Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. I will introduce
Speaker 1: Philip Lane. He's the chief Economist at the e c B,
Speaker 1: and I want to make clear, particularly to our American audience,
Speaker 1: there is no equivalent at the FED, with the inaugural
Speaker 1: Chief Economist Marius sing of Germany. This is considered a
Speaker 1: key position in global economics. Philip Lane, I want to
Speaker 1: go back to a paper you did from Trinity over
Speaker 1: to Harvard years ago with a guy named Manque, and
Speaker 1: you and Greg Manque did a paper on economics and
Speaker 1: the scientists in engineering of it all? Do we throw
Speaker 1: the textbooks out? Now? Does the science and does the
Speaker 1: engineering of modern economics work given this moment? So I'm
Speaker 1: familiar with that with that paper, but I cannot take credit.
Speaker 1: I think there might have been a Greg Manki and
Speaker 1: maybe Ricardo reset the London s going of economics, But
Speaker 1: but the the basic question is still very relevant and
Speaker 1: absolutely in central banking. Um, it's a blend of of course,
Speaker 1: respecting the science of the textbook while also understanding we
Speaker 1: live in the real world where we have to you know,
Speaker 1: understand the actual data arriving and to filter out and
Speaker 1: come up with policies that that work in the real world,
Speaker 1: not just in the textbook version. Well, let's talk about
Speaker 1: the real world and the data this morning, Philip, right
Speaker 1: to have you with us on the program. So, by
Speaker 1: the way, the writing core inflation in the urosign more
Speaker 1: bad news comes in at three point. It's that with
Speaker 1: how worried you are about the second round effects here
Speaker 1: and how quickly you think we should react to that pressure.
Speaker 1: So clearly the Holy economy, all sectors, so core non core,
Speaker 1: the Holy economy has to adjust at essentially three factors
Speaker 1: in Europe. One is the very large increase in energy prices,
Speaker 1: which of course matters directly, but also matters indirectly because
Speaker 1: every sector uses energy, so every every business which uses
Speaker 1: energies and input, including in the services sector just think
Speaker 1: about hotels, restaurants, transportation, That energy shock will show up everywhere.
Speaker 1: A second factor is the pandemic and that's working through
Speaker 1: different channels. As you know, now with the renewed wave
Speaker 1: of lockdowns in China, we have new bottom x. Well,
Speaker 1: we also in Europe have the reopening of the economy
Speaker 1: this winter, including the early weeks of Q one, which
Speaker 1: we just seen, a lot of sectors were still locked down,
Speaker 1: which basically meant that there was a lack of activity
Speaker 1: and also honestly in the world where of that less
Speaker 1: pricing pressure. And then as we reopened those sectors, at
Speaker 1: those sectors are also going to normalized prices. And then
Speaker 1: the third element is the war, and the war when
Speaker 1: we're talking about started as you know in late February,
Speaker 1: and this is a source of great uncertainty for the
Speaker 1: European economy. Of course, it interacts with the with the
Speaker 1: energy shock, it interacts with bottomnecks, but also has a
Speaker 1: direct effect in terms of annually trying to kind of
Speaker 1: form their outlook for for Europe for the coming months
Speaker 1: and years. How the war plays out in the coming
Speaker 1: weeks and months is really the most important topic. Well,
Speaker 1: let's talk about how that informs your sequencing. The latest
Speaker 1: minutes published by the ECB. Let's call them the account
Speaker 1: the way you like us to show. Do you viewed
Speaker 1: the call for a rate hikes sometime after the end
Speaker 1: of asset purchases. I understand from your point of view
Speaker 1: you want to disentangle the rate hikes from asset purchases.
Speaker 1: I get all of that. You suggested recently, Philip, that
Speaker 1: would give the Governing Council this extra space. Do you
Speaker 1: think you still need that extra space given everything you've
Speaker 1: just said and given the data this morning. So so
Speaker 1: I suppose that, let me be clear along a few
Speaker 1: dimensions after us uh, the the idea is to have
Speaker 1: an option. So that option is an option that that
Speaker 1: could be invoked quickly, as President of Guard has said.
Speaker 1: I think in the press conferences it covers, you know,
Speaker 1: I arranged at the long end from a few months
Speaker 1: to the short end, you know, as you know of
Speaker 1: of you know, even a week. I think specially mentioned
Speaker 1: that at the short end. So it's an option, it's
Speaker 1: not a it's not a fixed window of time. And
Speaker 1: essentially here we are at the end of April. We're
Speaker 1: nearly six weeks, six weeks I think from yesterday to
Speaker 1: the June meeting, and after that we have another number
Speaker 1: of weeks to the next meeting in July and and
Speaker 1: so on. So I appreciate those who are trying to
Speaker 1: uh form market judgments like predictions. I'm much more focused
Speaker 1: on the process. We we need to take into account
Speaker 1: of data we've seen today, We need to take into
Speaker 1: county boat on GDP and on inflation. We're basically, honestly
Speaker 1: in the middle of trying of the staff are working
Speaker 1: on the projections that will inform the June meeting. And
Speaker 1: we we were clear sequencing, if in terms of policymaking,
Speaker 1: but also in terms of the meetings we have and
Speaker 1: the information we have. So I don't really want to
Speaker 1: run ahead of that sequence. Philip, you mentioned market pricing.
Speaker 1: Do you think it adequately reflects right now? The way
Speaker 1: you're communicating is that of any interest to you whatsoever?
Speaker 1: So I mean, I think the is involved in the
Speaker 1: market and policymakers are essentially confronted with a number of factors.
Speaker 1: Number one, I think you said earlier on in the commentary.
Speaker 1: Our current policies are interest rate policies were developed at
Speaker 1: a time when when the imperative was to try and
Speaker 1: tackle inflation that was persistently below our two percent target.
Speaker 1: So we've been basically saying all the year long that
Speaker 1: that on a step by step basis uh uh conditional
Speaker 1: on this outlet where we do think, um, we are
Speaker 1: not returning to that low inflation trap of normalizing interest
Speaker 1: rate policy. So so the interest rate policy will move
Speaker 1: at the you know, the question of I know of
Speaker 1: of interest at to everyone is exactly when that that
Speaker 1: will start. And you know, we essentially have been assessing
Speaker 1: in our recent meetings that we should be data dependent
Speaker 1: to respect the uncertainty we face, and that you know
Speaker 1: we thought you respect. Can I just jump into some
Speaker 1: central bankers that you will be data dependent and then
Speaker 1: I see the data change, and then I don't see
Speaker 1: anything you say that changes whatsoever. I ask the question
Speaker 1: earlier on about what you said about a month ago
Speaker 1: relative to what the data says now, about whether you
Speaker 1: still need that extra space between ending rate purchases and
Speaker 1: rate heights, and then you say data dependence still sure,
Speaker 1: jump back in. Let's let me challenge this. Just look
Speaker 1: at the very large changes in the ECB's monetary stance
Speaker 1: since since December. So in December, you know we took
Speaker 1: decisions which you know we're not We're not universally praised
Speaker 1: at the time to to have a big scaling down
Speaker 1: of ass of purchases, including through the ending the announced
Speaker 1: end of the of the PEP purchases at the end
Speaker 1: of March. So in terms of step one scaling down
Speaker 1: that the monthly volume of purchases, a lot has already happened.
Speaker 1: Step two of not only going ending the PEP but
Speaker 1: talking about concluding net purchases under the app. You know,
Speaker 1: we we've signaled that strong expectation that this, this is,
Speaker 1: this is coming up. And then after that sequence it's
Speaker 1: it's the issue about moving interest rates and you know,
Speaker 1: the market um um and for ourselves, you know, it's
Speaker 1: the story is not you know, the issue about uh,
Speaker 1: you know, are we going to move away from from
Speaker 1: minus zero point five for for the deposit rate. The
Speaker 1: big issue which we do have to still be data
Speaker 1: dependent about is the scale and the timing of interest
Speaker 1: rate normalization. And you know, we've just thought about the
Speaker 1: high uncertainty um it's recurrent everywhere that that that there
Speaker 1: are mixed dynamics into your area in the near term. Yes,
Speaker 1: inflation is very high, and that us carry its own
Speaker 1: risk of momentum under the hand at the high energy
Speaker 1: prices are eating into a disposal incomes. It's reducing consumption.
Speaker 1: The war you know, has the scope especially you know,
Speaker 1: depending on how it goes in terms of mapping into
Speaker 1: lower investment, lower consumption at true true confidence effects and
Speaker 1: the extra pressure and energy. So I'm going to hold
Speaker 1: to this perspective that the a lot remains data dependent.
Speaker 1: But but but but I would emphasize though, is at
Speaker 1: where where you know, I don't think you're hearing anyone
Speaker 1: saying that the the current deposit rate of minus zero
Speaker 1: point five is going to be remained there indefinitely. It's
Speaker 1: all about the prudent and the robust and durable way
Speaker 1: of having normalization. Looking at the move in the Euro,
Speaker 1: it's been pretty brutal over the last month, phill It
Speaker 1: you're a dollars down about four point five on a
Speaker 1: month so far. You will, of course tell me that
Speaker 1: this is not a policy target, but we can all
Speaker 1: agree it has possible implications for the immediate turn outlook
Speaker 1: for price stability. We then in mind, Philip, the latest
Speaker 1: development is problematic for you. The way I mean I
Speaker 1: would think about it, I think I've always taken this
Speaker 1: view is that the exchange rate is a very important
Speaker 1: macroeconomic variable for Europe. The your area is a big
Speaker 1: trading block. It's from a Marcrot point of view, the
Speaker 1: exchange rate absolutely matters. So when we are when the
Speaker 1: staff now are working through the projections for June, that
Speaker 1: that currency depreciation will will be an important factor shaping
Speaker 1: their projections. And again to emphasize, it's you know, one
Speaker 1: channel is a mechanical effect and import prices, but when
Speaker 1: we think about investment, when we think about consumption net
Speaker 1: exports for the your area, it's it's a it's a
Speaker 1: big macro variable and this movie significant. So anyone looking
Speaker 1: at that and trying to think about the implications from
Speaker 1: mantro policy, that will definitely be one trend along with
Speaker 1: every other trend that we need to think about, which
Speaker 1: will be integrated into an overall assessment in the In
Speaker 1: the June forecast, Philip, how much does it affect your
Speaker 1: expectation for the potential for a recession in the Euroregion?
Speaker 1: And I say this as ECB member Mattis Muller came
Speaker 1: out and said that they saw that the chance of
Speaker 1: a recession in the euroregion was low. Do you agree so? Absolutely?
Speaker 1: In our baseline. Let me point point out two factors. One,
Speaker 1: this is still a lot of momentum from from the
Speaker 1: recovery from the pandemic um. That's true, especially when you
Speaker 1: think about year on year, because this time last year
Speaker 1: there was you know, we were still very far below
Speaker 1: at the now, so you know, when we think about
Speaker 1: the economy, that momentum is there. But it's not just
Speaker 1: about that kind of base effect, Like you know, the
Speaker 1: momentum we've just seen, you know, a positive Q one,
Speaker 1: not very high, admittedly, that's still positive. And the we
Speaker 1: know from the near time indicators for what's going on
Speaker 1: right now that this still seems to be resoural activity
Speaker 1: right now here at the end of April um. So again,
Speaker 1: I don't think it's it's the most interesting way to
Speaker 1: to kind of frame the question because even if the
Speaker 1: economic continues to grow compared to the pre war baseline,
Speaker 1: you know, under all scenarios, the path for output is
Speaker 1: not going to be as high as we as we
Speaker 1: were hoping before before the war broke out. So the
Speaker 1: basic analysis applies regardless of whether everything ends up being
Speaker 1: so strong to put us into negative territory. But but
Speaker 1: really it's it's not so much about what we know today.
Speaker 1: It's we all know the possible scenarios. We all know
Speaker 1: the possible scenarios about the intensification of the interruption of
Speaker 1: amgry supplies and other scenarios which could and this is
Speaker 1: why at the ECB we've been, you know, publishing scenarios.
Speaker 1: We've been emphasizing we don't just look at the baseline,
Speaker 1: but also adverse and severe scenarios. Philip, just a sort
Speaker 1: of some up though. Are you saying that the market
Speaker 1: is wrong because the market seems to increasingly be pricing
Speaker 1: in a recession in the euroregion and pricing in that
Speaker 1: those scenarios look a lot more likely. Are you saying
Speaker 1: that the risk reward is perhaps a little less pessimistic
Speaker 1: from your perspective. I don't think again, I want to
Speaker 1: spend any time on the commenting on that. What's too
Speaker 1: is the market, of course has to fold in a
Speaker 1: significant risk premium, a wrist premium on inflation, a wrist
Speaker 1: premium on GDP, and there is a covariance factor there
Speaker 1: which which is basically the urge to to kind of
Speaker 1: look for protection. It's going to be higher where when
Speaker 1: you're confronted with the risk of higher inflationment and lower output,
Speaker 1: and so filtering out between risk premia and what the
Speaker 1: market truly expects. Of course, we we we we we
Speaker 1: did that ourselves in understanding the data. But that but
Speaker 1: both forces risk management and kind of true forecasts are
Speaker 1: off the influencing market pricing. Philip Line of ECV, the
Speaker 1: chief economist, Philip, fantastic to catch up with you, deeply
Speaker 1: thoughtful stuff on a tricky moment for this European Central Bank, Philip,
Speaker 1: Thank you. Tom Purcellio joins us now truly expert within
Speaker 1: market economics in America on wage dynamics time. You're the
Speaker 1: best guy to talk to about this right now. Is
Speaker 1: it a wage spiral? Yeah, you know so. I'm sympathetic
Speaker 1: to everyone looking at ECI because Powell mentioned it, But
Speaker 1: I don't know too. It's quarterly number, and because monthly
Speaker 1: stuff in hand, where you have a month, we have
Speaker 1: a new month, we have March in hand. We're gonna
Speaker 1: get April dat as soon enough. I mean, look, if
Speaker 1: you're looking at wages and salaries, I think it's really
Speaker 1: interesting that at the month on months actually continue to
Speaker 1: slow and that's been going on for quite a number
Speaker 1: of months now again make a mistake. I mean, we're
Speaker 1: looking at really high run rate here, but at the
Speaker 1: end of the day, I mean, you know, look, everyone
Speaker 1: wants it so fast, right like they just wanted like
Speaker 1: one month. They want they want to wake up one
Speaker 1: day and they want like inflation back to you know,
Speaker 1: two percent. This is not how it's gonna work, right, mean,
Speaker 1: you have to look for like these sort of little
Speaker 1: shifts that are happening. And one of the I think
Speaker 1: there's a couple of interesting shifts that are happening right now.
Speaker 1: One of them is wages and salaries are actually slowing
Speaker 1: down on a month on month basis. Again running at
Speaker 1: a high level, we get that, but you got to
Speaker 1: look for these little ships. I thought the Beige Book
Speaker 1: from last week, I thought that was really interesting too.
Speaker 1: I mean, you know, there was this commentary embedded throughout
Speaker 1: again right like the things that you're not going to
Speaker 1: see at the at the headline. I'm looking at the
Speaker 1: comment right here. I thought it was really interesting. A
Speaker 1: few firms noted that they're reevaluating their employment level and
Speaker 1: maybe ready for some attrition to reduce staff size, and
Speaker 1: comments like that are embedded throughout the bag book. Now again,
Speaker 1: I want to be clear, You're not gonna wake up
Speaker 1: one day and everything is going to be sort of different.
Speaker 1: I'm just simply saying you've got to look at these things.
Speaker 1: We're sort of you know, signs or how things are
Speaker 1: starting to shift. Um, and I will submit to you
Speaker 1: that that that is happening. So you know what it
Speaker 1: means for markets, Tom, And you're trying to pick up
Speaker 1: on the e c I the recent people care it's
Speaker 1: because Chapman pounce old as he cares. This is about
Speaker 1: the reaction function of the FED. So let's work through
Speaker 1: it together. How do you anticipate this data will develop?
Speaker 1: There will be a mechanical peak developing in CP in America.
Speaker 1: We may have already seen that peak. Tom. How do
Speaker 1: you think this Federal Reserve will internalize that data and
Speaker 1: react to it as it peaks and you start to
Speaker 1: see this slow deceleration that I assume that you anticipate
Speaker 1: through the summer. Yeah, Jonathan, So I think that this
Speaker 1: is the question that you know, we've just wrote about
Speaker 1: this the other day, and I think this is the
Speaker 1: thing that you know, the FED is going to need
Speaker 1: to sort of quantify to some extent. Think about last year.
Speaker 1: Think about what they did last year. Last year, it
Speaker 1: was basically all about getting to max employment, right, like
Speaker 1: you know, forget about inflation. Um, it was, it was
Speaker 1: all it was, you know, a bee line to getting
Speaker 1: to max employment. Well we see how that worked out,
Speaker 1: right when you have your blinders on and you're only
Speaker 1: focused on a single side of the mandate. So the
Speaker 1: question today is are they only going to focus on
Speaker 1: getting back to target inflation? Because I'll tell you if
Speaker 1: that's true. Look, you're speaking to someone and I think
Speaker 1: you will know this. You're speaking to someone who actually
Speaker 1: thinks that inflation will slow down as the as the
Speaker 1: year progresses. But if if it's, if this is a
Speaker 1: march to target, then you're gonna blow through bullards three fifty.
Speaker 1: I mean you're not gonna get to target until well
Speaker 1: into next year. Um. From a from a core perspective, Um,
Speaker 1: So I think the Fed needs to define what they
Speaker 1: sort of would will feel comfortable with from an inflation perspective,
Speaker 1: because if it's if it's, if it's target, then you're
Speaker 1: gonna be meanifully higher than than neutral and you're going
Speaker 1: to cause a recession. So where do you think that
Speaker 1: they should be okay or comfortable with inflation. Coming down
Speaker 1: to yeah, Lisa, I think that it's it really is
Speaker 1: about the movement of inflation. Right Like if if by
Speaker 1: the end of the year your whole a three handle
Speaker 1: on core inflation, core inflation, UM, I would I would
Speaker 1: define that as actually feeling like you're in a good spot, right.
Speaker 1: It's it's about the movement and where we are going.
Speaker 1: It's about the narrative in place at the time. It's
Speaker 1: really easy today to say, hey, inflation is can be
Speaker 1: an eight at eight percent, because that's all people see
Speaker 1: is eight percent inflation. But I think as the year progresses,
Speaker 1: I think the sort of the tone on that will
Speaker 1: be very different. I think as the year progresses, the
Speaker 1: tone on spending will be very different. I mean, we've
Speaker 1: talked about this quite a bit. If you look at
Speaker 1: the lower end consumer, at the fourth and fifth income quintiles,
Speaker 1: they're tapped out. They don't have the ability to overspend overspend,
Speaker 1: which is what happened last year, and the data are
Speaker 1: pretty clear on that, you know. I think it's interesting.
Speaker 1: I was listening to um you guys earlier, and I
Speaker 1: think Tom was was completely spot on. I think that
Speaker 1: the most recent I think that yesterday's GDP number, I
Speaker 1: think that's fascinating. I think that that is a really
Speaker 1: interesting report. And it has nothing to do with the negative.
Speaker 1: It's nothing to do with the fact that the consumer
Speaker 1: held in nothing. Has everything to do with trade and
Speaker 1: inventories and when and this is again feeds into our
Speaker 1: story so so nicely. I think it's really interesting that
Speaker 1: the inventory build has been staggering over the last couple
Speaker 1: of quarters, absolutely staggering. And yes it's subtracted from growth yesterday,
Speaker 1: but only before you know, because of the way is
Speaker 1: the delta right, It is just because the build was
Speaker 1: less than what we saw last quarter. But the last
Speaker 1: two quarters we have seen an absolutely enormous amount of build.
Speaker 1: Think about that in the context of the other thing
Speaker 1: that's subtracted from growth, that was trade. We're importing. We've
Speaker 1: imported almost the annual run rate is eighteen percent, eighteen
Speaker 1: percent over the last two quarters. This is amazing, iRacing us.
Speaker 1: So sorry, let's just finish his point. So what's happening
Speaker 1: is we're building all of this inventory and at the
Speaker 1: same time that the consumer is transitioning from good spending
Speaker 1: the services spending. Um, what do you think is going
Speaker 1: to happen to good prices? In that context? Good prices
Speaker 1: are going to fall, And I think it could fall
Speaker 1: pretty sharply, just real quickly. We only have about forty
Speaker 1: five seconds left. It's no problem. I know that you're
Speaker 1: you is that the FED shouldn't go too quickly and
Speaker 1: force a recession. What would you have to see in
Speaker 1: the data that would make you change your mind about
Speaker 1: the momentum that the FED has to curtail. So so, Lisa,
Speaker 1: if if if we're wrong, if inflation remains elevated, then yes,
Speaker 1: of course then the FED should engineer a recession, right,
Speaker 1: They basically should just get aggressive and knock this thing out. Um.
Speaker 1: But but again I think, well I've said this many
Speaker 1: times on your program. I just think a little bit
Speaker 1: of sort of patients and and and and a little
Speaker 1: bit of sort of look, making sure you're sort of
Speaker 1: noting both sides of the mandate. I think that would
Speaker 1: get you to a pretty reasonable place. You know, we
Speaker 1: don't have to generate a recession. I don't think we'll
Speaker 1: have to generate a recession and inflation slows down. But
Speaker 1: if it doesn't, then yes, I think the FED will
Speaker 1: necessarily have to get aggressive some do you think the
Speaker 1: pivot was more to do with secure in a second
Speaker 1: term and not the a CI. Then just a final
Speaker 1: question from me. You know, you know Jonathan, I I
Speaker 1: don't think so. I mean, I don't I don't pretend
Speaker 1: to know J. Powell in any meaningful way, but I
Speaker 1: don't think that's that what was driving just incline in
Speaker 1: minds once tonight. Some thank you, So I don't think obviously.
Speaker 1: Cavina Markets, thank you very much, just checking in. So
Speaker 1: it's just having a word. Ellen Wald is definitive off
Speaker 1: the Atlantic Council as a senior fellow in a wonderful
Speaker 1: book Saudi and kind of culture, the fabric of the
Speaker 1: royal family in Saudi Arabia, And today we're all embargo
Speaker 1: with ellen Wald. Ellen, it's really simple. Can an embargo
Speaker 1: work on oil against Russia? I don't think that in
Speaker 1: this case an embargo really can work on oil against Russia, because, UH,
Speaker 1: there are, first of all, so many different points that
Speaker 1: Russia is able to UH to to export oil. We've
Speaker 1: got pipelines, we've got multiple ports. UH. In fact, we've
Speaker 1: got ports and UH and pipeline systems that they share
Speaker 1: with other countries like Kazakhstan, and that would be very
Speaker 1: very are to police. So I think that what we're
Speaker 1: really talking about here is um Europe is kind of
Speaker 1: embargoing itself against Russian oil and that oil will go
Speaker 1: to other sources. In fact, we just got news that
Speaker 1: UM Indian oil companies, Indian refineries are looking to set
Speaker 1: and to secure some longish term contracts with Russia to
Speaker 1: import Russian oil. And there really isn't any way that,
Speaker 1: you know, short of of some kind of military embargo,
Speaker 1: that the EU and the United States can stop that
Speaker 1: from happening. So then does Europe go after India. Well,
Speaker 1: they can definitely exert pressure on India, but India is
Speaker 1: a huge country with an absolutely huge population that has
Speaker 1: no domestic oil production, so they have to import all
Speaker 1: of their oil. Their oil consumption is growing, their population
Speaker 1: is growing, They're looking to really, uh, you know, to
Speaker 1: to develop their country, and to do that they need
Speaker 1: access to fossil fuels like oil, and they're not going
Speaker 1: to just bow down to what Europe wants. Because of
Speaker 1: some you know, conflict that Europe is in with Russia.
Speaker 1: They were we were able to get them on board
Speaker 1: with the embargo against Iran, with the Iran oil stactions,
Speaker 1: but Russia is a whole another ballgame. Meanwhile, we're talking
Speaker 1: about the issues with Russian oil and perhaps a lack
Speaker 1: of willingness to dramatically ramp up production Here in the US.
Speaker 1: We got Chevron earnings, We've got x On earnings, and
Speaker 1: both are still under investing relative to where they were
Speaker 1: over the recent past. Excellent in particular, I'm looking at
Speaker 1: three point four billion dollar charge off for Russia. What
Speaker 1: do you think of that number? Well, that's that's a
Speaker 1: pretty big, big number, and it's it's interesting to see
Speaker 1: how they these companies are taking UH significant right downs
Speaker 1: for getting out of their assets in Russia. And yet
Speaker 1: you know, we're still seeing huge profits and huge earnings
Speaker 1: from these companies, and one would expect that we'd see
Speaker 1: a lot of that maybe reinvested into UH into upstream
Speaker 1: or downstream development. But I think that we're we're seeing
Speaker 1: instead of seeing that, we're seeing UH significant amounts of
Speaker 1: money being put towards share buybacks to lift the share price,
Speaker 1: which I think is something that um, you know, long
Speaker 1: term and longtime investors in these big oil companies have
Speaker 1: really been looking forward to because they've been on such
Speaker 1: a downward trend for for many years, UH, and so
Speaker 1: now with high oil prices, they're looking forward to seeing
Speaker 1: their share prices go up. And one of the other
Speaker 1: issues with increasing oil production in the US is really
Speaker 1: the bottlenecks, the supply chain issues, and the regulatory regime
Speaker 1: that's making it very difficult and costly UH to ramp
Speaker 1: up production in a in a hasty way. Well, but
Speaker 1: ellen to that point, I mean Excellon tripled their share
Speaker 1: buy back to thirty billion dollars. They did not boost
Speaker 1: their dividend, although they are expected to later in the year.
Speaker 1: L How much does this make business sense for them
Speaker 1: that frankly it does not in their economic interest to
Speaker 1: boost production due to the boom and bus nature of
Speaker 1: the oil market. Or is this something where they just
Speaker 1: see it as no advantage because of some of the
Speaker 1: kinks in the supply chains now, but longer term would
Speaker 1: also make business sense. I think that you can make
Speaker 1: an argument that it would be UH that they could
Speaker 1: increase their revenue if they did increase production, because increasing
Speaker 1: production is not going to bring oil prices down that
Speaker 1: much at this point because in particular there being uh,
Speaker 1: these other factors, geopolitical factors are what's causing our prices
Speaker 1: to rise. W t I is up at you know,
Speaker 1: a hundred and six dollars of barrel just on news
Speaker 1: that Germany says it won't oppose an oil embargo and
Speaker 1: EU oil embargo against Russia. And that's not something that
Speaker 1: any number of increase in barrels per day productions from
Speaker 1: the US can combat. So they definitely could make more money.
Speaker 1: But if you're looking at the long term picture, and
Speaker 1: then yes, it does make sense not to shell out
Speaker 1: a lot of money in a very hasty way to
Speaker 1: try to increase production that you might not really be
Speaker 1: able to because of all of these other factors. And
Speaker 1: instead it does make sense to say, pay down debt,
Speaker 1: to increase your dividend, to do these these share buybacks.
Speaker 1: These companies will probably be in a very good position
Speaker 1: going forward. But you know, from the perspective of the consumer,
Speaker 1: it certainly is it certainly looks like they're taking advantage
Speaker 1: of the situation. And I'm well at the Atlantic Council
Speaker 1: and thank you, let's dive into this right now. We're
Speaker 1: not going to do price target. We're not gonna do
Speaker 1: buy old Cell. We're gonna talk to Brent Still And
Speaker 1: what you need to know is it was major global
Speaker 1: Wall Street headlines. A day he launched from UBS over
Speaker 1: to Jeffries and Mr Sail joins us. Uh this morning, brand,
Speaker 1: I want to talk about Silicon Valley arrogance. You are
Speaker 1: really really good at this. How do you feel about
Speaker 1: the bazos, Jessie feeling that we're only in this for
Speaker 1: our consumers. We're not going to harm our consumers. The
Speaker 1: inflation is something we're gonna deal with separate. Are they
Speaker 1: forgetting their shareholders because they're thinking only of the consumers
Speaker 1: and they need to input inflation fighting price increases? Right now?
Speaker 1: I think they protected us in the pandemic. I mean,
Speaker 1: if you think about what happened, you know, they went
Speaker 1: from growth growth overnight, and you can't automate a delivery
Speaker 1: of toothpaste via a drone in some software, and so
Speaker 1: they had to build this capacity out. And then all
Speaker 1: of a sudden, we're back to normal. We're starting to
Speaker 1: go back from from clicks, you know, into bricks. Right
Speaker 1: we're wandering in the Target and walmarts and in convenience
Speaker 1: stores on our local walks to pick up goods. We're
Speaker 1: walking back into into physical stores. The world's returning to normal,
Speaker 1: and they can't just automatically snap their fingers and and
Speaker 1: go back to normal. So it's gonna take time to unwind.
Speaker 1: Uh this and they've said they have over capacity now,
Speaker 1: so it just takes it takes time. So I want
Speaker 1: to buy holders sell into one year out or two
Speaker 1: years out or three years out. Did you find a
Speaker 1: confidence on the call yesterday that they can manage out
Speaker 1: from this pandemic to a good outcome of growth on
Speaker 1: the income statement? Well, I think they've been great. Uh
Speaker 1: you know, sources of value for shareholders over time. So
Speaker 1: I think the the answer right now for tech is
Speaker 1: all of text in the palony box. We're seeing a
Speaker 1: massive downswing post pandemic, hangover multiples have come from living
Speaker 1: with the aliens as we call it, back the planet Earth,
Speaker 1: and we have a potential recession that we're all staring
Speaker 1: at in the next year. So right now, every asset
Speaker 1: classes under duress. And I think it's not only Amazon,
Speaker 1: it's the rest attack and so I think that over
Speaker 1: a one to two year period, the answer is yes,
Speaker 1: it's a great investment if you start to look at
Speaker 1: now the recurring software and AD business, you know, these
Speaker 1: two businesses um could potentially account for Amazon's entire market
Speaker 1: cap on this on this pull back, when you look
Speaker 1: at a few years out and start to put some
Speaker 1: multiples on the some of the parts, uh and Amazon's
Speaker 1: E of U S business is only getting stronger. So
Speaker 1: I think you have to separate the business between the
Speaker 1: software ad business in the retail business. The retail businesses
Speaker 1: and is in the tailspin in the short term with
Speaker 1: decline in in actual demand as well as costs they're
Speaker 1: they're having, you know, to get ahold of. So yeah,
Speaker 1: price increases have to come in. But again this just
Speaker 1: takes some time. On the retail side. I think most
Speaker 1: of our investors are are looking at that, are looking
Speaker 1: at the other part of the business and some of
Speaker 1: the parts and really looking at the A W S
Speaker 1: and AD business. Right I'm looking right now at your
Speaker 1: price target of thirty seven hundred, and you've got a
Speaker 1: buy rating on Amazon shares currently nine one. What do
Speaker 1: you think or that that was where they were at
Speaker 1: the close yesterday. They're down a lot lower than that
Speaker 1: now in pre market trading. What makes you think that
Speaker 1: they can get to that thirty seven hundred is it's
Speaker 1: entirely a bet on AWS stripping out the entire commerce business. Well,
Speaker 1: there's some of the parts. When you take effectively the
Speaker 1: six big parts of the business and you you strip
Speaker 1: them down and look at what multiple do you pay
Speaker 1: if the Amazon was a stand own company. If you
Speaker 1: look at two thousand twenty three, you know this company
Speaker 1: is gonna do the division of the eight of us
Speaker 1: is going to do a hundred million in revenue plus,
Speaker 1: and most investors would pay you eight to nine times
Speaker 1: for revenue. You know that then itself is worth in
Speaker 1: nine billion just for that business. So you know, you
Speaker 1: take the decline in the stock, you start to add
Speaker 1: the ad business, you start part of the media business,
Speaker 1: and you subtract the retail business. And this is critical.
Speaker 1: You mentioned this twice now, bron we're gonna end the
Speaker 1: interview here and I need to get this in. It's
Speaker 1: too important. Are you telling me an acquisition of Amazon
Speaker 1: shares this morning, that I'm getting a cardboard box business
Speaker 1: for nothing. You're not getting it for nothing, but you're
Speaker 1: getting it for a multiple depending where it opens. And
Speaker 1: it's really not a huge multiple. And you're getting a
Speaker 1: free call option over time that that can come back
Speaker 1: and stabilize. So I think again, Uh, you have to
Speaker 1: look at it from from the sum of the parts,
Speaker 1: not from just the retail business. And I think that's
Speaker 1: what everyone's doing. So we're trying to think of it
Speaker 1: a little more thoughtfully over a period of time. And
Speaker 1: I'm telling you, when you have six market share of
Speaker 1: the big three in the cloud against Microsoft, Google, I'm
Speaker 1: not worried about their high sources of profitability. Uh, this
Speaker 1: is the thirty to forty percent margin business or time
Speaker 1: that no company is gonna leave once they go to
Speaker 1: on the of the US. I wanted to squeeze it
Speaker 1: in if I'm a your view seems to be the
Speaker 1: view on the south side right now, fifty seven buys
Speaker 1: one hold, one cell. The market seems to be interpreting
Speaker 1: things differently. When you have the conversations with the buy
Speaker 1: side and you talk about what's happening with this name,
Speaker 1: what's the pushmak agett in Brent pushback right now is
Speaker 1: no one wants to buy anything in tech. So it's
Speaker 1: not just Amazon. Go pull up a chart on on Microsoft,
Speaker 1: Go pull up but chart on Google pull up a
Speaker 1: chart on anything. We are on a buyer strike across
Speaker 1: Wall Street. On on software, Brent Hill alsome to catch
Speaker 1: up of Jeffreys. This is the Bloomberg Surveillance Podcast. Thanks
Speaker 1: for listening. Join us live weekdays from seven to ten
Speaker 1: AMI Eastern. I'm Bloomberg Radio and Bloomberg Television each day
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Speaker 1: and of course, on the terminal. I'm Tom keene In.
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