0:04:54.920 these forwards are wrong, and therefore race will go high. 0:04:54.920 --> 0:04:58.160 We're not suggesting that race will go materially higher. In fact, 0:04:58.200 --> 0:05:03.159 we would say we may turn to certain old normal conditions, 0:05:03.200 --> 0:05:07.240 but with new neutral characteristics, which is to say that, yes, Lisa, 0:05:07.600 --> 0:05:10.640 that the battles are can't raise its interest rate too 0:05:10.760 --> 0:05:13.840 much because of deadloads and certain other factors. Tony, we're 0:05:13.839 --> 0:05:15.560 out of time. Haven't even got the time to plug 0:05:15.640 --> 0:05:19.480 your book. Gotta let you go, Tony CRISCENTI, thank you. 0:05:19.640 --> 0:05:29.400 Gonna catch up as a white right now. This is 0:05:29.400 --> 0:05:32.919 an incredibly important interview for two thousand twenty two, and 0:05:33.000 --> 0:05:37.800 indeed two thousand us on fired again. The bears have 0:05:37.880 --> 0:05:41.000 been vanquished here, no question about that. But a recurring 0:05:41.040 --> 0:05:43.919 theme that we have on surveillance is look to Asia 0:05:44.240 --> 0:05:46.680 and look to the true growth there. Gabriela Santos with 0:05:46.800 --> 0:05:50.039 JP Morgan joins us their global market strategist. Gabriel, I 0:05:50.080 --> 0:05:54.000 love how your essay dovetails into what I'm seeing in 0:05:54.000 --> 0:05:57.359 the new Foreign Affairs magazine, which is China. And you 0:05:57.480 --> 0:06:02.760 define a new China. What is the new China? That's right, Tom, 0:06:02.800 --> 0:06:06.000 And in a lot of our conversations with investors, China 0:06:06.120 --> 0:06:09.160 keeps coming up time and time and again as really 0:06:09.200 --> 0:06:12.080 an area of growth in portfolios, and I think it's 0:06:12.160 --> 0:06:15.680 much more about a conversation about Chinese markets more so 0:06:15.760 --> 0:06:18.839 than than China's a comedy going forward. I see the 0:06:18.880 --> 0:06:22.719 new China really being about one that stresses the quality 0:06:22.880 --> 0:06:27.720 over the quantity of growth um that also prioritizes other 0:06:27.800 --> 0:06:31.560 objectives in addition to growth alone, such as reducing an 0:06:31.560 --> 0:06:36.440 equality and energy transition, a development of capital markets, and 0:06:36.480 --> 0:06:40.040 also in China that has new areas of emphasis. So 0:06:40.160 --> 0:06:42.520 this year has been all about the areas of pressure 0:06:42.960 --> 0:06:45.240 in the new China, but there are also areas of 0:06:45.320 --> 0:06:51.680 emphasis like domestic consumption, technological infrastructure, and the energy transition. 0:06:51.760 --> 0:06:56.479 And it's interesting our investors still believe China's investible are 0:06:56.600 --> 0:06:59.719 looking at this point in time as an opportunity to 0:07:00.040 --> 0:07:03.920 yield that allocation to China over time. Is there somewhat 0:07:04.040 --> 0:07:08.120 capitalism or at least their experiment. Is it endogenous more 0:07:08.200 --> 0:07:11.200 so to China, or does it readound out across the 0:07:11.280 --> 0:07:14.800 Pacific Rim and all of Asia. I think we do 0:07:14.880 --> 0:07:17.760 have to remember China has a very particular political and 0:07:17.800 --> 0:07:20.720 economic system, and we see that at play this year. 0:07:21.120 --> 0:07:24.200 When China does decide to pivot and to do reforms 0:07:24.200 --> 0:07:28.320 and regulations, it does so extremely quickly, and that is 0:07:28.360 --> 0:07:31.640 a feature of China. It does lead to these moments 0:07:31.680 --> 0:07:36.440 of volatility. We see these thirty plus percentage corrections every 0:07:36.520 --> 0:07:39.440 three years or so in China. It's a feature of 0:07:39.520 --> 0:07:42.800 investing there. It does come with higher volatility, about double 0:07:42.880 --> 0:07:46.560 the volatility for Chinese equities versus the S and P five, 0:07:47.280 --> 0:07:50.360 But you do get other benefits. You get the potential 0:07:50.400 --> 0:07:53.600 for higher revenue growth and these new sectors of emphasis, 0:07:54.120 --> 0:07:58.280 and you get extremely good diversification benefits. It's working against 0:07:58.360 --> 0:08:01.640 you this year, China's down eleven percent while E m 0:08:01.800 --> 0:08:04.440 X China is up ten percent, but it can also 0:08:04.520 --> 0:08:07.160 work in your favor, like it did last year. So 0:08:07.320 --> 0:08:10.040 net net, we still find it helps to boost risk 0:08:10.080 --> 0:08:14.200 adjusted returns and that's very unique to the China onshore market. 0:08:14.520 --> 0:08:17.840 Real are you concerned it all about the political ramifications 0:08:18.040 --> 0:08:21.440 in the United States toward investing in China. The idea 0:08:21.560 --> 0:08:24.520 here that there is a changed relationship between the two 0:08:24.600 --> 0:08:29.400 nations and that if companies or even investors move into China, 0:08:29.520 --> 0:08:32.080 they could be susceptible to risk at home in terms 0:08:32.080 --> 0:08:36.520 of regulation. So we we do see in surveys in 0:08:36.559 --> 0:08:38.840 the US as well as actually in a lot of 0:08:38.880 --> 0:08:44.600 countries around the world that's increased in unfavorable opinions towards China. 0:08:44.800 --> 0:08:47.320 Um and I think that's honestly a feature of the 0:08:47.400 --> 0:08:51.320 next century, this competition between China and the rest of 0:08:51.320 --> 0:08:54.680 the world. Well, we talk to our investors about is 0:08:54.720 --> 0:08:58.280 that whatever you may think or or not about China 0:08:58.320 --> 0:09:02.640 and it's political system, you can't ignore it. Uh. You 0:09:02.679 --> 0:09:05.120 can't ignore it in terms of the size of its economy, 0:09:05.160 --> 0:09:08.000 the size of its markets, with the second largest equity 0:09:08.000 --> 0:09:11.240 and bond markets, um and you also can't ignore it 0:09:11.280 --> 0:09:14.560 in terms of the risk adjusted benefits it can provide portfolio. 0:09:14.679 --> 0:09:18.360 So maybe an investor decides that investing in China is 0:09:18.400 --> 0:09:21.599 not for them, But I think as a fiduciary, investors 0:09:21.600 --> 0:09:24.480 need to prove that they thought out the benefits that 0:09:24.520 --> 0:09:27.239 they're leaving on the table, and that they've well documented 0:09:27.280 --> 0:09:31.240 the reasons why. Meanwhile, graby Ella, the question of what 0:09:31.280 --> 0:09:34.240 happens in China directly bleeds into the supply chain disruptions 0:09:34.280 --> 0:09:36.440 that we continue to see. How are you sort of 0:09:36.520 --> 0:09:40.280 engaging the activity level there with when we'll start to 0:09:40.320 --> 0:09:43.959 see some of the inflationary pressures from supply chain disruptions 0:09:44.320 --> 0:09:47.480 perhaps start to abate a little bit more So, we've 0:09:47.520 --> 0:09:50.760 clearly seen a deceleration in China in the third quarter 0:09:50.880 --> 0:09:54.000 four point four point nine percent GDP down from seven 0:09:54.040 --> 0:09:57.720 point nine. That deceleration can continue a bit longer in 0:09:57.760 --> 0:10:00.400 the fourth quarter. Part of it is re lated to 0:10:00.440 --> 0:10:03.360 the pandemic. China is the only country that continues with 0:10:03.400 --> 0:10:08.720 this zero tolerance approach to COVID, so localized restrictions are 0:10:08.760 --> 0:10:12.720 still going on in China, and that can affect up 0:10:12.760 --> 0:10:16.640 some production and some consumption of services. But more than that, 0:10:16.800 --> 0:10:19.760 I think we're learning that this deceleration in China is 0:10:19.800 --> 0:10:23.120 a feature, not a bug, of the new China. It 0:10:23.240 --> 0:10:28.920 is about lower quantity growth much more about quality. So structurally, 0:10:28.920 --> 0:10:32.280 we'll continue to see a decline in things like property, infrastructure, 0:10:32.679 --> 0:10:37.280 low end manufacturing, energy intensive industry. The floor on Chinese 0:10:37.360 --> 0:10:39.640 growth is much much lower, and I think that's something 0:10:39.640 --> 0:10:43.800 that investors need to internalize and adjust lower their expectations 0:10:44.160 --> 0:10:47.360 and then we can move on and focus on the opportunities. 0:10:47.520 --> 0:10:50.719 Gabrielle Santos, thank you so much. With JP Morgan this morning, 0:10:54.760 --> 0:10:56.839 let's go down and look at TS vodka. We can 0:10:56.840 --> 0:10:58.960 do that in Texas. We do that with Regina Mayor 0:10:59.040 --> 0:11:01.920 joining us right now, boy out of Energy at KPMG 0:11:02.040 --> 0:11:05.320 in a true force at Rice University in the Baker Center. 0:11:05.440 --> 0:11:08.760 What are you open question? I rarely do this, Regina, 0:11:08.840 --> 0:11:11.040 but you're so good, I'm going to ask it. What 0:11:11.280 --> 0:11:16.319 is your single point of study on a hydrocarbonage in America? 0:11:16.520 --> 0:11:20.960 What's the mystery for you into two thousand twenty two. Yeah, 0:11:21.000 --> 0:11:22.640 so let me try to boil it down, because I 0:11:22.640 --> 0:11:25.520 think what we're suffering from is a systematic and prolonged 0:11:25.640 --> 0:11:29.680 under investment in these long cycle projects. That is what 0:11:29.800 --> 0:11:31.640 it takes to bring well and gas to the market. 0:11:32.120 --> 0:11:34.800 We see demand continuing to grow the I e. A 0:11:34.880 --> 0:11:38.800 said it will be sion barrels per day uh and 0:11:38.800 --> 0:11:41.040 and others are saying it will be pre pandemic levels. 0:11:41.240 --> 0:11:43.800 We have tightening supply because countries are starting to worry 0:11:43.800 --> 0:11:47.439 about energy security, and countries you can are buying cargoes 0:11:47.480 --> 0:11:50.640 almost at any cost. So that's driving up all of 0:11:50.640 --> 0:11:53.000 that against the backdrop of a expectation of a cold 0:11:53.040 --> 0:11:56.000 winner hotter summers. So we have a crude oil up 0:11:56.040 --> 0:11:59.839 six over the last six months, natural gas over a 0:11:59.880 --> 0:12:02.480 lot six months, and I think it gets worse before 0:12:02.480 --> 0:12:05.880 it gets better. That's what I'm thinking about. Well said. 0:12:06.480 --> 0:12:10.560 The reality here is for the last twenty years on 0:12:10.600 --> 0:12:14.800 a hydrocarbons technology has saved us. Do you and the 0:12:14.880 --> 0:12:18.880 engineers at RICE and KPMG, do you assume there is 0:12:19.000 --> 0:12:22.520 new and improving technology or is this as good as 0:12:22.559 --> 0:12:27.120 it gets as we produce oil. I think technology will 0:12:27.160 --> 0:12:30.120 always continue to surprise us, and I never doubt the 0:12:30.320 --> 0:12:34.000 ingenuity of the industry and in particular the shale players. 0:12:34.000 --> 0:12:37.760 But what we've had is investors driving different kinds of behavior, 0:12:38.120 --> 0:12:40.920 and so your public shale players are sticking to the 0:12:41.000 --> 0:12:44.320 narrative of we're gonna delever the balance sheet. We're gonna 0:12:44.360 --> 0:12:47.920 return strong dividends to our investor base. An OPEC plus, 0:12:47.960 --> 0:12:52.400 which can release more supply, is enjoying this eight plus 0:12:52.480 --> 0:12:55.960 dollar rally to rebuild their government coffers because they've been 0:12:56.000 --> 0:12:58.880 suffering for budget deficits over the last eighteen months during 0:12:58.880 --> 0:13:02.439 the pandemic. So yes, technology can definitely play a role, 0:13:02.679 --> 0:13:05.480 but not in the short squeeze where we're in today, Regina. 0:13:05.720 --> 0:13:08.120 This is definitely a global story, but it's also a 0:13:08.240 --> 0:13:12.000 very US story, in particular Cushing, Oklahoma. I was taking 0:13:12.040 --> 0:13:13.880 a look at a bunch of the stories about how 0:13:13.960 --> 0:13:16.360 much of a supply shortage there is there, how much 0:13:16.360 --> 0:13:19.520 the inventories have gotten depleted, and how that is distorting 0:13:19.559 --> 0:13:22.679 markets dramatically. How much is that driving a lot of 0:13:22.720 --> 0:13:25.880 the rally that we're seeing frankly globally, but driven from 0:13:25.880 --> 0:13:29.040 the w t I crewed. I think w c I 0:13:29.120 --> 0:13:32.080 definitely is playing a key role because everyone's watching what 0:13:32.160 --> 0:13:34.280 the shield players are doing. But I think there's a 0:13:34.760 --> 0:13:38.200 Cushing story in all the global markets. You know, we 0:13:38.240 --> 0:13:42.200 saw in the gas prices spike ten times ten x 0:13:42.480 --> 0:13:45.640 in the UK not not too long ago. There's again 0:13:45.640 --> 0:13:49.720 an energy security story. There were of natural gas supplies 0:13:49.800 --> 0:13:53.000 into the European continent come from Russia. So when we 0:13:53.040 --> 0:13:56.840 look at tight supply choke points like Cushing, like some 0:13:56.920 --> 0:14:00.240 of the systems in the North Sea, even what open 0:14:00.280 --> 0:14:03.320 plus is going to do, those little bubbles create the 0:14:03.400 --> 0:14:07.400 overall geopolitical story and drive a global commodity price that's 0:14:07.480 --> 0:14:10.520 really extraordinarily healthy right now. One is hundred dollar barrel 0:14:10.559 --> 0:14:12.760 of oil. Do say at the end of this year 0:14:12.840 --> 0:14:16.480 early next year, as many people are predicting, I think 0:14:16.720 --> 0:14:19.920 that's where we start to see probably pretty significant demand 0:14:19.920 --> 0:14:24.000 destruction and probably where we start to see more increases 0:14:24.080 --> 0:14:27.000 in US activity, which can be a swing producer and 0:14:27.040 --> 0:14:29.760 we can return to being a swing producer. Aretist seeing 0:14:29.800 --> 0:14:33.600 rip counts that are up almost uh double from a 0:14:33.680 --> 0:14:36.600 year ago. And while the public shail players are sticking 0:14:36.640 --> 0:14:39.240 to the investor narrative, the signs seeing a lot more 0:14:39.320 --> 0:14:43.280 private shail activity uh and and more oil and gas 0:14:43.560 --> 0:14:46.480 development and production coming in the Permian and elsewhere in 0:14:46.480 --> 0:14:50.560 the US. How do you respond to market strategists, to 0:14:50.680 --> 0:14:54.080 Wall Street types with a vector to ninety dollars or 0:14:54.120 --> 0:14:56.760 even a hundred dollars of barrel? How do you respond 0:14:56.800 --> 0:15:02.400 to that? As an academic. Well, I think, I mean 0:15:02.440 --> 0:15:05.000 it's a it's a real economic challenge, right, I mean 0:15:05.040 --> 0:15:08.080 that's what the underlying value of the of the commodity 0:15:08.160 --> 0:15:10.720 is today. And I think that's where we have to 0:15:11.240 --> 0:15:13.360 look at what's going to happen in Glasgow and cop 0:15:14.200 --> 0:15:16.680 How do we accelerate the energy transition, how do we 0:15:16.720 --> 0:15:20.000 address energy security and how do we ensure that the 0:15:20.080 --> 0:15:25.080 market forces keep energy affordable and reliable and a planet 0:15:25.080 --> 0:15:27.600 that's consuming more and more, you know every day as 0:15:27.600 --> 0:15:31.520 we continue to grow with within the oil here, the 0:15:31.640 --> 0:15:34.040 overlay has already been gas. I remember the the the 0:15:34.120 --> 0:15:37.760 Exxon transaction. Everybody had to get into some form of 0:15:37.800 --> 0:15:40.720 net gas and the rest of it as well, after 0:15:41.080 --> 0:15:44.240 an a dark after accidental petroleum. What's going to be 0:15:44.280 --> 0:15:47.960 the synergy that we're gonna see in American oil? What's 0:15:47.960 --> 0:15:52.840 the next combination that just has to be done? Well, 0:15:53.000 --> 0:15:56.400 I think you've seen those combinations already, tom So. I 0:15:56.440 --> 0:15:59.680 think there's a lot of consolidation around shale assets in 0:15:59.680 --> 0:16:02.960 the u US, which will help because scale, as they say, 0:16:03.080 --> 0:16:06.520 shale means scale and that will help from a cost perspective. 0:16:06.720 --> 0:16:10.320 So even if oil ultimately comes back down to below forty, 0:16:10.440 --> 0:16:13.080 we can still be profitable with those larger players. And 0:16:13.160 --> 0:16:16.080 you see the international wild companies pivoting more to have 0:16:16.160 --> 0:16:19.600 a more diversified portfolio in the energy transition. Some are 0:16:19.600 --> 0:16:22.440 betting more on carbon capture and storage, others are betting 0:16:22.440 --> 0:16:25.800 more on hydrogen batteries, others are betting more on renewables. 0:16:25.880 --> 0:16:28.240 So I think you'll start to see a bifurcation of 0:16:28.840 --> 0:16:32.120 the traditional energy company strategy with sort of the new 0:16:32.240 --> 0:16:36.160 energy company strategy, and that will help balance the power 0:16:36.480 --> 0:16:39.360 needs that the planet has today. You know, as we 0:16:39.480 --> 0:16:42.840 pivot into the energy transition, Regina and Top twenty six 0:16:42.880 --> 0:16:45.480 will be very interesting to see. Regina. Before we let 0:16:45.520 --> 0:16:47.440 you go, there's been a dilemma for a lot of 0:16:47.480 --> 0:16:50.000 investors that want to move towards more E s G 0:16:50.160 --> 0:16:53.240 type strategies, that want to seem like the good guys 0:16:53.280 --> 0:16:56.120 investing in greener energy, and they have missed out on 0:16:56.200 --> 0:16:58.680 a rally that's been dramatic, And a lot of analysts 0:16:58.680 --> 0:17:00.680 have come on this show and said, you invest in 0:17:00.680 --> 0:17:03.760 oil companies, you'll do great. How do you sort of 0:17:03.960 --> 0:17:07.679 see that developing in terms of investors both getting the 0:17:07.720 --> 0:17:10.840 returns but also being able to sleep at night with 0:17:10.880 --> 0:17:13.840 how they're putting their money to work. Sector took a 0:17:13.880 --> 0:17:16.720 beating last year that I didn't think was necessarily warranted. 0:17:16.800 --> 0:17:19.200 So I think there's definite upside. And for those of 0:17:19.280 --> 0:17:21.640 us that stayed in our only guests uh come out 0:17:21.720 --> 0:17:24.840 of equities were doing really well in our portfolios. But 0:17:24.960 --> 0:17:27.159 I think what I would say is investors need to 0:17:27.160 --> 0:17:30.000 have a balance and don't count out the energy industry. 0:17:30.240 --> 0:17:33.560 We have to be a key part of driving into 0:17:33.800 --> 0:17:36.920 a lower carbon climate. If we're not at the forefront 0:17:36.920 --> 0:17:39.280 of driving that, then I don't think that we are 0:17:39.320 --> 0:17:41.560 able to achieve a two degree C at one point 0:17:41.560 --> 0:17:45.720 five degree C scenario. So I encourage investors to look 0:17:45.760 --> 0:17:49.359 at the bigger picture, don't demonize one side versus the other, 0:17:49.680 --> 0:17:51.800 because we need an all of the above strategy to 0:17:51.920 --> 0:17:55.639 get to the climate goal objectives that we have together. 0:17:56.040 --> 0:17:59.159 So don't just look for what sounds green in the 0:17:59.200 --> 0:18:02.440 short term. Look at a balanced portfolio because fossil fuels 0:18:02.440 --> 0:18:05.280 and hydrocarbons have to be a core part of the 0:18:05.359 --> 0:18:09.560 underlying part of the portfolio for for a substantial period 0:18:09.600 --> 0:18:12.080 of time, and we will reduce the carbon footprint of 0:18:12.119 --> 0:18:15.159 those hydrocarbons. The industry is committed to that. Regina, I've 0:18:15.160 --> 0:18:17.119 a really enjoyed listening to you. Thanks for being with this. 0:18:17.200 --> 0:18:26.000 Regina Matther of KPMG Tony presents you joining us now 0:18:26.000 --> 0:18:29.520 markets trying togist and portfolio manager at Pimco Tony. This 0:18:29.640 --> 0:18:32.879 cyclist moving so quickly, that's the story, the epicenter of 0:18:32.880 --> 0:18:34.360 your round. Look with you in the team right now, 0:18:34.359 --> 0:18:36.080 can you just walk us through how you thinking about 0:18:36.080 --> 0:18:39.280 the world around us at the moment? Well, we we 0:18:39.400 --> 0:18:41.520 when we talk like to talk about the Yiel curve 0:18:41.560 --> 0:18:44.399 and Yelk curve movement speaks this idea of a fast 0:18:44.480 --> 0:18:47.320 moving cycle. Does seem like the economic cycle is moving 0:18:47.320 --> 0:18:50.480 at warp speed. Think about it. We're probably at mid cycle, 0:18:50.960 --> 0:18:55.320 meaning look at the unemployment rate four what is a 0:18:55.400 --> 0:18:59.159 late cycle condition. Of course nonemployment rate that's lower, and 0:18:59.200 --> 0:19:02.760 that lower rate could be achieved the full employment next year. 0:19:02.840 --> 0:19:05.000 So that's a fast moving cycle. In fact, the Federal 0:19:05.000 --> 0:19:07.520 Reserve is projecting that the unemployant rate will be in 0:19:07.560 --> 0:19:09.960 the mid threes by the end of next year. So 0:19:10.040 --> 0:19:13.200 for investors, it's important to be on your toes. It's 0:19:13.200 --> 0:19:16.240 the simple way you're saying, it's important to be active 0:19:16.359 --> 0:19:20.040 with the portfolio management to be thinking more about security 0:19:20.080 --> 0:19:25.600 selection a region, regional selections, etcetera, uh, etcetera. But then 0:19:25.600 --> 0:19:27.800 it is a fast mood cycle. One final note that 0:19:27.840 --> 0:19:31.480 the gield curve again, it's it has flattened recently, and 0:19:31.560 --> 0:19:34.000 that's something that happens later in the cycle because the 0:19:34.000 --> 0:19:36.719 Federal Reserve is raising the short term rate, which pushes 0:19:36.800 --> 0:19:39.240 up if yield relative to the long term rate flattening. 0:19:39.640 --> 0:19:41.360 That's where I want to go to Ston spread this morning. 0:19:41.800 --> 0:19:44.600 Eighteen basis points, Tony. Where it is a two year 0:19:44.720 --> 0:19:47.800 yield that matters to you? Were at zero point four 0:19:47.920 --> 0:19:51.600 four percent? Just you're using your mind, Tony. Where's the 0:19:51.680 --> 0:19:54.960 two year yield a tip point or a critical point? 0:19:55.040 --> 0:19:59.000 For Chris Nzi, Well, the two year relative to other 0:19:59.080 --> 0:20:01.600 yields matters a lot, and it's just that the two 0:20:01.680 --> 0:20:04.600 years will tell us about the two year window. And 0:20:04.680 --> 0:20:07.639 we know that the markets looking at shorter term interest 0:20:07.760 --> 0:20:11.440 rates and forward interest rates like Euro dollar futures is 0:20:11.480 --> 0:20:14.440 projecting at the Federal Serve will increase its policy rates 0:20:14.440 --> 0:20:17.960 sometime next year, perhaps as early as June. The markets 0:20:18.000 --> 0:20:21.040 penning in several interest rate types. But the other these 0:20:21.119 --> 0:20:24.080 two extraordinary things about the two year to ten years spread. 0:20:24.680 --> 0:20:26.800 One is the fact that the spread started to flatten 0:20:26.880 --> 0:20:29.520 earlier in the cycle than we have seen since the 0:20:29.600 --> 0:20:32.439 nineteen eighties. And then in the last three cycles, the 0:20:32.480 --> 0:20:35.320 last three recessions, the spread between the two and the 0:20:35.359 --> 0:20:39.199 tenure no was is why these three basis points. In 0:20:39.200 --> 0:20:43.600 other words, the markets were patient about the idea of 0:20:43.760 --> 0:20:46.520 federal reserved interest rate hikes. It thought that industrate highs 0:20:46.560 --> 0:20:49.520 were somewhere on the distant horizon, and so long term 0:20:49.560 --> 0:20:54.040 wields had stayed high. Um but now so this this 0:20:54.119 --> 0:20:56.440 is the peak this time was one fifty, so it's 0:20:56.480 --> 0:20:59.400 half the level of the previous cycles. Was to cut 0:20:59.440 --> 0:21:02.240 to the a chase. The second part of the extraordinary 0:21:02.280 --> 0:21:04.679 part of about the yield curve two cent spread is 0:21:04.720 --> 0:21:08.000 that the tenure yield it's projected to be low and 0:21:08.040 --> 0:21:11.119 on Bloomberg of function through new Bloomberg uses f w 0:21:11.400 --> 0:21:14.680 c M it shows forward interest rates, and you see 0:21:15.359 --> 0:21:19.480 the market is saying that there's a benign story to 0:21:19.920 --> 0:21:23.720 evolved unfold over time, that interest rates probably won't get 0:21:24.000 --> 0:21:26.119 up two and a half presented as far out in 0:21:26.160 --> 0:21:28.159 these forewas as I look at the table calling it 0:21:28.240 --> 0:21:30.600 ten years plus well, but tony just to sort of 0:21:30.600 --> 0:21:33.400 tie this all together, then what is the message from 0:21:33.400 --> 0:21:35.639 the yield curve? Is it that the market that the 0:21:35.680 --> 0:21:39.719 economy can't necessarily handle too much tightening from central banks, 0:21:40.080 --> 0:21:42.399 or is it just that the margin is going to 0:21:42.480 --> 0:21:47.040 naturally be narrower because of this ceiling on longer term yields? 0:21:47.680 --> 0:21:50.760 He said, those are probably the conclusions that most would 0:21:50.800 --> 0:21:54.440 draw from it now. But perhaps forward interest rates are wrong. 0:21:54.480 --> 0:21:59.960 Perhaps the market, the consensus and that's embedded in these 0:22:00.160 --> 0:22:03.840 forward rates, is wrong in thinking that the twenty tens 0:22:03.960 --> 0:22:06.960 uh it will be uh repeated in the twenties. But 0:22:07.000 --> 0:22:10.879 the twenty tents is probably the wrong analog for the twenties. 0:22:10.920 --> 0:22:14.520 There's a lot going on in pimco's secular outlook. We 0:22:14.560 --> 0:22:18.280 talk about speak to transformations, for example, becoming more digital, 0:22:18.400 --> 0:22:21.840 more inclusive, more green. Those are the three major transformations 0:22:21.880 --> 0:22:24.560 we see. All those things could We're not saying they 0:22:24.600 --> 0:22:28.400 will result in faster growth, and simply doing the math. 0:22:28.480 --> 0:22:30.560 If if economic growth is four percent, as the FED 0:22:30.600 --> 0:22:33.560 projects next year and PIMCO projects as well, then looking 0:22:33.560 --> 0:22:35.400 at the next five years, even if growth is two 0:22:35.400 --> 0:22:39.120