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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best an economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Dana Peterson

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Speaker 1: knows a bullmarket when she sees a chief economist at

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Speaker 1: the conference board with wonderful perception on the American consumer. Dana,

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Speaker 1: how do you link a quiescent inflation report like this

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Speaker 1: over to retail sales on Thursday?

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Speaker 2: Well, I think the key thing is that we are

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Speaker 2: seeing inflation slowing, and it's consistent with what the fat

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Speaker 2: IT expects. But as was mentioned earlier, real wages are

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Speaker 2: rising and certainly it's supporting consumers or spending. But when

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Speaker 2: we ask consumers how they feel, they're still complaining about inflation.

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Speaker 2: They're still saying that everything's too expensive. Interest rates are rising,

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Speaker 2: so that means if you want to buy that car,

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Speaker 2: refrigerator is going to cost more. So I would expect

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Speaker 2: that even though real wages are rising, inflation is still

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Speaker 2: there and consumers are probably going to start pulling back

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Speaker 2: on spending.

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Speaker 1: How are real wages doing and within that are they part?

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Speaker 1: I mean, is it almost circuitous where they're actually part

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Speaker 1: of the inflation report as we adjust for inflation with wages?

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Speaker 2: Well, I think wages are a part of the inflation story.

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Speaker 3: Certainly.

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Speaker 2: You have a number of industries that are experiencing labor shortages,

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Speaker 2: and when you look at their wages nominal and real,

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Speaker 2: they're still rising pretty quickly, and I think that's showing

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Speaker 2: up in the services aspect. Let's also not forget that

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Speaker 2: insurance costs are rising because many of these insurance companies

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Speaker 2: are suffering losses and they're raising premium. So between insurance

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Speaker 2: and wages, we still have these sticky inflation measures and

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Speaker 2: I don't think that's going to go away right away.

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Speaker 4: So, Dana, do you think that people are a little

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Speaker 4: bit overzealous about this idea that the Fed is going

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Speaker 4: to come right significantly next year.

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Speaker 2: I think they are. Indeed, the Fed tomorrow is probably

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Speaker 2: going to signal yes, it's done, But don't expect rate

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Speaker 2: cuts anytime soon, and don't expect that many next year.

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Speaker 2: We think anywhere from fifty to one hundred basis points

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Speaker 2: probably makes sense, especially if inflation, according to the SEP,

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Speaker 2: doesn't get beyond two percent before the end of next year.

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Speaker 2: So I still think that, yes, we can get to

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Speaker 2: two percent by the end of next year. But that's

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Speaker 2: really going to suggest that not many interest rate cuts

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Speaker 2: are priced in.

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Speaker 4: Was transitory, right, Dana? Are we just basically seeing the

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Speaker 4: right sizing of the supply side after the pandemic and

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Speaker 4: that's entirely what we're seeing now? Or is this disinflation transitory?

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Speaker 4: Is this basically a period of a headfake before some

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Speaker 4: of the stickier elements take place in a more significant way.

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Speaker 2: Well, I don't know why people are surprised that inflation

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Speaker 2: gave are slowing. The FED did raise rates by five

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Speaker 2: hundred and twenty five basis points. This is part of

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Speaker 2: the program. Certainly, we saw the housing markets slow first,

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Speaker 2: and that's showing up with a significant lag in the

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Speaker 2: rental components of the CPI and the PCE deflator, so

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Speaker 2: that's slowing things down. Certainly, food and energy prices are

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Speaker 2: determined by things external, and you know, we don't have

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Speaker 2: the massive disruptions from OPEC or even wars affecting energy prices.

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Speaker 2: So they're coming off, but you still have the influence

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Speaker 2: of insurance costs and wages because labor shortages are here,

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Speaker 2: and I think that's gonna be Those two things are

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Speaker 2: going to be the challenge to getting inflation back to

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Speaker 2: two percent. But we can still get there.

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Speaker 1: Dana Peterson, Well, this is the conference where data. Please

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Speaker 1: stay with us. We're going to come right back on

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Speaker 1: market check here, because you saw a spike whichever way

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Speaker 1: your series going, and we've sort of given it back

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Speaker 1: S ANDB futures had a nice, nice pop. They've given

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Speaker 1: it back up six right now. Same thing in the

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Speaker 1: yield space. A tenure you'ld four point two one percent.

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Speaker 1: I noticed a real yield was one ninety seven. It's

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Speaker 1: come back nicely two point zero one. Perhaps we're already

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Speaker 1: on the way to adjusting for the FED meeting tomorrow.

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Speaker 1: Dana Peterson, what is nominal GDP? How about Chairman Poul

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Speaker 1: You watch us every morning. What's your estimate here of

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Speaker 1: the animal spirit of Chairman Powell's America?

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Speaker 2: Well, I think you know nominal GDP is certainly if

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Speaker 2: well nominal and real GDP, you're probably not going to

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Speaker 2: be as strong as what we saw in the third quarter.

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Speaker 2: We're probably looking at growth around you know, one percent

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Speaker 2: in real terms and roughly four percent in nominal terms.

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Speaker 2: Right adding in you know, roughly three percent headline inflation.

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Speaker 2: So that's a slowing economy, and I think again that's

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Speaker 2: part of the program. The FED wants to see the

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Speaker 2: economy slow to help bring down inflation. Now, when we

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Speaker 2: look at business investment, that's already slowing outside of manufacturing,

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Speaker 2: where companies are bringing back product and production and they're building.

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Speaker 2: Fact away from that, there's really not that much investment.

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Speaker 2: The last year to drop has to be the consumer.

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Speaker 2: And we know consumers are more indebted now, their interest

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Speaker 2: rates on their credit cards are higher, student loan payments

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Speaker 2: are coming back, and you know, consumers are quitting less

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Speaker 2: and they're thinking, well, maybe the labor market's going to slow,

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Speaker 2: so maybe I should also slow my spending as well.

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Speaker 4: Dana, I'm just curious. We're saying that shelter prices pretty

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Speaker 4: much offset the decline from oil prices. Is that sustainable

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Speaker 4: or do you think that this is just sort of

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Speaker 4: a lag before we start see housing costs inflect downward.

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Speaker 2: Well, I don't really look at the month on month

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Speaker 2: for housing. I look at the year on year and

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Speaker 2: year on year, the rental components are slowing, and it's

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Speaker 2: consistent with an eighteen month lag of the Case Shiller

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Speaker 2: Home Price Index. So we're seeing this happen month to month.

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Speaker 2: You're going to have bumpiness, but it's a year on

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Speaker 2: year growth rate or rate of inflation that we should

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Speaker 2: be paying attention to in terms of what's driving headlining

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Speaker 2: core inflation in the PCEE deflator.

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Speaker 1: Dana Peterson, thank you for the brief with the conference

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Speaker 1: board and under the Fed tomorrow and retail sales always

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Speaker 1: important at the conference board on Thursday. I'm joining us

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Speaker 1: now with terrific, rigorous mathematical analysis. Alicia Levin, head of

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Speaker 1: Investment Strategy Advisory Solutions BNY Mellan. I want to talk

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Speaker 1: about Jeffrey Hu's eurocall, but we'll say that for another time.

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Speaker 1: You have a beautiful sentence in your report. Cash will

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Speaker 1: underperform the known worlds in cash.

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Speaker 3: Discuss discuss almost six trillion in cash. If you step

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Speaker 3: back and say what were the trades this year, it

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Speaker 3: was aijlp ones and cash and T bills. So the

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Speaker 3: question you say is if I look into twenty twenty

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Speaker 3: four with an expectation that we're going into a healthy

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Speaker 3: slowdown for the economy, the Fed's going to cut we

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Speaker 3: think the second half of the year, not the first half,

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Speaker 3: we can discuss and we have the inflation moving in

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Speaker 3: the right direction. Where does cash lead you? And it

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Speaker 3: doesn't lead you to the same return you had this year,

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Speaker 3: and this is the time to start reallocating into other assets?

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Speaker 1: Where does cash go? Individual stocks? Is going to ETFs?

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Speaker 1: I mean, I am fascinated within the equity space. Where

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Speaker 1: does B and Y? Melon see that the cash will

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Speaker 1: migrate too.

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Speaker 3: So we think the cash goes to equities, it should

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Speaker 3: be going to bonds, Okay, should be going to bonds.

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Speaker 3: And we're actually calling for a twenty percent allocation to

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Speaker 3: alternatives as well because we think this is one of those.

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Speaker 1: Really it's an alternative.

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Speaker 3: So distressed at privates, right, it's a great time for

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Speaker 3: privates actually, because you're getting the repricing this year into

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Speaker 3: next year and there's going to be distressed opportunities out

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Speaker 3: there because of the rate piking cycle, and so that

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Speaker 3: is just a nice set up in real estate as well.

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Speaker 3: Nice setup for an entry of new capital into this

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Speaker 3: ASSI class.

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Speaker 5: Before we get stuck into that, just talk to me

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Speaker 5: about cash, how sticky that is a money market funds.

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Speaker 5: When you're making these recommendations to clients, they jump in

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Speaker 5: on boards or hesitant. What's the time like?

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Speaker 3: So clients are receptive to this because with the understanding

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Speaker 3: that what's worked over the last twelve months is likely

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Speaker 3: not to work over the next twelve to eighteen months.

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Speaker 3: If you've been in markets long enough, you know that

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Speaker 3: the same trade doesn't take you far every single year.

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Speaker 3: And on top of that, we've hit peak rates, we've

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Speaker 3: hit peak fed, inflation is slowing, cash will underperform the

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Speaker 3: bond market and equities.

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Speaker 5: Have we seen the distress.

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Speaker 3: So we haven't seen distress in large cap America. We're

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Speaker 3: going to see it in small cap America and other

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Speaker 3: areas that don't that are relying on refunding and funding growth.

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Speaker 3: So that means so, for instance, a small cap world

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Speaker 3: that the Russell twenty and forty percent or non earners

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Speaker 3: need to borrow to grow that debt that they're using

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Speaker 3: is floating rate and comes due a lot sooner than

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Speaker 3: the fixed rate debt from the large cap companies that

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Speaker 3: took out loans in twenty twenty and twenty twenty one.

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Speaker 3: So you're setting up a situation where you have some

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Speaker 3: parts of the economy that are relatively insulated termed out

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Speaker 3: their debt at low rates, like households did with mortgages,

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Speaker 3: and other parts that are more exposed.

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Speaker 4: Is there any inconsistency in being bullish on risk and

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Speaker 4: also expecting a tick up in distress and bankruptcies.

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Speaker 3: So there's not an inconsistency because this is not a

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Speaker 3: blanket call. Right the way we've sort of had a

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Speaker 3: rolling recession over the last twelve to eighteen months, you're

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Speaker 3: going to get a little bit of that going forward.

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Speaker 3: We do think there's some consolidation in the first half

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Speaker 3: of the year, and actually in an election year when

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Speaker 3: there's an incumbent, there's just a lot of creakiness in

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Speaker 3: the market in the first part of the years. Policies

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Speaker 3: get to discuss different sectors or targets. Right, just you

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Speaker 3: tend to have a bit of a slow debt and

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Speaker 3: probably a digestion. We're going to have a year that's

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Speaker 3: up twenty two to twenty three percent by the time

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Speaker 3: we finish the year here, so you know unlikely that

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Speaker 3: continues in the next few months. It coincides also with

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Speaker 3: if there's a slow down, it's the first half of

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Speaker 3: the year, right, because incumbents tend not to like recessions

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Speaker 3: when they're running for reelection.

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Speaker 4: Is there anything that we could see in less than

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Speaker 4: a half hour time that could shake your view on

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Speaker 4: this sort of disinflation that allows this next leg of

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Speaker 4: the cycle.

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Speaker 3: So it's the core, right, So energy prices look to

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Speaker 3: be well tamed to the discussion earlier that you all

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Speaker 3: had here about the record pumping of oil and gas

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Speaker 3: in the US and also the warm winters everywhere, so

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Speaker 3: oil prices seem to be well contained. If that's the case,

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Speaker 3: the low oil prices will filter into every other sector.

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Speaker 3: So the core prices today at four percent, we'll see

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Speaker 3: what we get in a few minutes time. That's where

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Speaker 3: you could get a different narrative if it doesn't come

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Speaker 3: down further. But to the point about whether the FED

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Speaker 3: cuts or not in March, it's just not realistic. And

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Speaker 3: I'll point out in the last eighteen months the market

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Speaker 3: has been overly up to miss on when the FED

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Speaker 3: has cutting. If you remember we were talking about the

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Speaker 3: FED cutting in August of twenty two.

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Speaker 2: You know, the market has.

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Speaker 3: Wanted that FED cut for eighteen months now. It's always

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Speaker 3: been too optimistic for where the Fed's going, and a

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Speaker 3: reality is going and if the mare and if our

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Speaker 3: call is right, more likely to have a soft landing

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Speaker 3: than a recession. Clearly not cutting in March of twenty

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Speaker 3: twenty four.

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Speaker 1: I want to go to your mass abilities here. There's

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Speaker 1: a lot of Greek letters getting thrown around right now. Gamma, Gamma,

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Speaker 1: Gamma and the rest of it. Alpha, beta, gamma, apps on,

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Speaker 1: blah blah blah. The skew is silent out there. Explain

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Speaker 1: to our audience the silence. It's some of these volatility measures.

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Speaker 3: Show right, boy twelve a VIX of twelve. It's just shocking.

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Speaker 3: But again, the VIX was about. The VIX number is

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Speaker 3: really about the volatility in the bond market, and the

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Speaker 3: bond market right now is just well behaved since that

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Speaker 3: CPI report back in early November. So the whole market

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Speaker 3: for the last eighteen months has been driven by the

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Speaker 3: bond market every other asset class, and as long as

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Speaker 3: that is tamed, the VIX as well will be tamed,

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Speaker 3: but look, it's a risk. It means at twelve it's

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Speaker 3: historically very low.

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Speaker 5: What would you expect from cham and Pound tomorrow.

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Speaker 3: I think it's his one chance to push back?

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Speaker 5: This is it right?

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Speaker 3: This is it is one chance, So I would expect

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Speaker 3: something like that was the easing of financial conditions can't

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Speaker 3: be too pleasing for the Fed in their fight, and

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Speaker 3: they will definitely fight back, I think against that first

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Speaker 3: half rate cut that we're seeing here. I mean, so

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Speaker 3: you know, you don't want to say, you know, calling

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Speaker 3: victory too early, but he will definitely fight back here.

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Speaker 5: It's crystal ball type stuff. So I forgive me, But

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Speaker 5: you think the market listens to him anymore? Is that

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Speaker 5: a credible threat? Given what we're all seeing in the data?

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Speaker 3: You know, the data has been very kind to risk assets.

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Speaker 3: So A thirty today is really the key, more so

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Speaker 3: CPI than Powell. But I expect Powell to push back

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Speaker 3: against all this excitement. And look, the risk in the

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Speaker 3: market is that everybody's expecting a soft landing, right, that's

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Speaker 3: the risk. Where were we all a year ago recession?

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Speaker 5: A year ago, two months agot, two months ago? Take cay?

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Speaker 1: Did she just say we're going to cash. Is that

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Speaker 1: what I heard? Even of inflation?

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Speaker 3: You you asked me that every time. So we are

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Speaker 3: never in cash because.

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Speaker 5: Here we go, as she tells, a domestic to my

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Speaker 5: right and domestic to my own.

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Speaker 3: But let me let me just say this. A year

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Speaker 3: ago you said to how do you avoid going five

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Speaker 3: percent in cash? And I say, well, we do relative allocations.

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Speaker 6: We never go to cash.

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Speaker 3: And we were over allocated to US large cap because

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Speaker 3: if I'm worried about recession, where do I want to

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Speaker 3: be and that's US large cap. So that was a

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Speaker 3: great allocation for our clients.

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Speaker 5: This year. You wanted to be in the nast night

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Speaker 5: one hundred forty eight percent yet today, which is just

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Speaker 5: absolutely bunkers.

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Speaker 1: That is nuts. Timely is a key idea there, maybe

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Speaker 1: the inertial force of disinflation back to wherever anybody chooses

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Speaker 1: that we should have had very sophisticated in this analysis.

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Speaker 1: Is Lindsay joins us this morning. Lindsey, thank you so much.

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Speaker 1: And on this moment of inflation, if you will, what

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Speaker 1: I find fascinating is getting the last mile. Let's say

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Speaker 1: we're three point eight, getting to two point eight is

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Speaker 1: a whole different story than what we've seen the last months.

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Speaker 6: Absolutely, the last one hundred two hundred basis points is

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Speaker 6: always the most difficult. And to your point, it's not

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Speaker 6: just the nominal level of inflation, but it's the underlying

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Speaker 6: momentum of disinflation that the market is really looking for.

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Speaker 6: We want to be convinced that we're on that sustainable

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Speaker 6: downward trajectory, and if we look at the third quarter

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Speaker 6: with that recent backup and then sideways movement, that's not

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Speaker 6: convincing that we are on this sustainable timely trajectory back

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Speaker 6: to two percent. So my concern is the longer the

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Speaker 6: Fed remains on the sideline and slow plays inflation, the

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Speaker 6: bigger the risk the Fed will have to come back

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Speaker 6: in and take further action and maybe slow the economy

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Speaker 6: more than they would have otherwise needed to if they'd

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Speaker 6: simply dealt with inflation the first time around.

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Speaker 5: Let's get into it. Where are the improvement's coming from

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Speaker 5: over the last twelve months. Where have they come from?

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Speaker 6: We've seen some widespread improvements in terms of inflation, it's

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Speaker 6: moved over from the good side into the service sector widespread,

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Speaker 6: but again, a lot of that downward momentum a welcomed

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Speaker 6: gauge as we move into the key holiday spending season

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Speaker 6: is from energy prices, and so when we talk about

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Speaker 6: the reversal there, that's probably not a long term sustainable trend.

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Speaker 6: We could see bounce back up in the first quarter,

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Speaker 6: again forcing the Fed's hand maybe to take further policy action.

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Speaker 5: One thing we've asked regarding the FED is how much

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Speaker 5: of the improvement in inflation is down to the FED

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Speaker 5: reserve and how much of that is just a natural

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Speaker 5: rebanacing of the economy. It's come from the supply side.

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Speaker 5: I know it's tremendously difficult to gauge, but if we're

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Speaker 5: going to talk about the prospect of higher interest rates

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Speaker 5: from here, we also have to have to understand what

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Speaker 5: higher interest rates have done so far over the last

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Speaker 5: twelve months. What have they done.

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Speaker 6: I think the FED can take responsibility for the improvement

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Speaker 6: that we've seen on the demand side. It's certainly not

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Speaker 6: the supply side, not the good side of things, as

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Speaker 6: you talk about the recalibration in the aftermath of reopening

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Speaker 6: the globele economy. But on the demand side, we have

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Speaker 6: seen the consumer pull back. Momentum has slowed from double

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Speaker 6: digit growth down to eight, down to six. We're now

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Speaker 6: at low single digits. Consumers are still spending, but at

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Speaker 6: a remarkably lower pace, So that loss of momentum I

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Speaker 6: think we can attribute to the Fed. But clearly they

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Speaker 6: haven't done enough to see below trend job growth, to

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Speaker 6: see below trend spending activity, and certainly not enough to

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Speaker 6: get that prolonged period of below trend top line activity

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Speaker 6: to ensure a return back to stable prices.

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Speaker 5: Just wait.

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Speaker 4: That's Mike Wilson's message, and what we hear from certain executives,

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Speaker 4: like that of Hasbro, seems to be something similar. They

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Speaker 4: are seeing a deceleration in consumer appetite. We heard the

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Speaker 4: same from Walmart. How do you pair that idea with

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Speaker 4: some of the recovery that you're seeing in services and

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Speaker 4: other areas that you think could fuel inflation again next year?

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Speaker 6: Well, this is the big concern. Do we wait on

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Speaker 6: the sideline and hope that inflation slows or do we

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Speaker 6: take further action to ensure that price is slow. And

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Speaker 6: from my point of view, I don't think the risk

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Speaker 6: is that the FED tightens too much, but that the

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Speaker 6: FED doesn't tighten enough and allows inflation to become further entrenched,

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Speaker 6: and this is really the mistake that they made on

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Speaker 6: the front end. If we go back to the initial

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Speaker 6: start of the tightening cycle, they held onto that transitory

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Speaker 6: language too long. They allowed inflation to become too ingrained,

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Speaker 6: and we're now trying to deal with it, particularly on

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Speaker 6: the wage side. These ingrained levels of price pressures that

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Speaker 6: are complicating this process to get us back to two

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Speaker 6: percent inflation.

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Speaker 4: What should they look for to be confident that they

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Speaker 4: can start using.

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Speaker 6: Well, One, a downward sustainable trend. This back and forth,

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Speaker 6: sideways movement doesn't instill confidence. But second, we need to

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Speaker 6: see broad based improvement in some of the most sticky components,

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Speaker 6: particularly wages, and last Friday's employment report didn't give us

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Speaker 6: that confidence. We're still talking about four percent annual wage growth.

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Speaker 6: We have come down from peak levels, but that's not

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Speaker 6: enough to suggest that we've done enough in terms of tightening.

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Speaker 1: On behalf of three hundred and thirty one point nine

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Speaker 1: million Americans, Can you explain the USDA, The Department of

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Speaker 1: Agriculture tells us in October we had three point three

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Speaker 1: percent food inflation. No one is experiencing that food inflation

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Speaker 1: is just shocking at the grocery store, it restaurants, Johnny,

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Speaker 1: had you had a sixty eight dollars stake the other night? Whatever.

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Speaker 1: But the answer is the reality. This is what I

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Speaker 1: get twenty four to seven. The reality of inflation's totally

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Speaker 1: different than the verbiage of people like you. What's a

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Speaker 1: divide there?

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Speaker 3: Want?

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Speaker 6: Well, I take a lot of the differential is the

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Speaker 6: wholesale prices versus what we're experiencing as the end consumer.

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Speaker 6: Because we're not going down. We're not buying the fish

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Speaker 6: at the market. We're buying the fish at the restaurant

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Speaker 6: or at the grocery store, and that is the pipeline

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Speaker 6: of price increase that the consumer is feeling. And so

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Speaker 6: three percent food inflation, no, we're not feeling that. We're

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Speaker 6: feeling more like fifteen twenty percent food inflation. But from

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Speaker 6: the Fed's perspective, again, they're looking at the broad based

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Speaker 6: components of inflation that regardless of where in the pipeline

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Speaker 6: they want to look, we're still above two percent. We

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Speaker 6: haven't gotten back to price stability. There's more work to

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Speaker 6: be done. Despite the market's consistent overreaction and constant calling

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Speaker 6: for rate cuts, FED officials are still talking about reaching

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Speaker 6: that sufficiently restrictive level.

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Speaker 1: The Bloomberg Financial Conditions Index, a Gold and Sachs Index

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Speaker 1: somewhat the same, all show accommodative structures right down part

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Speaker 1: of that as a buoyant stock market as well. Into

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Speaker 1: this meeting and with this report in ninety minutes, are

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Speaker 1: we restrictive or accommodative?

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Speaker 6: Now, well, that's the question. Are we really as restrictive

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Speaker 6: as the Fed things? Have we reached that sufficiently restrictive level?

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Speaker 6: And some of these indices say no, we have not

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Speaker 6: done enough.

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Speaker 1: And when you are you talking about a rate increase.

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Speaker 6: I think it's not out of the reabilities that we

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Speaker 6: see a further rate increase if we see stability and inflation.

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Speaker 6: And then as we move the calendar page into twenty

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Speaker 6: twenty four, we see a little bit of an uptick.

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Speaker 6: I think that could force the Fed's hand to take

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Speaker 6: one final rate increase to convince the market that three

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Speaker 6: is not the new two, Orange is not the new black.

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Speaker 6: We have to get back to two percent inflation, and

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Speaker 6: they will not tolerate an above trend level.

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Speaker 5: Why is two so important because that's.

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Speaker 6: The balancing level of inflation that allows the economy to

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Speaker 6: continue to accelerate without moving into a hyperinflation scenario, but

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Speaker 6: also keeps the economy afloat and avoiding the deflationary scenario.

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Speaker 6: So it's a delicate balance that the FED is trying

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Speaker 6: to walk. And we don't have to pinpoint exactly two

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Speaker 6: percent inflation. Remember it's the longer term average. So as

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Speaker 6: we fail to reach two percent for the better part

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Speaker 6: of a decade going into the pandemic, arguably the FED

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Speaker 6: may be willing to tolerate slightly higher inflation. But again

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Speaker 6: it's about that downward trajectory of momentum that we haven't established.

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Speaker 5: I just wonder if become too focused TOM two myopically

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Speaker 5: focused on this one hundred basis points. I remember from

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Speaker 5: the other side of it at one, searching two and

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Speaker 5: all the effort that global central banks went to to

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Speaker 5: try and get inflation up TOM one hundred basis points.

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Speaker 5: Whether the effort requires get us down from three to

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Speaker 5: two would be equally damaging and get a different why.

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Speaker 1: There's been a lot of study on this, starting with

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Speaker 1: Blanchard and Stiglets at the IMF off of seven eight,

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Speaker 1: and of course it's been rekindled three or four times

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Speaker 1: for it Olivia Blonchard's book last summer address. This directly

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Speaker 1: linked into fiscal policy. And the answer here is how

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Speaker 1: much work does it take? And the answer is no,

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Speaker 1: one knows. And the other answer is it's got to

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Speaker 1: have a price. It's got to have a cost at

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Speaker 1: some point. To me, Lindsay's job is to aggregate everything

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Speaker 1: that's out there. And my answer is we're disaggregated America.

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Speaker 1: We've got to halves technologically laid. They don't care about inflation.

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Speaker 1: They're off skiing somewhere.

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Speaker 5: Who's that pine Tree?

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Speaker 1: You know, they're off at Pine Tree, Vermont wherever. The

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Speaker 1: rest of America's flat on their back.

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Speaker 7: I'm not going to say.

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Speaker 4: It's something to say and we can move on now.

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Speaker 5: Okay, you want to move on?

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Speaker 1: Now?

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Speaker 5: About you this week? O?

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Speaker 4: Yes, it was the first.

438
00:22:02,200 --> 00:22:03,880
Speaker 5: That's what that was. Why am I missing the inside

439
00:22:03,920 --> 00:22:04,560
Speaker 5: jokes this morning?

440
00:22:04,600 --> 00:22:07,520
Speaker 4: Lookause you weren't here yesterday, Chris.

441
00:22:10,400 --> 00:22:11,760
Speaker 7: Look it was great.

442
00:22:12,160 --> 00:22:12,880
Speaker 3: I enjoyed it.

443
00:22:13,119 --> 00:22:14,480
Speaker 2: I'm feeding into the you know.

444
00:22:14,600 --> 00:22:18,840
Speaker 4: Consumption of America, economy.

445
00:22:18,480 --> 00:22:21,520
Speaker 5: Strong America. Nice, Lindsay, thank you, that was a clinic.

446
00:22:21,560 --> 00:22:23,440
Speaker 5: Thank you, Verty was thank you very much, Lindsay. PX

447
00:22:23,440 --> 00:22:24,800
Speaker 5: to that of stay four.

448
00:22:36,200 --> 00:22:39,520
Speaker 1: Right now. On oil. Christian Maylik joins us Managing director

449
00:22:39,520 --> 00:22:43,720
Speaker 1: of Global Head of Energy Strategy at JP Morgan. On oil, John,

450
00:22:43,800 --> 00:22:45,560
Speaker 1: we did this yesterday for you. We missed you so

451
00:22:45,680 --> 00:22:50,320
Speaker 1: much a gallon of patrol from peak down thirty two percent.

452
00:22:50,640 --> 00:22:54,280
Speaker 1: And I guess that's part of the inflation story. Christian.

453
00:22:54,520 --> 00:22:58,800
Speaker 1: Two years ago you were modeling out oil demand led

454
00:22:58,840 --> 00:23:01,879
Speaker 1: by emerging market it would put a bid to oil.

455
00:23:02,520 --> 00:23:06,480
Speaker 1: Is that theory still in place, that em and developing

456
00:23:06,560 --> 00:23:11,160
Speaker 1: economies will find a bid, have stable or increasing demand

457
00:23:11,200 --> 00:23:13,080
Speaker 1: on oil and lift the price.

458
00:23:14,720 --> 00:23:17,600
Speaker 8: If anything, Hey, Tom, I think it's strengthened. There is

459
00:23:17,680 --> 00:23:20,440
Speaker 8: demand in the world that we just simply cannot see.

460
00:23:20,680 --> 00:23:23,320
Speaker 8: So when we try modeling demand from the scale of

461
00:23:23,359 --> 00:23:26,240
Speaker 8: one to ten, we're going from seven to nine. There's

462
00:23:26,280 --> 00:23:28,280
Speaker 8: demand that's negative that's going to be positive. So, in

463
00:23:28,320 --> 00:23:31,520
Speaker 8: other words, there's demand in the am world penetration of

464
00:23:31,640 --> 00:23:34,200
Speaker 8: energy poverty that we see today where they would love

465
00:23:34,280 --> 00:23:37,240
Speaker 8: to consume any form of energy in order to high

466
00:23:37,240 --> 00:23:40,440
Speaker 8: grade there migrate themselves out of poverty, whether it's lights

467
00:23:40,480 --> 00:23:44,160
Speaker 8: in the street, whether it's being able to get to work.

468
00:23:44,280 --> 00:23:45,400
Speaker 7: So that demand, that.

469
00:23:45,400 --> 00:23:48,840
Speaker 8: Intrinsic demand that is not visible is so significant that

470
00:23:48,880 --> 00:23:51,280
Speaker 8: we don't see demand peaking. I don't think we'll see

471
00:23:51,320 --> 00:23:55,040
Speaker 8: demand peaking in our lifetimes, particularly as em demand growth

472
00:23:55,160 --> 00:23:57,240
Speaker 8: continues to surprise the.

473
00:23:57,240 --> 00:24:00,280
Speaker 4: Upside, which is really counterconsensus considering people are talking about

474
00:24:00,280 --> 00:24:02,440
Speaker 4: peake demand for quite a while. Christian, let's go through

475
00:24:02,480 --> 00:24:05,120
Speaker 4: the outlook that you just put out for next year,

476
00:24:05,480 --> 00:24:07,800
Speaker 4: talking about how prices could stay around here or go

477
00:24:07,880 --> 00:24:10,639
Speaker 4: a bit lower as you do have US production reaching

478
00:24:10,640 --> 00:24:13,240
Speaker 4: all time records, offsetting some of the cuts. But then

479
00:24:13,320 --> 00:24:15,600
Speaker 4: what what happens in the second half.

480
00:24:16,800 --> 00:24:17,840
Speaker 7: Right, Well, it's interesting.

481
00:24:17,840 --> 00:24:21,080
Speaker 8: I think we've had a lot of discussion around these

482
00:24:21,119 --> 00:24:24,040
Speaker 8: additional barrels that we don't see necessarily coming from the US,

483
00:24:24,119 --> 00:24:26,880
Speaker 8: shil coming from deep water, and look credit where it's too.

484
00:24:26,920 --> 00:24:27,800
Speaker 7: These guys have done a.

485
00:24:27,680 --> 00:24:32,800
Speaker 8: Great job in delivering additional productivity and therefore more production.

486
00:24:33,200 --> 00:24:35,040
Speaker 8: I think the key point that we make from the

487
00:24:35,080 --> 00:24:37,720
Speaker 8: second half going into next year is that these are

488
00:24:37,760 --> 00:24:40,600
Speaker 8: all additional barrels. There's are tens of thousands of barrels

489
00:24:40,640 --> 00:24:43,600
Speaker 8: and not millions of barrels. There is no massive quantitum

490
00:24:43,680 --> 00:24:46,360
Speaker 8: of volume that we don't know about that's coming into

491
00:24:46,359 --> 00:24:48,719
Speaker 8: the market over the next two to three years, and

492
00:24:48,760 --> 00:24:50,960
Speaker 8: that ultimately means that it's not a but when does

493
00:24:51,000 --> 00:24:51,879
Speaker 8: the market titan?

494
00:24:52,680 --> 00:24:54,360
Speaker 7: Even as we see potential surprises.

495
00:24:54,359 --> 00:24:56,960
Speaker 8: So I've obviously seen a lot of discussion around surpluses

496
00:24:57,000 --> 00:25:00,199
Speaker 8: next year, and we can talk about OPEC. But in

497
00:25:00,240 --> 00:25:03,000
Speaker 8: the end, the biggest asset test, or the litmus test

498
00:25:03,040 --> 00:25:04,560
Speaker 8: if you like, in terms of when do we know

499
00:25:04,640 --> 00:25:07,960
Speaker 8: the market is Stanto titan When OPEK led by Saldi

500
00:25:08,240 --> 00:25:10,640
Speaker 8: as volume into the market. That's not a negative, that's

501
00:25:10,640 --> 00:25:11,280
Speaker 8: a positive.

502
00:25:11,920 --> 00:25:14,080
Speaker 4: What's been most surprising to you this year, Christian? Because

503
00:25:14,080 --> 00:25:15,919
Speaker 4: so many people got the call wrong the oil prices

504
00:25:15,920 --> 00:25:20,160
Speaker 4: would be substantially higher. Why are people so confused by

505
00:25:20,160 --> 00:25:21,520
Speaker 4: what's going on and crude?

506
00:25:22,720 --> 00:25:24,200
Speaker 8: It's a great question. I think there's a lot of

507
00:25:24,520 --> 00:25:26,639
Speaker 8: couple of reasons. Let's just unpack that. First of all,

508
00:25:27,000 --> 00:25:30,080
Speaker 8: there's a lot of dark inventory led by Russia, Iran,

509
00:25:30,160 --> 00:25:32,520
Speaker 8: there's way Olibya. That is exactly why this time last

510
00:25:32,600 --> 00:25:35,800
Speaker 8: year we went bearish despite our super psycher call, who

511
00:25:35,840 --> 00:25:38,800
Speaker 8: went bearish into the first half of this year simply

512
00:25:38,800 --> 00:25:40,879
Speaker 8: because there's a lot of volume that we just couldn't see.

513
00:25:41,280 --> 00:25:43,080
Speaker 8: At least the shale we can see it. This was

514
00:25:43,119 --> 00:25:46,120
Speaker 8: an inventory that was in excess. So that's the first

515
00:25:46,160 --> 00:25:48,760
Speaker 8: point in terms of the sort of volatile that we saw.

516
00:25:49,080 --> 00:25:51,400
Speaker 8: The second is the risk premium, which is introduced through

517
00:25:51,720 --> 00:25:54,120
Speaker 8: the conflict in the Middle East, where there was concerns

518
00:25:54,160 --> 00:25:57,159
Speaker 8: around potentially widening of that conflict, and that curally created

519
00:25:57,200 --> 00:25:58,960
Speaker 8: a bit to the upside. I don't think the premium

520
00:25:59,000 --> 00:26:01,000
Speaker 8: is going to weigh something we need to keep an

521
00:26:01,040 --> 00:26:03,040
Speaker 8: eye on now if we go into if we're thinking

522
00:26:03,040 --> 00:26:04,960
Speaker 8: about that in the context of how do we see

523
00:26:05,000 --> 00:26:07,600
Speaker 8: all prices going into next year. I think probably the

524
00:26:07,640 --> 00:26:10,280
Speaker 8: biggest learning curve for us in terms of discovery is

525
00:26:10,280 --> 00:26:12,040
Speaker 8: the marginal cost for oil. I've seen a lot of

526
00:26:12,040 --> 00:26:15,040
Speaker 8: discussion around to surpluses and deficits.

527
00:26:15,080 --> 00:26:16,800
Speaker 7: In some ways you're gonna be critical. You can make

528
00:26:16,840 --> 00:26:17,480
Speaker 7: it what you want.

529
00:26:17,800 --> 00:26:20,040
Speaker 8: The reality is what you can't change is the marginal

530
00:26:20,080 --> 00:26:21,560
Speaker 8: cost of oil that has gone up.

531
00:26:21,600 --> 00:26:22,719
Speaker 7: It's gone up significantly.

532
00:26:22,760 --> 00:26:24,439
Speaker 8: In fact, if you look at the curve structure in

533
00:26:24,440 --> 00:26:28,760
Speaker 8: the last seven years, it's basically moved higher over time.

534
00:26:29,119 --> 00:26:30,800
Speaker 7: And so why is that relevant?

535
00:26:30,800 --> 00:26:32,520
Speaker 8: Because if the marginal cost of all is going up,

536
00:26:32,560 --> 00:26:35,119
Speaker 8: it's getting more exponsive to produce, whether it's because of

537
00:26:35,359 --> 00:26:39,520
Speaker 8: cash return for the major's supply chain, bottlenecks, etc. Then

538
00:26:40,080 --> 00:26:41,879
Speaker 8: we can look at the time when all went to

539
00:26:41,920 --> 00:26:45,600
Speaker 8: seventy dollars in April through the banking crisis and take

540
00:26:45,680 --> 00:26:47,879
Speaker 8: heed from that. That potentially does start to look like

541
00:26:47,920 --> 00:26:48,320
Speaker 8: a flaw.

542
00:26:48,600 --> 00:26:49,400
Speaker 7: We're in discovery.

543
00:26:49,400 --> 00:26:51,040
Speaker 8: I'm not going to try to call that as a

544
00:26:51,080 --> 00:26:54,160
Speaker 8: hard floor, but that to me sounds like a rather

545
00:26:54,240 --> 00:26:56,480
Speaker 8: than flaw. As we think about going into next year

546
00:26:56,680 --> 00:26:59,120
Speaker 8: in terms of the range, and that's why we've talked

547
00:26:59,119 --> 00:27:01,600
Speaker 8: about seventy to nine. To use the range, it'll be volatile,

548
00:27:02,119 --> 00:27:04,680
Speaker 8: but let's not forget that the marginal cost of wars

549
00:27:04,720 --> 00:27:06,000
Speaker 8: going up and that typically is.

550
00:27:05,960 --> 00:27:08,639
Speaker 7: The early leading indicator of an up cycle.

551
00:27:08,840 --> 00:27:12,000
Speaker 5: This confidence, Christian, that you have goes beyond twenty twenty four.

552
00:27:12,000 --> 00:27:14,000
Speaker 5: You and I have talked about this before. Talk to

553
00:27:14,080 --> 00:27:16,040
Speaker 5: me about why it is that you can make this

554
00:27:16,119 --> 00:27:18,920
Speaker 5: call and push it out beyond twenty four into twenty five.

555
00:27:20,560 --> 00:27:22,720
Speaker 8: There is no significant volume of oil coming to the

556
00:27:22,760 --> 00:27:24,879
Speaker 8: market in the next in the rest of the decade.

557
00:27:25,280 --> 00:27:27,680
Speaker 8: All the vordum that we know, we can see if

558
00:27:27,720 --> 00:27:31,520
Speaker 8: there's additional upside fair enough, they could create volatility to oil,

559
00:27:31,720 --> 00:27:33,960
Speaker 8: but there's no major quantum, not like the North Sea

560
00:27:33,960 --> 00:27:37,040
Speaker 8: in the eighties, not like shale in the last ten,

561
00:27:37,200 --> 00:27:39,200
Speaker 8: ten to twelve years. And so with that in mind,

562
00:27:39,520 --> 00:27:43,400
Speaker 8: it's just a matter of time for the markets significantly tighters.

563
00:27:43,640 --> 00:27:45,840
Speaker 8: And as the market titans, we expect the second half

564
00:27:45,920 --> 00:27:48,440
Speaker 8: the decade we'll see severe tightening.

565
00:27:48,680 --> 00:27:50,040
Speaker 7: That is the point where.

566
00:27:49,920 --> 00:27:52,680
Speaker 8: The only real quantum of volume that we can rely

567
00:27:52,760 --> 00:27:55,840
Speaker 8: on and lean into is Opek. So when people tell

568
00:27:55,880 --> 00:27:58,000
Speaker 8: me Opek is cutting, it's a bit like the eighties.

569
00:27:58,160 --> 00:28:00,400
Speaker 8: They're getting weaker. I sort of reverse this and think

570
00:28:00,760 --> 00:28:03,080
Speaker 8: almost like the Art of War here, they're retreating in

571
00:28:03,160 --> 00:28:05,560
Speaker 8: order to advance. They're going to take share of demand,

572
00:28:05,560 --> 00:28:07,720
Speaker 8: grow of the future when all the big volume out

573
00:28:07,720 --> 00:28:11,320
Speaker 8: there has diminished. And again I've stressed big because I'm

574
00:28:11,359 --> 00:28:13,639
Speaker 8: not saying that we won't see more volume, but not

575
00:28:13,760 --> 00:28:16,360
Speaker 8: in the millions of barrels that we need to meet

576
00:28:16,400 --> 00:28:18,399
Speaker 8: that future demand growth, which is at least going to

577
00:28:18,400 --> 00:28:21,520
Speaker 8: be three hundred and seven hundred million barrows by twenty thirty,

578
00:28:21,560 --> 00:28:22,200
Speaker 8: if not higher.

579
00:28:22,520 --> 00:28:24,800
Speaker 5: What's the signal that you take from the consolidation that

580
00:28:24,840 --> 00:28:27,960
Speaker 5: we've seen on the US side of things in places

581
00:28:27,960 --> 00:28:28,520
Speaker 5: like the PERMEA.

582
00:28:29,760 --> 00:28:32,040
Speaker 7: Yeah, it tells me two things. One that they're died.

583
00:28:32,560 --> 00:28:36,520
Speaker 8: These companies are now struggling to significantly raise productivity on

584
00:28:36,560 --> 00:28:38,600
Speaker 8: the land the open, So they're having to now pay

585
00:28:38,640 --> 00:28:42,400
Speaker 8: a premium using paper to gain more land in order

586
00:28:42,520 --> 00:28:46,080
Speaker 8: to take productivity and efficiencies that they've got apply it

587
00:28:46,120 --> 00:28:48,920
Speaker 8: to the thing that the land they've got they've acquired

588
00:28:49,120 --> 00:28:49,720
Speaker 8: and raised.

589
00:28:49,760 --> 00:28:53,280
Speaker 7: So this is definitely a narrative of efficiency.

590
00:28:53,400 --> 00:28:57,040
Speaker 8: It's a narrative of increased productivity, but it's sort of

591
00:28:57,040 --> 00:28:59,360
Speaker 8: a double ed sort. It's telling you that they don't

592
00:28:59,400 --> 00:29:01,680
Speaker 8: have it themselves in their own portfolio. They're sort of

593
00:29:01,760 --> 00:29:04,800
Speaker 8: maxed out on productivity, which is clearly bullish.

594
00:29:05,160 --> 00:29:07,600
Speaker 7: But equally that means that there's more wood to chop.

595
00:29:07,480 --> 00:29:10,000
Speaker 8: On what they bought in terms of the acreage to

596
00:29:10,120 --> 00:29:12,760
Speaker 8: raise the productivity to the standard that they're on for

597
00:29:12,800 --> 00:29:15,920
Speaker 8: example Exon. So while that means we'll see potentially more

598
00:29:16,000 --> 00:29:18,600
Speaker 8: volume hit the market over the next two to three years,

599
00:29:18,720 --> 00:29:22,840
Speaker 8: we wouldn't underestimate the productivity gains. It feels to me

600
00:29:22,960 --> 00:29:26,000
Speaker 8: as a short, short duration call to the upside, because

601
00:29:26,160 --> 00:29:28,720
Speaker 8: what these deals are telling you is that beyond twenty

602
00:29:28,720 --> 00:29:32,240
Speaker 8: five twenty six, we're now seeing a significant reduction in

603
00:29:32,680 --> 00:29:35,440
Speaker 8: new inventory that can hit the market, and therefore I'm

604
00:29:35,440 --> 00:29:37,440
Speaker 8: not necessarily going to call a peak on shale. Shale

605
00:29:37,560 --> 00:29:40,280
Speaker 8: continue to go. We actually need shale. We don't more

606
00:29:40,360 --> 00:29:42,520
Speaker 8: prices going in a run and very quickly one hundred

607
00:29:42,520 --> 00:29:46,200
Speaker 8: and fifty. But shale as a sort of as a

608
00:29:46,240 --> 00:29:49,080
Speaker 8: basin that's going to grow every year by a million

609
00:29:49,080 --> 00:29:49,680
Speaker 8: and a half.

610
00:29:49,640 --> 00:29:52,120
Speaker 7: Based on where your price. I think those days are over.

611
00:29:52,280 --> 00:29:55,040
Speaker 8: Now we're a sort of in steady state and we'll

612
00:29:55,080 --> 00:29:57,719
Speaker 8: see additional volume, but not significant.

613
00:29:57,960 --> 00:30:00,400
Speaker 5: Hey, Christian, you're one of the best. Appreciate it as always,

614
00:30:00,480 --> 00:30:02,400
Speaker 5: Christian Monica of JP Moulgan.

615
00:30:02,640 --> 00:30:06,480
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616
00:30:06,600 --> 00:30:10,800
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617
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620
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621
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