Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Dana Peterson
Speaker 1: knows a bullmarket when she sees a chief economist at
Speaker 1: the conference board with wonderful perception on the American consumer. Dana,
Speaker 1: how do you link a quiescent inflation report like this
Speaker 1: over to retail sales on Thursday?
Speaker 2: Well, I think the key thing is that we are
Speaker 2: seeing inflation slowing, and it's consistent with what the fat
Speaker 2: IT expects. But as was mentioned earlier, real wages are
Speaker 2: rising and certainly it's supporting consumers or spending. But when
Speaker 2: we ask consumers how they feel, they're still complaining about inflation.
Speaker 2: They're still saying that everything's too expensive. Interest rates are rising,
Speaker 2: so that means if you want to buy that car,
Speaker 2: refrigerator is going to cost more. So I would expect
Speaker 2: that even though real wages are rising, inflation is still
Speaker 2: there and consumers are probably going to start pulling back
Speaker 2: on spending.
Speaker 1: How are real wages doing and within that are they part?
Speaker 1: I mean, is it almost circuitous where they're actually part
Speaker 1: of the inflation report as we adjust for inflation with wages?
Speaker 2: Well, I think wages are a part of the inflation story.
Speaker 3: Certainly.
Speaker 2: You have a number of industries that are experiencing labor shortages,
Speaker 2: and when you look at their wages nominal and real,
Speaker 2: they're still rising pretty quickly, and I think that's showing
Speaker 2: up in the services aspect. Let's also not forget that
Speaker 2: insurance costs are rising because many of these insurance companies
Speaker 2: are suffering losses and they're raising premium. So between insurance
Speaker 2: and wages, we still have these sticky inflation measures and
Speaker 2: I don't think that's going to go away right away.
Speaker 4: So, Dana, do you think that people are a little
Speaker 4: bit overzealous about this idea that the Fed is going
Speaker 4: to come right significantly next year.
Speaker 2: I think they are. Indeed, the Fed tomorrow is probably
Speaker 2: going to signal yes, it's done, But don't expect rate
Speaker 2: cuts anytime soon, and don't expect that many next year.
Speaker 2: We think anywhere from fifty to one hundred basis points
Speaker 2: probably makes sense, especially if inflation, according to the SEP,
Speaker 2: doesn't get beyond two percent before the end of next year.
Speaker 2: So I still think that, yes, we can get to
Speaker 2: two percent by the end of next year. But that's
Speaker 2: really going to suggest that not many interest rate cuts
Speaker 2: are priced in.
Speaker 4: Was transitory, right, Dana? Are we just basically seeing the
Speaker 4: right sizing of the supply side after the pandemic and
Speaker 4: that's entirely what we're seeing now? Or is this disinflation transitory?
Speaker 4: Is this basically a period of a headfake before some
Speaker 4: of the stickier elements take place in a more significant way.
Speaker 2: Well, I don't know why people are surprised that inflation
Speaker 2: gave are slowing. The FED did raise rates by five
Speaker 2: hundred and twenty five basis points. This is part of
Speaker 2: the program. Certainly, we saw the housing markets slow first,
Speaker 2: and that's showing up with a significant lag in the
Speaker 2: rental components of the CPI and the PCE deflator, so
Speaker 2: that's slowing things down. Certainly, food and energy prices are
Speaker 2: determined by things external, and you know, we don't have
Speaker 2: the massive disruptions from OPEC or even wars affecting energy prices.
Speaker 2: So they're coming off, but you still have the influence
Speaker 2: of insurance costs and wages because labor shortages are here,
Speaker 2: and I think that's gonna be Those two things are
Speaker 2: going to be the challenge to getting inflation back to
Speaker 2: two percent. But we can still get there.
Speaker 1: Dana Peterson, Well, this is the conference where data. Please
Speaker 1: stay with us. We're going to come right back on
Speaker 1: market check here, because you saw a spike whichever way
Speaker 1: your series going, and we've sort of given it back
Speaker 1: S ANDB futures had a nice, nice pop. They've given
Speaker 1: it back up six right now. Same thing in the
Speaker 1: yield space. A tenure you'ld four point two one percent.
Speaker 1: I noticed a real yield was one ninety seven. It's
Speaker 1: come back nicely two point zero one. Perhaps we're already
Speaker 1: on the way to adjusting for the FED meeting tomorrow.
Speaker 1: Dana Peterson, what is nominal GDP? How about Chairman Poul
Speaker 1: You watch us every morning. What's your estimate here of
Speaker 1: the animal spirit of Chairman Powell's America?
Speaker 2: Well, I think you know nominal GDP is certainly if
Speaker 2: well nominal and real GDP, you're probably not going to
Speaker 2: be as strong as what we saw in the third quarter.
Speaker 2: We're probably looking at growth around you know, one percent
Speaker 2: in real terms and roughly four percent in nominal terms.
Speaker 2: Right adding in you know, roughly three percent headline inflation.
Speaker 2: So that's a slowing economy, and I think again that's
Speaker 2: part of the program. The FED wants to see the
Speaker 2: economy slow to help bring down inflation. Now, when we
Speaker 2: look at business investment, that's already slowing outside of manufacturing,
Speaker 2: where companies are bringing back product and production and they're building.
Speaker 2: Fact away from that, there's really not that much investment.
Speaker 2: The last year to drop has to be the consumer.
Speaker 2: And we know consumers are more indebted now, their interest
Speaker 2: rates on their credit cards are higher, student loan payments
Speaker 2: are coming back, and you know, consumers are quitting less
Speaker 2: and they're thinking, well, maybe the labor market's going to slow,
Speaker 2: so maybe I should also slow my spending as well.
Speaker 4: Dana, I'm just curious. We're saying that shelter prices pretty
Speaker 4: much offset the decline from oil prices. Is that sustainable
Speaker 4: or do you think that this is just sort of
Speaker 4: a lag before we start see housing costs inflect downward.
Speaker 2: Well, I don't really look at the month on month
Speaker 2: for housing. I look at the year on year and
Speaker 2: year on year, the rental components are slowing, and it's
Speaker 2: consistent with an eighteen month lag of the Case Shiller
Speaker 2: Home Price Index. So we're seeing this happen month to month.
Speaker 2: You're going to have bumpiness, but it's a year on
Speaker 2: year growth rate or rate of inflation that we should
Speaker 2: be paying attention to in terms of what's driving headlining
Speaker 2: core inflation in the PCEE deflator.
Speaker 1: Dana Peterson, thank you for the brief with the conference
Speaker 1: board and under the Fed tomorrow and retail sales always
Speaker 1: important at the conference board on Thursday. I'm joining us
Speaker 1: now with terrific, rigorous mathematical analysis. Alicia Levin, head of
Speaker 1: Investment Strategy Advisory Solutions BNY Mellan. I want to talk
Speaker 1: about Jeffrey Hu's eurocall, but we'll say that for another time.
Speaker 1: You have a beautiful sentence in your report. Cash will
Speaker 1: underperform the known worlds in cash.
Speaker 3: Discuss discuss almost six trillion in cash. If you step
Speaker 3: back and say what were the trades this year, it
Speaker 3: was aijlp ones and cash and T bills. So the
Speaker 3: question you say is if I look into twenty twenty
Speaker 3: four with an expectation that we're going into a healthy
Speaker 3: slowdown for the economy, the Fed's going to cut we
Speaker 3: think the second half of the year, not the first half,
Speaker 3: we can discuss and we have the inflation moving in
Speaker 3: the right direction. Where does cash lead you? And it
Speaker 3: doesn't lead you to the same return you had this year,
Speaker 3: and this is the time to start reallocating into other assets?
Speaker 1: Where does cash go? Individual stocks? Is going to ETFs?
Speaker 1: I mean, I am fascinated within the equity space. Where
Speaker 1: does B and Y? Melon see that the cash will
Speaker 1: migrate too.
Speaker 3: So we think the cash goes to equities, it should
Speaker 3: be going to bonds, Okay, should be going to bonds.
Speaker 3: And we're actually calling for a twenty percent allocation to
Speaker 3: alternatives as well because we think this is one of those.
Speaker 1: Really it's an alternative.
Speaker 3: So distressed at privates, right, it's a great time for
Speaker 3: privates actually, because you're getting the repricing this year into
Speaker 3: next year and there's going to be distressed opportunities out
Speaker 3: there because of the rate piking cycle, and so that
Speaker 3: is just a nice set up in real estate as well.
Speaker 3: Nice setup for an entry of new capital into this
Speaker 3: ASSI class.
Speaker 5: Before we get stuck into that, just talk to me
Speaker 5: about cash, how sticky that is a money market funds.
Speaker 5: When you're making these recommendations to clients, they jump in
Speaker 5: on boards or hesitant. What's the time like?
Speaker 3: So clients are receptive to this because with the understanding
Speaker 3: that what's worked over the last twelve months is likely
Speaker 3: not to work over the next twelve to eighteen months.
Speaker 3: If you've been in markets long enough, you know that
Speaker 3: the same trade doesn't take you far every single year.
Speaker 3: And on top of that, we've hit peak rates, we've
Speaker 3: hit peak fed, inflation is slowing, cash will underperform the
Speaker 3: bond market and equities.
Speaker 5: Have we seen the distress.
Speaker 3: So we haven't seen distress in large cap America. We're
Speaker 3: going to see it in small cap America and other
Speaker 3: areas that don't that are relying on refunding and funding growth.
Speaker 3: So that means so, for instance, a small cap world
Speaker 3: that the Russell twenty and forty percent or non earners
Speaker 3: need to borrow to grow that debt that they're using
Speaker 3: is floating rate and comes due a lot sooner than
Speaker 3: the fixed rate debt from the large cap companies that
Speaker 3: took out loans in twenty twenty and twenty twenty one.
Speaker 3: So you're setting up a situation where you have some
Speaker 3: parts of the economy that are relatively insulated termed out
Speaker 3: their debt at low rates, like households did with mortgages,
Speaker 3: and other parts that are more exposed.
Speaker 4: Is there any inconsistency in being bullish on risk and
Speaker 4: also expecting a tick up in distress and bankruptcies.
Speaker 3: So there's not an inconsistency because this is not a
Speaker 3: blanket call. Right the way we've sort of had a
Speaker 3: rolling recession over the last twelve to eighteen months, you're
Speaker 3: going to get a little bit of that going forward.
Speaker 3: We do think there's some consolidation in the first half
Speaker 3: of the year, and actually in an election year when
Speaker 3: there's an incumbent, there's just a lot of creakiness in
Speaker 3: the market in the first part of the years. Policies
Speaker 3: get to discuss different sectors or targets. Right, just you
Speaker 3: tend to have a bit of a slow debt and
Speaker 3: probably a digestion. We're going to have a year that's
Speaker 3: up twenty two to twenty three percent by the time
Speaker 3: we finish the year here, so you know unlikely that
Speaker 3: continues in the next few months. It coincides also with
Speaker 3: if there's a slow down, it's the first half of
Speaker 3: the year, right, because incumbents tend not to like recessions
Speaker 3: when they're running for reelection.
Speaker 4: Is there anything that we could see in less than
Speaker 4: a half hour time that could shake your view on
Speaker 4: this sort of disinflation that allows this next leg of
Speaker 4: the cycle.
Speaker 3: So it's the core, right, So energy prices look to
Speaker 3: be well tamed to the discussion earlier that you all
Speaker 3: had here about the record pumping of oil and gas
Speaker 3: in the US and also the warm winters everywhere, so
Speaker 3: oil prices seem to be well contained. If that's the case,
Speaker 3: the low oil prices will filter into every other sector.
Speaker 3: So the core prices today at four percent, we'll see
Speaker 3: what we get in a few minutes time. That's where
Speaker 3: you could get a different narrative if it doesn't come
Speaker 3: down further. But to the point about whether the FED
Speaker 3: cuts or not in March, it's just not realistic. And
Speaker 3: I'll point out in the last eighteen months the market
Speaker 3: has been overly up to miss on when the FED
Speaker 3: has cutting. If you remember we were talking about the
Speaker 3: FED cutting in August of twenty two.
Speaker 2: You know, the market has.
Speaker 3: Wanted that FED cut for eighteen months now. It's always
Speaker 3: been too optimistic for where the Fed's going, and a
Speaker 3: reality is going and if the mare and if our
Speaker 3: call is right, more likely to have a soft landing
Speaker 3: than a recession. Clearly not cutting in March of twenty
Speaker 3: twenty four.
Speaker 1: I want to go to your mass abilities here. There's
Speaker 1: a lot of Greek letters getting thrown around right now. Gamma, Gamma,
Speaker 1: Gamma and the rest of it. Alpha, beta, gamma, apps on,
Speaker 1: blah blah blah. The skew is silent out there. Explain
Speaker 1: to our audience the silence. It's some of these volatility measures.
Speaker 3: Show right, boy twelve a VIX of twelve. It's just shocking.
Speaker 3: But again, the VIX was about. The VIX number is
Speaker 3: really about the volatility in the bond market, and the
Speaker 3: bond market right now is just well behaved since that
Speaker 3: CPI report back in early November. So the whole market
Speaker 3: for the last eighteen months has been driven by the
Speaker 3: bond market every other asset class, and as long as
Speaker 3: that is tamed, the VIX as well will be tamed,
Speaker 3: but look, it's a risk. It means at twelve it's
Speaker 3: historically very low.
Speaker 5: What would you expect from cham and Pound tomorrow.
Speaker 3: I think it's his one chance to push back?
Speaker 5: This is it right?
Speaker 3: This is it is one chance, So I would expect
Speaker 3: something like that was the easing of financial conditions can't
Speaker 3: be too pleasing for the Fed in their fight, and
Speaker 3: they will definitely fight back, I think against that first
Speaker 3: half rate cut that we're seeing here. I mean, so
Speaker 3: you know, you don't want to say, you know, calling
Speaker 3: victory too early, but he will definitely fight back here.
Speaker 5: It's crystal ball type stuff. So I forgive me, But
Speaker 5: you think the market listens to him anymore? Is that
Speaker 5: a credible threat? Given what we're all seeing in the data?
Speaker 3: You know, the data has been very kind to risk assets.
Speaker 3: So A thirty today is really the key, more so
Speaker 3: CPI than Powell. But I expect Powell to push back
Speaker 3: against all this excitement. And look, the risk in the
Speaker 3: market is that everybody's expecting a soft landing, right, that's
Speaker 3: the risk. Where were we all a year ago recession?
Speaker 5: A year ago, two months agot, two months ago? Take cay?
Speaker 1: Did she just say we're going to cash. Is that
Speaker 1: what I heard? Even of inflation?
Speaker 3: You you asked me that every time. So we are
Speaker 3: never in cash because.
Speaker 5: Here we go, as she tells, a domestic to my
Speaker 5: right and domestic to my own.
Speaker 3: But let me let me just say this. A year
Speaker 3: ago you said to how do you avoid going five
Speaker 3: percent in cash? And I say, well, we do relative allocations.
Speaker 6: We never go to cash.
Speaker 3: And we were over allocated to US large cap because
Speaker 3: if I'm worried about recession, where do I want to
Speaker 3: be and that's US large cap. So that was a
Speaker 3: great allocation for our clients.
Speaker 5: This year. You wanted to be in the nast night
Speaker 5: one hundred forty eight percent yet today, which is just
Speaker 5: absolutely bunkers.
Speaker 1: That is nuts. Timely is a key idea there, maybe
Speaker 1: the inertial force of disinflation back to wherever anybody chooses
Speaker 1: that we should have had very sophisticated in this analysis.
Speaker 1: Is Lindsay joins us this morning. Lindsey, thank you so much.
Speaker 1: And on this moment of inflation, if you will, what
Speaker 1: I find fascinating is getting the last mile. Let's say
Speaker 1: we're three point eight, getting to two point eight is
Speaker 1: a whole different story than what we've seen the last months.
Speaker 6: Absolutely, the last one hundred two hundred basis points is
Speaker 6: always the most difficult. And to your point, it's not
Speaker 6: just the nominal level of inflation, but it's the underlying
Speaker 6: momentum of disinflation that the market is really looking for.
Speaker 6: We want to be convinced that we're on that sustainable
Speaker 6: downward trajectory, and if we look at the third quarter
Speaker 6: with that recent backup and then sideways movement, that's not
Speaker 6: convincing that we are on this sustainable timely trajectory back
Speaker 6: to two percent. So my concern is the longer the
Speaker 6: Fed remains on the sideline and slow plays inflation, the
Speaker 6: bigger the risk the Fed will have to come back
Speaker 6: in and take further action and maybe slow the economy
Speaker 6: more than they would have otherwise needed to if they'd
Speaker 6: simply dealt with inflation the first time around.
Speaker 5: Let's get into it. Where are the improvement's coming from
Speaker 5: over the last twelve months. Where have they come from?
Speaker 6: We've seen some widespread improvements in terms of inflation, it's
Speaker 6: moved over from the good side into the service sector widespread,
Speaker 6: but again, a lot of that downward momentum a welcomed
Speaker 6: gauge as we move into the key holiday spending season
Speaker 6: is from energy prices, and so when we talk about
Speaker 6: the reversal there, that's probably not a long term sustainable trend.
Speaker 6: We could see bounce back up in the first quarter,
Speaker 6: again forcing the Fed's hand maybe to take further policy action.
Speaker 5: One thing we've asked regarding the FED is how much
Speaker 5: of the improvement in inflation is down to the FED
Speaker 5: reserve and how much of that is just a natural
Speaker 5: rebanacing of the economy. It's come from the supply side.
Speaker 5: I know it's tremendously difficult to gauge, but if we're
Speaker 5: going to talk about the prospect of higher interest rates
Speaker 5: from here, we also have to have to understand what
Speaker 5: higher interest rates have done so far over the last
Speaker 5: twelve months. What have they done.
Speaker 6: I think the FED can take responsibility for the improvement
Speaker 6: that we've seen on the demand side. It's certainly not
Speaker 6: the supply side, not the good side of things, as
Speaker 6: you talk about the recalibration in the aftermath of reopening
Speaker 6: the globele economy. But on the demand side, we have
Speaker 6: seen the consumer pull back. Momentum has slowed from double
Speaker 6: digit growth down to eight, down to six. We're now
Speaker 6: at low single digits. Consumers are still spending, but at
Speaker 6: a remarkably lower pace, So that loss of momentum I
Speaker 6: think we can attribute to the Fed. But clearly they
Speaker 6: haven't done enough to see below trend job growth, to
Speaker 6: see below trend spending activity, and certainly not enough to
Speaker 6: get that prolonged period of below trend top line activity
Speaker 6: to ensure a return back to stable prices.
Speaker 5: Just wait.
Speaker 4: That's Mike Wilson's message, and what we hear from certain executives,
Speaker 4: like that of Hasbro, seems to be something similar. They
Speaker 4: are seeing a deceleration in consumer appetite. We heard the
Speaker 4: same from Walmart. How do you pair that idea with
Speaker 4: some of the recovery that you're seeing in services and
Speaker 4: other areas that you think could fuel inflation again next year?
Speaker 6: Well, this is the big concern. Do we wait on
Speaker 6: the sideline and hope that inflation slows or do we
Speaker 6: take further action to ensure that price is slow. And
Speaker 6: from my point of view, I don't think the risk
Speaker 6: is that the FED tightens too much, but that the
Speaker 6: FED doesn't tighten enough and allows inflation to become further entrenched,
Speaker 6: and this is really the mistake that they made on
Speaker 6: the front end. If we go back to the initial
Speaker 6: start of the tightening cycle, they held onto that transitory
Speaker 6: language too long. They allowed inflation to become too ingrained,
Speaker 6: and we're now trying to deal with it, particularly on
Speaker 6: the wage side. These ingrained levels of price pressures that
Speaker 6: are complicating this process to get us back to two
Speaker 6: percent inflation.
Speaker 4: What should they look for to be confident that they
Speaker 4: can start using.
Speaker 6: Well, One, a downward sustainable trend. This back and forth,
Speaker 6: sideways movement doesn't instill confidence. But second, we need to
Speaker 6: see broad based improvement in some of the most sticky components,
Speaker 6: particularly wages, and last Friday's employment report didn't give us
Speaker 6: that confidence. We're still talking about four percent annual wage growth.
Speaker 6: We have come down from peak levels, but that's not
Speaker 6: enough to suggest that we've done enough in terms of tightening.
Speaker 1: On behalf of three hundred and thirty one point nine
Speaker 1: million Americans, Can you explain the USDA, The Department of
Speaker 1: Agriculture tells us in October we had three point three
Speaker 1: percent food inflation. No one is experiencing that food inflation
Speaker 1: is just shocking at the grocery store, it restaurants, Johnny,
Speaker 1: had you had a sixty eight dollars stake the other night? Whatever.
Speaker 1: But the answer is the reality. This is what I
Speaker 1: get twenty four to seven. The reality of inflation's totally
Speaker 1: different than the verbiage of people like you. What's a
Speaker 1: divide there?
Speaker 3: Want?
Speaker 6: Well, I take a lot of the differential is the
Speaker 6: wholesale prices versus what we're experiencing as the end consumer.
Speaker 6: Because we're not going down. We're not buying the fish
Speaker 6: at the market. We're buying the fish at the restaurant
Speaker 6: or at the grocery store, and that is the pipeline
Speaker 6: of price increase that the consumer is feeling. And so
Speaker 6: three percent food inflation, no, we're not feeling that. We're
Speaker 6: feeling more like fifteen twenty percent food inflation. But from
Speaker 6: the Fed's perspective, again, they're looking at the broad based
Speaker 6: components of inflation that regardless of where in the pipeline
Speaker 6: they want to look, we're still above two percent. We
Speaker 6: haven't gotten back to price stability. There's more work to
Speaker 6: be done. Despite the market's consistent overreaction and constant calling
Speaker 6: for rate cuts, FED officials are still talking about reaching
Speaker 6: that sufficiently restrictive level.
Speaker 1: The Bloomberg Financial Conditions Index, a Gold and Sachs Index
Speaker 1: somewhat the same, all show accommodative structures right down part
Speaker 1: of that as a buoyant stock market as well. Into
Speaker 1: this meeting and with this report in ninety minutes, are
Speaker 1: we restrictive or accommodative?
Speaker 6: Now, well, that's the question. Are we really as restrictive
Speaker 6: as the Fed things? Have we reached that sufficiently restrictive level?
Speaker 6: And some of these indices say no, we have not
Speaker 6: done enough.
Speaker 1: And when you are you talking about a rate increase.
Speaker 6: I think it's not out of the reabilities that we
Speaker 6: see a further rate increase if we see stability and inflation.
Speaker 6: And then as we move the calendar page into twenty
Speaker 6: twenty four, we see a little bit of an uptick.
Speaker 6: I think that could force the Fed's hand to take
Speaker 6: one final rate increase to convince the market that three
Speaker 6: is not the new two, Orange is not the new black.
Speaker 6: We have to get back to two percent inflation, and
Speaker 6: they will not tolerate an above trend level.
Speaker 5: Why is two so important because that's.
Speaker 6: The balancing level of inflation that allows the economy to
Speaker 6: continue to accelerate without moving into a hyperinflation scenario, but
Speaker 6: also keeps the economy afloat and avoiding the deflationary scenario.
Speaker 6: So it's a delicate balance that the FED is trying
Speaker 6: to walk. And we don't have to pinpoint exactly two
Speaker 6: percent inflation. Remember it's the longer term average. So as
Speaker 6: we fail to reach two percent for the better part
Speaker 6: of a decade going into the pandemic, arguably the FED
Speaker 6: may be willing to tolerate slightly higher inflation. But again
Speaker 6: it's about that downward trajectory of momentum that we haven't established.
Speaker 5: I just wonder if become too focused TOM two myopically
Speaker 5: focused on this one hundred basis points. I remember from
Speaker 5: the other side of it at one, searching two and
Speaker 5: all the effort that global central banks went to to
Speaker 5: try and get inflation up TOM one hundred basis points.
Speaker 5: Whether the effort requires get us down from three to
Speaker 5: two would be equally damaging and get a different why.
Speaker 1: There's been a lot of study on this, starting with
Speaker 1: Blanchard and Stiglets at the IMF off of seven eight,
Speaker 1: and of course it's been rekindled three or four times
Speaker 1: for it Olivia Blonchard's book last summer address. This directly
Speaker 1: linked into fiscal policy. And the answer here is how
Speaker 1: much work does it take? And the answer is no,
Speaker 1: one knows. And the other answer is it's got to
Speaker 1: have a price. It's got to have a cost at
Speaker 1: some point. To me, Lindsay's job is to aggregate everything
Speaker 1: that's out there. And my answer is we're disaggregated America.
Speaker 1: We've got to halves technologically laid. They don't care about inflation.
Speaker 1: They're off skiing somewhere.
Speaker 5: Who's that pine Tree?
Speaker 1: You know, they're off at Pine Tree, Vermont wherever. The
Speaker 1: rest of America's flat on their back.
Speaker 7: I'm not going to say.
Speaker 4: It's something to say and we can move on now.
Speaker 5: Okay, you want to move on?
Speaker 1: Now?
Speaker 5: About you this week? O?
Speaker 4: Yes, it was the first.
Speaker 5: That's what that was. Why am I missing the inside
Speaker 5: jokes this morning?
Speaker 4: Lookause you weren't here yesterday, Chris.
Speaker 7: Look it was great.
Speaker 3: I enjoyed it.
Speaker 2: I'm feeding into the you know.
Speaker 4: Consumption of America, economy.
Speaker 5: Strong America. Nice, Lindsay, thank you, that was a clinic.
Speaker 5: Thank you, Verty was thank you very much, Lindsay. PX
Speaker 5: to that of stay four.
Speaker 1: Right now. On oil. Christian Maylik joins us Managing director
Speaker 1: of Global Head of Energy Strategy at JP Morgan. On oil, John,
Speaker 1: we did this yesterday for you. We missed you so
Speaker 1: much a gallon of patrol from peak down thirty two percent.
Speaker 1: And I guess that's part of the inflation story. Christian.
Speaker 1: Two years ago you were modeling out oil demand led
Speaker 1: by emerging market it would put a bid to oil.
Speaker 1: Is that theory still in place, that em and developing
Speaker 1: economies will find a bid, have stable or increasing demand
Speaker 1: on oil and lift the price.
Speaker 8: If anything, Hey, Tom, I think it's strengthened. There is
Speaker 8: demand in the world that we just simply cannot see.
Speaker 8: So when we try modeling demand from the scale of
Speaker 8: one to ten, we're going from seven to nine. There's
Speaker 8: demand that's negative that's going to be positive. So, in
Speaker 8: other words, there's demand in the am world penetration of
Speaker 8: energy poverty that we see today where they would love
Speaker 8: to consume any form of energy in order to high
Speaker 8: grade there migrate themselves out of poverty, whether it's lights
Speaker 8: in the street, whether it's being able to get to work.
Speaker 7: So that demand, that.
Speaker 8: Intrinsic demand that is not visible is so significant that
Speaker 8: we don't see demand peaking. I don't think we'll see
Speaker 8: demand peaking in our lifetimes, particularly as em demand growth
Speaker 8: continues to surprise the.
Speaker 4: Upside, which is really counterconsensus considering people are talking about
Speaker 4: peake demand for quite a while. Christian, let's go through
Speaker 4: the outlook that you just put out for next year,
Speaker 4: talking about how prices could stay around here or go
Speaker 4: a bit lower as you do have US production reaching
Speaker 4: all time records, offsetting some of the cuts. But then
Speaker 4: what what happens in the second half.
Speaker 7: Right, Well, it's interesting.
Speaker 8: I think we've had a lot of discussion around these
Speaker 8: additional barrels that we don't see necessarily coming from the US,
Speaker 8: shil coming from deep water, and look credit where it's too.
Speaker 7: These guys have done a.
Speaker 8: Great job in delivering additional productivity and therefore more production.
Speaker 8: I think the key point that we make from the
Speaker 8: second half going into next year is that these are
Speaker 8: all additional barrels. There's are tens of thousands of barrels
Speaker 8: and not millions of barrels. There is no massive quantitum
Speaker 8: of volume that we don't know about that's coming into
Speaker 8: the market over the next two to three years, and
Speaker 8: that ultimately means that it's not a but when does
Speaker 8: the market titan?
Speaker 7: Even as we see potential surprises.
Speaker 8: So I've obviously seen a lot of discussion around surpluses
Speaker 8: next year, and we can talk about OPEC. But in
Speaker 8: the end, the biggest asset test, or the litmus test
Speaker 8: if you like, in terms of when do we know
Speaker 8: the market is Stanto titan When OPEK led by Saldi
Speaker 8: as volume into the market. That's not a negative, that's
Speaker 8: a positive.
Speaker 4: What's been most surprising to you this year, Christian? Because
Speaker 4: so many people got the call wrong the oil prices
Speaker 4: would be substantially higher. Why are people so confused by
Speaker 4: what's going on and crude?
Speaker 8: It's a great question. I think there's a lot of
Speaker 8: couple of reasons. Let's just unpack that. First of all,
Speaker 8: there's a lot of dark inventory led by Russia, Iran,
Speaker 8: there's way Olibya. That is exactly why this time last
Speaker 8: year we went bearish despite our super psycher call, who
Speaker 8: went bearish into the first half of this year simply
Speaker 8: because there's a lot of volume that we just couldn't see.
Speaker 8: At least the shale we can see it. This was
Speaker 8: an inventory that was in excess. So that's the first
Speaker 8: point in terms of the sort of volatile that we saw.
Speaker 8: The second is the risk premium, which is introduced through
Speaker 8: the conflict in the Middle East, where there was concerns
Speaker 8: around potentially widening of that conflict, and that curally created
Speaker 8: a bit to the upside. I don't think the premium
Speaker 8: is going to weigh something we need to keep an
Speaker 8: eye on now if we go into if we're thinking
Speaker 8: about that in the context of how do we see
Speaker 8: all prices going into next year. I think probably the
Speaker 8: biggest learning curve for us in terms of discovery is
Speaker 8: the marginal cost for oil. I've seen a lot of
Speaker 8: discussion around to surpluses and deficits.
Speaker 7: In some ways you're gonna be critical. You can make
Speaker 7: it what you want.
Speaker 8: The reality is what you can't change is the marginal
Speaker 8: cost of oil that has gone up.
Speaker 7: It's gone up significantly.
Speaker 8: In fact, if you look at the curve structure in
Speaker 8: the last seven years, it's basically moved higher over time.
Speaker 7: And so why is that relevant?
Speaker 8: Because if the marginal cost of all is going up,
Speaker 8: it's getting more exponsive to produce, whether it's because of
Speaker 8: cash return for the major's supply chain, bottlenecks, etc. Then
Speaker 8: we can look at the time when all went to
Speaker 8: seventy dollars in April through the banking crisis and take
Speaker 8: heed from that. That potentially does start to look like
Speaker 8: a flaw.
Speaker 7: We're in discovery.
Speaker 8: I'm not going to try to call that as a
Speaker 8: hard floor, but that to me sounds like a rather
Speaker 8: than flaw. As we think about going into next year
Speaker 8: in terms of the range, and that's why we've talked
Speaker 8: about seventy to nine. To use the range, it'll be volatile,
Speaker 8: but let's not forget that the marginal cost of wars
Speaker 8: going up and that typically is.
Speaker 7: The early leading indicator of an up cycle.
Speaker 5: This confidence, Christian, that you have goes beyond twenty twenty four.
Speaker 5: You and I have talked about this before. Talk to
Speaker 5: me about why it is that you can make this
Speaker 5: call and push it out beyond twenty four into twenty five.
Speaker 8: There is no significant volume of oil coming to the
Speaker 8: market in the next in the rest of the decade.
Speaker 8: All the vordum that we know, we can see if
Speaker 8: there's additional upside fair enough, they could create volatility to oil,
Speaker 8: but there's no major quantum, not like the North Sea
Speaker 8: in the eighties, not like shale in the last ten,
Speaker 8: ten to twelve years. And so with that in mind,
Speaker 8: it's just a matter of time for the markets significantly tighters.
Speaker 8: And as the market titans, we expect the second half
Speaker 8: the decade we'll see severe tightening.
Speaker 7: That is the point where.
Speaker 8: The only real quantum of volume that we can rely
Speaker 8: on and lean into is Opek. So when people tell
Speaker 8: me Opek is cutting, it's a bit like the eighties.
Speaker 8: They're getting weaker. I sort of reverse this and think
Speaker 8: almost like the Art of War here, they're retreating in
Speaker 8: order to advance. They're going to take share of demand,
Speaker 8: grow of the future when all the big volume out
Speaker 8: there has diminished. And again I've stressed big because I'm
Speaker 8: not saying that we won't see more volume, but not
Speaker 8: in the millions of barrels that we need to meet
Speaker 8: that future demand growth, which is at least going to
Speaker 8: be three hundred and seven hundred million barrows by twenty thirty,
Speaker 8: if not higher.
Speaker 5: What's the signal that you take from the consolidation that
Speaker 5: we've seen on the US side of things in places
Speaker 5: like the PERMEA.
Speaker 7: Yeah, it tells me two things. One that they're died.
Speaker 8: These companies are now struggling to significantly raise productivity on
Speaker 8: the land the open, So they're having to now pay
Speaker 8: a premium using paper to gain more land in order
Speaker 8: to take productivity and efficiencies that they've got apply it
Speaker 8: to the thing that the land they've got they've acquired
Speaker 8: and raised.
Speaker 7: So this is definitely a narrative of efficiency.
Speaker 8: It's a narrative of increased productivity, but it's sort of
Speaker 8: a double ed sort. It's telling you that they don't
Speaker 8: have it themselves in their own portfolio. They're sort of
Speaker 8: maxed out on productivity, which is clearly bullish.
Speaker 7: But equally that means that there's more wood to chop.
Speaker 8: On what they bought in terms of the acreage to
Speaker 8: raise the productivity to the standard that they're on for
Speaker 8: example Exon. So while that means we'll see potentially more
Speaker 8: volume hit the market over the next two to three years,
Speaker 8: we wouldn't underestimate the productivity gains. It feels to me
Speaker 8: as a short, short duration call to the upside, because
Speaker 8: what these deals are telling you is that beyond twenty
Speaker 8: five twenty six, we're now seeing a significant reduction in
Speaker 8: new inventory that can hit the market, and therefore I'm
Speaker 8: not necessarily going to call a peak on shale. Shale
Speaker 8: continue to go. We actually need shale. We don't more
Speaker 8: prices going in a run and very quickly one hundred
Speaker 8: and fifty. But shale as a sort of as a
Speaker 8: basin that's going to grow every year by a million
Speaker 8: and a half.
Speaker 7: Based on where your price. I think those days are over.
Speaker 8: Now we're a sort of in steady state and we'll
Speaker 8: see additional volume, but not significant.
Speaker 5: Hey, Christian, you're one of the best. Appreciate it as always,
Speaker 5: Christian Monica of JP Moulgan.
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and
Speaker 1: anywhere else you get your podcasts. Listen live every weekday
Speaker 1: starting at seven am Eastern. I'm Bloomberg dot Com, the
Speaker 1: iHeartRadio app, tune In, and the Bloomberg Business app. You
Speaker 1: can watch us live on Bloomberg Television and always I'm
Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Tom Keen and
Speaker 1: this is Bloomberg