WEBVTT - Iran War Seen Causing Prolonged Pain on Energy Prices 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg 0:00:13.840 --> 0:00:17.920 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:21.240 on Apple car Play or Android Auto with the Bloomberg 0:00:21.320 --> 0:00:24.880 Business App. Listen on demand wherever you get your podcasts, 0:00:25.280 --> 0:00:27.040 or watch us live on YouTube. 0:00:27.440 --> 0:00:31.520 Mike McLoone, Senior commodity strategist, Bloomberg Intelligence. Mike, this is 0:00:31.680 --> 0:00:35.800 such an unknown scenario here as to how the warn 0:00:35.840 --> 0:00:37.400 Iran will play out in. 0:00:37.400 --> 0:00:38.320 The coming days and weeks. 0:00:38.360 --> 0:00:40.760 We could wake up tomorrow and President Trump, for whatever reason, 0:00:40.800 --> 0:00:44.800 decides to claim victory and bring everybody home here. If 0:00:44.840 --> 0:00:47.960 that were to happen, how do you think energy prices 0:00:48.080 --> 0:00:50.879 would ebb here and pull back when they get back 0:00:50.880 --> 0:00:51.840 to pre war levels? 0:00:51.880 --> 0:00:53.800 Would it take? How quickly would it happen? 0:00:54.160 --> 0:00:56.320 Or are we at maybe a little bit higher levels 0:00:56.360 --> 0:00:59.320 here just given the damage that's been done and maybe 0:00:59.320 --> 0:01:00.720 the tension level that still remain. 0:01:02.000 --> 0:01:04.640 I think the crude oil peak so far this year 0:01:04.720 --> 0:01:07.120 near one hundred and twenty dollars a barrel in WTI 0:01:07.319 --> 0:01:10.199 Paul will go down in history similar to one forty 0:01:10.240 --> 0:01:12.720 seven in two thousand and eight and one thirty in 0:01:12.720 --> 0:01:15.959 twenty twenty two. Right now on the week WTI crude 0:01:15.959 --> 0:01:18.280 oil is down almost four percent, and part of that 0:01:18.400 --> 0:01:20.720 is it's switching contracts. It's gone from the April to 0:01:20.760 --> 0:01:22.920 the May. You go out to December, it's down the 0:01:23.000 --> 0:01:24.160 seventy eight dollars of barrow. 0:01:24.200 --> 0:01:26.360 Why is December is important. It's going to be front 0:01:26.400 --> 0:01:29.360 month right before the midterms. So the scenario you mentioned, 0:01:29.400 --> 0:01:30.679 I think is very unlikely. 0:01:30.920 --> 0:01:33.280 Right now, we're at the stage of trying to produce 0:01:33.560 --> 0:01:37.360 capitulation from Iran where they have no more ability to 0:01:37.440 --> 0:01:40.199 create offensive issues in the golf. 0:01:40.360 --> 0:01:41.039 It's happening. 0:01:41.360 --> 0:01:43.720 The key thing I think people are under estimating is 0:01:43.959 --> 0:01:47.560 there's some significant forces there, not only US President Trump. 0:01:47.640 --> 0:01:51.600 US military is really military, but also is really military intelligence. 0:01:51.600 --> 0:01:54.320 When people talk about boots on the ground, they're there. 0:01:54.560 --> 0:01:56.920 I just things I've read. So I'm pretty sure the 0:01:57.520 --> 0:02:00.360 crude oil market's already saying this weekend, if we wake 0:02:00.440 --> 0:02:03.760 up Monday morning, there's so any major incidents of you know, 0:02:03.840 --> 0:02:07.280 we see burning tankers, crudell is going to have a 0:02:07.440 --> 0:02:08.880 problem and continue to go lower. 0:02:09.200 --> 0:02:11.679 Hey, Mike, the US, other countries, they're taking steps to 0:02:11.720 --> 0:02:14.640 tame prices. Right we're talking about the release of strategic reserves. 0:02:15.480 --> 0:02:18.960 From your history following this and tracking this market is 0:02:19.440 --> 0:02:21.440 would this I mean, is this just a band aid? 0:02:21.560 --> 0:02:23.880 To put it that way, I think that's a good 0:02:23.880 --> 0:02:24.560 way to describe it. 0:02:24.840 --> 0:02:27.200 The first thing I thought of when I heard that 0:02:27.320 --> 0:02:30.760 is it's a sign that yes, oops, we made a 0:02:30.800 --> 0:02:32.200 mistake the hormones. 0:02:32.280 --> 0:02:33.560 The strait is closed now. 0:02:33.600 --> 0:02:36.120 That is enduring for now, but it just means they're 0:02:36.160 --> 0:02:38.680 going to pound harder and harder and harder on this 0:02:38.800 --> 0:02:41.880 offensive capability of Iran. I think that's what's happening now. 0:02:42.040 --> 0:02:45.240 They're bringing in more and more and more offensive capabilities 0:02:45.280 --> 0:02:46.200 that just stop it enough. 0:02:46.240 --> 0:02:48.000 They can't. That's a major failure. 0:02:48.240 --> 0:02:50.640 But right now we're seeing the markets starting saying, yeah, 0:02:50.880 --> 0:02:53.480 a lot of these attacks are slowing down. The worst 0:02:53.520 --> 0:02:56.280 is probably over, and a key indicator that is collapsing gold. 0:02:56.320 --> 0:02:58.440 I think it's looking forward to a safer world. 0:02:59.320 --> 0:03:02.359 What are the future markets telling us Mike today about 0:03:02.400 --> 0:03:04.000 the oil market. 0:03:04.760 --> 0:03:07.640 There's a major burden to go higher. 0:03:07.720 --> 0:03:10.520 Like I mentioned, if you go every future contract is 0:03:10.560 --> 0:03:12.359 in backgradation, which means is lower. 0:03:12.480 --> 0:03:13.880 So I'm focusing on the US. 0:03:14.080 --> 0:03:16.320 Why the US is the largest energy producer and a 0:03:16.360 --> 0:03:19.320 net exporterer it's the one that matters. That's what's shifted 0:03:19.320 --> 0:03:21.880 from the last ten twenty years, and US is a 0:03:21.880 --> 0:03:25.240 complete upper hand. But we're also seeing the price of 0:03:25.280 --> 0:03:27.640 gasoline went to four dollars a gallon. Remember what happened 0:03:27.639 --> 0:03:30.320 in two thousand and eight. When that happened, it accelerates recession. 0:03:30.400 --> 0:03:32.800 So we're seeing right now as a global energy crisis 0:03:32.880 --> 0:03:35.920 ticking over. The straight of har Moose might be somewhat 0:03:35.960 --> 0:03:38.520 safe within a few days. It's already getting safeer and 0:03:38.560 --> 0:03:41.400 Crudell's anticipating. And what I point out is now we're 0:03:41.400 --> 0:03:44.080 seeing collapsing in dustrial metals, which I think that's a 0:03:44.160 --> 0:03:47.760 sign that this is a global recessionary trajectory on the 0:03:47.760 --> 0:03:51.480 back of the spike and the shock of the straight 0:03:51.480 --> 0:03:52.160 being closed. 0:03:52.440 --> 0:03:54.400 Hey, Mike, we have about thirty seconds left. So you 0:03:54.440 --> 0:03:56.360 mentioned golds. I want you to kind of expand on 0:03:56.440 --> 0:03:57.760 that a little bit. I mean, it's seen of this 0:03:57.880 --> 0:04:00.720 haven heading for the biggest weekly loss in Sea. I mean, 0:04:01.040 --> 0:04:03.320 what does gold see kind of moving forward? 0:04:04.360 --> 0:04:07.839 Gold predicted this, It went up too much last year. 0:04:07.960 --> 0:04:09.760 It warned us something might be happened. 0:04:09.800 --> 0:04:12.720 So by the rumor sell effect, the significance is gold 0:04:12.920 --> 0:04:15.080 was a store value, but right now, at almost two 0:04:15.120 --> 0:04:17.640 point four times the volatility of the S and B 0:04:17.720 --> 0:04:20.400 five hundred, it's now a speculative risk asset in the 0:04:20.480 --> 0:04:21.680 late days of a bear mark. 0:04:21.680 --> 0:04:23.040 And I think it's more like a go down to 0:04:23.080 --> 0:04:24.320 four thousand dollars and announce. 0:04:25.040 --> 0:04:27.720 All right, Micha maclohan, thank you so much. We appreciate that. 0:04:27.839 --> 0:04:32.080 Mike mcloon, he is the senior commodity strategist for Bloomberg Intelligence. 0:04:32.120 --> 0:04:34.600 He's spaced down there in Miami Beach, Florida, and if 0:04:34.640 --> 0:04:37.560 you care about that part of the world, Sonny and eighty, 0:04:38.040 --> 0:04:40.720 as far as the I can see, Mike McLoone the 0:04:40.880 --> 0:04:43.400 smartest guy in the room, no doubt. 0:04:45.120 --> 0:04:48.240 Stay with us. More from Bloomberg Surveillance coming up after this. 0:04:54.480 --> 0:04:58.080 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:04:58.120 --> 0:05:02.160 weekday afternoons from seven to ten. Listen on Apple Karplay 0:05:02.160 --> 0:05:05.440 and Android Otto with the Bloomberg Business app, or watch 0:05:05.520 --> 0:05:06.720 us live on YouTube. 0:05:07.080 --> 0:05:09.000 Welcome Cole Smeat into our studio. 0:05:09.560 --> 0:05:12.280 Cole Smith is the CEO and portfolio manager Smeat Capital 0:05:12.279 --> 0:05:14.840 Manager based out there in Phoenix. Your summer has already 0:05:14.839 --> 0:05:18.760 started in Phoenix, Right, I've seen some crazy temperatures it has. 0:05:18.800 --> 0:05:20.320 In fact, I need to invite both of you to 0:05:20.360 --> 0:05:22.359 come out breakfast with us like Tom Keane did a 0:05:22.360 --> 0:05:24.440 few weeks ago here yep, before he went off to 0:05:24.520 --> 0:05:27.159 his you know, San Francisco Giants spring training game LA 0:05:27.240 --> 0:05:27.880 that afternoon. 0:05:28.120 --> 0:05:31.000 So that's an open welcome, by the way, one hundred percent. 0:05:31.360 --> 0:05:33.279 We are we already We're gonna think we're gonna hit 0:05:33.279 --> 0:05:36.039 a hundred degree temperature this next week, earliest we've seen 0:05:36.080 --> 0:05:36.599 for a while. 0:05:37.480 --> 0:05:40.040 That being said, as I walk around to Cole New York, Yep, 0:05:40.279 --> 0:05:42.440 I'm not exactly sad about that. So it's back for 0:05:42.480 --> 0:05:44.360 ski season, but it is what it is. 0:05:44.440 --> 0:05:47.159 It is, and it's a dry heat. Col what's the 0:05:47.200 --> 0:05:49.520 conversation you're having with your clients these days? The last 0:05:49.520 --> 0:05:52.040 three weeks have kind of thrown that Black Swan event 0:05:52.120 --> 0:05:53.599 out there, and I'm sure it's got a lot of 0:05:53.880 --> 0:05:56.880 volatility into the marketplaces. Probably your phones might be bringing 0:05:56.880 --> 0:05:59.000 a little bit more than usual. What's the message you're 0:05:59.000 --> 0:05:59.800 bringing to your clients? 0:06:00.120 --> 0:06:01.400 Yeah, so here's what I would say. 0:06:01.880 --> 0:06:03.640 You know, you were just mentioning the timeline of what's 0:06:03.640 --> 0:06:05.760 going on in this conflict. Let's just go back to 0:06:05.839 --> 0:06:09.120 nineteen seventy three Yam Kapor War lasted thirty days, and 0:06:09.200 --> 0:06:11.760 yet the effects of it were seen throughout the rest 0:06:11.800 --> 0:06:12.359 of the decade. 0:06:13.160 --> 0:06:15.520 So I say that because I. 0:06:15.440 --> 0:06:17.320 Think that the idea was this is going to be 0:06:17.360 --> 0:06:19.640 like venny aka Venezuela. 0:06:19.720 --> 0:06:22.080 We're going to come in. It's gonna be strategic, super surgical. 0:06:22.440 --> 0:06:26.000 This has been everything but that, okay, And therefore what 0:06:26.000 --> 0:06:28.600 we're in is a longer term conflict. And what are 0:06:28.600 --> 0:06:30.920 we seeing. We are seeing longer term problems arise. 0:06:31.000 --> 0:06:32.840 Okay, you're Calleague in Dubai. 0:06:32.880 --> 0:06:34.360 If they go out to the spot market and oil 0:06:34.440 --> 0:06:37.840 right now, they're not going to see that price on Brent. 0:06:38.160 --> 0:06:40.360 They're looking at one seventy the highest price ever paid 0:06:40.360 --> 0:06:41.280 in the history of the world. Yep. 0:06:41.400 --> 0:06:41.719 Okay. 0:06:42.120 --> 0:06:44.680 And so I point that out because just think of what. 0:06:44.760 --> 0:06:47.000 Let's go back one year ago. We're sitting there staring 0:06:47.040 --> 0:06:51.159 at the tariff tantrum. We're watching economic cyclicality get bludgeoned. 0:06:51.720 --> 0:06:54.719 OPEC plus is increasing supply. It's going to be a 0:06:54.800 --> 0:06:56.719 nightmare for the oil business because we might have a 0:06:56.760 --> 0:07:00.440 recession YadA, YadA, YadA. And here we are less than 0:07:00.440 --> 0:07:02.800 twelve months later, and that seems to be a place 0:07:02.800 --> 0:07:04.839 to be. And guess where investors are not. They do 0:07:04.920 --> 0:07:07.719 not own the energy assets to quote the money python. 0:07:07.920 --> 0:07:10.320 The energy business started off as tis merely a flesh 0:07:10.360 --> 0:07:13.440 wound at three percent, and now investors are having to 0:07:13.440 --> 0:07:15.440 ask the question, what should I be doing? What am 0:07:15.480 --> 0:07:18.360 I doing differently? But here's what's weird. Markets are very 0:07:18.400 --> 0:07:18.840 slow to. 0:07:18.800 --> 0:07:21.760 Adapt to this. I mean, the first week the oil 0:07:21.760 --> 0:07:22.920 stocks didn't even go up. 0:07:23.440 --> 0:07:27.040 Okay, you wake up two. Week two there's a marginal bid. 0:07:27.160 --> 0:07:30.360 Week three, there's more of a bid. This looks like 0:07:30.400 --> 0:07:33.200 it's going to just continue on. But the former trade, 0:07:33.240 --> 0:07:37.640 the former great glorious mania in America, the AI Campex 0:07:38.000 --> 0:07:40.240 hyper scaling game that year is over. 0:07:40.920 --> 0:07:44.080 Well, all that said, I mean, where are their opportunities? 0:07:44.480 --> 0:07:45.320 Where's their value? 0:07:45.520 --> 0:07:48.760 Yeah, you know, if you want to beat Bobby Fisher, 0:07:49.200 --> 0:07:51.880 you got to play him in any game. But chess, Okay, 0:07:52.160 --> 0:07:55.360 chess in the American stock market is big cap tech. 0:07:55.880 --> 0:07:56.920 You can't play that game. 0:07:57.040 --> 0:07:59.760 Okay. Go look at all the quality. 0:07:59.400 --> 0:08:02.040 Growth manager that hid out in the SaaS businesses the 0:08:02.080 --> 0:08:03.840 last couple of years, thinking that that's the way they'll 0:08:03.840 --> 0:08:05.480 beat the game of chess and they found out they 0:08:05.520 --> 0:08:08.360 are actually playing chess. Been pretty nightmare in the last 0:08:08.400 --> 0:08:11.080 six months. So I say that because ultimately, you know, 0:08:11.120 --> 0:08:13.960 we have found to be more attractive in economic cyclical businesses. 0:08:14.000 --> 0:08:18.400 So like think of housing mall rates. We're in a 0:08:18.440 --> 0:08:20.560 world today. We're in nineteen seventy three, we did not 0:08:20.680 --> 0:08:23.800 have energy security. We are the largest oil producing nation 0:08:23.840 --> 0:08:25.920 in the world. We have this neighbor to the north 0:08:26.120 --> 0:08:27.880 that we have a lot of security with, who's a 0:08:27.960 --> 0:08:31.320 large oil producing nation as well. We look at the tars, 0:08:31.600 --> 0:08:34.360 the oil stands in Canada. Our largest holding across our 0:08:34.360 --> 0:08:37.559 book is Sonovas. Okay, Sonovas is a thirty plus year asset. 0:08:38.320 --> 0:08:40.400 You know, they bought out Meg last year. It's a 0:08:40.440 --> 0:08:42.520 great business to own. We think it's very attractive price. 0:08:42.559 --> 0:08:44.320 But what's going on right now is if you look 0:08:44.360 --> 0:08:46.800 at the returns on invested capital accruing per day at 0:08:46.840 --> 0:08:50.400 these prices, these oil companies are producing higher returns on 0:08:50.440 --> 0:08:53.840 capital than SaaS businesses, then software businesses, then all the 0:08:53.880 --> 0:08:57.240 asset light players in the world. So what's perverse is 0:08:57.320 --> 0:08:59.599 why are some of the most capital intensive businesses in 0:08:59.600 --> 0:09:03.080 the world producing the highest returns on capital, and yet 0:09:03.640 --> 0:09:06.319 investors are still treating the asset light businesses like they're 0:09:06.360 --> 0:09:09.480 producing great returns, even though, like I just said, we 0:09:09.600 --> 0:09:12.080 know that in this cap X game, the cash returns 0:09:12.080 --> 0:09:14.959 are declining rapidly in these hyperscalers. 0:09:15.360 --> 0:09:17.360 Aside from energy, which you guys have a couple of 0:09:17.440 --> 0:09:21.160 names including APA in this so novas you mentioned, yep, 0:09:22.080 --> 0:09:25.160 we're else what other sector may be screens wall for you. 0:09:25.080 --> 0:09:29.040 Guys these days, Yeah, the banking world looks attractive because 0:09:29.080 --> 0:09:33.560 people are overplaying fears. Okay, I don't doubt for one 0:09:33.600 --> 0:09:36.280 second that institutions and a bunch of ultra high net 0:09:36.320 --> 0:09:39.400 worth people bought some assets they shouldn't have in places 0:09:39.440 --> 0:09:42.559 like private credit and other alternatives. That is a totally 0:09:42.600 --> 0:09:46.199 plausible theory. The idea that that is the average American 0:09:46.400 --> 0:09:49.800 and the average American household if you go look, if 0:09:49.800 --> 0:09:52.360 you go look at the Federal reserves reports on household 0:09:52.440 --> 0:09:55.160 net worth equity is a percentage of household assets. Is 0:09:55.200 --> 0:09:58.440 the highest I ever been right now, fifty four percent. Okay. Now, 0:09:58.480 --> 0:10:01.679 what's more normal is real estate is bigger in that 0:10:01.720 --> 0:10:04.360 because your home is typically your largest asset, and that's 0:10:04.440 --> 0:10:07.120 very typical for most Americans to retire. We're at a 0:10:07.120 --> 0:10:11.079 point where stocks have become bigger than real estate, and ultimately, 0:10:11.120 --> 0:10:13.160 what it means is we're probably in an era where 0:10:13.800 --> 0:10:18.040 your home out punches your stocks and the problems of 0:10:18.080 --> 0:10:21.120 these products that we're sold to institutions and high network folks, 0:10:21.320 --> 0:10:23.439 you know, the private credit type stuff that is going 0:10:23.440 --> 0:10:27.440 to be contained in wealthy and institutional arenas. But the 0:10:27.600 --> 0:10:30.040 average American doesn't take risk in that. And so the 0:10:30.080 --> 0:10:32.599 idea that there's some massive spill over the economy and 0:10:32.640 --> 0:10:34.280 therefore banking is can be really terrible. 0:10:34.800 --> 0:10:36.920 We just don't see proof to that theory. 0:10:37.120 --> 0:10:39.840 How are you talking to your clients and this kind 0:10:39.880 --> 0:10:41.400 of climate that we're living, mean, well, what kind of 0:10:41.440 --> 0:10:42.719 questions do they have for you? 0:10:44.240 --> 0:10:48.040 Disbelief that the folks that own energy might win the game? 0:10:48.480 --> 0:10:51.280 I mean disbelief where it's like, gosh, you know. The 0:10:51.320 --> 0:10:53.280 main thing we've been talking about with investors is like, listen, 0:10:53.360 --> 0:10:56.240 this is a very concentrated, narrow world, and if the 0:10:56.280 --> 0:10:59.560 future is unknown, which it always is unknown, are we 0:10:59.600 --> 0:11:00.720 all playing the wrong game? 0:11:00.880 --> 0:11:01.240 Okay? 0:11:01.720 --> 0:11:04.200 And ultimately, what's happened the last twelve months is people 0:11:04.240 --> 0:11:06.160 went from being like I know, I should probably get 0:11:06.200 --> 0:11:07.880 away from some of this stuff and diversify a way. 0:11:08.040 --> 0:11:09.880 And if you look at our portfolio, we're a diversifier. 0:11:09.920 --> 0:11:12.119 Whether you're talking us or not. Us and our portfolio, 0:11:12.160 --> 0:11:15.160 we just we tend on things that people don't. And 0:11:15.240 --> 0:11:17.720 now people are actually asking that question for the first time, 0:11:17.920 --> 0:11:19.840 why should I look at this? Because if this is 0:11:19.880 --> 0:11:22.720 a longer term problem, maybe I haven't been doing what 0:11:22.760 --> 0:11:25.800 I should. But again there we're nowhere near money moving 0:11:25.840 --> 0:11:26.480 based on that. 0:11:26.920 --> 0:11:29.000 Col, thanks so much for coming in here. We appreciate it. 0:11:29.040 --> 0:11:31.400 Col Sweeden, he's the CEO of portfolio manager of SMED 0:11:31.679 --> 0:11:32.839 Capital Management. 0:11:34.800 --> 0:11:35.400 Stay with us. 0:11:35.440 --> 0:11:37.880 More from Bloomberg Surveillance coming up after this. 0:11:44.160 --> 0:11:47.760 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:11:47.800 --> 0:11:50.960 weekday afternoons from seven to ten am Eastern Listen on 0:11:51.040 --> 0:11:54.720 Applecarplay and Android Otto with the Bloomberg Business app, or 0:11:54.840 --> 0:11:56.319 watch us live on YouTube. 0:11:56.840 --> 0:12:00.240 Karon Mannet vice president and Fixed Income Investment Directors. IT 0:12:00.600 --> 0:12:03.440 federated her as she is a proud Nitly Lion from 0:12:03.480 --> 0:12:07.000 Penn State University. That's the highlight for me, I think, Karen, 0:12:07.280 --> 0:12:10.800 let's step back here. How are you kind of rethinking 0:12:12.360 --> 0:12:14.680 your fixed income strategy here and what does it become 0:12:14.679 --> 0:12:18.559 a more turbulent world over the last three to four weeks. 0:12:19.600 --> 0:12:23.440 Well, good morning and thank you. Definitely more volatility in 0:12:23.679 --> 0:12:27.559 fixed income markets and to you know, reset that range 0:12:27.640 --> 0:12:30.560 or put it into context. We entered the conflict at 0:12:30.600 --> 0:12:34.280 the end of February with yields really at the lower 0:12:34.400 --> 0:12:36.720 end of that range. As you said, we had pushed 0:12:36.720 --> 0:12:39.920 down below four percent on that guiding star for US 0:12:39.960 --> 0:12:43.160 long term fixed income managers, the ten year rate, and 0:12:43.240 --> 0:12:46.120 I think we entered the conflict a little bit low. 0:12:46.520 --> 0:12:49.319 You know, that was a rate that priced in significant 0:12:49.360 --> 0:12:53.080 movement from the Federal Reserve, likely on the heels of 0:12:53.400 --> 0:12:57.280 Kevin Warsh being nominated as the new head, and then 0:12:57.360 --> 0:13:00.400 we got into a more reasonable trading range. But what 0:13:00.440 --> 0:13:05.160 we saw, particularly yesterday and through this week is a 0:13:05.280 --> 0:13:09.640 significant reprising of expectations of what the Federal Reserve can 0:13:09.720 --> 0:13:12.079 do or what they will do at the front end 0:13:12.120 --> 0:13:15.840 of the curve. So tens pushing a little bit higher, 0:13:16.320 --> 0:13:19.600 but really that two year rate going even higher than 0:13:19.640 --> 0:13:23.440 that and flattening yield curves. So here we see the 0:13:23.520 --> 0:13:28.240 bond market fighting off its eternal foe inflation. And it's 0:13:28.280 --> 0:13:32.200 a good time for investors to look more to coupon 0:13:32.320 --> 0:13:37.479 clipping or income rather than the price appreciation or diversification 0:13:37.600 --> 0:13:38.480 of the bond market. 0:13:38.760 --> 0:13:41.040 Karen, you mentioned the FED, I mean the composition of 0:13:41.080 --> 0:13:44.520 it continues, of course to be interesting. Is your house 0:13:44.600 --> 0:13:47.680 view still for one ease this year? Has that changed? 0:13:49.320 --> 0:13:52.360 It hasn't changed, well moderated since the beginning of the year. 0:13:52.760 --> 0:13:54.920 We went into the beginning of the year looking for 0:13:55.160 --> 0:13:58.680 maybe two cuts, expected maybe one in June than one 0:13:58.720 --> 0:14:02.720 in September through decem With the behavior of the markets, 0:14:02.760 --> 0:14:05.520 and some of that is health Lisa, it is a 0:14:05.800 --> 0:14:11.319 relatively resilient and stable economy. I describe it as equilibrium. 0:14:11.520 --> 0:14:16.960 Equilibrium is not necessarily comfortable. But now with inflation coming 0:14:17.040 --> 0:14:21.720 back in, with the spike in oil prices, extreme sensitivity 0:14:21.880 --> 0:14:26.560 around the length of this conflict, we are now expecting 0:14:26.680 --> 0:14:29.400 one and perhaps that would be later in the year. 0:14:29.480 --> 0:14:32.480 So you hear you hear that hedging in my voice, 0:14:32.520 --> 0:14:35.000 and in that position, it's a little bit wait and see. 0:14:35.520 --> 0:14:36.400 High yield market. 0:14:36.480 --> 0:14:37.400 What's your view there? 0:14:37.640 --> 0:14:39.720 You have credit concerns there in a high yield market 0:14:39.800 --> 0:14:42.480 or do you feel like the risk reward. 0:14:42.240 --> 0:14:45.640 Is worth it here, I would say the latter, Paul, 0:14:45.840 --> 0:14:49.720 it's not so much a'll recharacterize it. We're more sensitive 0:14:49.760 --> 0:14:53.200 to valuation with high yield. Still, we have seen a 0:14:53.320 --> 0:14:57.080 nice orderly widening of spreads there, but we are not 0:14:57.280 --> 0:15:01.200 at our target to lift out of the underweight position 0:15:01.320 --> 0:15:04.320 where we've been. We would like to see spreads closer 0:15:04.400 --> 0:15:09.720 to four hundred basis points on a pretty stabilized basis point, sorry, 0:15:09.840 --> 0:15:12.480 stabilized point, not just a flash in the pan. We 0:15:12.680 --> 0:15:16.360 are above three hundred, but still waiting to see more 0:15:16.480 --> 0:15:20.560 value there. The companies are largely doing fine. They would 0:15:20.640 --> 0:15:24.120 not have the ability to move out of non investment 0:15:24.160 --> 0:15:28.080 grade to investment grade. The pricing power isn't there, the 0:15:28.080 --> 0:15:32.280 ability to grow volumes. You know, they can't correct what 0:15:32.440 --> 0:15:35.920 made them non investment grade. Our analysts there think results 0:15:35.960 --> 0:15:40.600 are largely fine to inline. Nothing to make them overly worried, 0:15:40.720 --> 0:15:44.080 but nothing to make them overly excited that they can, 0:15:44.200 --> 0:15:46.960 you know, eclipse that non investment grade rating. 0:15:47.280 --> 0:15:49.320 Karen, I'm looking through your notes here. You talk about 0:15:49.400 --> 0:15:51.880 private credit being in the headlines, of course, does it 0:15:51.920 --> 0:15:55.080 have the characteristics to build toward this systemic crisis that 0:15:55.440 --> 0:15:58.280 we've been hearing, we don't think so. 0:15:58.800 --> 0:16:02.320 And we took a look at what has caused systemic 0:16:02.520 --> 0:16:06.560 crisis in the past, and oftentimes, yes, you do see 0:16:06.720 --> 0:16:10.120 an increase in defaults, and we look at defaults by 0:16:10.280 --> 0:16:14.200 number and also by dollar amount. But you really need 0:16:14.520 --> 0:16:18.160 leverage in the system in order to become a systemic 0:16:18.200 --> 0:16:21.560 event like long term capital management the late eighties or 0:16:21.600 --> 0:16:24.720 the Great Financial Crisis. But we all know that there's 0:16:25.040 --> 0:16:28.400 a lot of market value and road between systemic crisis 0:16:28.880 --> 0:16:32.520 and optimal markets. And I think what we're really seeing, 0:16:32.560 --> 0:16:35.000 and as many of your speakers have said over the morning, 0:16:35.560 --> 0:16:41.040 is a recalibration of liquidity and pricing around liquidity. These 0:16:41.040 --> 0:16:45.160 are loans to middle market companies that are very necessary, 0:16:45.520 --> 0:16:48.520 and we're getting a lot of our information from Bloomberg 0:16:48.680 --> 0:16:52.440 on these private markets and from media. Roger Ferguson wrote 0:16:52.480 --> 0:16:55.720 a great piece in the Financial Times where you characterize 0:16:55.760 --> 0:16:59.880 these loans and how private credit came about. But what happened, 0:17:00.000 --> 0:17:03.400 as with the success of private credit with the attractive yields, 0:17:03.600 --> 0:17:06.920 it began to be sold down into retail channels. The 0:17:06.960 --> 0:17:13.000 retail vehicles provide for greater liquidity or faster liquidity than 0:17:13.040 --> 0:17:16.080 the tenor of the underlying loans, those are mostly three 0:17:16.080 --> 0:17:19.159 to five years. So when you have a liquidity mismatch 0:17:19.400 --> 0:17:21.879 and then you have something in the headlines that was 0:17:21.960 --> 0:17:26.000 sold for being attractive and something that you needed to 0:17:26.200 --> 0:17:29.040 have in the portfolio, and then you're seeing in the 0:17:29.080 --> 0:17:31.800 headlines that you need to get out, you're just having 0:17:31.920 --> 0:17:36.200 a mismatch in the vehicle versus the purchaser. 0:17:37.000 --> 0:17:37.640 Karen Mike, my. 0:17:37.600 --> 0:17:40.160 Good friends on the debt capital markets desks across Wall 0:17:40.200 --> 0:17:42.000 Street are having a heck of a year here. The 0:17:42.040 --> 0:17:45.320 supply has been really really heavy. How's the market been 0:17:45.800 --> 0:17:47.240 receiving this supply. 0:17:48.680 --> 0:17:52.680 It's been received extraordinarily well. We went into the year 0:17:52.800 --> 0:17:57.160 knowing that we would see significant new supply from merger 0:17:57.400 --> 0:18:00.600 and activity funding, and then that we would also see 0:18:00.600 --> 0:18:03.639 the hyperscalers coming to the market. They have already done 0:18:03.680 --> 0:18:06.840 more than half of their expected supply. But the supply 0:18:07.000 --> 0:18:10.160 is coming in, and because the yield and the income 0:18:10.359 --> 0:18:14.359 it's that known variable are attractive, it seems that investors 0:18:14.359 --> 0:18:17.800 are flocking to investment grade corporate bonds for that known income, 0:18:18.119 --> 0:18:21.040 that little bit of spread over the US Treasury and 0:18:21.280 --> 0:18:25.200 enjoying that rather than taking excessive duration risk. So we've 0:18:25.240 --> 0:18:28.440 seen again a little bit of widening. We've gone out 0:18:28.480 --> 0:18:33.119 from the high seventies for the investment grade oas until 0:18:33.160 --> 0:18:34.200 now we're into. 0:18:34.080 --> 0:18:35.760 The mid nineties or so. 0:18:36.080 --> 0:18:39.480 But we see that as a restoration of value and 0:18:39.600 --> 0:18:44.040 a time where selection security, selection can begin to matter. 0:18:44.359 --> 0:18:46.720 So one of our big themes in houses. While we 0:18:46.760 --> 0:18:50.280 have a top down framework, we are bottom up fundamental 0:18:50.440 --> 0:18:54.280 reviewers of credit day in, day out. We speak to 0:18:54.600 --> 0:18:59.200 discernment and discipline around valuation. Of course we're cognizant of themes, 0:18:59.400 --> 0:19:02.040 but as we say in health, it wasn't likely that 0:19:02.200 --> 0:19:05.919 all software companies were great going into the beginning of 0:19:05.960 --> 0:19:09.199 this year, and it's similarly just as likely that they 0:19:09.240 --> 0:19:12.680 are not all going to fail just because the tide 0:19:12.760 --> 0:19:13.159 is turned. 0:19:13.880 --> 0:19:17.040 Thanks so much appreciating Arent Man, vice president and fixing them. 0:19:17.040 --> 0:19:20.919 Investment director for Federator, Hermie Stay with us. 0:19:21.040 --> 0:19:23.520 More from Bloomberg Surveillance coming up after this. 0:19:29.760 --> 0:19:33.320 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:19:33.400 --> 0:19:36.560 weekday afternoons from seven to ten am Eastern Listen on 0:19:36.640 --> 0:19:40.320 Applecarplay and Android Otto with the Bloomberg Business app, or 0:19:40.440 --> 0:19:41.960 watch us live on YouTube. 0:19:42.280 --> 0:19:45.360 Rebecca Walser joins us here Presidency of Walser Wealth Management. 0:19:45.480 --> 0:19:47.800 Rebecca, thanks so much for joining us here in the studio. 0:19:47.880 --> 0:19:48.040 Home. 0:19:48.240 --> 0:19:52.919 Crazy times out there, crazy lots of volatility. What are 0:19:52.960 --> 0:19:54.760 the conversation I'm sure your phone's bringing off the hook 0:19:54.760 --> 0:19:56.719 from your clients. What's the conversation you're having here? 0:19:57.080 --> 0:19:59.560 I mean, we've been big commodity bugs for the lascence 0:19:59.600 --> 0:20:01.520 twenty twenty pandemic, so I think a lot of people 0:20:01.560 --> 0:20:04.720