Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa A. Bramowitz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. Right down,
Speaker 1: an immense joy is Michael Farola, chief US economist at
Speaker 1: JP Morgan, and the hallmark of his weekly notes written
Speaker 1: Friday evening. It comes out about seven pm. Did you
Speaker 1: talk about going beneath headline analysis? And that's the JP
Speaker 1: Morgan team. Even algebraic functions, Michael, Algebraic functions Friday night
Speaker 1: at eight pm is a highlight of my Friday evening.
Speaker 1: What do here algebraic functions say about the American housing market?
Speaker 1: Units are Graham Price hasn't moved, so housing clearly is
Speaker 1: suffering a little bit from higher mortgage rates. And we
Speaker 1: saw that again with the new home sales that Mike
Speaker 1: just mentioned, as well as almost every housing point we
Speaker 1: got last week, and we would expect that to continue
Speaker 1: for the next several months, just given the lags between
Speaker 1: when mortgage rates go up and when home sales come down,
Speaker 1: that said, we're coming off you know, white hot levels,
Speaker 1: and uh so we're basically I think, getting a little
Speaker 1: bit back more into balance. And it's likely to be
Speaker 1: the case that inventories with even with housing home sales
Speaker 1: coming off, inventories will likely remain pretty lane and home prices.
Speaker 1: We don't see home prices declining certainly, so hopefully getting
Speaker 1: a little bit more into balance, cooling off, but but
Speaker 1: not in not two thousand six by our means, Michael,
Speaker 1: this question pains me to ask, but are people getting
Speaker 1: too gloomy as they start to price in some sort
Speaker 1: of slow down that allows the FED to be patient.
Speaker 1: So the Fed, I think we'll continue moving after obviously
Speaker 1: we're gonna get the June July fifty paces point moves.
Speaker 1: And I think to the point you discussed earlier, look,
Speaker 1: Chair Powell is an outcome based guy, and he wants
Speaker 1: to actually see inflation and activity slow down. So while
Speaker 1: housing maybe a leading indicator for the economy, I think
Speaker 1: Powell will actually want to see things slow before he
Speaker 1: actually pulls off of the rate hikes. So I do
Speaker 1: think that maybe we've gone a little bit. Maybe we're
Speaker 1: thinking that fed's going to be too too gentle here
Speaker 1: with the economy. But they really had their work cut
Speaker 1: out for them, and so I don't see them pausing
Speaker 1: after after July. What are you looking for, Michael, is
Speaker 1: a sign that truly we are seeing some sort of
Speaker 1: slow down with respect to inflation at a time when
Speaker 1: we're hearing from everyone here that the consumer is still
Speaker 1: very strong. Yeah, I think you'd really want to see
Speaker 1: the labor markets soften more materially than we have seen. Uh. Again,
Speaker 1: we don't. We don't want to see a lot of unemployment.
Speaker 1: But the jobless claims numbers that we just mentioned the
Speaker 1: can suggest we're still in a very hot waiver market.
Speaker 1: So you would like to see next week not only
Speaker 1: job grows slow, but you know, perhaps vacancies come down. Uh,
Speaker 1: And we'd like to see that happen, you know, in
Speaker 1: a in a smooth kind of linear fashion. Generally that
Speaker 1: doesn't it's not the case, but that would be the
Speaker 1: ideal scenario if we have a nice slow wing and
Speaker 1: jock growth. One of the key sentences I've heard your
Speaker 1: Michael Faroli is central banks that really don't have reaction
Speaker 1: functions right now, they're making it up as they go,
Speaker 1: is you and Bruce Kasman and your team piece together
Speaker 1: Tomorrow's note, Do you have a mathematical structure or a
Speaker 1: geometric structure of where we're heading or as you are
Speaker 1: you as blind as the Central bank? Look. I think
Speaker 1: it's clear that the FED is not operating and has
Speaker 1: not been operating by anything close to a tailor rule
Speaker 1: or any other type of formula reaction to functions. So
Speaker 1: I think that makes you know, gauging central banks here
Speaker 1: a little bit tricky. But that's been the case for
Speaker 1: a couple of years, where you know, you can do
Speaker 1: your implied tailor roll and doesn't look anything like what
Speaker 1: the FETE has been doing. So that's just the fact
Speaker 1: we're living with. What what is the fact we're living with?
Speaker 1: Just Lisa mentions to just watch the consumer is at
Speaker 1: the heart of the matter. So the consumer matters. I
Speaker 1: think the consumer will follow where the labor market goes.
Speaker 1: And that's why I really exercize the labor market. And
Speaker 1: you know, we can talk all about excess saving and
Speaker 1: all that, but it's really labor income that's driving consumer
Speaker 1: spending here, Michael, that's Jamie Diamond online. Three. Pick up
Speaker 1: the phone, say Hi to Mr diamond Forest, Michael Faroli
Speaker 1: at JP Morgan, Jeffrey You is just brilliant with B
Speaker 1: and Y Mellen and jeff You. You say they're wrong.
Speaker 1: All the people doubting plas a chord and dollar intervention
Speaker 1: are wrong. You mentioned the giant Frankel of Harvard and
Speaker 1: you say we need to start to think of about
Speaker 1: a plaza accord of two thousand twenty three. Why is
Speaker 1: the dour too strong? Well, the donar is too strong
Speaker 1: in terms of valuations, but the US needs to figure
Speaker 1: this out on its own accord. The dollar itself from
Speaker 1: the Fed is not really going to matter in terms
Speaker 1: of financial conditions. You look at the four pillars of
Speaker 1: financial conditions, rates, exchange rates, spreads, equity market FFX by
Speaker 1: a long way ranks last, and also what does Japan need?
Speaker 1: What does Europe need? Europe finally they're changing their tone.
Speaker 1: You know, they need a stronger euro to bring down inflation,
Speaker 1: but they need to realize this actually strengthens consumer sentiment
Speaker 1: as well, and they're purchasing power. So this is a
Speaker 1: very different environment compared to several decades ago. We need
Speaker 1: to think about not a new plaza or louver anything
Speaker 1: like that, but what each country needs for themselves. So
Speaker 1: that's the difference between now and three decades. Let's find
Speaker 1: common ground between David focas Landa over the small German
Speaker 1: Bank and Ian Bremer out with this new book, The
Speaker 1: Power cris in Every Nation for Itself. Jeff, you, how
Speaker 1: do you have coordination if you're not kempt down in
Speaker 1: the lobby of the Plaza in New York. Well, you
Speaker 1: know right now you have enough communication between the central
Speaker 1: bankers and we've had that in the last fifteen years
Speaker 1: or so, like the swap lines, and you're during the crisis,
Speaker 1: and you're during the panda, during the pandemic. But it's
Speaker 1: kind of backward looking. There's coordination when it comes to firefighting,
Speaker 1: responding to crises, and look at how the sanctions were
Speaker 1: brought in after the war started, But you know, where
Speaker 1: is the coordination up ahead in an era of deglobalization.
Speaker 1: That's the philosophical question we need to ask. If you're
Speaker 1: talking about deglobalization, then why bother coordinate isn't deglobalization by
Speaker 1: definition every central bank for itself? So philosophically, where do
Speaker 1: they spands right now? Where the government stand that needs
Speaker 1: to be harmonization. If not, then we can forget about
Speaker 1: picking up the phone. Okay, so Jeffrey, if we don't
Speaker 1: get that harmonization and we stay where we are, which
Speaker 1: is and maybe perhaps deglobalization, but a regionalization partnerships, how
Speaker 1: do you see the euro reacting at a time when
Speaker 1: people are downgrading some of their growth expectations for world
Speaker 1: growth and we're starting to see, I don't know, the
Speaker 1: Euro get a little bit of a bounce from that.
Speaker 1: So I think Eurozone policymakers and to their credit, the
Speaker 1: ECB starting to realize this a strong currency need not
Speaker 1: be a bad thing. You know, there are more things
Speaker 1: to an economy than a trade surplus. Let's get away
Speaker 1: from this eighth century merk Untiless way of thinking. No,
Speaker 1: it's harder for Asia and Euro to dislodge. But if
Speaker 1: you have stronger purchasing power, that can actually help offset
Speaker 1: some of the inflation losses and too real income as well.
Speaker 1: So they need to state a stronger euro at this
Speaker 1: point and you're is still going to be undervalued, like
Speaker 1: even five big figures from here, right, So that is
Speaker 1: good for the Eurozone households. It can lift their demand
Speaker 1: in real terms, that's good for the Euro, So they
Speaker 1: need to actually cross that hill. They're not there yet,
Speaker 1: but finally they are starting to shift, so I think
Speaker 1: the Euro will find a new range of higher range.
Speaker 1: But still even with a higher range, right now, it's
Speaker 1: still going to be very, very much under valued. We're
Speaker 1: talking about fluctuations that are miniscule at least for this week.
Speaker 1: But the big elephant the room at Davos has really
Speaker 1: been China. Jeffrey, and how we deal with the fact
Speaker 1: that the slowdown that we're seeing from shutdowns probably are
Speaker 1: not going to end any time soon. How do you
Speaker 1: map that out into a currency call, into a growth
Speaker 1: call at a time when it seems as though that
Speaker 1: is going to remain the policy at least for the
Speaker 1: remainder of the year. Well, what's fascinating is if we
Speaker 1: look at our eye flow custody data, our clients are
Speaker 1: starting to buy CNY, They're starting to buy Chinese equities,
Speaker 1: and after an unbroken run of let's say three or
Speaker 1: four quarters of selling gentle buying in Chinese government bonds
Speaker 1: as well, So it looks like the globe markets they're
Speaker 1: so underweight China right then they're not actually taking a
Speaker 1: growth view. I highly doubt that because of the lockdown
Speaker 1: still happening, but maybe they're just starting to find some
Speaker 1: value on a total return basis with Chinese equities, Chinese
Speaker 1: bonds and also the currency you know where it is.
Speaker 1: But to translate that from a rerating, you know, from
Speaker 1: a growth view, I want to go away China again.
Speaker 1: The window is narrowing on Afraider. So we need more stimulus,
Speaker 1: more government driven stimulus and demand lift right now. But
Speaker 1: yesterday's Premier League comments um he said basically the too
Speaker 1: local governments. You need to fend for yourself, you know
Speaker 1: right now, the very limited resources. That's tough, Darr You
Speaker 1: let's turn to your virology expert expertise, which is of
Speaker 1: China ends on lockdown? What happens to the Greater Pacific
Speaker 1: RIM one day it's going to be over? Then? What right?
Speaker 1: Then we are going to have not only in an
Speaker 1: Asia but probably a global context the mother of all
Speaker 1: services stimuluses. And we're talking about not just lockdowns ending,
Speaker 1: but also borders reopening in China. There's no time frame
Speaker 1: for that, but look at how Thailand, Indonesia, Malaysia, Ascian
Speaker 1: countries dependent on Chinese tourists Davos, you know, Tom going
Speaker 1: to the what shops in Davos? You know, are they
Speaker 1: complaining about lack of Chinese tourists buying what those patech leaps? Right?
Speaker 1: So when they return that two hundred billion dollars services
Speaker 1: deficit China runs with the rest of the world, that
Speaker 1: is going to be such a big stimulus, something we
Speaker 1: can all look forward to. But right now, again no timeline.
Speaker 1: Do you think, Jeff, that we're seeing right now people
Speaker 1: bake in an appropriate slowdown and we take a look
Speaker 1: at the global economy or do you think that there's
Speaker 1: more to come to be priced into risk ASD's and
Speaker 1: frankly even to yield. So on a quality of basis,
Speaker 1: I think we need to differentiate what is a slowdown
Speaker 1: versus so basically soft versus hard landing. I think people
Speaker 1: are still baking in a soft landing right now. But
Speaker 1: if the Fed terms restrictive and we still think the
Speaker 1: market is actually not appreciating the risk of that enough.
Speaker 1: We're talking FED funds right going to three and a
Speaker 1: half to four that kind of level, then a hard
Speaker 1: landing that I think the market is probably taking a
Speaker 1: bit too lightly, right now. So we're not saying as
Speaker 1: it's over yet by any stretch. And the markets are
Speaker 1: appreciating a great slow down. They're just not ready to
Speaker 1: bake in a harder landing. So I think that's where
Speaker 1: some further repricing is needed, be in the short term evaluations, adjustments,
Speaker 1: waiting readjustments. You know, we're seeing a bit of a
Speaker 1: rest bounse, but I think the Fed will have the
Speaker 1: final world on not Jeff you brilliant, extremely important note,
Speaker 1: really pushing against the forget about the Plaza re chord consensus.
Speaker 1: Mr you with b and why melantoday we get to
Speaker 1: rip up the script to do that. With em Rita
Speaker 1: send chief Oil Analystic Energy aspects truly excellent and the
Speaker 1: microeconomics of what Brent crude will do. Em Rita in
Speaker 1: your academic studies to windfall profit taxes work, No, especially
Speaker 1: not at a time when you're asking all it produces
Speaker 1: to all it's a race production right, because there is
Speaker 1: a bit of a supply crunch. So no, the answer
Speaker 1: is no. I go back em Rita to Lyndon Baines
Speaker 1: Johnson and the idea of an investment tax credit. Now
Speaker 1: Suonak is going to fold in here. If you invest,
Speaker 1: you don't pay as much tax. What kind of investment
Speaker 1: program spurs oil production? The problem right now is that
Speaker 1: you know, we do need investment for sure, and into
Speaker 1: your question what kind of investment spurs oil production, you're
Speaker 1: talking about investment in the North Sea um and that
Speaker 1: is not overnight. You are going to still look for
Speaker 1: you need to first and foremost find the oil. But
Speaker 1: again you can. I mean there are small fields that
Speaker 1: can still be extracted, and you can get some tie
Speaker 1: back projects which are pretty quick, so say within a year,
Speaker 1: you could get oil out. But these are small volumes.
Speaker 1: You're talking about maybe forty barrels per day rather than
Speaker 1: hundreds of thousands of barrels per day, which is what
Speaker 1: we need, if anything, we probably need in the millions
Speaker 1: of barrels per day. For that, you need a sustained
Speaker 1: investment program. And you know, particularly the UK not see
Speaker 1: is a declining asset. No Way, on the other hand,
Speaker 1: actually has much better prospects, so it's not that lucrative
Speaker 1: to necessarily invest. But having said that, there are still
Speaker 1: assets which oil majors of here could extract oil from.
Speaker 1: And if the tax incentive is right, I think the
Speaker 1: world needs that oil, and they would be more than
Speaker 1: keen to develop that, except of course that there are
Speaker 1: E s G pressures on them as well, So that
Speaker 1: is always going to be their tension whether shareholder doesn't
Speaker 1: necessarily want them to invest in oil and gas regardless
Speaker 1: of the tax structure and readA. How much is this
Speaker 1: an issue of getting the oil out of the ground
Speaker 1: and how much is this an issue of refining it
Speaker 1: that people can use it to power their cars and
Speaker 1: their homes. Well, it's a great question because we've got
Speaker 1: shortages in both right now. Of course, we're not investing
Speaker 1: enough in the upstream. That's been a trend for the
Speaker 1: last eight years. In fact, on our database, we've not
Speaker 1: invested much more than four billion dollars each year for
Speaker 1: the last pretty much eight years. And since last year,
Speaker 1: China changed his policy around refining and product exports, and
Speaker 1: we've closed about three million barrels per day of refineries
Speaker 1: in the West, mostly in the West UM, so we
Speaker 1: are very short of refining capall city. We have a
Speaker 1: few refineries starting up in the next couple of years
Speaker 1: and even back off of this year, but not nearly
Speaker 1: enough to meet demands. So we are constrained on both sides,
Speaker 1: but right here, right now, I'd say we are more
Speaker 1: constrained on refineries. Um, so the oil you and I
Speaker 1: would consume, that's more constrained than actually the crude oil
Speaker 1: side of things, which in itself is a challenge with
Speaker 1: opex spe capacity load. I mean, all of this comes
Speaker 1: together in a taxic brew, if you will, that only
Speaker 1: raises costs for consumers and continues to do so despite
Speaker 1: wobbles in the actual crude market. How much I understand
Speaker 1: that perhaps they're not going to see oil companies produced
Speaker 1: more as a result of the tax it's being proposed
Speaker 1: in the United Kingdom, However, how much does it just
Speaker 1: give cash to be able to offset the costs for
Speaker 1: people who are going to only see those costs climb.
Speaker 1: The challenge is going to be how are you going
Speaker 1: to make this a global um solution? Right? Because oil
Speaker 1: markets are global, and I think part of the problem
Speaker 1: politicians in the West have is that the always trying
Speaker 1: to come up with local solutions. Even the US is
Speaker 1: talking about potentially limiting diesel exports. That's just not going
Speaker 1: to work because ultimately both crude and product markets are very,
Speaker 1: very global. So we have to acknowledge that oil and
Speaker 1: gas demount continue to grow very, very sharply, particularly in Asia,
Speaker 1: and even you know right now China is not even growing.
Speaker 1: So imagine when China does come out of its zero
Speaker 1: COVID policy, the impact it's going to have um and
Speaker 1: we need to therefore facilitate enough investment across the board,
Speaker 1: not just an oil and gas, but also in renewables
Speaker 1: to meet that energy demand. Otherwise, like you say, there
Speaker 1: is only going to be one thing that the cost
Speaker 1: goes up. It is pretty simple, demand and supply. I'm
Speaker 1: reading an unfair question, and this goes back to and
Speaker 1: the experience of the United States and a quote windfall
Speaker 1: profit tax, which many people would suggest with just a
Speaker 1: flat and excise tex over the already elevated text as
Speaker 1: they were already paying because they were making more money.
Speaker 1: And read to say, if the United States affects a
Speaker 1: British equivalent in a win for profits tax, what does
Speaker 1: that do to a gallon of gas? Well, I'll say
Speaker 1: this much. I think at least producers we speak to
Speaker 1: in the US have said the administration has considered it
Speaker 1: and probably probably still is. You will see US shail
Speaker 1: production fall because again, what's the incentive Much like in
Speaker 1: the UK, what's the incentive in the US to continue
Speaker 1: producing if you're just going to be taxed? And if
Speaker 1: that happens, then crew prices go up even further. Refining
Speaker 1: was already constrained, so you know, gasline prices are already high,
Speaker 1: and of course it's going to make matters worse, but
Speaker 1: the crew price will definitely rise. I'm read twenty seconds.
Speaker 1: Whereas gas prices, where are they going to go in
Speaker 1: the United States through the remainder of this year? Um,
Speaker 1: we think it's going to continue to go higher. You've
Speaker 1: got Memorial Day driving season and it's starting up, and yes,
Speaker 1: inflation is high, but this is the first time in
Speaker 1: a couple of years where there are no restrictions and
Speaker 1: people are going to be driving and flying as well.
Speaker 1: So both gasoline and jet fer prices will continue to rise.
Speaker 1: And we're just saying thank you so much for joining
Speaker 1: us with energy aspects. Our last section in Davos and
Speaker 1: the cars. As we know we can't afford anything in
Speaker 1: Davos to buy a rent, we might as well talk
Speaker 1: to Jonathan Miller or Jonathan Miller joins as president and
Speaker 1: CEO of Miller, Samuel To tell us when the housing
Speaker 1: is gonna crack in America, John Miller, you would suggest
Speaker 1: we're starting to see an EBB. Is that because people
Speaker 1: can't afford the rent, they can't afford the mortgages. Yeah,
Speaker 1: I think we're approaching a peak. One of the I
Speaker 1: think rising mortgage rates are probably one of the best
Speaker 1: things that is happening to housing. In many ways, low
Speaker 1: mortgage rates are making housing less affordable because it has
Speaker 1: a blow a rated supply, whether in the rental market
Speaker 1: or the or the purchase market. We're seeing I cover
Speaker 1: about forty different housing markets across the US, and the
Speaker 1: rate the market share of bidding wares right now is
Speaker 1: anywhere from twenty five to sev of all closed sales activity.
Speaker 1: That is not a sustainable condition. We need more inventory.
Speaker 1: Tell us about the mortgage rate right now. Are the
Speaker 1: people that did short term mortgages at lower, lower, lower rates?
Speaker 1: Are they already in trouble given that we now have
Speaker 1: higher and higher rates, So it clearly places more pressure
Speaker 1: on them. Given how much prices have gone up over
Speaker 1: the last year, we're looking at, you know, depending on
Speaker 1: the metric around UH this next year two more like
Speaker 1: nine and probably three to four percent the following year,
Speaker 1: even with the rate hikes. Um. All this is because
Speaker 1: there is limited supply. There's a firm underpinning. Uh. You know,
Speaker 1: there's this isn't financial engineering exercise that we had during
Speaker 1: the bubble. Credit conditions are still tighter than you know,
Speaker 1: historic norms and uh and actually that's a that's really
Speaker 1: driving pushing some people into the rental market, which is
Speaker 1: making it even less affordable. Jonathan, how much is this
Speaker 1: a story of private investors and investment firms buying up
Speaker 1: a lot of the single family homes and removing a
Speaker 1: lot of supply. I think that certainly it's a factor, uh,
Speaker 1: you know, and it becomes more apparent when you're already
Speaker 1: in a situation right now where inventory is about a
Speaker 1: third is one third of what it should be for
Speaker 1: a normal, stable market. But I also think it's overhyped
Speaker 1: as a contributing factor. I think the bottom line is
Speaker 1: that rates have been too low for too long. Um.
Speaker 1: And you know, you have to think of inventory. Is
Speaker 1: this living, breathing organism that takes time to recover, and
Speaker 1: it has it hasn't had a chance, and that's causing
Speaker 1: price growth that's just you know, likes that we've never seen.
Speaker 1: And Jonathan, this is the distinction as people talk about
Speaker 1: five plus percent mortgage rates and the idea that the
Speaker 1: actual number of sales is slowing, the prices still are
Speaker 1: going up. When do we see prices peaked, Jonathan? And
Speaker 1: how high do mortgage rates have to go? So I
Speaker 1: I think that pricing isn't gonna So I think it's
Speaker 1: more about the rate of growth that we're seeing. You know,
Speaker 1: we've been seeing in the last year a rocket ship
Speaker 1: basically straight up. I think we're going to see a moderation. Uh.
Speaker 1: You know, look, affordability is followen by half since the
Speaker 1: end of the year. Mortgage rates are up two. I
Speaker 1: mean that's a that's a rapid sudden change, uh, and
Speaker 1: that's gonna slow down transactions. What's interesting is before the
Speaker 1: rape growth, sales are already falling, but it was because
Speaker 1: inventory had collapsed and was restraining sales activity. Now it's
Speaker 1: a combination of both. Jonathan Miller too short of visit.
Speaker 1: Thank you so much for joining this morning with Miller. Samuel.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg h