Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Yeah.
Speaker 1: So let's get through the market, shall we a cross
Speaker 1: straight over to Cal Weinberg, high frequency Economics founder, as
Speaker 1: we break through that breaking news here at Bloomberg following
Speaker 1: what could be a significant shift in China's purchases of treasuries. Kylie,
Speaker 1: you've heard the news. Walk me through what you think
Speaker 1: is the significance the message that comes from these Chinese officials. Well,
Speaker 1: a good morning. I think that we need to know
Speaker 1: a lot more about what's actually going on. The notion
Speaker 1: that the Chinese would actually sell treasuries seems to me
Speaker 1: to be extremely implausible. Uh, you know, to sell treasuries
Speaker 1: that have to buy something else, and that would involve
Speaker 1: currency transaction. And I don't think they're prepared to be
Speaker 1: seen as intervening in the currency markets. If they're just
Speaker 1: going to be buying less of them, Well, they have
Speaker 1: been buying less of them, although there has been a
Speaker 1: bit of renaissance recently, but that would mean that they're
Speaker 1: not taking in more dollars on their foreign trade surpluses,
Speaker 1: that they're taking in more euros perhaps, and they're they're
Speaker 1: buying more an exchange counterpart to the cash and flows.
Speaker 1: But it doesn't necessarily mean a catastrophic sell of treasuries
Speaker 1: at all. I think that we just have to get
Speaker 1: some more information. But probably they're just going to buy
Speaker 1: a little bit less moving forward rather than liquidate their holdings.
Speaker 1: But it's not clear whether this recommendation is actually materialized
Speaker 1: into action either cows so we should probably think about
Speaker 1: that as well. But if you take a step back,
Speaker 1: last year they took the opportunity as their currency strengthened
Speaker 1: to build up their effects reserves. Is there a message
Speaker 1: that we can take away from this about how comfortable
Speaker 1: they might be with the current level of the Chinese
Speaker 1: You are well. I I think that there's been and
Speaker 1: overt changed since President Gee's speech in Davos last year,
Speaker 1: in which he pitched China as the new champion of globalization.
Speaker 1: To keep the the yuan strong and to make it
Speaker 1: even stronger so that people would have confidence in holding
Speaker 1: it is very clearly a competition developing between China and
Speaker 1: the United States to be the leader of globalization, the
Speaker 1: leader of free trade. And I think that a strong
Speaker 1: currency is part of china strategy. They're managing it. They
Speaker 1: can do it. Carl Weinberg with us out of our
Speaker 1: studios in London, which is a good and beautiful UH thing.
Speaker 1: Bloomberg Surmanance this morning brought you by U s c
Speaker 1: F invest In. What's real Visit us c F Investments
Speaker 1: dot com. That's U s c F Investments dot com.
Speaker 1: We thank them for their UH support. Carl. There has
Speaker 1: been a grand shift. It occurred yesterday with a shock
Speaker 1: of a president to Davos. My phrase for the year
Speaker 1: is make Davos Davos again. Is a president could have
Speaker 1: succeeded that if he's going to go there without Mike
Speaker 1: Allen over to Xios calls a carrot and stick approach
Speaker 1: from one of his sources. Is the carrot and the
Speaker 1: stick going to be felt up Happy Valley? Well, you know, Tom,
Speaker 1: I'd like to think that the president's handlers are sending
Speaker 1: him over there to try to repair US relations and
Speaker 1: to try to reverse some of the damage that has
Speaker 1: been done in those relations over the last year. For me,
Speaker 1: the highlight of last year's Davos was President Gee's speech,
Speaker 1: the one I just referred to, in which he proposed
Speaker 1: that China would promote globalization if the U. S wouldn't think.
Speaker 1: This is a chance for the President to explain to
Speaker 1: everybody what US policy is, and I'm hoping that his
Speaker 1: his statement will be that the U. S. Believes in trade,
Speaker 1: it just wants to level the trading field. And that's
Speaker 1: a much more digestible proposition. That is not a multilateral tone.
Speaker 1: He isn't I mean if he if he Waltz is
Speaker 1: over there with Peter Navarro and Wilbur Ross. It's not
Speaker 1: a Davos friendly tone, is it. Well, it's not a
Speaker 1: Vos friendly crowd. But remember the President will be scripted
Speaker 1: and that Navarro will only be one of the voices
Speaker 1: that will will draft that script. There are other voices
Speaker 1: out there, particularly over at the state side, that is
Speaker 1: concerned about Europe, for example, pivoting its primary relations away
Speaker 1: from the Atlantic Alliance to the stronger tie with China.
Speaker 1: And I think that there are concerns in other parts
Speaker 1: of his advice pool about the damage that could be
Speaker 1: done long term to the US by being more isolated.
Speaker 1: Tom Kane, this is not the morning to talk about
Speaker 1: the World Economic Forum, not with the moves we've had
Speaker 1: in the bond market of the last Maybe the link
Speaker 1: you think Trump going to Davos is the news of
Speaker 1: the morning. I think it's a huge, huge deal for washing.
Speaker 1: I think the fragility of the bond market is absolutely
Speaker 1: front and center, and that's the significant story this morning.
Speaker 1: Carl walked me up about walk me through about how
Speaker 1: francile you think the situation and treasuries might be. Well,
Speaker 1: I mean there are there are very explosive headlines and
Speaker 1: doom and gloom for by various people about the bottom market.
Speaker 1: But you know, the bottom line is that most of
Speaker 1: the time when the Fed hikes rates, and it's hiking
Speaker 1: rates because it fears inflation, bondy yields go up. Because
Speaker 1: the base the primary base for for bondy yields, the
Speaker 1: Fed rates are going up, and because inflation expectations are
Speaker 1: going up. So this is not really news. This is
Speaker 1: maybe a startling movement on a single day, but you
Speaker 1: really have to expect that if history is not going
Speaker 1: to reverse itself. Five out of six times we've seen
Speaker 1: the bottom market rise with the FED tightening, and this
Speaker 1: is I think shaping up to be one of those times.
Speaker 1: Just another day in paradise, John, I just took a
Speaker 1: quick look at one of my technical studies and I
Speaker 1: don't even get sweaty until two sixty. We had a
Speaker 1: guest on this morning, Jonathan Krinsky in MK. I'm looking
Speaker 1: for two sixty three. Two sixty four is key technical
Speaker 1: resistance on a higher yield. As you look at the
Speaker 1: bond market, Carl, the situation for many people has been
Speaker 1: term premium has been incredibly low and faint. It's being negative.
Speaker 1: What's going to be the catalyst to get term premium up,
Speaker 1: which would mean to sustain move higher in treasury year
Speaker 1: it's going forward? Yeah, So I think that, you know,
Speaker 1: risk and supply are one element in there. You know,
Speaker 1: we just had a tax bill passed with a trillion
Speaker 1: and a half dollars of new borrowing for the next decade,
Speaker 1: possibly more, possibly less, but something on that order of magnitude.
Speaker 1: We have infrastructure spending coming, so we have I think
Speaker 1: some uncertainty about some nervousness perhaps about having to deal
Speaker 1: with that. We do have expectations for higher inflation coming
Speaker 1: out there, and while it's a slow burn inflation indicators,
Speaker 1: wages in particular, are starting to accelerate a little bit visibly.
Speaker 1: So the elements are in place for that term premium
Speaker 1: to normalize and maybe even overshoot to the higher side.
Speaker 1: You can't be sure of that, but certainly this is
Speaker 1: not a time to be looking for lower term premium
Speaker 1: for lower bodylds. I certainly agree with that statement. Just
Speaker 1: the question whether it's going to be a panic or not,
Speaker 1: and I have no reason to think it will well
Speaker 1: call at this stage when you put all the moving
Speaker 1: parts together, the prospect of a bigger deficit in the
Speaker 1: United States for America, the prospect of China stepping back,
Speaker 1: the reality of an unline of the federal reserves balance sheet,
Speaker 1: and rights going higher as well, that's fertile grind for
Speaker 1: repricing of treasuries, isn't it. Well, yes, but you know,
Speaker 1: almost all of those things you mentioned, except for the
Speaker 1: China announcement, have been in the market for a while,
Speaker 1: so you think about what's new and what's going to
Speaker 1: change the expectations, and I don't believe the China statement
Speaker 1: is enough to uh, to to really create a panicky
Speaker 1: market situation in and of itself. We've known about the
Speaker 1: FED for a while. We've known about the FED unwinding
Speaker 1: its balance sheet. We've known about inflation, We've known about
Speaker 1: growth and wages in the unemployment rate and all that.
Speaker 1: So I think that in terms of news this morning,
Speaker 1: China and the margin could make a difference. But again
Speaker 1: we don't even have enough details to fully assess what
Speaker 1: that means. At this moment, we don't care. But what
Speaker 1: is clear is that we're seeing a repricing of the
Speaker 1: last couple of weeks. You're seeing a lot more people
Speaker 1: reach to hedge their exposure potentially to a higher inflation
Speaker 1: rate through this year. Does that make sense to you? Well, yes,
Speaker 1: and you know, my due diligence and saying you know,
Speaker 1: uh and saying everything is that yes, we should expect
Speaker 1: higher bond yields. No, I have no basis to exp
Speaker 1: back the panic in bond in bonds to occur in
Speaker 1: the short term. Technicians may have a reason for the
Speaker 1: market to sell off, and that's independent of what the
Speaker 1: economics says. When the technicals and the economics call for
Speaker 1: the same thing, you do tend to get more powerful moves.
Speaker 1: But the economics of the matter are actually pretty tranquil.
Speaker 1: High frequency economics founder the reality check on on some
Speaker 1: franchile some fragility, just some fragility coming through in the
Speaker 1: bond market. It is a joy to speak with Jeffrey
Speaker 1: Curry of Golden Sex ahead of their commodities research. He
Speaker 1: writes acutely detailed notes on the dynamics of supplying demand.
Speaker 1: Jeff Curry, you are trumpeting the return of backward backwardation.
Speaker 1: That is a mouthful. What is backwardation and why should
Speaker 1: we care? It's a condition and a come oddity market
Speaker 1: where the spot price sits above the forward price, and
Speaker 1: it's a condition that's usually representative of market that is
Speaker 1: very short. I like to think of an example. Let's
Speaker 1: take oxygen. You have to have it today because if
Speaker 1: you don't have it today, you're dead. You don't care
Speaker 1: about tomorrow. So oxygen would be a perfectly backrodated market.
Speaker 1: And so we think about a contango markets where spot
Speaker 1: prices sit below forward prices. That's what these markets look
Speaker 1: like throughout most of the period over the last ten
Speaker 1: years since that since the crisis. So the fact that
Speaker 1: we have oil now shifting into a solid backgrodation zinc
Speaker 1: invtive backgrodation. It's an indication that supply chains around the
Speaker 1: world for both metals and oil are starting to get very,
Speaker 1: very tight. So backwardation is an indication a premium for
Speaker 1: prompt deliberty spot prices above forward prices. How much is
Speaker 1: it Jeff about shale coming online as this crewed price
Speaker 1: guys U Uh. That's a very important component of this
Speaker 1: is that when we think about the forward outlook for energy,
Speaker 1: I don't think anybody out there is going to argue
Speaker 1: we're running out of oil on a longer term basis
Speaker 1: because there's so much supply. And what we saw with
Speaker 1: the rally this week in prices is that producers came
Speaker 1: in and sold the back into that forward curve, which
Speaker 1: then reinforces this whole concept of agrodation. And the thing
Speaker 1: about is what the backwardation is that, particularly even if
Speaker 1: OPEC tries to ramp up production or you have the shale,
Speaker 1: it's just gonna put more selling pressure on the back end,
Speaker 1: while the strong global economic backdrop that we have right
Speaker 1: now is going to put upward pressure on the front
Speaker 1: end of the curve. Reinforcing the bagardation. I'm gonna go
Speaker 1: back to Tom's question of why is this important is
Speaker 1: because an investor can buy oil at a discount on
Speaker 1: the forward curve and then hold it up and it
Speaker 1: rolls up to expiration, and sell it at a premium.
Speaker 1: So the oil price does not need to move. All
Speaker 1: you do is you roll the front end of the curve.
Speaker 1: And I want to emphasize commodities are yielding assets, and
Speaker 1: that's that shape of the forward curve that gives the yield.
Speaker 1: And for the first time and quite sometime, we're now
Speaker 1: in a positive yield, which allows the investor to hold
Speaker 1: oil without having to pay the cost of carrey. So
Speaker 1: this is a very important development for investors. Jeff, this
Speaker 1: is the market dynamic. Let's talk about the economic bankdrop
Speaker 1: fundamentally and the commodity complex in its entirety. China. A
Speaker 1: lot of news coming through from China today. A conversation
Speaker 1: this morning here on Bloomberg about Chinese officials wary of
Speaker 1: purchasing more treasuries. From here. As you look at the
Speaker 1: effects dynamics in China, what does it mean ultimately for
Speaker 1: how you view the commodity trade. Well, I think the big,
Speaker 1: biggest and most important component of what's going on in
Speaker 1: China really is the supply side policy that they've implemented
Speaker 1: more recently, in the sense that they're trying to deal
Speaker 1: with two problems in China. One is the pollution problem,
Speaker 1: so the anti pollution, but the other is that they have,
Speaker 1: you know, a debt problem and some of the key industries,
Speaker 1: and those key industries in which they have the debt
Speaker 1: problem happened to be in your core commodity sectors like steel, iron, ore, aluminum,
Speaker 1: and as a result, like hutting back capacity, not only
Speaker 1: they take pollution out of the system, but they also
Speaker 1: increase the prices of these commodities, which reduces the number
Speaker 1: of non performing loans on the bank's bouncy. So that's
Speaker 1: a really important component. And if you go back to
Speaker 1: the currency question, because these are the commodities that they export,
Speaker 1: not import um. When we think about you know, a
Speaker 1: weakening currency in terms of UM, any type of you know,
Speaker 1: retaliation type of dynamic here that you end up with
Speaker 1: a more competitive environment to push these commodities out. So there,
Speaker 1: you know, there's a lot of connections here between these,
Speaker 1: but I think the primary one really is a supply
Speaker 1: side policy, Jeff, at the moment of the last few years,
Speaker 1: for that matter, you've always joined a distinction between what
Speaker 1: you see in China's campex commodities and ompex commodities. How
Speaker 1: much that story developed of the last few quarters for
Speaker 1: you when when we look at the the broader demand
Speaker 1: for commodities right now is that there's something I've never
Speaker 1: seen before. We use the term global synchronous growth from
Speaker 1: a g graphic perspective, and we're seeing that right now.
Speaker 1: But what makes this even more different than two thousand
Speaker 1: and four was last time we saw a real strong
Speaker 1: global synchronous growth, is that it's synchronous across the commodity complex,
Speaker 1: across medals, across the barrel of oil. I've never seen this.
Speaker 1: It's the the comprehensive nature of this demand growth is Okay, well,
Speaker 1: I'm looking at the copper chart. I'll get it out
Speaker 1: on Twitter for Bloomberg Radio. You've gotta first look at it.
Speaker 1: But I mean, as copper, something that we're Jeff Curry
Speaker 1: can call bottom to the commodity bear marketing. Coppers had
Speaker 1: a great movement by no means is broken out through
Speaker 1: you know two thousand five, two thousand six highs Well,
Speaker 1: I think when you think about you know, the old saying,
Speaker 1: you know, the copper has a PhD in economics, I'm
Speaker 1: a firm believer the only differences instead of being Harvard
Speaker 1: now it's some Shanghai University UM. And in terms of
Speaker 1: looking at the health of the global economy, you know,
Speaker 1: the one thing is, you know, shorting base metals in
Speaker 1: the midst of an economic engine is a very dangerous proposition.
Speaker 1: And so I think, you know, even though our target
Speaker 1: is seventy seven thousand fifty right now in the markets
Speaker 1: trading around, I think all the risk or to the
Speaker 1: upside right now and I could easily see UM copper
Speaker 1: pushing up and testing new highs. Maybe ten thousand we
Speaker 1: saw in two thousand eleven may be difficult, but the
Speaker 1: highs of oh six and oh eight I think are
Speaker 1: very very much of risk to the upside quickly. Or
Speaker 1: Jeff Crey, do I get Brent Crew to seventy a barrel? Um,
Speaker 1: I'm not. I haven't looked at my screen in the
Speaker 1: last five minutes. It may already be there. It shows
Speaker 1: you reminded us. Yeah, I would argue that oil is
Speaker 1: going to have a much more difficult time um getting
Speaker 1: upside pressure unlike copper. And the reason for this is
Speaker 1: the long term oil supply story is oversupplied, so you
Speaker 1: have producers are going to go sell that back in
Speaker 1: every time you go to the metals has a long
Speaker 1: term supply story that's bullish. Means both the up back
Speaker 1: in and the front end of medals can go up
Speaker 1: with just why we prefer price perspective by the medals.
Speaker 1: Great briefing, Jeffrey Curry, GOLBN Sex, thank you so much.
Speaker 1: Real effort there from Frankford is all you may know
Speaker 1: nationwide that there is with the worship of a football
Speaker 1: player in the New England region one T. Brady, or
Speaker 1: maybe it's Lawrence Bird of basketball fame of a time ago, Bobby,
Speaker 1: you are leaping across to St. Louis Blues goal. The
Speaker 1: same can be said of academics out of Fall River,
Speaker 1: Massachusetts in Boston College. He has held court in science
Speaker 1: at the Massachusetts of Institute of Technology, where it's been
Speaker 1: known that he fly fishes on the Charles River. He's
Speaker 1: a former Secretary of Energy. Earnest Money's professor. Money's wonderful
Speaker 1: to have you back with us. UM. I would suggest
Speaker 1: we have wandered into an anti science, anti math moment
Speaker 1: in Washington. Do we need to reverse it or do
Speaker 1: we need to get used to it and live with it? Well,
Speaker 1: I think the issue of addressing the whole range policy
Speaker 1: issues based on facts. I mean, there's science, but there's
Speaker 1: also facts and analysis. UH, scientifically based is absolutely critical.
Speaker 1: Otherwise we're just we'll just be lurching, uh from one
Speaker 1: side of the room to the other side of the room,
Speaker 1: if you like. UH. In terms of in terms of
Speaker 1: how we put our policies together, and frankly, I think
Speaker 1: that this UH is creating tremendous problems UH in terms
Speaker 1: of the underpinnings of our global strength, which is the
Speaker 1: set of alliances and institutions that this country spent seventy
Speaker 1: years building. UH. If we are viewed as unreliable, as
Speaker 1: as not uh not moving forward on the basis of
Speaker 1: facts and analysis and science, UH, that's going to shake
Speaker 1: confidence in those institutions and and undercut again our our enginet,
Speaker 1: national strength, and in our our our ability to lead.
Speaker 1: The kids that come into the Massachusetts Institute of Technology
Speaker 1: are all top shelf. They wander with great arrogance through
Speaker 1: physics one, physics to physics three, and then there's a
Speaker 1: great divider course number eight point zero four, quantum physics one.
Speaker 1: What's it like making the leap to pretend to be
Speaker 1: like Professor Moneies. Well, first of all, I should say
Speaker 1: that the students, no matter what their majors are, are
Speaker 1: required to take UH to take physics here, UH and UH.
Speaker 1: They are not required to take quantum physics unless they
Speaker 1: are in physics or one of the engineering disciplines that
Speaker 1: calls for it. But it certainly is. UH. It's a
Speaker 1: it's a mind stretching experience to you to uh to
Speaker 1: at the end of the second year to to start
Speaker 1: looking at quantum physics. But I think the arrogance you
Speaker 1: referred to uh is is gone by that time. Frankly,
Speaker 1: you beat it out of them. I bring this up, folks,
Speaker 1: because I just spoke to a wonderful student out of
Speaker 1: a major state university who got through college with no
Speaker 1: science and only one marginal math course. And I just
Speaker 1: think the death of this is is a hugely important
Speaker 1: Let's move on to important. If I could just add on,
Speaker 1: I think it's it's that that's a disservice. I believe
Speaker 1: to those students that she knew that. Yeah, she was
Speaker 1: more than aware that she had been cheated. We are
Speaker 1: not cheated by your expertise when we see North and
Speaker 1: South Korea get together, and this does come down to
Speaker 1: the physics of UH, nuclear science. Do you have a
Speaker 1: legitimate belief that North Korea has the monies physics to
Speaker 1: attack someone and do harm. Well, first of all, we
Speaker 1: have to say that it's a fact that they have
Speaker 1: had a remarkable trajectory in developing their nuclear weapons and
Speaker 1: developing their their missile capabilities. Now, UH, it's maybe, and
Speaker 1: I believe actually it is likely that they did have
Speaker 1: some assistance in in both arenas. But one cannot take
Speaker 1: it away from them that they have They've trained their
Speaker 1: their scientists to a large extent internally, UH and UH,
Speaker 1: and they've had they've moved rather rather quickly. In fact,
Speaker 1: I think that we have underestimated that consistently, UH, in
Speaker 1: the sense that we prefer to call a nuclear test
Speaker 1: in North Korea a provocation as opposed to what I
Speaker 1: believe it really is a a systematic step along a
Speaker 1: longer trajectory, UH, to to make nuclew weapons uh, and
Speaker 1: and with a strong commitment to it. So so I
Speaker 1: think we we we make a mistake if we if
Speaker 1: we underestimate their their capabilities. UH. I know my my colleague,
Speaker 1: UH sig Hecker, who used to be the director of
Speaker 1: the Los Alamos National Laboratory, UH, an expert in in
Speaker 1: the weapons arena. Uh, he visited North Korea many times
Speaker 1: and and already uh seven years ago he told me,
Speaker 1: just in fact recently again how stunted he was to
Speaker 1: see a enrichment plant. Uh. That was extraordinarily modern, all
Speaker 1: the modern technologies. And so you know, we have to
Speaker 1: take we have to take this threat for for what
Speaker 1: it is. We all have our benchmarks along the way.
Speaker 1: And for those of us more fossil nature, there's Ted
Speaker 1: Taylor's the Curve of binding Energy that John mcfeebook, or
Speaker 1: there's something as myth making is doctor Strange Love from four.
Speaker 1: Do they have the rocketry? Do they have the telemetry?
Speaker 1: Do they have the ignition systems within their physics to
Speaker 1: make the toy work if they launch it at us?
Speaker 1: So they clearly have the rockets, they have demonstrated that.
Speaker 1: But when you start getting into telemetry, etcetera. Etcetera. I
Speaker 1: think you put your finger on what we have as
Speaker 1: far as I can see at least, and of course
Speaker 1: I no longer have access to all the information. But
Speaker 1: from what we can see, uh, they certainly have a
Speaker 1: long way to go in terms of getting the entire
Speaker 1: system together to deliver a nuclear weapon over intercontinental distances,
Speaker 1: because they're telemetry and including meaning making all of the
Speaker 1: physical measurements, uh, to understand how the how the system
Speaker 1: works and survives. I've seen no evidence of that. But
Speaker 1: when I say, can I say a long time? I actually, Uh,
Speaker 1: it depends what what the time scale is here. I
Speaker 1: think we have to assume that we're only talking about
Speaker 1: a couple of years of dedicated effort for the entire
Speaker 1: system to be to be brought together. Whether that happens,
Speaker 1: I don't know, but I think it's the planning basis
Speaker 1: that we need to use as we think about how
Speaker 1: to address the North Korean situation. Each administration is different,
Speaker 1: your sector of energy for President Obama. But if each
Speaker 1: administration is different, do you have confidence that the General's
Speaker 1: General of Master, General Maddis, General Kelly and others are
Speaker 1: are moving forward our defense against this physics? Well? First
Speaker 1: of all, UH Secretary Secretary Maddis UH formerly General Madness
Speaker 1: UH McMaster and and and also the Secretary of State Tillerson.
Speaker 1: I think they have all stated explicitly that they understand
Speaker 1: UH the very very bad options that a military intervention
Speaker 1: would represent. UM, mainly because it's hard to see how
Speaker 1: a major altercation UH would not lead to tremendous destruction
Speaker 1: not only of North Korea, but of our allies, our
Speaker 1: own military personnel, their families UH in South Korea and Japan.
Speaker 1: So Number one is we really need to have a discussion.
Speaker 1: I believe that discussion needs to be broadened from what
Speaker 1: it has been because, frankly, this may sound strange, but
Speaker 1: I think the discussion has been too much focused on
Speaker 1: uclear weapons UH in North Korea as opposed to the
Speaker 1: broader security context UH in that region, and that includes,
Speaker 1: of course South Korea, Japan, and China. UH, and I
Speaker 1: think we need to end and it includes frankly, the
Speaker 1: future military profile of the United States in that region.
Speaker 1: And until we bring all those issues together UH informed
Speaker 1: by the ground truth in terms of what North Korean
Speaker 1: capabilities are and what the capabilities of our allies are, UH,
Speaker 1: we're not gonna We're not going to get there. Look,
Speaker 1: I think the d nuclearization of the peninsula remains the
Speaker 1: right goal, but we have to understand that that's going
Speaker 1: to be a long term goal. It's not going to
Speaker 1: happen quickly. It's a step by step process, UH that
Speaker 1: we need to we need to commit to over probably
Speaker 1: over over a few decades. Secretary Monies, thank you so much.
Speaker 1: He's a former Secretary of Energy and of course at
Speaker 1: the Massachusetts UH Institute of Technologies in charge of making
Speaker 1: freshmen use a slide rule for the first three weeks
Speaker 1: in m I T. Thank you so much. We welcome
Speaker 1: Bloomberg Television Bloomberg Radio worldwide with William Gross of Janice Henderson. Bill,
Speaker 1: thank you so much for being with us on short
Speaker 1: notice today. Let me get right to the granularity of
Speaker 1: the moment. What have you done in your Janice unconstrained
Speaker 1: fund as we've moved rapidly from to forty to two
Speaker 1: fifty and soon a print of two point six zero. Well,
Speaker 1: good morning, Tom. We've gone short bonds, not just treasures,
Speaker 1: but short guilts and short boons. UH left the j
Speaker 1: GB market alone. But you know it appears it's a
Speaker 1: treasury phenomena and treasury directed based upon your Bloomberg report
Speaker 1: this morning with China being disaffected with the U S
Speaker 1: treasuries and your report a day or two ago about
Speaker 1: j g B s and they're changing quantitative easing policies,
Speaker 1: but nonetheless, um, you know, it appears a negative type
Speaker 1: of posture for bonds. I've also gone rather negative on
Speaker 1: high yield bonds and credit spreads because you know, as
Speaker 1: yields rise UH, you know, zombie like corporations pay higher yields,
Speaker 1: and their UH spreads are compressed and their cover is compressed.
Speaker 1: And so this is not a favorable element for high
Speaker 1: yield bonds or sovereign bonds. And it's not a favorable
Speaker 1: element this morning, at least for the dollar. You worked
Speaker 1: for years, and you built for years a small shop
Speaker 1: that had enough mass where the Chinese worried about the
Speaker 1: Pacific Investment Management Company. Give us your experience of what
Speaker 1: China is doing at the margin with their treasury obligations. Well,
Speaker 1: they certainly haven't been building treasures, and you know, recent
Speaker 1: evidence of the last few months suggest that they've been
Speaker 1: liquidating treasuries. Um. You know, supposedly an effort to more
Speaker 1: diversify their portfolio perhaps. Uh. In any case, uh, you know,
Speaker 1: the liquidation of treasuries as opposed to the accumulation of
Speaker 1: treasuries by China over the past few years is certainly
Speaker 1: a negative. And you know, one of the things mentioned
Speaker 1: several days ago by your reporters has to do with
Speaker 1: quantitative easing, to the extent that the Japanese uh, you know,
Speaker 1: are less easy in terms of their purchases of j
Speaker 1: g vs, to the extent that the ECB at some
Speaker 1: point later this year pulls back. You know, we've got
Speaker 1: a worldwide situation in which central banks in total and
Speaker 1: in the FED that's actually reducing their portfolio. In which
Speaker 1: the world central banks in total are not adding to
Speaker 1: their portfolio like to have in the past. There's been
Speaker 1: fourteen trillion dollars worth of bonds bought by central banks
Speaker 1: in the past four or five years. That appears to
Speaker 1: be um close to an end bill gross. Given your
Speaker 1: negative view on high yield and sovereign debt and so on,
Speaker 1: So where should investors go for yield right now? Well
Speaker 1: that that's a good question, because you know, a dramatic
Speaker 1: rise in yields and I'm not suggesting that you know,
Speaker 1: I've I've suggested that once we broke the tot barrier
Speaker 1: on the tenure under peers that we have, which is
Speaker 1: a long term trend line over twenty five years, that
Speaker 1: you know, the increase is likely to be mild. I
Speaker 1: think tenure treasuries, you know, could approach two point seven
Speaker 1: two point eight percent by the end of two thousand
Speaker 1: and eighteen. And what does that mean. That means another
Speaker 1: two or three points loss and it basically wipes out
Speaker 1: all income for the year. It's not a bear market
Speaker 1: per se, but it's certainly not a bullmark. And you know,
Speaker 1: to be technical, bear markets bottomed in two thousand and
Speaker 1: twelve and June of two thousand and sixteen five and
Speaker 1: so we're a hundred basis points plus higher. UM. That
Speaker 1: could be defined as a bear market, but I think
Speaker 1: more legitimately because bonds you know, for those years did
Speaker 1: still three or four percent based upon you know, high
Speaker 1: yield total returns that um, you know, the bear market
Speaker 1: that I'm talking about is a mild one, but it
Speaker 1: includes you know, negative prices for high yield bonds. So
Speaker 1: where again do you go and get that yield? Well,
Speaker 1: an investor that has been used to carry, that has
Speaker 1: been used to risk assets, and I'm talking about stocks
Speaker 1: to you know, everything in this barrel is basically the
Speaker 1: same and connected like the thigh bone and the hip bone.
Speaker 1: And so where do you go, Well, cash is the
Speaker 1: first place. You know, I've talked about janice, unconstrained being
Speaker 1: negative or negative duration or short bonds, and so that's
Speaker 1: one area to do. Today should be a fabulous day
Speaker 1: for unconstrained. Yesterday it was as well, and so there's
Speaker 1: a way to make money on the other side of
Speaker 1: the river. So to what is the positioning of the
Speaker 1: street right now? I mean we talk about convexity, which
Speaker 1: is a jargon phrase folks were where people cover their
Speaker 1: trades and go, oh mg, Bill Gross is right, and
Speaker 1: they get out, what is the bet that you see
Speaker 1: within the institutional market now on bonds? I think it's
Speaker 1: significant to them. I think it's significant not just in
Speaker 1: terms of bonds, but in terms of spreads and what
Speaker 1: we call and what I've referred to as carry. You
Speaker 1: know that it's about a wonderful period of times sin
Speaker 1: is bonds have come down carry total return, you know,
Speaker 1: put it all together. In the world the investment world
Speaker 1: is happy. Um, you know, now at this point, you know,
Speaker 1: it appears that the market and that institutions are over
Speaker 1: levered carry and so anything that's carry dominant and the
Speaker 1: you know, let's face at risk assets and the bonds
Speaker 1: and UM currencies in many cases are carry dominant, then
Speaker 1: they could be at risk. Now I'm not again, this
Speaker 1: is not armageddon for me. It's a mild increase, but
Speaker 1: it basically signifies that, um, you know, the bull bond
Speaker 1: market for five years is over and that we should
Speaker 1: look forward to periods of low total returns. I mean,
Speaker 1: I think this is so important, Bill Gross the idea
Speaker 1: here of the leverage involved within the institutional markets and
Speaker 1: the idea of what those reaction functions will be, and
Speaker 1: any of us with a collective memory of remember that,
Speaker 1: are we setting ourselves up for that August of shock
Speaker 1: that we felt? Well? I I don't think so, tom uh.
Speaker 1: If for only one reason, Um, you know, Mario drag in,
Speaker 1: whatever it takes, has not been dismissed. Okay, he may
Speaker 1: be tightening over a period of time, but it's not
Speaker 1: been dismissed. And so central banks are still in their
Speaker 1: central banks where the you know, the primary um, the
Speaker 1: primary giver of carry for the past five or six years.
Speaker 1: They save the system, they popped up economies. And so
Speaker 1: as long as central banks are in there, not tightening significantly,
Speaker 1: not withdrawing QWY significantly over a short period of time,
Speaker 1: than I think carry can still survive and the leverage
Speaker 1: inherent and carry, while threatened in terms of mildly negative returns,
Speaker 1: probably doesn't produce a design. The Bloomberg Barclay's Total Return
Speaker 1: Index can show a more quiescent market. We don't see
Speaker 1: that in the ten year yield with a two point
Speaker 1: three price rollover in the last so, say since Thanksgiving
Speaker 1: or so are we at a point where bond market
Speaker 1: dynamics in price declines changes the dialogue for the central banks,
Speaker 1: and particularly for Chairman Powell, Well, it might, you know.
Speaker 1: I think central banks and certainly the Fed is is
Speaker 1: geared towards low volatility containing market declines, especially in the
Speaker 1: stock market and UM to the extent that a tenure
Speaker 1: treasury threatens that. And I don't think it does. Let's
Speaker 1: let's be clear, or let me be clear. I don't
Speaker 1: think it does. You know. UM, then central banks, as
Speaker 1: I suggested with drug, are are not done with this,
Speaker 1: and so um, I would expect tom volatility as evidenced
Speaker 1: by the VIX and volatility as evidenced by the move
Speaker 1: index and bonds to to basically increase. That doesn't mean
Speaker 1: that we're not going to have higher volatility over short
Speaker 1: periods of time like you just suggested. But I don't
Speaker 1: think we're headed for investment armageddon, all right, So we're
Speaker 1: not headed to investment ar mcgeddon. Bill grows. How many
Speaker 1: people have asked you about bitcoin in the last week
Speaker 1: or so? Lots of people, and especially my donut girl
Speaker 1: that I stopped by at five during the morning every day.
Speaker 1: Not only did she ask me, I asked her and
Speaker 1: she told me that she didn't vested in bitcoins. And
Speaker 1: so you know, that's sort of like the shoeshine boy
Speaker 1: in the thirties or the taxi driver. Um. You know,
Speaker 1: perhaps that's a sign I am a believer in blockchain technology.
Speaker 1: I don't know how it applies to a price on bitcoin,
Speaker 1: but nonetheless, uh yeah, it's all it's all around the
Speaker 1: public in the street. Bill, I got a problem. You're
Speaker 1: Warren Buffett's eighties seven years old, and he looks good
Speaker 1: today when he's making his board changes at Berkeley. Do
Speaker 1: you think Warren Buffett's chowing down the donuts every morning
Speaker 1: like Bill Gross? Well, maybe the cherry cox and hot dogs.
Speaker 1: I don't know whether it has diet cherry coke or
Speaker 1: a regular cherry coke. In any case, it's good for him.
Speaker 1: He's a he's in his mid eighties and he's he's
Speaker 1: still rolling, and that's what I would hope to do
Speaker 1: to um. He came out this morning and talked about
Speaker 1: about bitcoin and suggested at some point he would buy
Speaker 1: puts over a longer term basis. I'm more optimistic than that.
Speaker 1: I think bitcoin and cryptocurrencies have a picture, you know,
Speaker 1: if only because the world is beginning to suspect global currency. Okay,
Speaker 1: we gotta leave it there, Bill Gross, thank you so
Speaker 1: much with Jannis Henderson this important day with China moving
Speaker 1: the bond markets. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
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Speaker 1: Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio