Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course, on the Bloomberg terminal. Our next guest
Speaker 1: is important because a year and two weeks ago, Lele
Speaker 1: Brainerd was at the Boost Schools Seminar in New York.
Speaker 1: Obviously it was you know, pandemic and all that, and
Speaker 1: Michael Faroli, kim Shaw notes, Katherine Mann and Steve Chacchetty
Speaker 1: wrote a definitive paper on the tools that we have
Speaker 1: forward monetary policy. We come forward fifty four weeks and
Speaker 1: it's a whole new world after all. Michael Faroli joins
Speaker 1: us this morning with JP Morgan. Michael, the paper that
Speaker 1: you wrote at the Boost School seminar a fifty four
Speaker 1: weeks ago? Is that paper true today? Are you and
Speaker 1: Bruce Kasman working off a new playbook? No? I think
Speaker 1: I think the results from that paper we're actually put
Speaker 1: into uh into use a few weeks later, right, So, uh,
Speaker 1: that paper focused on the tools what we have that
Speaker 1: the FED has when in a low interest rate environment
Speaker 1: and we had we come to a recession, which is
Speaker 1: forward guidance and quantitative using. They used both those tools
Speaker 1: very aggressively. And one of the tools that we recommended
Speaker 1: UH and most economists I think recommend weren't a looning.
Speaker 1: This is outcome based guidance, which is basically saying when
Speaker 1: the first hike will COMMA is going to be based
Speaker 1: on certain economic conditions, which the Fed put into place
Speaker 1: last September. What is so important here, and I believe
Speaker 1: John Farrell mentioned in an hour ago, were the United
Speaker 1: Kingdom and vision sub two percent GDP out a number
Speaker 1: of years as well? You own the study of potential
Speaker 1: g d P. Do you look at six or seven
Speaker 1: or eight percent g d P now is one quarter
Speaker 1: two quarters fade out or one quarters two quarters in
Speaker 1: a real abrupt drop down to where you see potential GDP?
Speaker 1: So first of all, I should say we see GDP
Speaker 1: growth this year around six and a half percent, but
Speaker 1: we also see above trend GDP growth persisting next year.
Speaker 1: So a lot of the stimulus that we're expecting UH
Speaker 1: should be somewhat delayed. So, for instance, a lot of
Speaker 1: the a to state and local governments won't necessarily get
Speaker 1: spent quickly. H. So that should support growth on into
Speaker 1: next year. But you know, I think when we get
Speaker 1: to perhaps twenty three or twenty four, it's reasonable to
Speaker 1: expect a return to sub GDP growth, which is probably
Speaker 1: still the h the potential GDP growth rate of the economy.
Speaker 1: Tom kicked off this hour talking about the Simon Kennedy
Speaker 1: article about the savings rate, about the glut of cash
Speaker 1: sitting and savings accounts in the US. He pegs it
Speaker 1: at one and a half trillion dollars. And then there's
Speaker 1: this nugget that if everyone were to spend all of
Speaker 1: that money, GDP would run it about nine percent. If
Speaker 1: none of it were spent, it would be two point
Speaker 1: two percent. A huge spread there. What gives you confidence
Speaker 1: that people are going to go out and spend it?
Speaker 1: And on? What? So? Uh? First of all, I would
Speaker 1: say a lot of that saving is an accumulated stimulus
Speaker 1: that wasn't spent last year. Uh, But we should keep
Speaker 1: in mind that it's very likely that we're going to
Speaker 1: see further stimulus this year. Right, so now we have
Speaker 1: potentially checks coming uh, perhaps within a couple of weeks,
Speaker 1: and we saw last year a lot of those checks
Speaker 1: were spent pretty quickly. Uh this year we would expect
Speaker 1: the same, perhaps even more so because unlike last year,
Speaker 1: those checks may be coming out of time when the
Speaker 1: economy as reopening and you can actually spend on a
Speaker 1: lot of things that you couldn't spend on last year.
Speaker 1: So it's not simply the fact that we have a
Speaker 1: lot of accumulated saving, but there should be more income
Speaker 1: support forthcoming that I think should be the really big
Speaker 1: stimulus to growth this year. Give me a second. I
Speaker 1: just want to run through the ice action at the moment,
Speaker 1: up seven basis points on tens, up six on thirties,
Speaker 1: and the NASTAC does roll over to NASTAC future is
Speaker 1: now down by thirty six call it thirty five, and
Speaker 1: off by about a thirty one percent. And just one observation, John,
Speaker 1: we go back to where we were on Friday. We've
Speaker 1: given up essentially Monday, Tuesday, Wednesday of dynamics. This is
Speaker 1: the outlook gets better, and might let's put some numbers
Speaker 1: on that better outlook you've mentioned GDP growth. I read
Speaker 1: a note from you guys in the last couple of
Speaker 1: days six eighty five thousand monthly average for payrolls growth
Speaker 1: for the rest of this year. That just fat sounds
Speaker 1: absolutely fantastic, Mike. Are they the kind of numbers you're
Speaker 1: looking for? Now? Those are two things I would say.
Speaker 1: One is that there's a link between GDP growth and
Speaker 1: job growth, which or at least between the unemploymer rate,
Speaker 1: which is called the Oakin's rule that economists use. Uh.
Speaker 1: In addition, I would say that relative to that, to
Speaker 1: that sort of rule of thumb, we might see more
Speaker 1: than one might expect in terms of job growth because
Speaker 1: we're going to see a lot of sectors come back.
Speaker 1: We should see a lot of sectors come back. That
Speaker 1: a are things like restaurants and movie theaters that might
Speaker 1: be you know, services tend to be a little lower
Speaker 1: than average productivity, but that means you're gonna have higher
Speaker 1: than average jobs per amount of GDP growth. So uh
Speaker 1: So I think we're set for a very good year
Speaker 1: in terms of job growth. In addition to participation rate,
Speaker 1: we anticipate will mostly recover some of the gain some
Speaker 1: of the losses that suffered over the past twelve months. Uh.
Speaker 1: In part because those who are concerned about you know, uh,
Speaker 1: face to face job, so you can can actually get
Speaker 1: back in the labor market, as well as hopefully the
Speaker 1: normalization of school schedules should allow uh, you know, parents
Speaker 1: to get back into the labor market. So it should
Speaker 1: be good from both the perspective of the number of
Speaker 1: jobs created as well as you know, the amount of
Speaker 1: the population that's actually back in the workforce. And perhaps
Speaker 1: markets have already prices in at least if you look
Speaker 1: at the equity valuations that we're looking at, And the
Speaker 1: question is what happens three, what happens even two, and
Speaker 1: whether there's sort of an ongoing virtuous cycle it gets
Speaker 1: create aided by some of the stimulus by the job creation,
Speaker 1: and growth can go a little bit faster than people
Speaker 1: currently are expecting. What's your view on that, given the
Speaker 1: sort of consensus that we will see a slowing out
Speaker 1: of growth, a slowing out of inflation, in a return
Speaker 1: to the environment that we were in pre COVID, right, So,
Speaker 1: as Tomas mentioned, you know, we have been somewhat cautious
Speaker 1: on potential GDP growth, but there have been some developed
Speaker 1: developments that have been um I think favorable When thinking
Speaker 1: about the longer term outlook. One of those is that
Speaker 1: capital spending has really recovered quite robustly, particularly spending on
Speaker 1: tech R and D, things that tend to be sort
Speaker 1: of high productivity uh categories of spending. So I think
Speaker 1: that's one favorable development. I think if we do get
Speaker 1: an infrastructure package later this year, which seems you know,
Speaker 1: uh likely, Uh, there's a lot of evidence that suggest
Speaker 1: that infrastructure is good for the economy's long run growth rate.
Speaker 1: So there are still a lot of get us out
Speaker 1: there in terms of slowing growth in the labor force
Speaker 1: that will you know, keep trend GDP growth definitely below
Speaker 1: three percent and probably below two percent. But there have
Speaker 1: been some favorable developments when we look at the productivity picture.
Speaker 1: Mike want to finish up on the bond market. We've
Speaker 1: got a thirty year at two five tens at one
Speaker 1: forty six helds bleeding high again. Chairman Power tomorrow, do
Speaker 1: you expect Chairman Power to stay on script? I do.
Speaker 1: I think he's going to remain quite dothersh um. I
Speaker 1: don't know if he necessarily is going to have to
Speaker 1: fight the market per se, but I think he wants to. Uh,
Speaker 1: he'll have to reiterate that they're gonna hike only when
Speaker 1: they are confident that inflation is going to be above
Speaker 1: two percent, And right now it doesn't look like the
Speaker 1: inflation markets are pricing persistent above two percent pc inflation.
Speaker 1: So I think Powell have to address that that perhaps
Speaker 1: misperception in the market that they're going to be quick
Speaker 1: to tighten even when there's no inflation pressure out there
Speaker 1: doesn't really I want to steal a phrase from Jean Clautrichet,
Speaker 1: and that is the idea of diffuse. He was talking
Speaker 1: to me about productivity diffew using. What is the diffusement
Speaker 1: of stimulus? Do you and your combine over there under
Speaker 1: Bruce Kasman, do you have a confidence in knowing how
Speaker 1: stimulus will diffuse through the American system? I don't think
Speaker 1: the economics profession really has a lot of confidence in
Speaker 1: UH and understanding UH stimulus to you know, to the
Speaker 1: decimal point. We do think it will UM obviously boost spending,
Speaker 1: particularly the stimulus checks H and that should help view
Speaker 1: overall economy and once we kind of get out of
Speaker 1: UM this patchword and where we still have a lot
Speaker 1: of excess labor resources, that should help you know, a
Speaker 1: broad set of of sectors in the economy. But you know,
Speaker 1: I think we do have to be humble and kind
Speaker 1: of putting too much false precision on our understanding of
Speaker 1: how fiscal stimulus affects the economy. Tocay the number for Friday,
Speaker 1: Mike for Friday, We're looking for two. My front could
Speaker 1: say SA and so ife more than chafe. US economists
Speaker 1: look at two hundred thousand on Friday. Let's get a
Speaker 1: relation of it in Bank of New York Man and
Speaker 1: chief strategist joining us now at Lesia Great to catch up,
Speaker 1: Let's just start with the SMP five hundred struggling at
Speaker 1: thirty hundred. What's going on? Well, what's going on here
Speaker 1: is the rotation trade and and higher yields and a
Speaker 1: steeper yelker because the sectors of the market that are
Speaker 1: outperforming and are quite strong are not the ones at
Speaker 1: the top of the index. So all those large cap
Speaker 1: tech docks have really peeked out on a relative basis
Speaker 1: in the summer of so as they struggle, the index
Speaker 1: itself will struggle. But there are plenty of sectors and
Speaker 1: plenty of companies that are doing great year today that
Speaker 1: that are having very clear bowl markets and as yields
Speaker 1: move higher as as we have expectations for higher yields.
Speaker 1: Listen the tech and the growth sectors as large cap
Speaker 1: names that really led last year are going to struggle.
Speaker 1: They're just going to struggle, and that's affecting the index. Alicia,
Speaker 1: you do the macro micro was such acuity. I want
Speaker 1: you to dove chail the easy call on the macro
Speaker 1: with the reality of microadjustment down the income statement. Are
Speaker 1: we at the edge of too good to be true?
Speaker 1: So that is the great question. I think this year
Speaker 1: we're going to see a little bit of a bifurcation
Speaker 1: between Main Street and Wall Street. And last year was
Speaker 1: an amazing year for Wall Street and for asset classes
Speaker 1: because we sat on yields, and this year it's going
Speaker 1: to be a very difficult dance for the FED and
Speaker 1: actually a very difficult dance for the bond market because
Speaker 1: if we actually print ten percent quarters of g d
Speaker 1: P a couple in a row double digits, which I
Speaker 1: think could happen given the spending and consumption numbers we're seeing,
Speaker 1: I think it's gonna be very hard for yields just
Speaker 1: to sit there and for the market to believe that
Speaker 1: the FED isn't going to move sooner. That's the dance
Speaker 1: that the market has to absorb. We do think that
Speaker 1: the economy will reopen. You can feel it everywhere, even
Speaker 1: in the middle of New York City where I am.
Speaker 1: You know, you feel it. Half springs coming. People are
Speaker 1: getting inoculated, and it's happening sooner than I think we
Speaker 1: had hoped for six weeks ago. At Leasha Roberts Shiftment
Speaker 1: over at Bloomberg Intelligence as a brilliant piece today on
Speaker 1: how tight the big tech bond credits are. They're shockingly
Speaker 1: tight and surprisingly Amazon actually doing you know, on the
Speaker 1: edge of apple uh in tightness as well. They're up
Speaker 1: to their eyeballs in cash. What do they do with
Speaker 1: the cash? And particularly across the market, what do they
Speaker 1: do with all the new cash? Look, that's a great question.
Speaker 1: We think overall, in the aggregate, with all the new
Speaker 1: cash that's raised, you are going to see a lot
Speaker 1: of M and A, which will help support markets here.
Speaker 1: But I think I think ultimately, you know, the cash
Speaker 1: is going to be used for buybacks and things like that,
Speaker 1: an investment, because this is a great investment year for
Speaker 1: those companies that have large cash surpluses change the business
Speaker 1: grow the business ad businesses. This is really the way
Speaker 1: to use it to look forward. We were kind of
Speaker 1: concerned about those favorite names that supported all of us
Speaker 1: last year during the misery we all experienced. It's kind
Speaker 1: of clear that the growth year of the year is
Speaker 1: going to be slower this year, and I think those
Speaker 1: names are going to struggle. We love energy, we love financials.
Speaker 1: Invest with the yield curve, think big, big economy boom
Speaker 1: in the economy, yields moving higher, and pick those old
Speaker 1: economy stocks that everybody gave up for dead for years
Speaker 1: and years and years. You know, value has an outperformed
Speaker 1: since two thousand and seven. There are many investors who
Speaker 1: don't remember a time when those stocks in the old
Speaker 1: economy actually worked and gave your performance. And here we
Speaker 1: are and it's working. Not to mention the under allocation
Speaker 1: to energy across the investors space because of E S
Speaker 1: G concerns and investor concerns. I mean, this is the
Speaker 1: sectory that's outperforming, outperforming, and under owned. There's your pain trade, Felicia.
Speaker 1: I don't want to say that I'm Debbie Downer again.
Speaker 1: I go back to trying to see a on corners
Speaker 1: because I think that that's sort of more how I'm
Speaker 1: playing this. But let's say the consensus is wrong, and
Speaker 1: let's say yields instead of rising fall a fall to
Speaker 1: eighty basis points, as Greg Peter's of PGM was saying,
Speaker 1: could very well happen earlier, as we've seen Scott miner
Speaker 1: And of Guggenheim say that he could see yields going
Speaker 1: close to zero next year on the ten year treasury.
Speaker 1: Let's say that the structural story here of an aging
Speaker 1: demographic of slow growth reasserts itself. What happens then, how
Speaker 1: violent could the move be? Given how crowded this consensus
Speaker 1: that we see today in the market really is. Look,
Speaker 1: that's really the left tail risk, and it could be
Speaker 1: a violent move down. You'll see a rotation very quickly
Speaker 1: back into those defensive favorites of large large cap growers
Speaker 1: and tech. But also, I mean, but that is really
Speaker 1: the risk here. You know, the variant whoever invented that
Speaker 1: word was the scary variants. I mean, that's that's really
Speaker 1: the risk. And also that there's their stasis within the
Speaker 1: labor market and that bottom and has really been affected
Speaker 1: by unemployment and the closing of the service economy. Doesn't
Speaker 1: really quite come back. So maybe you get fifty of
Speaker 1: those jobs back, maybe sev but what do you do
Speaker 1: with the rest? And it's very clear that retraining is
Speaker 1: not something this country does very well on a short
Speaker 1: term basis, So then you do have a permanently unemployed
Speaker 1: That is the risk here. Um. We do think though,
Speaker 1: there's so much forward momentum in the next few months,
Speaker 1: and I think the desire to engage with the service
Speaker 1: economy is palpable. It's real, and so I'm pretty optimistic
Speaker 1: about what happens with the labor market going forward. Alicia
Speaker 1: love catching up with you, Alicia Leving The Bank of
Speaker 1: New York melon chief strategists John, is there a bag
Speaker 1: book with a Bank of England? They do have the
Speaker 1: report the agencies around the country report bank, Yeah, something similar,
Speaker 1: so like you know Tottenham is terrible, they report something
Speaker 1: like that. You get the North London report on report
Speaker 1: back to the government. Yeah, we often do that in
Speaker 1: London time because our wonderful to the question this morning
Speaker 1: with Greg paid is a page Jim Senya futfolio manager.
Speaker 1: Greg We've been asking is awake about page Jim. He
Speaker 1: was touching one sixty one sixty one on Thursday. Have
Speaker 1: you been a buyer? Yeah, So we've been poking around.
Speaker 1: I mean it's been definitely an interesting journey, right, So
Speaker 1: I mean our view, you know above, it gets more
Speaker 1: interesting kind of one fifty uh, you know, even more interesting, uh,
Speaker 1: and then one seventy five very interesting. And so that's
Speaker 1: kind of how we're thinking about it from a scale.
Speaker 1: I mean, what happened last Thursday was less about kind
Speaker 1: of the level of yield, but more what happened in
Speaker 1: the market itself. Right, The market really had a whiff
Speaker 1: of March two thousand and twenty where there was just
Speaker 1: a lot of dysfunction in the marketplace, tremendous ill liquidity.
Speaker 1: So those are the things that we were really more
Speaker 1: attuned to. But at the same time it has created,
Speaker 1: i think dislocations in the curve. And so there's been
Speaker 1: lots to talk about the seven year auction and how
Speaker 1: at tailed and by frankly, how worrisome that was. The
Speaker 1: twenty year part of the curve. Tread curve is also
Speaker 1: very interesting. So to me, maybe it's not so much
Speaker 1: about the overall level of interistrates, but really the dislocations
Speaker 1: across treasuries themselves. Within there, we go back to basics,
Speaker 1: Greg Peters, and there's an idea of the nominal yield,
Speaker 1: the regular yield, the one point four or four percent yield, folks,
Speaker 1: and around that the dynamics of inflation, and what's called
Speaker 1: the residual, which is the real yield. It's a show
Speaker 1: on Bloomberg TV Greg Peters. Which matters right now, the
Speaker 1: inflation dynamics or the residual the real yield. I think
Speaker 1: the real yield matters more here as that will actually
Speaker 1: act as a buying constraint around activity, I think, uh
Speaker 1: and borrowing. And so you've seen this real move in inflation, right,
Speaker 1: So inflation was priced clearly too low in March of
Speaker 1: last year. It was absolutely on the floor. So it's
Speaker 1: been moving higher ever since. But I really struggle with
Speaker 1: this narrative that inflation, uh, it's really going to continue
Speaker 1: to pick up. So so I'm I'm kind of on
Speaker 1: the other side of inflation continuing to rise. Will it
Speaker 1: be around the two percent level, yes, but it's not
Speaker 1: going to be well above uh. And I hate to
Speaker 1: talk about base effects, but there are real base effects
Speaker 1: coming through here that gives the optics of inflation being
Speaker 1: much higher than it really is, and the FETE is
Speaker 1: telling you that, and no one wants to listen. This
Speaker 1: is so so, so so important, Lisa. I can't say
Speaker 1: enough about this five year five year forward says exactly
Speaker 1: what Mr Peters just described. Yeah, and that's what we've
Speaker 1: been seeing with respect to short term inflation expectations versus
Speaker 1: long term inflation expectations. The curve is inverted the most
Speaker 1: ever on record, which raises a question, could we actually
Speaker 1: see tenure treasure yields drop two new lows at some point?
Speaker 1: And this seemed to be at Scott Minard of Guggenheim
Speaker 1: was saying yesterday in a report where he was seeing
Speaker 1: saying that even tenure treasure yields could go negative at
Speaker 1: some point. I mean, Greg, are you on that side
Speaker 1: of things that we could see an actual rally that
Speaker 1: is pretty significant in treasuries? Are you just saying that
Speaker 1: perhaps it's gotten a little ahead of itself in terms
Speaker 1: of the sell off. Also, I'm not willing to say
Speaker 1: negative at this point. I mean, let's get below one
Speaker 1: percent and then take it from there. So I think
Speaker 1: that's somewhat heroic. But I think the director of travels right,
Speaker 1: But the timing is tricky. So so we think the
Speaker 1: natural wrestling place for ten year treasuries is around a
Speaker 1: B basis points. Uh so. Uh. That's not to say
Speaker 1: it's going to happen over the next several months, as
Speaker 1: the forces with stimulus and just the economic rebound is
Speaker 1: so strong. But I think when you look out, you know,
Speaker 1: eighteen months, two years, I do really see an environment
Speaker 1: where yields will continue to kind of move lower. So
Speaker 1: timing is tricky, but I do think the direction of
Speaker 1: travel is for lower yields, not higher yields. Correct the
Speaker 1: south side, and this is not at this on the
Speaker 1: south side, they often predict high yields, but gradual moves.
Speaker 1: And I think on the bis side right now, there's
Speaker 1: more attention being paid to that volatility, that burst of
Speaker 1: all we got last week in the treasury market, and
Speaker 1: whether we see repeats of that. Think Apollo in the
Speaker 1: last twenty four hours speaking of Bloomberg about this, how
Speaker 1: to take advantage of those bursts of volatility in the future. Greg,
Speaker 1: can you want me three how you approach things last
Speaker 1: week and how you approach things in the future if
Speaker 1: you expect to see that again, Well, quite frankly, it's
Speaker 1: it's tricky though, because the markets have a tendency of
Speaker 1: seizing up, and so if there's dysfunction and dislocation in
Speaker 1: the treasury market, which is the most liquid market, uh
Speaker 1: in the world, in the US for sure, everything sets
Speaker 1: off of that. So what we saw in March of
Speaker 1: last year was it all started with treasuries and then
Speaker 1: the illequidity broke down everywhere else. So quite frankly, it's
Speaker 1: difficult to do that. Being said, the derivative market is
Speaker 1: where you continue to see real liquidity in times of
Speaker 1: stress with cash. So I do think though, if you
Speaker 1: get these gaps and creating kind of these vacuum moods
Speaker 1: which which we didn't really see um, that will create
Speaker 1: opportunity because I think the whole world on the boy
Speaker 1: sides waiting for credit the cheapen up because uh, you know,
Speaker 1: the strengthened economy is such where you really want to
Speaker 1: own it. Greg always get to say so, Greg Padish,
Speaker 1: portfolio manager. Right now in commodities and of course every
Speaker 1: major house is really looking at the idea of a supercycle.
Speaker 1: The nuances of commodities, the metals, the softs and of
Speaker 1: course oil lifting Francisco. Blanche rides a herd at Bank
Speaker 1: of America Securities, head of Global Commodities in Derivatives Research,
Speaker 1: Francisco to cut to the chase into paragraph one. Are
Speaker 1: we re seeing now a new commodity supercycle? Hey Tom,
Speaker 1: thank you for having me. I do think we are saying, Uh,
Speaker 1: definitely upside pressure sending in some cases across the commority complex.
Speaker 1: We could see um supercycle like behavior. But I do
Speaker 1: think I do think it's gonna be more concentrated on
Speaker 1: the metals. Um. Unfortunately, I don't see that cycle happening
Speaker 1: in oil. I do see upside pressure on oil prices,
Speaker 1: but as you know, oil is the main commodity, is
Speaker 1: the largest portion of the commodity market value, so and
Speaker 1: it's gonna be hard for oil to see the kind
Speaker 1: of supercycle we witness in the two thousands. The metals, then,
Speaker 1: how do you apply capital on a bed of the
Speaker 1: Pacific rim? Is it as simple as buying re minby?
Speaker 1: Is there something more nuanced if you believe in the
Speaker 1: metals play? Um? No, I mean I think you can
Speaker 1: you can buy you can buy industrial metals for sure. Um.
Speaker 1: You know, we do like copper a lot we we
Speaker 1: also like UH nickel that we think it's all stretched
Speaker 1: right now, we think aluminium will perform well. Um. And
Speaker 1: then of course there is also some of the precious
Speaker 1: metals that are used in new technologies, like silver or
Speaker 1: platinum played in so so we we like those metals
Speaker 1: UM and UH and and think those have still significant
Speaker 1: upside over the course of the O the next few years.
Speaker 1: But um, but yeah, that's kind of the most direct
Speaker 1: way to do it. And then of course there is
Speaker 1: also the the the equities in that space, which I
Speaker 1: think are also also interesting ways to to to lever
Speaker 1: into the metal story. Let me energy, I need to
Speaker 1: bring in the China conversation as well. What's your reading,
Speaker 1: what's happening with China right now? And can you be
Speaker 1: this constructive on metals on the miners when the recovery
Speaker 1: in China is already maturing at this stage you're not exagerating. Um,
Speaker 1: I think you can because remember the metal, sir, not
Speaker 1: not just throughout China. It is true to half of
Speaker 1: the world's metals demand comes from China. But what we're
Speaker 1: going to see in the next few years is a
Speaker 1: huge transformation towards UM. The electrification of transportation, the actrification
Speaker 1: of industry, and also the big organization of electricity electricity networks,
Speaker 1: and those three elements are very very metals intensive. So
Speaker 1: in my mind, um metals still have I think quite
Speaker 1: quite a run ahead. Energy is probably gonna run to
Speaker 1: and remember as those vaccines get more and more distributed,
Speaker 1: and we heard from President by Them yesterday that we
Speaker 1: may have vaccines for the entire population by May in
Speaker 1: the US. M Johnson and Johnson is going to really
Speaker 1: accelerate the vaccination process with the vaccine. That could also
Speaker 1: lead to a pickup in UH, a pickup in in
Speaker 1: mobility around the world. But the thing is, we have
Speaker 1: ten million barrels they spare capacity temper cent of of
Speaker 1: supplies still spare in the case of transplation fuels. So
Speaker 1: that's gonna, I think lead to OPEC tomorrow opening out
Speaker 1: the tabs and tampering the price appreciation. But you'll still
Speaker 1: see I think the commority cycle moving higher with pretty
Speaker 1: good with all the monetary and fiscal stimulas that we've
Speaker 1: seen so far. Let's get numbers this morning. Brent sixty
Speaker 1: three ninety three w c I sixty Francisco, what do
Speaker 1: you say this topping. Now, what are the limits of
Speaker 1: this rally? So we think for this year the limits
Speaker 1: about seventy lords of barrel, So we don't see a
Speaker 1: lot of upside. And we think that OPEN is gonna
Speaker 1: be quite careful, uh, trying not to breach that seventy
Speaker 1: dollar level on Brent because obviously that could trigger a
Speaker 1: fair amount of UM response in the US shell patch
Speaker 1: if if they did so. I do realize producers are
Speaker 1: trying to be disciplined. But but obviously there's something called
Speaker 1: price that can can change the Yeah, Francisco, actually can
Speaker 1: you elaborate on that? This idea of the price point
Speaker 1: at which shall comes back into the picture. Well, so
Speaker 1: remember the curves is in very steep backwardation. Um, so
Speaker 1: the spot price is very high righted to a forward.
Speaker 1: If you look at prices for oil five years out
Speaker 1: on the w t I, they're actually under barrel. So um,
Speaker 1: what we think is OPEN wants to keep the curving backwardation.
Speaker 1: That's definitely a key objective of the group. They want
Speaker 1: to collect a high price on the spot basis and
Speaker 1: give shailed players the lowest possible price on my four basis. Um.
Speaker 1: And and again this means that that they'll try to
Speaker 1: keep things relatively tight. But um, but I do see
Speaker 1: eventually over the next three years there's a risk, as
Speaker 1: I mentioned earlier, if demand accelerates beyond our expectations, and
Speaker 1: remember the next three years are going to be the
Speaker 1: fastest three years of oil demand growth since the seventies,
Speaker 1: simply because we're coming from a very low base. But
Speaker 1: if if we overshoot, that's where I think that the
Speaker 1: upside risk over the next three years could be up
Speaker 1: to a hundred dollors preparal. So that's that's our view
Speaker 1: that we could see up to a hundred if demand
Speaker 1: conditions really stand up to to UH these levels of
Speaker 1: nine plus million barrels a day. Francisco, can you talk
Speaker 1: a little bit about the dynamics of what that would
Speaker 1: look like that upside surprise in terms of both GDP growth,
Speaker 1: in terms terms of the recovery and international travel. What
Speaker 1: would we have to see to get to the hundred
Speaker 1: dollars a barrel? So I think, as I said, from
Speaker 1: from an oil demand standpoint, we have to see over
Speaker 1: nine million bells they of growth. We would have to
Speaker 1: be above levels UH from a demand standpoint, by the
Speaker 1: second half of next year, so again relatively quick acceleration UM.
Speaker 1: And we will also that's from a from an oil consumption,
Speaker 1: from a consumption standpoint, my GPS standpoint UM. Again, our
Speaker 1: our U S economics team is calling for US GDP
Speaker 1: of six and a half percent this year UM. Some
Speaker 1: of this spills into next year with growth potentially in
Speaker 1: the three to four percent range. So if that's the
Speaker 1: case for the US, the world follows along. We see
Speaker 1: relatively UH week dollar on the back of that. Because
Speaker 1: some of this US growth feeds into international UH demand
Speaker 1: for goods as we've seen so far, and that feeds
Speaker 1: into a stronger Chinese bounced payments UM. Together with easy
Speaker 1: monitory policy, all of that can can actually trigger US
Speaker 1: to that higher level from a macrostandpoint. So it's those
Speaker 1: three things really. It's it's improving micro fundamentals, it's continued
Speaker 1: easy fiscal and monetary and it's of course UH continued
Speaker 1: improvements in China's balance of payments. Those are the three
Speaker 1: key elements for for a continued commority rally. Francisco, just
Speaker 1: a final question from me, just to wrap things up
Speaker 1: on the metals market, how supply response there because they've
Speaker 1: been disciplined over the last few years because they got
Speaker 1: burned coming out. Do they maintain that discipline? Do you
Speaker 1: see them doing that this story of value of a
Speaker 1: volume that really standed with Rio and p HP several
Speaker 1: years back. I I think they do. I think they do,
Speaker 1: and in fact I think what the metals and mean Ultimately,
Speaker 1: Number one thing is very different metals versus energy is uh.
Speaker 1: Metals don't have something like US shale. US shale is
Speaker 1: short cycle. It can respond within six flot months. Nothing
Speaker 1: in the metals world response in six quot months. There's
Speaker 1: a very very long investment cycles looking at seven years.
Speaker 1: So uh, even if they responded, this has still probably
Speaker 1: respond by by the end of the decade. And and
Speaker 1: and by then we will have maybe vehicles being sold
Speaker 1: into the market will be electric and uh, and that
Speaker 1: that's going to create some serious model legs in the
Speaker 1: in the metal space in our I think we saw
Speaker 1: that from Volvo yesterday looking for an electric fleet by Francisco.
Speaker 1: Great to catch up with you, sir, Francisco Blanche that
Speaker 1: Bank of America security has had at global commodities, and
Speaker 1: the Rivers says, this is the Bloomberg Surveillance Podcast. Thanks
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Speaker 1: and of course on the terminal. I'm Tom Keene, and
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