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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Yeah.

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Speaker 1: So let's get through the market, shall we a cross

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Speaker 1: straight over to Cal Weinberg, high frequency Economics founder, as

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Speaker 1: we break through that breaking news here at Bloomberg following

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Speaker 1: what could be a significant shift in China's purchases of treasuries. Kylie,

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Speaker 1: you've heard the news. Walk me through what you think

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Speaker 1: is the significance the message that comes from these Chinese officials. Well,

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Speaker 1: a good morning. I think that we need to know

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Speaker 1: a lot more about what's actually going on. The notion

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Speaker 1: that the Chinese would actually sell treasuries seems to me

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Speaker 1: to be extremely implausible. Uh, you know, to sell treasuries

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Speaker 1: that have to buy something else, and that would involve

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Speaker 1: currency transaction. And I don't think they're prepared to be

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Speaker 1: seen as intervening in the currency markets. If they're just

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Speaker 1: going to be buying less of them, Well, they have

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Speaker 1: been buying less of them, although there has been a

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Speaker 1: bit of renaissance recently, but that would mean that they're

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Speaker 1: not taking in more dollars on their foreign trade surpluses,

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Speaker 1: that they're taking in more euros perhaps, and they're they're

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Speaker 1: buying more an exchange counterpart to the cash and flows.

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Speaker 1: But it doesn't necessarily mean a catastrophic sell of treasuries

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Speaker 1: at all. I think that we just have to get

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Speaker 1: some more information. But probably they're just going to buy

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Speaker 1: a little bit less moving forward rather than liquidate their holdings.

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Speaker 1: But it's not clear whether this recommendation is actually materialized

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Speaker 1: into action either cows so we should probably think about

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Speaker 1: that as well. But if you take a step back,

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Speaker 1: last year they took the opportunity as their currency strengthened

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Speaker 1: to build up their effects reserves. Is there a message

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Speaker 1: that we can take away from this about how comfortable

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Speaker 1: they might be with the current level of the Chinese

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Speaker 1: You are well. I I think that there's been and

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Speaker 1: overt changed since President Gee's speech in Davos last year,

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Speaker 1: in which he pitched China as the new champion of globalization.

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Speaker 1: To keep the the yuan strong and to make it

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Speaker 1: even stronger so that people would have confidence in holding

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Speaker 1: it is very clearly a competition developing between China and

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Speaker 1: the United States to be the leader of globalization, the

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Speaker 1: leader of free trade. And I think that a strong

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Speaker 1: currency is part of china strategy. They're managing it. They

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Speaker 1: can do it. Carl Weinberg with us out of our

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Speaker 1: studios in London, which is a good and beautiful UH thing.

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Speaker 1: Bloomberg Surmanance this morning brought you by U s c

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Speaker 1: F invest In. What's real Visit us c F Investments

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Speaker 1: dot com. That's U s c F Investments dot com.

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Speaker 1: We thank them for their UH support. Carl. There has

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Speaker 1: been a grand shift. It occurred yesterday with a shock

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Speaker 1: of a president to Davos. My phrase for the year

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Speaker 1: is make Davos Davos again. Is a president could have

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Speaker 1: succeeded that if he's going to go there without Mike

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Speaker 1: Allen over to Xios calls a carrot and stick approach

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Speaker 1: from one of his sources. Is the carrot and the

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Speaker 1: stick going to be felt up Happy Valley? Well, you know, Tom,

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Speaker 1: I'd like to think that the president's handlers are sending

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Speaker 1: him over there to try to repair US relations and

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Speaker 1: to try to reverse some of the damage that has

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Speaker 1: been done in those relations over the last year. For me,

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Speaker 1: the highlight of last year's Davos was President Gee's speech,

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Speaker 1: the one I just referred to, in which he proposed

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Speaker 1: that China would promote globalization if the U. S wouldn't think.

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Speaker 1: This is a chance for the President to explain to

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Speaker 1: everybody what US policy is, and I'm hoping that his

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Speaker 1: his statement will be that the U. S. Believes in trade,

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Speaker 1: it just wants to level the trading field. And that's

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Speaker 1: a much more digestible proposition. That is not a multilateral tone.

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Speaker 1: He isn't I mean if he if he Waltz is

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Speaker 1: over there with Peter Navarro and Wilbur Ross. It's not

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Speaker 1: a Davos friendly tone, is it. Well, it's not a

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Speaker 1: Vos friendly crowd. But remember the President will be scripted

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Speaker 1: and that Navarro will only be one of the voices

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Speaker 1: that will will draft that script. There are other voices

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Speaker 1: out there, particularly over at the state side, that is

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Speaker 1: concerned about Europe, for example, pivoting its primary relations away

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Speaker 1: from the Atlantic Alliance to the stronger tie with China.

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Speaker 1: And I think that there are concerns in other parts

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Speaker 1: of his advice pool about the damage that could be

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Speaker 1: done long term to the US by being more isolated.

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Speaker 1: Tom Kane, this is not the morning to talk about

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Speaker 1: the World Economic Forum, not with the moves we've had

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Speaker 1: in the bond market of the last Maybe the link

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Speaker 1: you think Trump going to Davos is the news of

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Speaker 1: the morning. I think it's a huge, huge deal for washing.

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Speaker 1: I think the fragility of the bond market is absolutely

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Speaker 1: front and center, and that's the significant story this morning.

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Speaker 1: Carl walked me up about walk me through about how

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Speaker 1: francile you think the situation and treasuries might be. Well,

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Speaker 1: I mean there are there are very explosive headlines and

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Speaker 1: doom and gloom for by various people about the bottom market.

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Speaker 1: But you know, the bottom line is that most of

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Speaker 1: the time when the Fed hikes rates, and it's hiking

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Speaker 1: rates because it fears inflation, bondy yields go up. Because

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Speaker 1: the base the primary base for for bondy yields, the

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Speaker 1: Fed rates are going up, and because inflation expectations are

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Speaker 1: going up. So this is not really news. This is

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Speaker 1: maybe a startling movement on a single day, but you

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Speaker 1: really have to expect that if history is not going

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Speaker 1: to reverse itself. Five out of six times we've seen

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Speaker 1: the bottom market rise with the FED tightening, and this

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Speaker 1: is I think shaping up to be one of those times.

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Speaker 1: Just another day in paradise, John, I just took a

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Speaker 1: quick look at one of my technical studies and I

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Speaker 1: don't even get sweaty until two sixty. We had a

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Speaker 1: guest on this morning, Jonathan Krinsky in MK. I'm looking

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Speaker 1: for two sixty three. Two sixty four is key technical

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Speaker 1: resistance on a higher yield. As you look at the

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Speaker 1: bond market, Carl, the situation for many people has been

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Speaker 1: term premium has been incredibly low and faint. It's being negative.

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Speaker 1: What's going to be the catalyst to get term premium up,

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Speaker 1: which would mean to sustain move higher in treasury year

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Speaker 1: it's going forward? Yeah, So I think that, you know,

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Speaker 1: risk and supply are one element in there. You know,

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Speaker 1: we just had a tax bill passed with a trillion

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Speaker 1: and a half dollars of new borrowing for the next decade,

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Speaker 1: possibly more, possibly less, but something on that order of magnitude.

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Speaker 1: We have infrastructure spending coming, so we have I think

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Speaker 1: some uncertainty about some nervousness perhaps about having to deal

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Speaker 1: with that. We do have expectations for higher inflation coming

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Speaker 1: out there, and while it's a slow burn inflation indicators,

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Speaker 1: wages in particular, are starting to accelerate a little bit visibly.

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Speaker 1: So the elements are in place for that term premium

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Speaker 1: to normalize and maybe even overshoot to the higher side.

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Speaker 1: You can't be sure of that, but certainly this is

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Speaker 1: not a time to be looking for lower term premium

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Speaker 1: for lower bodylds. I certainly agree with that statement. Just

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Speaker 1: the question whether it's going to be a panic or not,

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Speaker 1: and I have no reason to think it will well

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Speaker 1: call at this stage when you put all the moving

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Speaker 1: parts together, the prospect of a bigger deficit in the

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Speaker 1: United States for America, the prospect of China stepping back,

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Speaker 1: the reality of an unline of the federal reserves balance sheet,

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Speaker 1: and rights going higher as well, that's fertile grind for

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Speaker 1: repricing of treasuries, isn't it. Well, yes, but you know,

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Speaker 1: almost all of those things you mentioned, except for the

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Speaker 1: China announcement, have been in the market for a while,

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Speaker 1: so you think about what's new and what's going to

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Speaker 1: change the expectations, and I don't believe the China statement

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Speaker 1: is enough to uh, to to really create a panicky

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Speaker 1: market situation in and of itself. We've known about the

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Speaker 1: FED for a while. We've known about the FED unwinding

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Speaker 1: its balance sheet. We've known about inflation, We've known about

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Speaker 1: growth and wages in the unemployment rate and all that.

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Speaker 1: So I think that in terms of news this morning,

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Speaker 1: China and the margin could make a difference. But again

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Speaker 1: we don't even have enough details to fully assess what

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Speaker 1: that means. At this moment, we don't care. But what

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Speaker 1: is clear is that we're seeing a repricing of the

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Speaker 1: last couple of weeks. You're seeing a lot more people

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Speaker 1: reach to hedge their exposure potentially to a higher inflation

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Speaker 1: rate through this year. Does that make sense to you? Well, yes,

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Speaker 1: and you know, my due diligence and saying you know,

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Speaker 1: uh and saying everything is that yes, we should expect

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Speaker 1: higher bond yields. No, I have no basis to exp

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Speaker 1: back the panic in bond in bonds to occur in

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Speaker 1: the short term. Technicians may have a reason for the

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Speaker 1: market to sell off, and that's independent of what the

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Speaker 1: economics says. When the technicals and the economics call for

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Speaker 1: the same thing, you do tend to get more powerful moves.

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Speaker 1: But the economics of the matter are actually pretty tranquil.

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Speaker 1: High frequency economics founder the reality check on on some

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Speaker 1: franchile some fragility, just some fragility coming through in the

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Speaker 1: bond market. It is a joy to speak with Jeffrey

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Speaker 1: Curry of Golden Sex ahead of their commodities research. He

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Speaker 1: writes acutely detailed notes on the dynamics of supplying demand.

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Speaker 1: Jeff Curry, you are trumpeting the return of backward backwardation.

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Speaker 1: That is a mouthful. What is backwardation and why should

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Speaker 1: we care? It's a condition and a come oddity market

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Speaker 1: where the spot price sits above the forward price, and

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Speaker 1: it's a condition that's usually representative of market that is

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Speaker 1: very short. I like to think of an example. Let's

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Speaker 1: take oxygen. You have to have it today because if

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Speaker 1: you don't have it today, you're dead. You don't care

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Speaker 1: about tomorrow. So oxygen would be a perfectly backrodated market.

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Speaker 1: And so we think about a contango markets where spot

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Speaker 1: prices sit below forward prices. That's what these markets look

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Speaker 1: like throughout most of the period over the last ten

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Speaker 1: years since that since the crisis. So the fact that

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Speaker 1: we have oil now shifting into a solid backgrodation zinc

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Speaker 1: invtive backgrodation. It's an indication that supply chains around the

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Speaker 1: world for both metals and oil are starting to get very,

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Speaker 1: very tight. So backwardation is an indication a premium for

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Speaker 1: prompt deliberty spot prices above forward prices. How much is

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Speaker 1: it Jeff about shale coming online as this crewed price

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Speaker 1: guys U Uh. That's a very important component of this

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Speaker 1: is that when we think about the forward outlook for energy,

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Speaker 1: I don't think anybody out there is going to argue

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Speaker 1: we're running out of oil on a longer term basis

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Speaker 1: because there's so much supply. And what we saw with

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Speaker 1: the rally this week in prices is that producers came

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Speaker 1: in and sold the back into that forward curve, which

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Speaker 1: then reinforces this whole concept of agrodation. And the thing

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Speaker 1: about is what the backwardation is that, particularly even if

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Speaker 1: OPEC tries to ramp up production or you have the shale,

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Speaker 1: it's just gonna put more selling pressure on the back end,

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Speaker 1: while the strong global economic backdrop that we have right

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Speaker 1: now is going to put upward pressure on the front

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Speaker 1: end of the curve. Reinforcing the bagardation. I'm gonna go

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Speaker 1: back to Tom's question of why is this important is

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Speaker 1: because an investor can buy oil at a discount on

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Speaker 1: the forward curve and then hold it up and it

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Speaker 1: rolls up to expiration, and sell it at a premium.

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Speaker 1: So the oil price does not need to move. All

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Speaker 1: you do is you roll the front end of the curve.

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Speaker 1: And I want to emphasize commodities are yielding assets, and

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Speaker 1: that's that shape of the forward curve that gives the yield.

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Speaker 1: And for the first time and quite sometime, we're now

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Speaker 1: in a positive yield, which allows the investor to hold

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Speaker 1: oil without having to pay the cost of carrey. So

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Speaker 1: this is a very important development for investors. Jeff, this

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Speaker 1: is the market dynamic. Let's talk about the economic bankdrop

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Speaker 1: fundamentally and the commodity complex in its entirety. China. A

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Speaker 1: lot of news coming through from China today. A conversation

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Speaker 1: this morning here on Bloomberg about Chinese officials wary of

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Speaker 1: purchasing more treasuries. From here. As you look at the

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Speaker 1: effects dynamics in China, what does it mean ultimately for

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Speaker 1: how you view the commodity trade. Well, I think the big,

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Speaker 1: biggest and most important component of what's going on in

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Speaker 1: China really is the supply side policy that they've implemented

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Speaker 1: more recently, in the sense that they're trying to deal

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Speaker 1: with two problems in China. One is the pollution problem,

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Speaker 1: so the anti pollution, but the other is that they have,

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Speaker 1: you know, a debt problem and some of the key industries,

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Speaker 1: and those key industries in which they have the debt

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Speaker 1: problem happened to be in your core commodity sectors like steel, iron, ore, aluminum,

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Speaker 1: and as a result, like hutting back capacity, not only

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Speaker 1: they take pollution out of the system, but they also

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Speaker 1: increase the prices of these commodities, which reduces the number

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Speaker 1: of non performing loans on the bank's bouncy. So that's

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Speaker 1: a really important component. And if you go back to

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Speaker 1: the currency question, because these are the commodities that they export,

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Speaker 1: not import um. When we think about you know, a

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Speaker 1: weakening currency in terms of UM, any type of you know,

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Speaker 1: retaliation type of dynamic here that you end up with

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Speaker 1: a more competitive environment to push these commodities out. So there,

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Speaker 1: you know, there's a lot of connections here between these,

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Speaker 1: but I think the primary one really is a supply

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Speaker 1: side policy, Jeff, at the moment of the last few years,

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Speaker 1: for that matter, you've always joined a distinction between what

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Speaker 1: you see in China's campex commodities and ompex commodities. How

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Speaker 1: much that story developed of the last few quarters for

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Speaker 1: you when when we look at the the broader demand

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Speaker 1: for commodities right now is that there's something I've never

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Speaker 1: seen before. We use the term global synchronous growth from

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Speaker 1: a g graphic perspective, and we're seeing that right now.

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Speaker 1: But what makes this even more different than two thousand

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Speaker 1: and four was last time we saw a real strong

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Speaker 1: global synchronous growth, is that it's synchronous across the commodity complex,

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Speaker 1: across medals, across the barrel of oil. I've never seen this.

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Speaker 1: It's the the comprehensive nature of this demand growth is Okay, well,

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Speaker 1: I'm looking at the copper chart. I'll get it out

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Speaker 1: on Twitter for Bloomberg Radio. You've gotta first look at it.

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Speaker 1: But I mean, as copper, something that we're Jeff Curry

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Speaker 1: can call bottom to the commodity bear marketing. Coppers had

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Speaker 1: a great movement by no means is broken out through

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Speaker 1: you know two thousand five, two thousand six highs Well,

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Speaker 1: I think when you think about you know, the old saying,

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Speaker 1: you know, the copper has a PhD in economics, I'm

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Speaker 1: a firm believer the only differences instead of being Harvard

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Speaker 1: now it's some Shanghai University UM. And in terms of

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Speaker 1: looking at the health of the global economy, you know,

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Speaker 1: the one thing is, you know, shorting base metals in

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Speaker 1: the midst of an economic engine is a very dangerous proposition.

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Speaker 1: And so I think, you know, even though our target

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Speaker 1: is seventy seven thousand fifty right now in the markets

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Speaker 1: trading around, I think all the risk or to the

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Speaker 1: upside right now and I could easily see UM copper

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Speaker 1: pushing up and testing new highs. Maybe ten thousand we

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Speaker 1: saw in two thousand eleven may be difficult, but the

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Speaker 1: highs of oh six and oh eight I think are

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Speaker 1: very very much of risk to the upside quickly. Or

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Speaker 1: Jeff Crey, do I get Brent Crew to seventy a barrel? Um,

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Speaker 1: I'm not. I haven't looked at my screen in the

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Speaker 1: last five minutes. It may already be there. It shows

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Speaker 1: you reminded us. Yeah, I would argue that oil is

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Speaker 1: going to have a much more difficult time um getting

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Speaker 1: upside pressure unlike copper. And the reason for this is

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Speaker 1: the long term oil supply story is oversupplied, so you

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Speaker 1: have producers are going to go sell that back in

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Speaker 1: every time you go to the metals has a long

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Speaker 1: term supply story that's bullish. Means both the up back

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Speaker 1: in and the front end of medals can go up

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Speaker 1: with just why we prefer price perspective by the medals.

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Speaker 1: Great briefing, Jeffrey Curry, GOLBN Sex, thank you so much.

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Speaker 1: Real effort there from Frankford is all you may know

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Speaker 1: nationwide that there is with the worship of a football

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Speaker 1: player in the New England region one T. Brady, or

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Speaker 1: maybe it's Lawrence Bird of basketball fame of a time ago, Bobby,

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Speaker 1: you are leaping across to St. Louis Blues goal. The

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Speaker 1: same can be said of academics out of Fall River,

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Speaker 1: Massachusetts in Boston College. He has held court in science

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Speaker 1: at the Massachusetts of Institute of Technology, where it's been

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Speaker 1: known that he fly fishes on the Charles River. He's

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Speaker 1: a former Secretary of Energy. Earnest Money's professor. Money's wonderful

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Speaker 1: to have you back with us. UM. I would suggest

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Speaker 1: we have wandered into an anti science, anti math moment

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Speaker 1: in Washington. Do we need to reverse it or do

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Speaker 1: we need to get used to it and live with it? Well,

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Speaker 1: I think the issue of addressing the whole range policy

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Speaker 1: issues based on facts. I mean, there's science, but there's

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Speaker 1: also facts and analysis. UH, scientifically based is absolutely critical.

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Speaker 1: Otherwise we're just we'll just be lurching, uh from one

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Speaker 1: side of the room to the other side of the room,

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Speaker 1: if you like. UH. In terms of in terms of

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Speaker 1: how we put our policies together, and frankly, I think

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Speaker 1: that this UH is creating tremendous problems UH in terms

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Speaker 1: of the underpinnings of our global strength, which is the

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Speaker 1: set of alliances and institutions that this country spent seventy

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Speaker 1: years building. UH. If we are viewed as unreliable, as

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Speaker 1: as not uh not moving forward on the basis of

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Speaker 1: facts and analysis and science, UH, that's going to shake

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Speaker 1: confidence in those institutions and and undercut again our our enginet,

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Speaker 1: national strength, and in our our our ability to lead.

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Speaker 1: The kids that come into the Massachusetts Institute of Technology

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Speaker 1: are all top shelf. They wander with great arrogance through

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Speaker 1: physics one, physics to physics three, and then there's a

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Speaker 1: great divider course number eight point zero four, quantum physics one.

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Speaker 1: What's it like making the leap to pretend to be

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Speaker 1: like Professor Moneies. Well, first of all, I should say

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Speaker 1: that the students, no matter what their majors are, are

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Speaker 1: required to take UH to take physics here, UH and UH.

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Speaker 1: They are not required to take quantum physics unless they

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Speaker 1: are in physics or one of the engineering disciplines that

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Speaker 1: calls for it. But it certainly is. UH. It's a

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Speaker 1: it's a mind stretching experience to you to uh to

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Speaker 1: at the end of the second year to to start

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Speaker 1: looking at quantum physics. But I think the arrogance you

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Speaker 1: referred to uh is is gone by that time. Frankly,

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Speaker 1: you beat it out of them. I bring this up, folks,

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Speaker 1: because I just spoke to a wonderful student out of

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Speaker 1: a major state university who got through college with no

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Speaker 1: science and only one marginal math course. And I just

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Speaker 1: think the death of this is is a hugely important

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Speaker 1: Let's move on to important. If I could just add on,

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Speaker 1: I think it's it's that that's a disservice. I believe

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Speaker 1: to those students that she knew that. Yeah, she was

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Speaker 1: more than aware that she had been cheated. We are

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Speaker 1: not cheated by your expertise when we see North and

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Speaker 1: South Korea get together, and this does come down to

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Speaker 1: the physics of UH, nuclear science. Do you have a

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Speaker 1: legitimate belief that North Korea has the monies physics to

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Speaker 1: attack someone and do harm. Well, first of all, we

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Speaker 1: have to say that it's a fact that they have

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Speaker 1: had a remarkable trajectory in developing their nuclear weapons and

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Speaker 1: developing their their missile capabilities. Now, UH, it's maybe, and

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Speaker 1: I believe actually it is likely that they did have

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Speaker 1: some assistance in in both arenas. But one cannot take

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Speaker 1: it away from them that they have They've trained their

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Speaker 1: their scientists to a large extent internally, UH and UH,

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Speaker 1: and they've had they've moved rather rather quickly. In fact,

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Speaker 1: I think that we have underestimated that consistently, UH, in

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Speaker 1: the sense that we prefer to call a nuclear test

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Speaker 1: in North Korea a provocation as opposed to what I

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Speaker 1: believe it really is a a systematic step along a

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Speaker 1: longer trajectory, UH, to to make nuclew weapons uh, and

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Speaker 1: and with a strong commitment to it. So so I

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Speaker 1: think we we we make a mistake if we if

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Speaker 1: we underestimate their their capabilities. UH. I know my my colleague,

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Speaker 1: UH sig Hecker, who used to be the director of

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Speaker 1: the Los Alamos National Laboratory, UH, an expert in in

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Speaker 1: the weapons arena. Uh, he visited North Korea many times

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Speaker 1: and and already uh seven years ago he told me,

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Speaker 1: just in fact recently again how stunted he was to

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Speaker 1: see a enrichment plant. Uh. That was extraordinarily modern, all

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Speaker 1: the modern technologies. And so you know, we have to

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Speaker 1: take we have to take this threat for for what

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Speaker 1: it is. We all have our benchmarks along the way.

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Speaker 1: And for those of us more fossil nature, there's Ted

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Speaker 1: Taylor's the Curve of binding Energy that John mcfeebook, or

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Speaker 1: there's something as myth making is doctor Strange Love from four.

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Speaker 1: Do they have the rocketry? Do they have the telemetry?

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Speaker 1: Do they have the ignition systems within their physics to

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Speaker 1: make the toy work if they launch it at us?

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Speaker 1: So they clearly have the rockets, they have demonstrated that.

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Speaker 1: But when you start getting into telemetry, etcetera. Etcetera. I

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Speaker 1: think you put your finger on what we have as

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Speaker 1: far as I can see at least, and of course

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Speaker 1: I no longer have access to all the information. But

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Speaker 1: from what we can see, uh, they certainly have a

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Speaker 1: long way to go in terms of getting the entire

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Speaker 1: system together to deliver a nuclear weapon over intercontinental distances,

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Speaker 1: because they're telemetry and including meaning making all of the

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Speaker 1: physical measurements, uh, to understand how the how the system

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Speaker 1: works and survives. I've seen no evidence of that. But

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Speaker 1: when I say, can I say a long time? I actually, Uh,

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Speaker 1: it depends what what the time scale is here. I

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Speaker 1: think we have to assume that we're only talking about

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Speaker 1: a couple of years of dedicated effort for the entire

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Speaker 1: system to be to be brought together. Whether that happens,

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Speaker 1: I don't know, but I think it's the planning basis

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Speaker 1: that we need to use as we think about how

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Speaker 1: to address the North Korean situation. Each administration is different,

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Speaker 1: your sector of energy for President Obama. But if each

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Speaker 1: administration is different, do you have confidence that the General's

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Speaker 1: General of Master, General Maddis, General Kelly and others are

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Speaker 1: are moving forward our defense against this physics? Well? First

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Speaker 1: of all, UH Secretary Secretary Maddis UH formerly General Madness

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Speaker 1: UH McMaster and and and also the Secretary of State Tillerson.

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Speaker 1: I think they have all stated explicitly that they understand

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Speaker 1: UH the very very bad options that a military intervention

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Speaker 1: would represent. UM, mainly because it's hard to see how

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Speaker 1: a major altercation UH would not lead to tremendous destruction

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Speaker 1: not only of North Korea, but of our allies, our

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Speaker 1: own military personnel, their families UH in South Korea and Japan.

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Speaker 1: So Number one is we really need to have a discussion.

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Speaker 1: I believe that discussion needs to be broadened from what

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Speaker 1: it has been because, frankly, this may sound strange, but

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Speaker 1: I think the discussion has been too much focused on

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Speaker 1: uclear weapons UH in North Korea as opposed to the

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Speaker 1: broader security context UH in that region, and that includes,

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Speaker 1: of course South Korea, Japan, and China. UH, and I

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Speaker 1: think we need to end and it includes frankly, the

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Speaker 1: future military profile of the United States in that region.

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Speaker 1: And until we bring all those issues together UH informed

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Speaker 1: by the ground truth in terms of what North Korean

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Speaker 1: capabilities are and what the capabilities of our allies are, UH,

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Speaker 1: we're not gonna We're not going to get there. Look,

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Speaker 1: I think the d nuclearization of the peninsula remains the

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Speaker 1: right goal, but we have to understand that that's going

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Speaker 1: to be a long term goal. It's not going to

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Speaker 1: happen quickly. It's a step by step process, UH that

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Speaker 1: we need to we need to commit to over probably

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Speaker 1: over over a few decades. Secretary Monies, thank you so much.

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Speaker 1: He's a former Secretary of Energy and of course at

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Speaker 1: the Massachusetts UH Institute of Technologies in charge of making

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Speaker 1: freshmen use a slide rule for the first three weeks

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Speaker 1: in m I T. Thank you so much. We welcome

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00:24:17,240 --> 00:24:23,200
Speaker 1: Bloomberg Television Bloomberg Radio worldwide with William Gross of Janice Henderson. Bill,

430
00:24:23,280 --> 00:24:24,920
Speaker 1: thank you so much for being with us on short

431
00:24:25,000 --> 00:24:28,040
Speaker 1: notice today. Let me get right to the granularity of

432
00:24:28,080 --> 00:24:32,040
Speaker 1: the moment. What have you done in your Janice unconstrained

433
00:24:32,160 --> 00:24:35,760
Speaker 1: fund as we've moved rapidly from to forty to two

434
00:24:35,760 --> 00:24:41,520
Speaker 1: fifty and soon a print of two point six zero. Well,

435
00:24:41,560 --> 00:24:45,600
Speaker 1: good morning, Tom. We've gone short bonds, not just treasures,

436
00:24:45,600 --> 00:24:49,399
Speaker 1: but short guilts and short boons. UH left the j

437
00:24:49,480 --> 00:24:52,680
Speaker 1: GB market alone. But you know it appears it's a

438
00:24:52,760 --> 00:24:57,200
Speaker 1: treasury phenomena and treasury directed based upon your Bloomberg report

439
00:24:57,280 --> 00:25:00,800
Speaker 1: this morning with China being disaffected with the U S

440
00:25:00,800 --> 00:25:03,639
Speaker 1: treasuries and your report a day or two ago about

441
00:25:03,760 --> 00:25:07,119
Speaker 1: j g B s and they're changing quantitative easing policies,

442
00:25:07,160 --> 00:25:10,920
Speaker 1: but nonetheless, um, you know, it appears a negative type

443
00:25:10,920 --> 00:25:15,080
Speaker 1: of posture for bonds. I've also gone rather negative on

444
00:25:15,359 --> 00:25:19,200
Speaker 1: high yield bonds and credit spreads because you know, as

445
00:25:19,320 --> 00:25:23,919
Speaker 1: yields rise UH, you know, zombie like corporations pay higher yields,

446
00:25:23,920 --> 00:25:27,520
Speaker 1: and their UH spreads are compressed and their cover is compressed.

447
00:25:27,560 --> 00:25:30,720
Speaker 1: And so this is not a favorable element for high

448
00:25:30,800 --> 00:25:33,280
Speaker 1: yield bonds or sovereign bonds. And it's not a favorable

449
00:25:33,320 --> 00:25:36,480
Speaker 1: element this morning, at least for the dollar. You worked

450
00:25:36,720 --> 00:25:40,600
Speaker 1: for years, and you built for years a small shop

451
00:25:41,119 --> 00:25:44,439
Speaker 1: that had enough mass where the Chinese worried about the

452
00:25:44,480 --> 00:25:50,000
Speaker 1: Pacific Investment Management Company. Give us your experience of what

453
00:25:50,240 --> 00:25:57,440
Speaker 1: China is doing at the margin with their treasury obligations. Well,

454
00:25:57,480 --> 00:26:00,560
Speaker 1: they certainly haven't been building treasures, and you know, recent

455
00:26:00,600 --> 00:26:03,400
Speaker 1: evidence of the last few months suggest that they've been

456
00:26:03,440 --> 00:26:07,680
Speaker 1: liquidating treasuries. Um. You know, supposedly an effort to more

457
00:26:07,720 --> 00:26:13,520
Speaker 1: diversify their portfolio perhaps. Uh. In any case, uh, you know,

458
00:26:13,560 --> 00:26:16,080
Speaker 1: the liquidation of treasuries as opposed to the accumulation of

459
00:26:16,119 --> 00:26:19,280
Speaker 1: treasuries by China over the past few years is certainly

460
00:26:19,280 --> 00:26:22,359
Speaker 1: a negative. And you know, one of the things mentioned

461
00:26:22,520 --> 00:26:26,159
Speaker 1: several days ago by your reporters has to do with

462
00:26:26,240 --> 00:26:31,119
Speaker 1: quantitative easing, to the extent that the Japanese uh, you know,

463
00:26:31,200 --> 00:26:34,080
Speaker 1: are less easy in terms of their purchases of j

464
00:26:34,200 --> 00:26:36,560
Speaker 1: g vs, to the extent that the ECB at some

465
00:26:36,640 --> 00:26:39,080
Speaker 1: point later this year pulls back. You know, we've got

466
00:26:39,080 --> 00:26:42,840
Speaker 1: a worldwide situation in which central banks in total and

467
00:26:43,040 --> 00:26:46,480
Speaker 1: in the FED that's actually reducing their portfolio. In which

468
00:26:46,520 --> 00:26:51,080
Speaker 1: the world central banks in total are not adding to

469
00:26:51,160 --> 00:26:53,160
Speaker 1: their portfolio like to have in the past. There's been

470
00:26:53,160 --> 00:26:56,600
Speaker 1: fourteen trillion dollars worth of bonds bought by central banks

471
00:26:56,600 --> 00:26:58,760
Speaker 1: in the past four or five years. That appears to

472
00:26:58,840 --> 00:27:03,720
Speaker 1: be um close to an end bill gross. Given your

473
00:27:04,080 --> 00:27:07,320
Speaker 1: negative view on high yield and sovereign debt and so on,

474
00:27:07,560 --> 00:27:12,960
Speaker 1: So where should investors go for yield right now? Well

475
00:27:13,000 --> 00:27:17,200
Speaker 1: that that's a good question, because you know, a dramatic

476
00:27:17,320 --> 00:27:20,200
Speaker 1: rise in yields and I'm not suggesting that you know,

477
00:27:20,240 --> 00:27:24,200
Speaker 1: I've I've suggested that once we broke the tot barrier

478
00:27:24,280 --> 00:27:26,879
Speaker 1: on the tenure under peers that we have, which is

479
00:27:26,880 --> 00:27:29,840
Speaker 1: a long term trend line over twenty five years, that

480
00:27:30,200 --> 00:27:32,600
Speaker 1: you know, the increase is likely to be mild. I

481
00:27:33,160 --> 00:27:36,919
Speaker 1: think tenure treasuries, you know, could approach two point seven

482
00:27:36,960 --> 00:27:40,080
Speaker 1: two point eight percent by the end of two thousand

483
00:27:40,119 --> 00:27:42,479
Speaker 1: and eighteen. And what does that mean. That means another

484
00:27:42,920 --> 00:27:46,240
Speaker 1: two or three points loss and it basically wipes out

485
00:27:46,520 --> 00:27:49,639
Speaker 1: all income for the year. It's not a bear market

486
00:27:49,720 --> 00:27:52,359
Speaker 1: per se, but it's certainly not a bullmark. And you know,

487
00:27:52,440 --> 00:27:56,919
Speaker 1: to be technical, bear markets bottomed in two thousand and

488
00:27:56,920 --> 00:28:00,119
Speaker 1: twelve and June of two thousand and sixteen five and

489
00:28:00,200 --> 00:28:03,080
Speaker 1: so we're a hundred basis points plus higher. UM. That

490
00:28:03,200 --> 00:28:05,160
Speaker 1: could be defined as a bear market, but I think

491
00:28:05,200 --> 00:28:08,720
Speaker 1: more legitimately because bonds you know, for those years did

492
00:28:09,080 --> 00:28:12,000
Speaker 1: still three or four percent based upon you know, high

493
00:28:12,080 --> 00:28:16,119
Speaker 1: yield total returns that um, you know, the bear market

494
00:28:16,920 --> 00:28:19,200
Speaker 1: that I'm talking about is a mild one, but it

495
00:28:19,480 --> 00:28:23,840
Speaker 1: includes you know, negative prices for high yield bonds. So

496
00:28:23,880 --> 00:28:28,160
Speaker 1: where again do you go and get that yield? Well,

497
00:28:28,560 --> 00:28:31,239
Speaker 1: an investor that has been used to carry, that has

498
00:28:31,280 --> 00:28:33,640
Speaker 1: been used to risk assets, and I'm talking about stocks

499
00:28:33,680 --> 00:28:37,040
Speaker 1: to you know, everything in this barrel is basically the

500
00:28:37,080 --> 00:28:39,280
Speaker 1: same and connected like the thigh bone and the hip bone.

501
00:28:39,640 --> 00:28:42,480
Speaker 1: And so where do you go, Well, cash is the

502
00:28:42,520 --> 00:28:46,560
Speaker 1: first place. You know, I've talked about janice, unconstrained being

503
00:28:46,720 --> 00:28:50,000
Speaker 1: negative or negative duration or short bonds, and so that's

504
00:28:50,080 --> 00:28:52,920
Speaker 1: one area to do. Today should be a fabulous day

505
00:28:53,000 --> 00:28:56,080
Speaker 1: for unconstrained. Yesterday it was as well, and so there's

506
00:28:56,080 --> 00:28:58,760
Speaker 1: a way to make money on the other side of

507
00:28:58,840 --> 00:29:01,760
Speaker 1: the river. So to what is the positioning of the

508
00:29:01,800 --> 00:29:04,400
Speaker 1: street right now? I mean we talk about convexity, which

509
00:29:04,440 --> 00:29:07,720
Speaker 1: is a jargon phrase folks were where people cover their

510
00:29:07,720 --> 00:29:10,200
Speaker 1: trades and go, oh mg, Bill Gross is right, and

511
00:29:10,240 --> 00:29:13,040
Speaker 1: they get out, what is the bet that you see

512
00:29:13,080 --> 00:29:18,520
Speaker 1: within the institutional market now on bonds? I think it's

513
00:29:18,520 --> 00:29:21,040
Speaker 1: significant to them. I think it's significant not just in

514
00:29:21,120 --> 00:29:24,440
Speaker 1: terms of bonds, but in terms of spreads and what

515
00:29:24,480 --> 00:29:26,960
Speaker 1: we call and what I've referred to as carry. You

516
00:29:26,960 --> 00:29:29,080
Speaker 1: know that it's about a wonderful period of times sin

517
00:29:30,320 --> 00:29:34,200
Speaker 1: is bonds have come down carry total return, you know,

518
00:29:34,240 --> 00:29:37,000
Speaker 1: put it all together. In the world the investment world

519
00:29:37,120 --> 00:29:41,240
Speaker 1: is happy. Um, you know, now at this point, you know,

520
00:29:41,280 --> 00:29:44,360
Speaker 1: it appears that the market and that institutions are over

521
00:29:44,520 --> 00:29:48,880
Speaker 1: levered carry and so anything that's carry dominant and the

522
00:29:49,360 --> 00:29:52,200
Speaker 1: you know, let's face at risk assets and the bonds

523
00:29:52,240 --> 00:29:58,200
Speaker 1: and UM currencies in many cases are carry dominant, then

524
00:29:58,760 --> 00:30:01,720
Speaker 1: they could be at risk. Now I'm not again, this

525
00:30:01,800 --> 00:30:04,960
Speaker 1: is not armageddon for me. It's a mild increase, but

526
00:30:05,080 --> 00:30:08,640
Speaker 1: it basically signifies that, um, you know, the bull bond

527
00:30:08,760 --> 00:30:11,520
Speaker 1: market for five years is over and that we should

528
00:30:11,520 --> 00:30:15,040
Speaker 1: look forward to periods of low total returns. I mean,

529
00:30:15,080 --> 00:30:17,520
Speaker 1: I think this is so important, Bill Gross the idea

530
00:30:17,600 --> 00:30:21,040
Speaker 1: here of the leverage involved within the institutional markets and

531
00:30:21,120 --> 00:30:24,480
Speaker 1: the idea of what those reaction functions will be, and

532
00:30:24,560 --> 00:30:28,080
Speaker 1: any of us with a collective memory of remember that,

533
00:30:28,320 --> 00:30:32,640
Speaker 1: are we setting ourselves up for that August of shock

534
00:30:32,720 --> 00:30:39,040
Speaker 1: that we felt? Well? I I don't think so, tom uh.

535
00:30:39,360 --> 00:30:42,920
Speaker 1: If for only one reason, Um, you know, Mario drag in,

536
00:30:43,000 --> 00:30:47,000
Speaker 1: whatever it takes, has not been dismissed. Okay, he may

537
00:30:47,040 --> 00:30:49,280
Speaker 1: be tightening over a period of time, but it's not

538
00:30:49,360 --> 00:30:52,280
Speaker 1: been dismissed. And so central banks are still in their

539
00:30:52,480 --> 00:30:56,800
Speaker 1: central banks where the you know, the primary um, the

540
00:30:56,840 --> 00:31:00,480
Speaker 1: primary giver of carry for the past five or six years.

541
00:31:00,520 --> 00:31:03,760
Speaker 1: They save the system, they popped up economies. And so

542
00:31:04,040 --> 00:31:08,800
Speaker 1: as long as central banks are in there, not tightening significantly,

543
00:31:08,960 --> 00:31:13,520
Speaker 1: not withdrawing QWY significantly over a short period of time,

544
00:31:13,560 --> 00:31:17,560
Speaker 1: than I think carry can still survive and the leverage

545
00:31:17,840 --> 00:31:23,040
Speaker 1: inherent and carry, while threatened in terms of mildly negative returns,

546
00:31:23,080 --> 00:31:27,120
Speaker 1: probably doesn't produce a design. The Bloomberg Barclay's Total Return

547
00:31:27,160 --> 00:31:30,200
Speaker 1: Index can show a more quiescent market. We don't see

548
00:31:30,240 --> 00:31:32,560
Speaker 1: that in the ten year yield with a two point

549
00:31:32,560 --> 00:31:36,280
Speaker 1: three price rollover in the last so, say since Thanksgiving

550
00:31:36,640 --> 00:31:40,160
Speaker 1: or so are we at a point where bond market

551
00:31:40,360 --> 00:31:46,240
Speaker 1: dynamics in price declines changes the dialogue for the central banks,

552
00:31:46,520 --> 00:31:52,200
Speaker 1: and particularly for Chairman Powell, Well, it might, you know.

553
00:31:52,240 --> 00:31:56,360
Speaker 1: I think central banks and certainly the Fed is is

554
00:31:56,760 --> 00:32:01,960
Speaker 1: geared towards low volatility containing market declines, especially in the

555
00:32:02,000 --> 00:32:04,960
Speaker 1: stock market and UM to the extent that a tenure

556
00:32:05,040 --> 00:32:08,720
Speaker 1: treasury threatens that. And I don't think it does. Let's

557
00:32:08,760 --> 00:32:10,920
Speaker 1: let's be clear, or let me be clear. I don't

558
00:32:10,960 --> 00:32:14,720
Speaker 1: think it does. You know. UM, then central banks, as

559
00:32:14,760 --> 00:32:18,520
Speaker 1: I suggested with drug, are are not done with this,

560
00:32:18,640 --> 00:32:23,600
Speaker 1: and so um, I would expect tom volatility as evidenced

561
00:32:23,600 --> 00:32:26,920
Speaker 1: by the VIX and volatility as evidenced by the move

562
00:32:27,000 --> 00:32:30,720
Speaker 1: index and bonds to to basically increase. That doesn't mean

563
00:32:31,400 --> 00:32:34,000
Speaker 1: that we're not going to have higher volatility over short

564
00:32:34,000 --> 00:32:36,920
Speaker 1: periods of time like you just suggested. But I don't

565
00:32:36,920 --> 00:32:41,720
Speaker 1: think we're headed for investment armageddon, all right, So we're

566
00:32:41,760 --> 00:32:45,000
Speaker 1: not headed to investment ar mcgeddon. Bill grows. How many

567
00:32:45,040 --> 00:32:48,280
Speaker 1: people have asked you about bitcoin in the last week

568
00:32:48,360 --> 00:32:53,160
Speaker 1: or so? Lots of people, and especially my donut girl

569
00:32:53,240 --> 00:32:56,440
Speaker 1: that I stopped by at five during the morning every day.

570
00:32:56,720 --> 00:32:58,880
Speaker 1: Not only did she ask me, I asked her and

571
00:32:58,960 --> 00:33:01,239
Speaker 1: she told me that she didn't vested in bitcoins. And

572
00:33:01,280 --> 00:33:03,440
Speaker 1: so you know, that's sort of like the shoeshine boy

573
00:33:03,440 --> 00:33:05,800
Speaker 1: in the thirties or the taxi driver. Um. You know,

574
00:33:05,880 --> 00:33:10,720
Speaker 1: perhaps that's a sign I am a believer in blockchain technology.

575
00:33:10,760 --> 00:33:13,200
Speaker 1: I don't know how it applies to a price on bitcoin,

576
00:33:13,560 --> 00:33:16,840
Speaker 1: but nonetheless, uh yeah, it's all it's all around the

577
00:33:16,840 --> 00:33:19,040
Speaker 1: public in the street. Bill, I got a problem. You're

578
00:33:19,040 --> 00:33:22,120
Speaker 1: Warren Buffett's eighties seven years old, and he looks good

579
00:33:22,120 --> 00:33:25,280
Speaker 1: today when he's making his board changes at Berkeley. Do

580
00:33:25,320 --> 00:33:28,320
Speaker 1: you think Warren Buffett's chowing down the donuts every morning

581
00:33:28,640 --> 00:33:33,840
Speaker 1: like Bill Gross? Well, maybe the cherry cox and hot dogs.

582
00:33:33,880 --> 00:33:35,800
Speaker 1: I don't know whether it has diet cherry coke or

583
00:33:35,880 --> 00:33:38,200
Speaker 1: a regular cherry coke. In any case, it's good for him.

584
00:33:38,200 --> 00:33:40,880
Speaker 1: He's a he's in his mid eighties and he's he's

585
00:33:40,920 --> 00:33:43,320
Speaker 1: still rolling, and that's what I would hope to do

586
00:33:43,440 --> 00:33:46,360
Speaker 1: to um. He came out this morning and talked about

587
00:33:47,040 --> 00:33:49,880
Speaker 1: about bitcoin and suggested at some point he would buy

588
00:33:49,920 --> 00:33:53,720
Speaker 1: puts over a longer term basis. I'm more optimistic than that.

589
00:33:53,840 --> 00:33:58,560
Speaker 1: I think bitcoin and cryptocurrencies have a picture, you know,

590
00:33:58,640 --> 00:34:03,600
Speaker 1: if only because the world is beginning to suspect global currency. Okay,

591
00:34:03,640 --> 00:34:05,800
Speaker 1: we gotta leave it there, Bill Gross, thank you so

592
00:34:05,880 --> 00:34:09,800
Speaker 1: much with Jannis Henderson this important day with China moving

593
00:34:10,000 --> 00:34:20,719
Speaker 1: the bond markets. Thanks for listening to the Bloomberg Surveillance podcast.

594
00:34:21,120 --> 00:34:26,040
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

595
00:34:26,200 --> 00:34:30,520
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom

596
00:34:30,600 --> 00:34:34,480
Speaker 1: Keane before the podcast. You can always catch us worldwide.

597
00:34:34,960 --> 00:34:36,040
Speaker 1: I'm Bloomberg Radio