00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts. 00:00:05 Speaker 3: Radio. News. 00:00:12 Speaker 1: This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. 00:00:27 Speaker 4: Had a broad market fixed income. He's in charge of yield at Morgan Stanley Investment Management. Vishal Kanduja joins us. Do you and Jim Caron disagree? Like when you go to a meeting with Jim Caron, are you on the same page? 00:00:43 Speaker 5: A lot of times you're on the same page, but there is quite a bit of times healthy disagreement. 00:00:48 Speaker 3: Good. 00:00:48 Speaker 4: What's the point? 00:00:49 Speaker 6: Because of time. 00:00:50 Speaker 4: What's the key distinction now in that disagreement at Morgan Stanley? 00:00:55 Speaker 5: I think there are two key themes right now. I think Fed definitely was and remains to be the center stage. We'll find out more at 10 o'clock on Friday from Kevin Warsh, a reiteration of the 2% and maybe a little bit more hawkish reiteration of the same. I think the big thing now, Scott Besson, the Treasury Secretary, wants to take the center stage. So things that have not changed, fundamentally, we still don't have a very clear plan to for deficit reduction. But they say that they're going to have something for us in the next two weeks. Things that have changed is now you have clearly gone out of your way to come out, surprise the market, and then give us a little bit more information that this is some sort of a pain threshold has been reached. Either it is the curve shape, it is absolute level of yields, or it is a worry that these higher yields are going to add to deficits even more. 00:01:49 Speaker 2: So Vishal, one of the narratives for higher interest rates is this whole crowding out issue that all this investment grade AI debt is crowding out the treasury market. 00:02:00 Speaker 7: Is that really happening? 00:02:03 Speaker 8: It's definitely happening on the margin. 00:02:05 Speaker 5: The way we measure this is just the amount of duration that is coming out. High-quality balance sheets, which are AA, AAA, almost by quality, are now finally trying to use the strength of those balance sheets, the corporate ones that I'm talking about. And they're going to use quite a bit of that given the amount that they need for the CapEx. Now, the same high-quality buyer of long-end duration also buys a lot of treasuries in their balance. So definitely they're scouting out, but size is very different. You're talking about a $ 40 trillion market versus a less than $ 2 trillion market on the other side. 00:02:41 Speaker 4: Do we need to get used to higher rates? We had a guest earlier, Rochelle, who suggested grinding yields, you know, just sort of a movement here, dare I say to 5%. Are you in that camp? 00:02:54 Speaker 5: So four and three quarters, I think we might spike to five on the 10-year. 00:02:58 Speaker 4: But four and three quarters. 00:02:59 Speaker 5: Is a pretty fantastic threshold here. And why we say that is because of the fundamental reasons. We do see very clear-cut, broad-based disinflationary pressures. 00:03:11 Speaker 4: In the economy. 00:03:11 Speaker 5: Got a little bit delayed because of the conflict, because of the nominal growth picking up, because of the capex spend that you're seeing from the corporates. 00:03:20 Speaker 4: But we do see quite a bit of. 00:03:21 Speaker 8: Disinflationary pressures, which then. 00:03:24 Speaker 5: brings down that yield or anchors that yield down over the long term. 00:03:27 Speaker 4: So, yes, quite a bit of value. 00:03:29 Speaker 5: And we do see that we are topping up in yields at these levels on the 10-year in the U.S. 00:03:34 Speaker 2: Vishal, I understand a lot of smart folks are heading out to Jackson Hole, Wyoming, which I presume is for the bison burger thing. But I guess we're going to hear from some economists. What do you expect to hear from Fed Chairman Warsh? What do you think the market would really like to hear? 00:03:49 Speaker 5: I think the market would love to hear some reiteration of the target and then a little bit more about those five working groups or forums that we've heard about. The leadership of those forums that has been set is pretty fantastic and terrific. We would love to see what the initial work from those forums. 00:04:10 Speaker 8: Tells us at the moment. 00:04:11 Speaker 5: So I think a little bit more on that one and a little bit more about What is your assessment about the economy? We don't need some forward guidance here, but that will tell us if there is some piece of information that is you looking at that we should be also focused on as a market participant. 00:04:27 Speaker 4: Thank you so much for the brief here into the PCE report. joins us, head of broad market fixed income at Morgan Stanley. And so I got red and green in the screen, the 10-year yield into the report, 4.6208%. Across America from New York, it's Bloomberg Surveillance. 00:04:48 Speaker 9: And the government's personal consumption expenditures price index, otherwise known as the Fed's favorite gauge of inflation, is out. And month over month, PCE increased by two-tenths of a percent, rebounding from a 0.1% decrease in the previous month, hotter than the estimate of a tenth of a percent. Year over year, the PCE price index rose by to 3.7% in July, matching what happened in June when we saw a rise of 3.7%, a bit hotter than the 3.6% we were expecting. Now, if you exclude volatile food and energy costs, core PCE month over month edging up 0.2% versus the 0.1% rise the prior month, and that's right in line with estimates, and the annual core rate holding steady at 3.3%, right in line with estimates, In terms of personal income and spending, it seems like we made more than we spent. Personal income up four-tenths of a percent, besting the estimate of two-tenths of a percent versus a rise of two-tenths of a percent the prior month, spending up two-tenths of a percent, down a bit from that three-tenths of a percent rise we saw the prior month, and that versus the one-tenth of a percent increase we were expecting. So once again here, the headline number, PCE price index year over year coming in at 3.7% right in line with estimates. Back over to Tom and Paul. 00:06:08 Speaker 4: Thanks so much, Alexis. Really, really appreciate that. It's a really... A churning, almost confusing report with important revisions as well. We'll get to that here in a moment. Bloomberg Surveillance and all that we do in economics. It's brought to you by IBKR. Trade, election, climate, and economic outcomes with IBKR prediction markets right alongside your stocks and options. Earn interest on your position and receive $ 1 per contract. If you're right, learn more at IBKR.com slash economics. predictions. I'm looking at the yield space. And I mean, it's directionally, Paul, it wants to give me higher yields, but I'm not getting the higher yields I thought I'd be getting here. 00:06:53 Speaker 3: Yeah. 00:06:53 Speaker 2: I mean, the two-year, Tom, is up about almost two basis points, 4.19%. But that's at the level we've been at for several weeks, if not months at this point. So I mean, and the stock market future is really showing No real move here. The S & P is down eight points. The Dow is up 30 and the Nasdaq is down 100 points. 00:07:11 Speaker 4: I'm looking at the second view of GDP. This is ancient data, folks, ending June 30. Look once, look twice, look three times, and Michael Ball revises it five years later. Joining us now from Bloomberg News and a macro strategist, Michael Ball. I'm looking at a screen, and I don't have the statistic in front of me, but it's still a boom economy, Michael Ball, on nominal GDP. You add real GDP, sort of, eh, big inflation ending June 30, and this Jackson Hole is a big nominal GDP Jackson Hole. 00:07:47 Speaker 10: Yeah, I mean, again, as you guys know, I love to look at real final domestic demand because it takes out. 00:07:52 Speaker 6: That sort of import noise. 00:07:54 Speaker 11: Really? 00:07:55 Speaker 10: Yeah, because it's just basically what people are spending domestically versus import noise from the CapEx boom. Remember, we had a low GDP print because we imported a lot. And also the inventory cycle was doing what it did, which was a boost. 00:08:06 Speaker 4: So what's domestic final sales? 00:08:07 Speaker 6: Strong. And this is what the upgrades are. 00:08:09 Speaker 10: And they're sticking apparently in Q2, which is good because now we're starting to see the finalization of that. So we had good momentum coming into the third quarter. The worry here, again, is that we're going to be losing some of this momentum. So this personal spending number is catching my eye a little. And we also recently had a big note out from Goldman basically saying that their July and August data is showing that there is a slowing in consumer activity. Despite all the boom we're seeing at the U.S. Open and the World Cup and all that. So there's a little bit of a divergence here with the momentum coming out of Q2 going into Q3 where we're going to still have this fixed investment boom from CapEx and from the reshoring and from the defense spending. 00:08:44 Speaker 6: But the consumer itself now is looking more wavery. 00:08:46 Speaker 4: Can I just say Michael Ball starts talking in the 10-year move to basis points? 00:08:50 Speaker 7: I know. 00:08:51 Speaker 4: Higher yields here right now. 00:08:53 Speaker 2: So you go out there, if you were at the Fed here, what would be your big concern? What would you want to get a little bit smarter at, maybe at Jackson Hole here? 00:09:02 Speaker 10: So, again, this probably isn't going to be a great platform for speaking about policy in its core function because, again, this is about future payment systems. And this might have to do with why crypto, again, is having a couple of good weeks here. It kind of falls into some of that. But to your point, guys, we need to talk about what the actual structural inflation story is versus what the cyclical story is and what the Fed can affect. 00:09:24 Speaker 4: So parse the distinction there. 00:09:26 Speaker 10: So that's a great question that I think they need to clarify. I myself am not clear on because what do we want to do? Do we want to step on AI capex inflation? No, probably not. 00:09:33 Speaker 12: Right. 00:09:34 Speaker 11: We do. 00:09:34 Speaker 10: We want to actually look at wage inflation. Well, that's not actually going to going anywhere. So then you have a case to hold. So there are plenty of things to cut and parse through as far as the inflation picture, which is exactly why we hear from Warsh that he wants to take a different look at it. 00:09:48 Speaker 4: Second quarter GDP price index. 6.2, which is ginormous, and it came in even bigger than that, 6.4%. That's not a normal. 00:09:58 Speaker 6: Economy, is it? No, again, it's a tale of two stories here. 00:10:04 Speaker 10: We have a real drive, not only from AI build out, but also from our own government to kind of reshore. And then obviously we have a lot of defense spending coming through now. So the fiscal pulse has been quite strong. That's expected to fade into year end, but that's clearly reflected in Q2 data. And again, the momentum right now is pretty strong. So we are looking at an economy that is above trend. And that is a problem for the Fed, given that inflation remains stickier in that kind of backdrop. 00:10:31 Speaker 2: W.I.R.P., the world interest rate fund probability, blah, blah, blah, blah. Markets pricing in one rate hike by. 00:10:38 Speaker 7: The end of the year. 00:10:40 Speaker 4: I don't know. 00:10:40 Speaker 7: How do you think that looks these days? 00:10:42 Speaker 10: Yeah, after July, when we had sort of the lack of communication from the press conference. That's exactly where it went to. And actually, we crept into January and out of December. Now the idea being, if they don't go in September, which again, it's not looking too good as far as what probability is. 00:10:58 Speaker 6: Now let's keep in mind, we went into July. 00:11:00 Speaker 10: I think we were somewhere around between 30% and 40% chance anyway. And that was one of the lowest probabilities going into a meeting, which goes to show this new error where the chairman doesn't want to guide markets into a meeting. So we need to get accustomed to this new reality. 00:11:14 Speaker 4: I just found this statistic I was looking for. Thank you, Google Gemini, for this. Nominal GDP ending second quarter, first look, an annualized rate of 7.9%. I have never perceived that in my academic life. I've never witnessed it. That's something I get out of Southeast Asia, you know, given a war going on. 00:11:39 Speaker 10: You know, I mean, me and you have talked about this for a couple months now, about this reacceleration sort of, and it's broadening as we get— the consumer was active in Q2— This is why the market is doing quite well, the stock market. I mean, this is why it's not about AI anymore and momentum and higher beta trading. It's about a broadening and a rotation and some more cyclical parts of it. 00:11:56 Speaker 4: And I don't understand Druckenmiller. I'm going to say, look, I took this off AI. Anna Wong's smarter than me. She's going to figure this statistic out. But Paul, 7.9% run rate, a nominal GDP, tells me in no way, shape, or form, is this a normal Jackson Hole? 00:12:12 Speaker 2: No. It'd be interesting to see kind of how people... factoring today's data into the discussion. AI, Michael, how much of economic growth, of that number Tom just quoted, how much of all this is AI spending? 00:12:25 Speaker 6: A good chunk of it. 00:12:26 Speaker 10: And again, that's sort of where we get this kind of tale of two cities. And I'm, again, going back to this real personal spending being zero. It's good that income was up. When we adjust that, though, for inflation, that's obviously going to be a little lower. But what we need to see is it's not just a fixed investment boom in a certain pocket that now has become highly political and very uncertain and also very expensive. Meaning that every kind of buck they're spending in CapEx now gets less marginal compute because everyone's kind of rushing into. 00:12:53 Speaker 6: One door at the same time. 00:12:55 Speaker 7: Didn't think about that. 00:12:56 Speaker 10: So we want to see the broadening out and we want to see the consumer play its role. And again, the worry is that we are going to become more tapped out as people are going into savings, going up in credit spending. 00:13:06 Speaker 6: But this has. 00:13:07 Speaker 10: Been a story I've been told for quarters now and that the resilience of the consumer has kind of baffled everyone and it continues. 00:13:13 Speaker 6: So I'm not calling for an immediate end. I'm just saying this is where all eyes are. 00:13:17 Speaker 4: How urgent is it to get the run rate of our economy down to begin to get inflation back to? Forget about mandates. Forget about Taylor and the rest of it. What's the urgency to get the vector on inflation. 00:13:36 Speaker 7: Lower? 00:13:36 Speaker 6: I mean, one would argue not urgent or they would have gone in July. There's been no material change since that. 00:13:42 Speaker 4: Why is it not urgent with a banana republic nominal GDP? 00:13:45 Speaker 6: I mean, a lot of theories on that. 00:13:47 Speaker 10: We don't want to step on sort of the overall consumer by raising rates and tightening Main Street while trying to pop maybe a financial bubble or some fraud scene. 00:13:58 Speaker 4: In real assets. So in Jackson Hole, it's a political Fed. 00:14:00 Speaker 6: Could be. 00:14:01 Speaker 4: They can't step on half of America flat on their back. 00:14:04 Speaker 5: Yeah. 00:14:05 Speaker 4: Because somebody's paying Paul Sweeney ticket prices at the U.S. Open. 00:14:09 Speaker 6: Yeah, but this is a divergence. 00:14:10 Speaker 10: Like when you heard from Hammock and Logan, they're talking about what their business, they're telling them the cost increases there, the problems they're having with managing that. And when you talk to some of the other guys, the more dovish guys, they're talking about Main Street and they're talking about the consumer. 00:14:20 Speaker 4: Paul wants to get one more in here quickly. Beth Hammock, I believe, leading our coverage on Friday. 00:14:26 Speaker 1: Very good. 00:14:27 Speaker 7: NVIDIA after the close tonight. What's a macro guy? take away from NVIDIA. What are you going to be looking for? 00:14:33 Speaker 10: Yeah, so I've been looking sort of for NVIDIA to reassert this kind of AI capex winter momentum, which is cool, then actually kind of split open, right? So there's certain parts of AI still doing well, like optics and memory, where you've seen some of the. 00:14:45 Speaker 6: Core chip guys and others lose momentum. 00:14:48 Speaker 10: And it's been more of a divergent trade versus this just higher beta, all ships rising, anything to do with AI. So what we need from NVIDIA is maybe to settle some of that. Just the passage of that event being in line would help cool that. And then you get, you know, the volatility picture sort of settles. And again, more participation. Because that really has been a lagger, sort of, you know, semis have been one of the bigger laggers and they're right on top of momentum. All that kind of needs to settle a little for the market's breadth and the broadening that we see to continue in a healthier way. Like, we don't want to see AI left behind. We want to see everyone to participate if you want to keep going to 8,000 XPX. 00:15:19 Speaker 4: It sounds like he's running for office. 00:15:22 Speaker 7: I'd vote for him. 00:15:23 Speaker 6: Stock market mayor. If I'm elected, I'm going to be your Michael Paul. Yes, exactly. 00:15:27 Speaker 11: We'll see how that goes. 00:15:29 Speaker 2: So, again, the next thing for this market here, what is it? 00:15:34 Speaker 8: What do we need to focus on? 00:15:35 Speaker 6: Yeah, it is NVIDIA, I think, to your point. We need the passage of this earnings season. 00:15:39 Speaker 10: I mean, someone was saying that we've got banks coming in a week or two, so we're right back in it now. But to your point, Jackson Hole is starting to smell like it may not be a risk event as much as we like to hype it up. 00:15:49 Speaker 4: I agree. 00:15:50 Speaker 6: Because I think he's got a. 00:15:51 Speaker 11: Kind of bulk. 00:15:52 Speaker 10: Which leaves us status quo, which means it's probably a more dovish tilt to the Fed. So we don't have to worry about tightening there, which is good for stocks. And back to Tom's point, like nominal GDP is so high, the earnings picture has broadened so well in Q2 that it's just like everything is kind of working, even though we all still have this mainstream kind of affordability crisis going on in the backdrop. 00:16:09 Speaker 6: And geopolitics, obviously, are still not settled. 00:16:11 Speaker 4: It's a $ 23 honey deuce cocktail at the US Open. 00:16:15 Speaker 6: That goes up every year. 00:16:16 Speaker 7: We have like a thousand cups at our house. 00:16:19 Speaker 4: But is it like 16 ounce? 00:16:21 Speaker 11: No. 00:16:23 Speaker 7: It's a 12 ounce. And it's like that much vodka. 00:16:27 Speaker 4: Yeah, exactly. They put like eight buckets of ice in it. 00:16:30 Speaker 11: Yes. 00:16:31 Speaker 7: And I buy it every year. 00:16:33 Speaker 4: You buy it for him. Don't get me wrong. 00:16:36 Speaker 6: You kind of have to. You're already all in at that point. 00:16:38 Speaker 11: Michael Ball, brilliant. 00:16:40 Speaker 4: Thank you so much. We've got to do better. Ball was okay, but Jess Benton will be better. Michael Ball, thank you so much. here this morning. Red and green on the screen right now. It's a really quiet screen. It's got that August feel after the PCE and the churn of it. The yields finally changed. Michael Ball was talking, and we finally got price down, yield up. 30-year bond up just a point. 10-year yield gives me more, up two basis points. In the Sweeney two year, the Fed sensitive yield up a big four basis points as well. Why don't you bring in our next guest? 00:17:17 Speaker 6: Absolutely. 00:17:18 Speaker 2: Jess Metten, she is deputy team lead for the equities group over there at Bloomberg News. Jess, I mean, inflation, it's there. It's kind of in line with what. I guess the market was kind of discounting here. Not much happening in the equity markets here. Or maybe the yields. 00:17:35 Speaker 6: Lift a little bit. 00:17:36 Speaker 7: But what are you looking at in the equities market this morning? 00:17:38 Speaker 13: Well, part of it and why it looks like there's not a lot happening is it's still been more of a micro story rather than a macro. Anytime like Mandy Zhu over at Subo's talked a lot about this if you're looking at the options side of things. And especially during earnings season, of course, we have NVIDIA. reporting after the bell today. So that's more when I'm talking to portfolio managers, what their focus is on today. Even though we have, of course, Jackson Hole, Kevin Moore speaking, his first speech at Jackson Hole. Typically, I've compiled some data. It's a little preview here for a story I'm going to have Friday morning looking for a taking stock column. But this is really about historically, there tends not to be a gigantic move a week post that presser because it's really more when you're at an inflection point with monetary policy, say like back in 2022 or when former Fed Chair Jerome Powell was speaking. That was when we were sort of in the middle of those 75 basis point hikes. 00:18:26 Speaker 7: It happened four times. 00:18:27 Speaker 13: That was when we had already had two of them. So it's a little bit different because also Kevin Warsh clearly has made it his focus of not putting out forward guidance. But it's been more of a micro story when you're seeing much more volatility underneath the hood of the major indexes. So it's most likely going to continue that today. And even if you look, it's interesting with NVIDIA because, of course, this has been one of the main stocks that has been driven the bull market rallies since October of 2022. And it first had that huge revenue forecast in May of 2023. So when you're looking at this, even if you look at SERP, what the one day implied move is, it's around 5% for Nvidia post those earnings. If you look at the S & P 500, the move for tomorrow, which is when Jackson Hole starts. It's actually 70 basis points swing. But of course, that matches in line when Fed Chair Kevin Warr speaks on Friday. So that would be the third highest mood we see over the next three weeks behind CPI. And then, of course, Fed Day on September 16th. 00:19:20 Speaker 4: So getting from NVIDIA this afternoon to the madness of headlines at 10 a.m. on Friday, is it 10 a.m. Mountain Time or Eastern Time? I think Eastern time. 00:19:31 Speaker 7: I think Eastern time. Yeah. 00:19:33 Speaker 4: Eastern time. It's two zip codes away. 00:19:35 Speaker 11: They are. They are. 00:19:37 Speaker 4: In the mountains. 00:19:38 Speaker 11: I could. 00:19:38 Speaker 4: Bruno's in charge of the clock. What can I say? To get from NVIDIA to Friday, is that like a big deal for equity animals trading every five minutes? Yes. 00:19:50 Speaker 13: Well, and also I want to point out because if you look at where NVIDIA stock is year to date, it's up 14%. 00:19:56 Speaker 6: If you compare that. 00:19:57 Speaker 13: To Micron technology, that stock's up over 200% and SanDisk over 500%. The reason I bring up SanDisk and Micron. Those were the two best performers in the S & P 500 in the first half of the year. Of course, I have to mention that the SOX, the Philadelphia Semiconductor Index, peaked on June 22nd. So since then, the SOX is down close to 20%. But if you look at NVIDIA in that time, it's up around 1%. But those other stocks are down double digits. So my point is, right now, when I'm speaking with portfolio managers, look at the PE on NVIDIA. I mean, it's around 18. 00:20:28 Speaker 6: That's less than the. 00:20:29 Speaker 4: S & P 500. Stop, stop. That's too important. Folks, what you just heard there from Ms. Benton is too important. 00:20:34 Speaker 6: Well, it's also cheaper than Hershey's. 00:20:36 Speaker 4: Hershey's is a staple. 00:20:38 Speaker 6: And NVIDIA is cheaper than Hershey's right now. 00:20:41 Speaker 13: So I feel like that's important just to point out that people are going to still jump in and buy that regardless. 00:20:45 Speaker 4: Of its earnings. NVIDIA's forward PE based on earnings growth is cheaper than Hershey's chocolate. Yes. 00:20:54 Speaker 5: Yes. 00:20:56 Speaker 4: I did not know that. 00:20:57 Speaker 12: Right. 00:20:57 Speaker 7: So look at it. 00:20:58 Speaker 13: It's around 18.8 for NVIDIA, and it's a little less than 20 for Hershey's and for the S. 00:21:04 Speaker 6: & P 500. 00:21:04 Speaker 13: So I think that's something that people should keep in context here. 00:21:07 Speaker 4: Jess, thank you so much for having equity coverage here, and particularly the volatility measurement of what we see in the indices versus the underlying day-to-day movement. Stay with us. More from Bloomberg Surveillance coming up after this. 00:21:30 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:21:35 Speaker 4: Eastern. 00:21:36 Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:21:42 Speaker 4: In charge of that stuff at Wolf Research, head of U.S. public policy, Tobin Marcus joins us right now. Tobin, this uproar that we're in of the demarcation of Besson and Warsh, and all the rest of it, does it link back into the midterm elections, or is it discrete and separate? 00:22:04 Speaker 11: Good to be here, Tom. 00:22:06 Speaker 14: I don't read it as particularly closely driven by the midterms. In general, I don't think the Trump administration has been executing against the midterms as a goal very much recently. That's come up a lot in Iran, where there's been a theory of the case that the midterms would force them into some sort of capitulatory posture. 00:22:21 Speaker 8: We haven't seen that. 00:22:22 Speaker 14: And here, too, I think they'd prefer to lose a couple fewer seats at the margin in the House, but the House is basically a foregone conclusion. I think Besson's doing this because he doesn't like how the prices look. 00:22:30 Speaker 4: I mean, the bottom line is, as Paul just correctly stated— It's about the data. I got PCE at 3.6% survey. I got core PCE a little bit south, 3.3%. That's untenable for most of America, isn't it? 00:22:49 Speaker 6: Yeah, I completely agree. 00:22:51 Speaker 14: Ultimately, both voter economic sentiment and the movements in the long end of the curve are going to be driven by fundamentals, with inflation being a big part of that. I mean, you know, there was some debate yesterday as to whether the little leg down in yields at the long end of the curve was showing that the best intervention is in fact working. I think that's more a reflection of sort of improving sentiment on the Iran war. I'm, again, a little skeptical that we're going to actually get that de-escalation, but the oil price moves, I think, are what drove that. 00:23:17 Speaker 2: So Tobin, with several days now of some hindsight here, how do we think about Secretary Besson's bond buying announcement and policy? 00:23:26 Speaker 7: How do we should we think about that? 00:23:29 Speaker 14: To me, it looks kind of like an opportunistic attempt to come into the market. 00:23:32 Speaker 8: In a place where he thought liquidity was thin. 00:23:35 Speaker 14: Not that it was a real response to liquidity conditions, but he's like, ah, you know, I have a chance to take a shot here, maybe bring prices down a little bit at the margin. I'm not reading anything he's said or done as projecting the kind of whatever it takes resolve that you would really need if you're intending to draw a line in the sand and say, yields go no higher and we're going to force them down. 00:23:54 Speaker 2: Tobin, sticking with Secretary Besant, making news on another front. 00:23:57 Speaker 7: This is in Iran. 00:24:00 Speaker 2: D-Day, this economic D-Day, is there any reason to believe an incremental layer of sanctions on Iran will have any effect here? It seems like they've been the most sanctioned country out there for a long time. 00:24:12 Speaker 11: Yeah, I mean, the. 00:24:13 Speaker 14: Original maximum pressure sanctions campaign in Trump 1.0 began more than six years ago at this point. 00:24:17 Speaker 11: So certainly economic isolation is not new for them. 00:24:20 Speaker 14: You know, the pressure continues ratcheting tighter and their economy is under very severe strain. So it's inflicting pain, but I don't think that that pain is going to cause the regime to crumble or give up. 00:24:32 Speaker 4: To summarize this, I think it's really important. Dan Tannenbaum is going to be on the 9 o'clock hour. He's an expert on this. And it's all this sanction, sanction, this, and limit, limit, this. The bottom line is China gets its oil from Iran, right? And the answers are going to continue to, right? 00:24:47 Speaker 14: Yeah, I have no expectation that China is going to alter their behavior in any way based on this. 00:24:53 Speaker 4: OK, then I don't apply. I'm absolutely baffled. 00:24:56 Speaker 2: Well, I think, Tom, this brings up and Tobin, I'd love to get your thoughts here about President Xi still scheduled to come and meet with President Trump here, I guess, next month. 00:25:06 Speaker 7: Boy, how do we handicap that thing now? 00:25:09 Speaker 14: I mean, from the Chinese side, I think that the fact of that meeting happening is a win at some level. What they want is to reinforce this dynamic of constructive strategic stability, which to them means that the U.S. 00:25:20 Speaker 11: Needs to treat them as a peer. 00:25:22 Speaker 14: We can't just reach out and slap them around with long-arm sanctions and export controls. And so I think continuing the sort of parade of meetings where we're embracing each other as equals, that's a win from their perspective. So I suspect that that summit will go forward even with some recent ratcheting of export controls in terms of these FCC actions on optical transceivers or the polysilicon tariffs or those kinds of confrontational steps by the U.S. 00:25:44 Speaker 4: Look, can we switch geographies? 00:25:46 Speaker 11: Oh, yeah. 00:25:46 Speaker 4: Canada. What did you think of what Mr. Carney and all of Canada did yesterday in their, I guess, their tariff tit for tat? Does it really limit a lot of our industrial ability? Let's start with, are you ready? Three, two, one. 00:26:02 Speaker 11: Aluminium. 00:26:03 Speaker 5: Oh, yes. 00:26:06 Speaker 14: Yeah, I mean, look, the actual scale of the tariffs imposed in both directions is quite small. You know, the rate's high, but the base is very narrow. It's about 5% of the trade in each direction. 00:26:14 Speaker 7: So at some level, it's symbolic. 00:26:15 Speaker 14: I mean, they're a proud nation like we are. I do ultimately think that the relationship is going to get back on track. I think the USMCA will be extended with some revisions probably sometime next year. I don't think that the US administration is willing to blow it all up. 00:26:28 Speaker 4: But did you see anything that Canada was tariffing Is that a word? Tariffing that really struck you as being politically or from an industrial standpoint limiting. 00:26:43 Speaker 14: I don't see any concentrated industrial impacts. 00:26:46 Speaker 8: The sort of U.S. 00:26:47 Speaker 14: Metal sales to Canada, ultimately, again, it's just not that big of a market as a share of our sort. 00:26:52 Speaker 11: Of global sales. 00:26:53 Speaker 14: To me, what stands out in terms of the concentrated impact of the Canada tariffs is the political geography of it, where Michigan and Maine in particular are really high leverage states in the midterms in the Senate. And they're obviously border states and rely a lot on trade back and forth with Canada. So you have Maine lobstermen, for example, up in arms. So that to me, I think, is the sort of political shortcoming of this strategy. And you do have people in the Senate prevailing upon the president to try and cool it. 00:27:19 Speaker 2: So, I mean, that kind of goes to Tom's midterm question earlier. It feels like the president is not really attuned at all to the midterms in terms of trying to support Republican candidates, because a lot of his policies are whether it is tariffs, whether it is around, just simply don't poll well, yet he seems to be double down on these types of things right before the elections. 00:27:44 Speaker 11: Yeah, I think he's pursuing his agenda because he believes in it. 00:27:48 Speaker 14: And the chips will fall where they may from a Republican congressional prospect's perspective. I think he basically thinks that congressional Republicans are there to support his agenda. And so if the price of getting some elements of his agenda move forward, either in trade or in the U.S.-Iran conflict, is that some of them lose their seats, then that's a noble sacrifice by them in service of the cause. 00:28:11 Speaker 4: Tobin, thank you so much. Tobin Marcus, really appreciate it. 00:28:13 Speaker 8: U.S. 00:28:14 Speaker 4: Policy analyst, Wolf Research. Stay with us. More from Bloomberg Surveillance coming up after this. 00:28:29 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:28:35 Speaker 3: Eastern. 00:28:35 Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. 00:28:41 Speaker 4: This is like from my ute. It's from another life, folks. I'm so happy that Ben Cook's on, Portfolio Manager. Hennergy Energy Transition Fund, also known as the OMG Look at the Dividend Fund. Ben, this is way back. I'm thinking Finley, Ohio. MPLX with a 7% yield with an Apple-like return since the beginning of COVID, like think 25% per year. Are we still in love with midstream and pipelines that pay huge dividends? 00:29:15 Speaker 8: Yeah, good morning, Tom, and thanks for that introduction. You know, we are. 00:29:19 Speaker 12: We think that the investment case for midstream today is as strong as it's ever been, a combination of rising growth and production here in the United States, strong commodity price fundamentals, corporate governance that's vastly improved over the last five years, and as you mentioned, cash payouts to investors, which continue to rise on the back of those favorable drivers that I just mentioned. 00:29:42 Speaker 4: Paul, this was all the rage decades ago. You make 13% per year like on an MLP. You know, you get some growthiness, double digit. But then with the overlay of a 7% yield reinvested, you're popping 25% per year since the beginning of COVID. 00:29:59 Speaker 6: Exactly. 00:30:00 Speaker 2: Hey, Ben, you know, a lot of lay people like myself, I just look at the price of, you know, Brent crude or WTI crude. And I see some moderation today. But experts like you tell me we should be looking at refined products. 00:30:12 Speaker 6: I guess that's the. 00:30:13 Speaker 2: Distillates, the diesel, the jet fuel. 00:30:15 Speaker 7: What's what's going on there with the stuff people actually use? 00:30:20 Speaker 8: Yeah, that's exactly right, Paul. 00:30:22 Speaker 12: You know, if you look at the global price of, you know, whether it's diesel or gasoline, it's obviously elevated with the tightness we're seeing based on the conflict with Iran and with the Russia-Ukraine conflict. You know, just recently on the second quarter call by ExxonMobil, You know, we heard from CEO Darren Woods that global refining capacity is off by as much as five to six million barrels. So that's as tight as the market's ever been. And we continue to see drawdowns in inventories. And we think the strength in those refined product prices will continue. 00:30:59 Speaker 2: How does that get addressed by the industry? You just don't build a refinery on the Gulf of Mexico overnight. 00:31:05 Speaker 11: Do you? 00:31:07 Speaker 4: No, you don't. 00:31:08 Speaker 12: It takes a long time, a significant amount of capital, and obviously approvals that are required by a number of different bodies to get a refinery built in this country. We've seen capacity added in the industry on a global basis in places like Mexico and West Africa over the last several years. 00:31:26 Speaker 8: But here in the U.S., it's a difficult task. 00:31:29 Speaker 12: Short of killing demand, there's really not an easy way to add supply to the market. So over time, as prices remain elevated, we'll attract more volume here. But it really is a matter of deferring or destroying demand, which is going to create extra supply. 00:31:46 Speaker 4: Give me an update on not in my backyard. Like, you know, we're talking about a pipeline from the, you know, say from the northern Arabian Peninsula across to the eastern shore of the Red Sea. I'm making this up, folks. Stay with me. Ben Cook, if we want to build pipelines in America, can we? Yeah, we can. 00:32:06 Speaker 12: And the Trump administration has done a lot to remove the impediments that I think were in place during the Biden administration. Famously, in the early days of the Biden administration, we saw the removal of the permit for the Keystone XL pipeline and effectively killing that project. But you know, removing the impediments, the approval, streamlining the approval process through the various bodies that are responsible for the permitting of new pipeline construction and build out. That can allow for a fast track of project expansion. 00:32:38 Speaker 8: And we're seeing a number of big. 00:32:40 Speaker 12: Projects being developed in areas like Texas and Ultimately, we'll see some pipelines deliver refined products to the southwest and ultimately the west coast of California. But it is a process that's lengthy, and the Trump administration is doing a lot to expedite that process. 00:32:59 Speaker 2: So, Ben, if you talk to shippers and insurers of ships, is the Strait of Hormuz ever. 00:33:06 Speaker 7: Going to be open like it was before? 00:33:08 Speaker 2: Before this war, or is the world just simply changed in that part of the world? 00:33:12 Speaker 8: Yeah, that's a great question, Paul. 00:33:13 Speaker 12: You know, I think the reality of the situation is the Iranians now know that they have significant leverage over the Strait. And whatever, you know, a durable, peaceful resolution looks like, it's hard to imagine them ceding control of the Strait. 00:33:27 Speaker 8: So I think the world has changed. 00:33:29 Speaker 12: I do think the recent announcement or the headlines associated with the Omanis and the Iranians negotiating some sort of controls and non-starter for the U.S., It's going to be a long time before we sort that out. 00:33:41 Speaker 4: Ben, you're a legend at this. You've been doing it for ages with Hennessy Energy Transition Fund. Do you see a day where the energy portion of the Standard & Poor's 500 will get back to quote-unquote normal? 00:33:57 Speaker 12: The fundamentals in the industry would certainly justify today. Right now, the energy sector, in terms of its weighting in the S & P, is roughly 3.3%. That's amazing. For the generalist, it hasn't really been punitive to be underweight energy because it's not a large percentage of the index. We think historically that the guideline of its earnings contribution to the S & P is the right way to look at the weighting in the S & P 500. That would imply roughly 7% to 8%. Historically, it's been as high as 10%, 12%. So we could certainly move up from here. Fundamentals, again, would certainly justify it. 00:34:35 Speaker 4: That's what I thought. Like a double would be sort of what Ben Cook sees somewhere out there far in the distance. Ben Cook, thank you so much with Hennessy Energy Transition. Stay with us. More from Bloomberg Surveillance coming up after this. 00:34:58 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:35:04 Speaker 4: Eastern. 00:35:04 Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:35:11 Speaker 4: This is our interview of the day. Plain and simple. on the unspoken in the news, which is the sanctions work. Dan Tannenbaum is truly expert at this. He's got a fancy title, Global Anti-Financial Crime Practice Leader at Oliver Wyman. He is surveillance sanctions expert. Dan, can we sanction China? 00:35:34 Speaker 11: We absolutely can. The question is, will we? And the U.S. 00:35:38 Speaker 3: Government has historically been very reluctant to sanction any sort of meaningful entity in China. We've sanctioned smaller businesses in Hong Kong and the mainland, a couple of small banks over the years, but really nothing that anyone's heard of. 00:35:53 Speaker 11: The question is, will the U.S. move forward? 00:35:56 Speaker 3: And go at, let's say, a Chinese financial institution, the conduit for China's purchase of Iranian oil, which they purchased roughly 80% of Iran's oil on the market. 00:36:08 Speaker 11: So that's the big question mark this week. 00:36:11 Speaker 2: So when we heard from Secretary Besant regarding Operation Economic Outcast, what did you make of that? I mean, does this have any teeth? It just seems like Iran has been sanctioned more than anybody else seemingly on the planet, yet they Keep on going. 00:36:28 Speaker 3: Look, it's a little like Ted Knight waiting at the tee box. We've been waiting for this for a while. I mean, the sanctions that the secretary spoke about earlier this week, the U.S. 00:36:42 Speaker 11: Could have done that since 2020. 00:36:43 Speaker 3: This is not new authority. 00:36:45 Speaker 11: It's not new EO. It's not new regulation. It's a new position. The question is, will the U.S. make good on the threats? 00:36:52 Speaker 3: We saw overnight The Treasury Department announced discussions between the U.S. 00:36:57 Speaker 11: And Bahrain on the issue. 00:36:59 Speaker 3: The Fifth Fleet is housed in Bahrain, so they were never really in Iran proxy or relation. Will they go to Oman after what was announced this morning on this revenue sharing agreement? That's almost a certainty. But China's the real linchpin here. China is their most important trading partner. I'm not sure they necessarily will, at least at any significant scale. 00:37:22 Speaker 4: I mean, get down to the nite grite, as only Dan Tannenbaum can do. So if somebody decides we want to go after China, what do we actually do, Dan? 00:37:34 Speaker 3: I mean, what you do is you sanction a Chinese financial institution, not one of the state-owned banks and not one that's large enough that's systemically important in China, basically a bank that someone's heard of that's not significant enough to hurt the global economy. And I think you heard the secretary mention in the last question during that presser, why haven't you done that? And his response is, well, I don't want to, why would I blow up the global economy? That calibration is likely happening now to figure out What can you do that's significant enough that doesn't create unintended consequences, like in 2018 when Ole Deripaska was sanctioned and the U.S. briefly destabilized the world's aluminum sector for two weeks? 00:38:18 Speaker 2: Dan, President Xi is scheduled to come and meet with President Trump in September. 00:38:24 Speaker 7: How does that factor into all this? 00:38:27 Speaker 3: And they built that fun helipad for the visit as well. I mean, that's certainly a part of this calculus. Now, what I'm hoping for, and as we think we've heard at some point, hope isn't a strategy, is that the president is leveraging his relationship with President Xi to try and come up with a side deal to essentially push Iran forward. further away from China based on the way China responded yesterday overnight from the economic D-Day announcement on Monday. I'm not so sure that's happening, but that's hugely playing in the minds of the administration right now to not disrupt the relative detente we've been experiencing. So that's the real question is what are they going to do? The secretary kind of teased a bank that could be sanctioned by the end of this week. 00:39:11 Speaker 11: We've still got a few more days left. 00:39:13 Speaker 2: So net net here, it really comes down to China and how, I guess, serious the United States wants to get to China. But boy, that brings into discussion a whole host of issues here. Is there a time frame that you're kind of thinking? 00:39:30 Speaker 11: About? 00:39:31 Speaker 3: I mean, there is no time frame. We heard that from the secretary. There are other countries, to be clear. 00:39:35 Speaker 4: There's India. 00:39:36 Speaker 3: There's the UAE, which did announce last weekend that they were suspending trade with Iran, but it can't go to zero instantly. There's also Turkey, although interestingly, one of the Turkish banks was under criminal investigation for sanctions violation. That case was dropped by the DOJ in this administration. So it will be interesting to see where they go. There are other targets beyond China. There were sanctions designations made on Monday as part of this announcement, but none of them are really moving the needle. 00:40:08 Speaker 7: Dan, so it's interesting here. 00:40:09 Speaker 2: You know, we get this economic operation, economic outcast here. Does that suggest to you that military options by this administration are essentially off the table, at least for the near term? 00:40:23 Speaker 6: I forget who. 00:40:24 Speaker 3: Reported it yesterday, but that is what it sounds like. I mean, the shift now is from the Department of Defense slash war over to the Treasury Department to use sanctions and enforce them. That does seem like what the tact of the administration is. And we've heard from the president directly that they're looking to squeeze Iran economically. But you said it in the intro that They've been under sanctions for 40-something years. They're good at managing their existence under sanctions. Now, it's certainly getting harder in this environment since February, but it's not a slam dunk that this will happen instantly. 00:40:59 Speaker 2: It's interesting also because the domestic politics here, Dan, are kind of suggesting that I think probably most Americans are not supportive of the swore, certainly has not polled well. And we've got midterm elections. It seems like perhaps This president would like to get resolution of this thing sooner rather than later. 00:41:18 Speaker 11: And Iran knows that. They're a savvy adversary. 00:41:22 Speaker 3: It's highly unlikely that there would be an agreement between the U.S. and Iran before the midterms because Iran is going to use whatever mechanisms they have left to inflict pain back on the U.S. 00:41:34 Speaker 11: As the driver of this for the West. 00:41:37 Speaker 3: So that is going to be the thing to watch is will they even negotiate in good faith at this point because they know that this is so deeply unpopular in the U.S. 00:41:48 Speaker 4: Thank you so much. Really, really appreciate your expertise on this. He's with Oliver Wyman. 00:41:54 Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. 00:42:19 Speaker 11: Thank you.