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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot

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Speaker 1: Com and of course on the Bloomberg terminal. Right now,

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Speaker 1: we're gonna digress an importantly digress with David mel Pass.

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Speaker 1: He's President of the World Bank and with his work

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Speaker 1: at bear Stearns over the years, a student of detail

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Speaker 1: and at the World Bank, which is surrounded by experts

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Speaker 1: much like the United Nations on food, Mr mal Pass

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Speaker 1: has the services of John Baff's he's out of Greece

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Speaker 1: and out of the United States PhD from Maryland and

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Speaker 1: John Bass. David mal Pass is exquisite on this linkage

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Speaker 1: of energy to food, od ser fertilizer and fertilizers, something

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Speaker 1: we're not talking enough about. The World Bank is focused

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Speaker 1: on this linkage. Hi, Tim, that's right, and we have

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Speaker 1: a lot of experts as you as you mentioned, and

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Speaker 1: the linkage is pretty tight. The world is going through

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Speaker 1: these two major shifts, one on interest rates and bond

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Speaker 1: yields that you talk a lot about it, and it it

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Speaker 1: effects currency values. Uh. And then on on energy, it's

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Speaker 1: reducing that dependence on Russia, which is a huge shift

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Speaker 1: for the world and has I think several more innings

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Speaker 1: to go to really get it right. Nuclear and natural

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Speaker 1: gas probably are parts of the solution in the long run.

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Speaker 1: But right now Europe is drawing in natural gas from

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Speaker 1: around the world, which leaves these shortages of fertilizer and

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Speaker 1: food elsewhere. Does the World Bank of any form of

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Speaker 1: dialogue or new dialogue with Russia and Mr Putin, No, Uh,

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Speaker 1: that's not what we're doing. We're very involved. Yesterday I

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Speaker 1: met with the Prime Minister of Moldova right here in

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Speaker 1: this room. Uh and uh. We talked about the the

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Speaker 1: major shift going on in Moldovan energy. The electricity grid

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Speaker 1: is being shift shifted, the natural gas sources are being

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Speaker 1: shifted away from Russia. UH. And that's that's where the

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Speaker 1: world is heading right now. As we talk about where

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Speaker 1: the world is right now, and we talk about the

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Speaker 1: prospect of natural gas flows to Europe being cut off

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Speaker 1: if North Room one does not in fact resume operations

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Speaker 1: come Thursday, we have to keep in mind that also

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Speaker 1: happens against the backdrop of record temperatures in the UK

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Speaker 1: with forty degrees celsius just lagged. Climate a very real

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Speaker 1: issue here, and as we talk about investing in some

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Speaker 1: of these more traditional fossil fuel type sources for energy,

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Speaker 1: does that not risk setting us further behind in the

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Speaker 1: long term on climate issues which we know affect lower

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Speaker 1: income countries more dramatically than others. The the natural gas

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Speaker 1: is cleaner than other fossil fuels, and nuclear is cleaner,

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Speaker 1: is very clean from a carbon dioxide standpoint. I think

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Speaker 1: the world has to has to really prioritize where it's

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Speaker 1: going with regard to the climate change issues. One of

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Speaker 1: the things we're finding in our diagnostics that we're putting

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Speaker 1: out that are that are very significant country by country

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Speaker 1: is the things that they can do to protect themselves

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Speaker 1: and to be more efficient in their development practices. It's

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Speaker 1: integrating climate and development that I think is the way forward. Okay,

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Speaker 1: so investing in development, Let's talk about what else you

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Speaker 1: think is is vital here. What kind of debt relief

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Speaker 1: efforts do we need to see right now? This is

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Speaker 1: a major of major importance for the world because interest

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Speaker 1: rates are going up. The debt was already to to burdensome,

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Speaker 1: and now the countries are losing our currency, experiencing currency

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Speaker 1: depreciation which causes inflation, and they also have a loss

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Speaker 1: of international reserves. The debt reduction efforts have really been

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Speaker 1: stalled for some years. We know that there are countries

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Speaker 1: that have unsustainable debt. There's not really a process to

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Speaker 1: reduce that debt. We saw that at the G twenty

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Speaker 1: just completed last week. No forward progress. I'm hopeful that

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Speaker 1: Zambia may be able to get UHBT debt relief in

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Speaker 1: the next few days. There was just a creditors meeting yesterday,

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Speaker 1: so that gives some sign of hope that it has

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Speaker 1: to be put into practice with actual reduction of debt,

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Speaker 1: massive reduction of debt for some of the poorest developing countries.

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Speaker 1: Otherwise the poverty rate goes up and the instability that

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Speaker 1: you're seeing in these countries worsens. David, you've touched on

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Speaker 1: the most important point. The biggest killer is poverty. Do

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Speaker 1: you think the West needs a bit of a reality

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Speaker 1: check about the speed at which you can move away

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Speaker 1: from fossil fuels given the concerns that you have. I

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Speaker 1: think there has to be a prioritization of energy policies

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Speaker 1: in the in the West that that includes uh, massive

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Speaker 1: increases in production of less carbon intensive energy sources that

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Speaker 1: may lead the world to nuclear into natural gas, because

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Speaker 1: you know, natural gas has the added benefit of producing fertilizer.

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Speaker 1: It's the source of crop yields that is so important

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Speaker 1: for poverty reduction and malnutrition, and so we have to

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Speaker 1: have a direction on that. Right now, Europe is buying

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Speaker 1: up the global sources of natural gas, and uh importantly,

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Speaker 1: the world is shifting back to coal and even to

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Speaker 1: fuel oil. Every day I meet with global leaders whose

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Speaker 1: countries are either selling cold to Europe or themselves shifting

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Speaker 1: back to more carbon intensive energy sources in order to

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Speaker 1: try to keep the electricity grids running. So it's a

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Speaker 1: very practical effort by the world to this major shift

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Speaker 1: in energy and in interest rates that's underway. David wonderful

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Speaker 1: to get your thoughts at an important time photical level economy.

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Speaker 1: David mouth pass that a World Bank President Ander seats

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Speaker 1: in this July My head is spinning. Give us the

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Speaker 1: keel of your strategy right now? What is the thing

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Speaker 1: keeping you on a straight and narrow path into Q

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Speaker 1: three in Q four great, well, it's it's great to

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Speaker 1: be here with you. I think a key message is patients,

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Speaker 1: you know we're in a bear market. We are going

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Speaker 1: through the different cycles and parts of a bear market,

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Speaker 1: but this is a process that still has further to

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Speaker 1: play out. And I think the market has made good

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Speaker 1: progress on the inflation front, and we started to see

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Speaker 1: inflation break evens come down. I think the market is

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Speaker 1: clearly getting more comfortable with the long term inflation story.

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Speaker 1: I think we've done made good progress in pricing in

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Speaker 1: more from the FED, but there's still a gross slow

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Speaker 1: down ahead of us, and we still think that not

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Speaker 1: enough of that is in the price and not enough

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Speaker 1: of that is reflected in earnings expectations. So you know,

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Speaker 1: there's been good progress. Valuations have adjusted, sentiment is more negative.

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Speaker 1: Both those things are good, but I think we want

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Speaker 1: to see more signs that were closer to that trough

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Speaker 1: and growth and that we've seen more resetting in earnings expectations.

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Speaker 1: You touched on the answer to this question just there

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Speaker 1: at the end their Andrew build on it. You said,

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Speaker 1: we're in a bear market. How do you know when

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Speaker 1: we're not in a bear market, and when you get

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Speaker 1: to that point, is it often too light? Yeah, it's

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Speaker 1: it's a fair point. I think if we think about,

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Speaker 1: you know, dynamics of this bear market, there's obviously the

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Speaker 1: scale of the drawdown that qualifies. There's the nature of

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Speaker 1: the market leadership, which is very defensive. You know, there's

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Speaker 1: the fact that you know, we've seen uh, certain conditions

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Speaker 1: that often go along with bear markets, policy tightening, curve, inversion, declining,

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Speaker 1: p M. I s. All those elements are there. But

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Speaker 1: but you're right, you know, by the time the economic

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Speaker 1: data really turns, usually it's it's too late. So you know,

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Speaker 1: in terms of things that we're looking for, I think,

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Speaker 1: you know p M is being below fifty is usually

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Speaker 1: a better indication that the market is closer to that

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Speaker 1: growth trough. I think we'd like to see more signs

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Speaker 1: that analysts are cutting numbers more aggressively, which is usually

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Speaker 1: a sign that again sentiment on the analyst side is

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Speaker 1: getting a lot more cautious. Signs that individual investors are

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Speaker 1: getting more negative on the market again, I think would

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Speaker 1: be a good sign that you're closer to that trough,

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Speaker 1: and you know, we're making progress on that front. But

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Speaker 1: I think not quite there yet, Andrew looking for that

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Speaker 1: relative a performance on the way down and hopefully some

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Speaker 1: absolute positive returns to you. Guys have focused on defensive now, Andrew.

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Speaker 1: Some people might hear defensives and they start to gravitate

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Speaker 1: towards some of the tech names. Andrew want you to

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Speaker 1: really define what you mean my defensive and why you

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Speaker 1: want to stay there still, So we've been thinking about

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Speaker 1: defensives in the traditional utilities, staples, healthcare baskets and those

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Speaker 1: those have become more expensive sectors. They've rerated um or

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Speaker 1: relatively re rate in a pretty significant way, which again

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Speaker 1: is never great. I mean, I think it's a sign

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Speaker 1: of how difficult this market is that the places to

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Speaker 1: hide or the traditional places to hide have become more expensive,

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Speaker 1: which makes it more difficult to hide in them. But

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Speaker 1: you know, we're still overweight utilities and healthcare. We still

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Speaker 1: think the market will gravitate and pay an increasing premium

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Speaker 1: for those sectors is as growth risks continue to abound.

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Speaker 1: We think also that the market is is under positioned

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Speaker 1: in those areas still. And you know, those are areas

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Speaker 1: where we were least worried about growth slowing down utilities

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Speaker 1: because we think the demand is relatively non cyclical healthcare

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Speaker 1: because I think that's a sector that could actually benefit

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Speaker 1: as demand shifts from goods to services and the economy

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Speaker 1: healthcare is very exposed to a lot of services type

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Speaker 1: of spending as things renormalized. So you know, that's currently

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Speaker 1: still where where our US equity strategy team is overweight,

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Speaker 1: where we think investors can still find out performance, but

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Speaker 1: it clearly has become uh more expensive as the as

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Speaker 1: the market is declined. Okay, Andrew, So that's what you're

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Speaker 1: buying in equities. What else people have been buying over

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Speaker 1: the course of the year so far as commodities and

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Speaker 1: the dollar? How close are we to the peak of

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Speaker 1: those traits? So we think the dollar can still rise further.

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Speaker 1: We think the d X Y will move up to

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Speaker 1: around one twelve by by the third quarters. So that's

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Speaker 1: a relatively sharp near term move that that our foreign

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Speaker 1: exchange team is expecting. And that's on the back of

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Speaker 1: the fact that we think the FED is much more

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Speaker 1: likely to meet or beat implied rate expectations than the

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Speaker 1: e c B, where we think weak growth will ultimately

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Speaker 1: raise the risk that the ECB won't be able to

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Speaker 1: hike as much as the market expects that the Bank

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Speaker 1: of England won't be able to hike as much as

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Speaker 1: the market expects. And on commodities, I think it remains

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Speaker 1: a story of energy versus metals. On the energy side,

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Speaker 1: we still think further gains are are possible, especially against

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Speaker 1: the forward curve which is implying large price declines. We

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Speaker 1: are forecasting higher energy prices into the third quarter. I

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Speaker 1: think the metals case remains much more challenging, where a

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Speaker 1: lot more of that is driven by uncertain Chinese demand.

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Speaker 1: But for oil prices, we think they're moving higher over

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Speaker 1: the next three months. And did you just cite d

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Speaker 1: x y one swave? Yes, wow, Andre, that is a

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Speaker 1: monster move. Andry sheets there of mortgage Stanley. As you know,

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Speaker 1: we protect the copyright of all of our guests. It's

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Speaker 1: something sacred here at Bloomberg Surveillance. It is their meal ticket.

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Speaker 1: That's how I'm read to send pays for air conditioning.

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Speaker 1: She's chief Oil Analysts and Energy Aspects and her research

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Speaker 1: is absolutely exquisite. She walks through in her latest note

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Speaker 1: why she is structurally an oil bull and reading my

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Speaker 1: head spinning up up up we go, down down, down

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Speaker 1: we go. Why do you suggest at some point oil

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Speaker 1: gets a bid and moves higher. Well, that's kind of

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Speaker 1: why I say there's a difference between tactical instructor Right

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Speaker 1: like right now liquid these thing people are away on

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Speaker 1: holiday machines. There's more machines and humans, and we can

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Speaker 1: continue to kind of trade in this very technical band

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Speaker 1: um going up five dollars in a day, going down

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Speaker 1: ten dollars in another day. No, no problems with structurally,

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Speaker 1: this is a market defined by under investment. We just

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Speaker 1: haven't been investing enough for eight years now, right This

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Speaker 1: isn't because of Russia, This isn't because of COVID. It

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Speaker 1: has been going on for a long time, so that

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Speaker 1: doesn't change overnight. And right now, even above hundred dollars,

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Speaker 1: there isn't really an incentive to increase investment, and I

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Speaker 1: think that's why we remain structurally bullish this space. What

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Speaker 1: do you think that means for gasoline prices with the

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Speaker 1: average price below four fifty in the United States, now

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Speaker 1: rates are thirty five day slide, what do you make

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Speaker 1: of that? I mean, look right now, again, these have

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Speaker 1: been driven by recessionary fears, and I still think in

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Speaker 1: the short term prices can correct lower. Once again, that

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Speaker 1: doesn't change the fact that overall refining capacity is extremely tight. Remember,

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Speaker 1: gasoline does have seasonality in its favor. We are going

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Speaker 1: to come out of the peak summer driving season and

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Speaker 1: we do do foresee a much weaker winter gasoline pricing,

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Speaker 1: but then next summer we're going to have again very

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Speaker 1: similar high prices. Right whereas diesel is the one to

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Speaker 1: watch out for. That's really been the tightness in the market,

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Speaker 1: and again with the European embargo kicking in early next

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Speaker 1: year for products, Russia exports a lot of diesel, about

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Speaker 1: six barrels per day to Europe. That's where the real

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Speaker 1: tightness is going to be much more than gasoline. Well, Emrina,

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Speaker 1: we know that the prices of the plump have dogged

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Speaker 1: President Biden for some time. He is trying to take

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Speaker 1: whatever measure he can to get those down in a

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Speaker 1: sustainable way. Hence the trip to the Middle East. In

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Speaker 1: the visit at Saudi Arabia, the Biden administration seemed optimistic

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Speaker 1: that we were going to see Sardi the U a

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Speaker 1: E start to pump more tap into that access capacity.

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Speaker 1: What do you actually expect OPEC plus to do come

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Speaker 1: August three, we are expecting them to increase production gradually. Um.

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Speaker 1: I mean, look, in theory, the deal ends in December,

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Speaker 1: so they shouldn't be changing anything after they've unwound all

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Speaker 1: the cuts, which was for August. Right now, that doesn't

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Speaker 1: mean that all pepplasts are just going to sit on

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Speaker 1: their hands, because not increasing production for four months would

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Speaker 1: massively overtightened this already tight market. So the market is

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Speaker 1: we are we're all expecting them to continue adding in

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Speaker 1: small increments, just like they have been over the last

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Speaker 1: four months of the year as well. But I reckon

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Speaker 1: the Biden administration will take that as a win. They'll

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Speaker 1: probably spend that as a win and say, look, it's

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Speaker 1: because of the trip to the Mid least, whereas the

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Speaker 1: reality is that that was always going to happen. And

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Speaker 1: I want you to describe just briefly, what would happen

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Speaker 1: in Europe if north Stream one doesn't come back online

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Speaker 1: this Thursday. What does the situation look like? Where does

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Speaker 1: Germany get his energy from? Just walk us all through it.

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Speaker 1: So look on our balances, we're actually not been expecting

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Speaker 1: them to come back next week. I know that's obviously

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Speaker 1: the focus in the market. Um, we have been building

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Speaker 1: a scenario where it takes a lot longer to come back.

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Speaker 1: We do think if Russia is actually playing logically and economically,

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Speaker 1: they will have to bring not three one back by

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Speaker 1: the end of October. Otherwise they will have to shut

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Speaker 1: down fields domestically. That might lead to more long term

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Speaker 1: damage for their gas field So that's yet to be serious.

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Speaker 1: Of course, if they choose to go down a political route,

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Speaker 1: then that's very different, but they still have until October

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Speaker 1: to make that mind up. EMA. This is critical because

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Speaker 1: the non sophisticates like me sort of go, well, if

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Speaker 1: Russia doesn't sell the Europe, they can sell to other

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Speaker 1: people in the China, etcetera, etcetera. If they have to

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Speaker 1: play with north Stream too is John is an expert

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Speaker 1: on can they move the hydro carbons over to other

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Speaker 1: countries or not. See you could do that for oil,

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Speaker 1: you can't do it for gas. Gas and Russia particularly

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Speaker 1: very very distinct. The gas that comes to Europe simply

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Speaker 1: cannot be redirected to the East. It will take years

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Speaker 1: to build new pipelines to redirect the flows. And that's

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Speaker 1: where this becomes a real, real struggle for both sides right,

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Speaker 1: And to John's point that Europe, I mean, you've already

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Speaker 1: seen Germany come out putting measures to cut down consumption,

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Speaker 1: nationalize some of the utility companies. This is just the start.

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Speaker 1: Things are going to get materially worse for Europe when

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Speaker 1: it comes to its power situation. I'm racing. You've got

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Speaker 1: to the heart of it in your assumption. Do you

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Speaker 1: assume the Vladimir Putin is still a rational economic actor

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Speaker 1: for now? Yes, I mean that's look, let's let's put

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Speaker 1: it this way. Um, we are saying that should North

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Speaker 1: Stream one not come back by October, then we will

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Speaker 1: very clearly know that he is not. But our base

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Speaker 1: case still is that it does come back, but with

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Speaker 1: a very very high probability and risk that you know,

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Speaker 1: it could get delayed further and probably just not come back,

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Speaker 1: because again that's where the swing factor really comes in,

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Speaker 1: that you know, what's what's the signal that he's trying

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Speaker 1: to send. But even if it is end August, sorry,

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Speaker 1: end October, for Europe, I mean, given the heat wave

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Speaker 1: that's going on right now, the call on gas is

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Speaker 1: very very high, and then we just will not be

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Speaker 1: building into the winter. I think that is. I mean,

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Speaker 1: I cannot stress how important that is and how much

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Speaker 1: upside there is two gas prices. One of the things

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Speaker 1: we're seeing right now with gas so high, we're getting

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Speaker 1: oil back into the power mix as a result of this.

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Speaker 1: What a tough situation. I'm ready to send thank you

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Speaker 1: of energy aspects there. Russ Coastreet joins us now to

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Speaker 1: talk about equities and bonds, portfolio manager for the black

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Speaker 1: Rock Global Adocation Fund. Russ, you have been conservative through

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Speaker 1: a bunch of this year. Do you have not been

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Speaker 1: constructive on the equity market? Has any of that changed

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Speaker 1: in the last month, John, You know, I think the

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Speaker 1: short answer is not really. Uh. We're still in environment

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Speaker 1: where you have the same headwinds we've had for most

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Speaker 1: of the year. You've got tightening liquidity, which has been

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Speaker 1: a huge head wind, particularly for the growth sector. You've

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Speaker 1: got a slowing economy. Uh, these have not gone away.

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Speaker 1: What I would say is that valuations already a much

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Speaker 1: more reasonable place than they were twelve months ago. Globally,

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Speaker 1: you've seen multiples of compressed around thirty. They're down about

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Speaker 1: in Europe, so I think we're close to go bottom.

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Speaker 1: I think the markets in the process of making the bottom.

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Speaker 1: But all of the conditions that led to the volatility, unfortunately,

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Speaker 1: they have not gone away yet. Russ Julian Emmanuel Over

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Speaker 1: whatever course I s, I gives me the first look

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Speaker 1: with eleven percent of SPX earnings in, he's got a nice,

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Speaker 1: nice inflation revenue lift. But critically he's modeling out earnings

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Speaker 1: at four point eight percent growth. That's not bad. You know,

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Speaker 1: I know things are down, but it is the pendulum

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Speaker 1: just overestimating the gloom. Well, it's a it's a great question.

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Speaker 1: I think you hit on what really is the big

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Speaker 1: issue going forward? You know, again I've spoke about evaluations,

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Speaker 1: and that's been all of the losses here today, all

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Speaker 1: of the loss in the SMP, it's all been about

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Speaker 1: that been multiple compression. But your point, what really is

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Speaker 1: the issue going forward now is how much is the

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Speaker 1: economy going to slow? How much is nominal GDP GONN

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Speaker 1: slow and what does that mean for earnings? Earnings so

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Speaker 1: far through the second quarter don't look bad. The real

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Speaker 1: question is that we continue to see the is a

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Speaker 1: result of FED tightening the economy slows in Q three

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Speaker 1: and Q four or those earnings estimates in the back

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Speaker 1: half of the year realistic, and this is why I

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Speaker 1: think the market is struggling to break out of this range. Okay,

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Speaker 1: so if equities are struggling to break out of a range,

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Speaker 1: if you are not yet seeing the signal that we've

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Speaker 1: actually reached a bottom. How much do you like treasuries?

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Speaker 1: Hear us, Well, the short answers really don't. We're still underweight,

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Speaker 1: but we we disliked in less than we did a

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Speaker 1: year ago. You you've already chopped a lot of wood.

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Speaker 1: We've seen that real rate on the long and the

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Speaker 1: curve have actually gone back to where they were in

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Speaker 1: the post GFC environment. I still think you might have

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Speaker 1: more pressure as the FED continues the tighten, but you're

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Speaker 1: starting to get better really yields, and I say, really, well,

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Speaker 1: we're starting to The opportunity is in the credit markets,

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Speaker 1: in the US investment grade, in U S high yield,

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Speaker 1: where the spreads of wide and considerably and if we're

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Speaker 1: going to be in an environment we're equity is gonna

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Speaker 1: be chopping over the next several months. One of the

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Speaker 1: things you can do in your portfolio is you can

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Speaker 1: add carrot, you can add income, and right now that's

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Speaker 1: an ass a class, we're starting to see better value.

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Speaker 1: Are you making an assumption the RUSS about how sticky

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Speaker 1: inflation might be through the next several years, not just

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Speaker 1: this year. Well, we're certainly assuming it's going to be,

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Speaker 1: you know, difficult for inflation to get back to the

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Speaker 1: two post GFC norm anytime soon, which means that at

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Speaker 1: some point up while the Fed may have to slow down,

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Speaker 1: we're not envisioned in the world where you're gonna go

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Speaker 1: back to this very easy environment of low interest rates UEE,

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Speaker 1: which obviously was this huge tailwind for financial assets to

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Speaker 1: the better part of the decade. Russels to catch out

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Speaker 1: RUSS constrict that of black Rock West closely, of course,

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Speaker 1: with refredris Well. This is the Bloomberg Surveillance Podcast. Thanks

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Speaker 1: for listening. Join us live weekdays from seven to ten

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Speaker 1: am Eastern on Bloomberg Radio and on Bloomberg Television each

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Speaker 1: day from six to nine am for insight from the

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Speaker 1: best in economics, finance, investment, and international relations. And subscribe

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Speaker 1: to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course on the terminal. I'm Tom Keene and

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Speaker 1: this is Bloomberg