Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Right now,
Speaker 1: we're going to begin here benis Grant and Lisa Bramitz
Speaker 1: and Tom kan with our definitive call in the day
Speaker 1: on global fixed income. Way lead as global chief investment
Speaker 1: strategists at Blackrock, prodigious in mathematics and joins us here
Speaker 1: on our fears of price down and yield up. Walley,
Speaker 1: thank you so much for finding the time. Where is
Speaker 1: the bid on bonds? To me, the bid is walked away?
Speaker 1: Is that true? Is there just a dearth of bid
Speaker 1: across all of fixed income?
Speaker 2: There are lots of moving parts right now. Good morning everyone.
Speaker 2: In terms of our review on long bonds long duration,
Speaker 2: we have been underweight US long duration for three years now.
Speaker 2: Since late twenty twenty one, ten year yields was below
Speaker 2: one percent, and last week we closed the underweight to
Speaker 2: get to neutral. There are a couple of moving parts
Speaker 2: in terms of why rates have reprised so very meaningfully.
Speaker 2: The first piece is policy path repricing, and a second
Speaker 2: piece is term premier repricing, and within that, inflation premier
Speaker 2: is part of tim premier. So where we are now
Speaker 2: with ten year yields testing five percent in our assessment,
Speaker 2: policy path is not that different from where we think
Speaker 2: it should be. But term premier, depending on which measure
Speaker 2: you use, we're looking at somewhere between twenty based point
Speaker 2: forty basis in different methodology actually could push even higher
Speaker 2: over the strategic horizon. So we're talking about term premier
Speaker 2: over the strategic horizon at one hundred basis point, not
Speaker 2: out of this world because of fiscal imbalance, because of
Speaker 2: insurance dynamics, because of higher rate environment, rate volatility, as
Speaker 2: well as because of higher inflationary environment. So when you
Speaker 2: bring all of that together, strategically we're still underweight, but
Speaker 2: technically we're not neutral because risks have now become more balanced.
Speaker 2: And when we think about kind of the reader cross
Speaker 2: of weight repricing to risk assets, actually policy path repricing
Speaker 2: can be negative for equities because it impacts the discount
Speaker 2: rates directly, but time premier repricing doesn't have to be
Speaker 2: negative for equities because it's more an assessment of the
Speaker 2: relative appeal of duration in portfolios.
Speaker 3: Do you think way, I know that you've been leaning
Speaker 3: into the whole AI discussion and the whole AI thesis,
Speaker 3: and that's been driving some of your equity bets. Do
Speaker 3: you think that that area is completely immune to term
Speaker 3: premium in these discussions of yields, given the cash cows
Speaker 3: that they've become.
Speaker 2: Well, what has been very interesting with regards to this
Speaker 2: mega tech and AI theme is that on the one hand,
Speaker 2: they benefit from the growth upgrade earnings upgrates that we're
Speaker 2: seeing coming through. So, for example, next year ten percent
Speaker 2: EPs podcasts for S and B five hundred, half of
Speaker 2: that is driven by mega tech names, right, five percent
Speaker 2: is coming from the tech names. So they're definitely benefiting
Speaker 2: from earning's upgrades, which we appay a lot of attention to.
Speaker 2: But at the same time, they are more long duration
Speaker 2: compared with the broader equity market, so when the rate reprices,
Speaker 2: it pressures down on long duration a little bit more.
Speaker 2: Everything else be equal. But when you bring the two
Speaker 2: factors together, actually the growth prospect and the AI theme
Speaker 2: gathering momentum and the earnings upgrades actually trunk the duration sensitivity,
Speaker 2: as we have seen so far earlier in the year,
Speaker 2: but also in recent periods of reprising. Actually the AI
Speaker 2: theme the nastac have been holding up better than you
Speaker 2: would have accepted given the rate folatility.
Speaker 1: Well, good morning.
Speaker 4: Just to carry on from that, this week they're going
Speaker 4: to see sixteen trillion dollars worth of equity reports and
Speaker 4: the magnificent part of the magnificent seven of tech are
Speaker 4: going to be in there. What Tom, Lisa and myself
Speaker 4: what we're talking about was the balance sheets, the cash
Speaker 4: on the balance sheets, the cash on Apples balance sheet,
Speaker 4: the cash on the other big tech. Is that another
Speaker 4: defensive hallmark and a reason to endure and stay long
Speaker 4: big tech.
Speaker 2: That is why we are still overweight to the big
Speaker 2: tech and AI theme, because when we think about kind
Speaker 2: of quality characteristics as growth slows down reacts to the
Speaker 2: tightening environment that we're all experiencing, actually having cash on
Speaker 2: your balance sheet and not being as geared up in
Speaker 2: this environment is a definite is a definite plus and
Speaker 2: more broadly, we're talking about kind of the impression of
Speaker 2: the earning season. The feeling is that it's holding up better,
Speaker 2: but actually not forget the broader backdrop, which is the earnings.
Speaker 2: Actually the three quarters have been stagnating, and we're just
Speaker 2: talking about incremental rebound from the stagnating maddrob So that's
Speaker 2: the big picture here.
Speaker 1: Well, Lawrence from New York emails in and says, ask
Speaker 1: way Lee, if an institutional for marks to market and
Speaker 1: everything else is on the balance sheet, and the rationalization
Speaker 1: is I can own it forever and I'll get paid
Speaker 1: back eventually. Blowny, how do you do the math and
Speaker 1: the midpoint of where the stuff you hold on the
Speaker 1: balance sheet gets a valuation. If I've got eight years
Speaker 1: of maturity, how close is it to where you get
Speaker 1: a tipping point where you've got to confront what's on
Speaker 1: the balance sheet.
Speaker 2: Well, first say hello to Lawrence, and so yes, indeed
Speaker 2: we have we have to see more repricing of risk
Speaker 2: assets reflecting the higher rate environment. We look at duration
Speaker 2: work kind of almost there, which is why tactically we
Speaker 2: turned neutral. But if you look at equities, it has
Speaker 2: yet to reflect the higher rate environment. By our bras
Speaker 2: and for kind of arithmetic, kind of braise and for
Speaker 2: back of the envelope analysis, you know, like further five
Speaker 2: percent to ten percent adjustment is not you know, unthinkable.
Speaker 2: And then you think about private markets, there is also
Speaker 2: further reprising to go, which is why greater dispersion, greater
Speaker 2: selectivity is really warranted as we think about kind of
Speaker 2: deploying your risk budget in this environment, because there is
Speaker 2: a different rate sensitivity across risk spectrum, which is why
Speaker 2: we're very selective when it comes to our these we're
Speaker 2: focusing on sceptor cell growing earnings, but also very selective
Speaker 2: in terms of the private market. We like private credit,
Speaker 2: we like infrastructure that all these parts and private markets
Speaker 2: that benefits sail.
Speaker 1: Wings on your full faith and credit there way, Lee,
Speaker 1: thank you so much of black Crack. Tom Stauris is
Speaker 1: with Strtigas is a bird company. He's had a fixed income,
Speaker 1: but he's got to bounce off the great Jason Trenner
Speaker 1: as well. And you floored me. Within an analysis, it's
Speaker 1: seventy percent of America our voters that are small business
Speaker 1: and they're in the churn, and they only make up
Speaker 1: five percent of the GDP has the Fed left them
Speaker 1: behind in this yield environment.
Speaker 5: Well, I would very much say so. The Fed, by
Speaker 5: overly relying on the Fed funds rate to titan, has
Speaker 5: put so much of that pain on main Street USA.
Speaker 5: It's almost as if we've decided there's too big defail.
Speaker 5: The earlier this year we decided there medium is too
Speaker 5: big to fail. Medium sized businesses still kind of val
Speaker 5: bank signature bank depositors there. So if that means that
Speaker 5: if there's large companies are too big to fail, medium
Speaker 5: sized companies are too big to fail. The only place
Speaker 5: you can actually tighten in the US economy these days
Speaker 5: is small businesses and households, and the FED has done
Speaker 5: exactly that by overly relying on the FED funds rate.
Speaker 5: With that said, balance sheet reduction is catching up with
Speaker 5: the bond market. Now we're seeing treasury yields rise in
Speaker 5: the belly of the curve.
Speaker 3: Okay, and we'll get there on one sec which is
Speaker 3: a technical underpinnings of why we're seeing a sell off.
Speaker 3: But to stick on the point that Tom was talking about,
Speaker 3: if you have such a swath of the voter base
Speaker 3: that is feeling this kind of pain, and if you
Speaker 3: have small businesses that account for a significant proportion of
Speaker 3: the jobs losing momentum. When does that start to trickle
Speaker 3: into a higher unemployment rate, When does it start to
Speaker 3: reinforce and then actually bring rates down because of slower growth.
Speaker 5: Well, we were already at that point in March of
Speaker 5: this year. We were forty eight hours from recession, which
Speaker 5: would have been very deep, and then we had financial
Speaker 5: stabilization via liquidity injections. So when does it begin to
Speaker 5: bite again, Probably sometime between Christmas and we'll say Valentine's Day,
Speaker 5: when the consumer gets those late twenty twenty three credit
Speaker 5: card bills in January and you start to see a pullback.
Speaker 5: I don't see any sort of slow down in consumption.
Speaker 5: We didn't see it in the data last week. So
Speaker 5: that suggests to us the labor market's going to continue
Speaker 5: to remain strong, at least until the end of the year.
Speaker 5: But at some point in time, those higher interest rates
Speaker 5: are going to bite all corners of the economy, not
Speaker 5: just small businesses and households.
Speaker 3: Are yields rising right now because of the perception of
Speaker 3: strength that is given by some of the bigger businesses
Speaker 3: that are much stronger, I.
Speaker 1: Don't think so.
Speaker 5: I think yields are rising because we're finally seeing supply
Speaker 5: come in and really scare those bond vigilantes. The bond
Speaker 5: vigilantes are back, and they're pushing the term premium up
Speaker 5: on all treasuries, not just the front end of the curve.
Speaker 4: Now, well, they've been on at leach, not just in
Speaker 4: the US treasury market, but also in UK gilds and
Speaker 4: on boons. What goes through my mind is that when
Speaker 4: you trigger through five percent and you see the curve
Speaker 4: moving so aggressively, do you think that we hit some
Speaker 4: kind of a point of where risk powergy trades begin
Speaker 4: to get smacked, or where var limits at various various
Speaker 4: trading houses get triggered. Do you think that we're going
Speaker 4: to go into that next evolution of where we see
Speaker 4: a real liquidation moment.
Speaker 5: That's a tough question because I think we've seen now
Speaker 5: this is really the third substantial rise in ten year
Speaker 5: treasury as we've seen over the last three years. Each
Speaker 5: time you've probably seen those var strategies take a turn
Speaker 5: of leverage off along the way. So the sensitivity today
Speaker 5: to a five percent is probably less than it was
Speaker 5: to a three percent two years ago because they've taken.
Speaker 5: From what we can see, there's been some leverage nets
Speaker 5: come off. With that said, there's always another break point.
Speaker 5: I don't know if it's five h two or five seventeen,
Speaker 5: or we might have already hit it at four ninety,
Speaker 5: but there's a break point here where you're going to
Speaker 5: see another round of leverage come off. And that's part
Speaker 5: of the reason why we're it's probably a multi step process,
Speaker 5: but that's probably one of the reasons why we're seeing
Speaker 5: the SMP off again as well, and credit spreads inching
Speaker 5: higher because I think we're getting close to that point again.
Speaker 4: So who steps in here? This is the debate that
Speaker 4: we three of us have had for the past two hours,
Speaker 4: which is duration heroes aren't to be seen. Yeash, you're
Speaker 4: trading above five percent. Insurance companies have a different accounting system.
Speaker 4: They don't need to come in and hedge themselves. Who
Speaker 4: steps into this bond market to comp yields?
Speaker 5: Well, there's a good and a bad to this. The
Speaker 5: good is there's need to mean the good. The good
Speaker 5: is an enormous amount of plain vanilla core fixed income
Speaker 5: strategies that will just love to keep buying and buying
Speaker 5: and buying treasuries. The bad news is those are price
Speaker 5: sensitive investors. They're not like the leveraged investorship past. So
Speaker 5: they're going to basically come in after there's a concession,
Speaker 5: so treasury supply comes in, yields tick a little higher,
Speaker 5: they come in and buy on the cheap. They're not
Speaker 5: going to be price and sensitive who will buy on
Speaker 5: any tip.
Speaker 1: You are a grizzled veteran of this. I'm going to
Speaker 1: give you two ideas. One that we talked to way
Speaker 1: Lee about at black Rock, which is the bid walks
Speaker 1: away all of a sudden, non priced folks, not yield
Speaker 1: price of bonds, the bid walks away. And the great
Speaker 1: Chris Whaling call this the Wayland's silence. You're out there,
Speaker 1: you're on your phone. This is the old days. Man
Speaker 1: is you buy tickets here, sell tickets here. You're on
Speaker 1: your phone and you're going, I got a gazillion dollars
Speaker 1: of the trender, you know what, And there's just silence.
Speaker 1: Nobody wants that piece of paper. Are we close to that?
Speaker 5: Well, some would say we've actually hit that people. There's
Speaker 5: a lot of fair about thirty year auction. There's a
Speaker 5: lot of fair about auctions on the front of the
Speaker 5: curve over the last few weeks, saying they were even
Speaker 5: having desks.
Speaker 1: Norway calls up and they go, I gotta sell a
Speaker 1: zillion years of that cranny of twenty forty two. Is
Speaker 1: there somebody there to buy this garbage?
Speaker 5: There is, but you're going to have to put in
Speaker 5: a price concession. That is, yields are going to have
Speaker 5: to push higher than what the market is trading at.
Speaker 5: And the treasury is now no longer immune to this.
Speaker 1: I said price concession, and the bramokamshook. I mean, at
Speaker 1: what point the reality.
Speaker 3: Just real quick here Tom, to sum it all together.
Speaker 3: Are you getting compensated for the uncertainty right now? Are
Speaker 3: you buying duration?
Speaker 1: Yes, we would be.
Speaker 5: I think you're being fairly compensated. Our own measure of
Speaker 5: the term premium on the ten year treasury it's above
Speaker 5: one hundred basis points. That's a very important level, not
Speaker 5: just symbolically, but what it's telling you is that you're
Speaker 5: getting normalized cushion for that uncertainty. This is where you
Speaker 5: normally would be. So we feel you're being compensated. Doesn't
Speaker 5: mean we can't see yields tick higher here but you're
Speaker 5: being compensated for the risk going forward. I believe at this.
Speaker 1: Point Asson from a cigar bar in East Side emails
Speaker 1: and it says, talk about me. Okay, let's talk about
Speaker 1: Jason Trunnan. How does this fold in? How does your
Speaker 1: fixed income analysis fold into Jason Trennan's calling this on
Speaker 1: the equity markets?
Speaker 5: Well, it makes us that much more bearish on the
Speaker 5: economy because we continue to see another source of stress
Speaker 5: for the consumer and now businesses picking up here. So
Speaker 5: what we're doing is we've delayed recession and we've said
Speaker 5: we're going to avoid recession at all costs in twenty
Speaker 5: twenty three. But that itself, there's cost to that, and
Speaker 5: the cost is going to be that the breaking point
Speaker 5: is going to be when yields are higher, which means
Speaker 5: there's more risk of financial credit events.
Speaker 1: Have you predicted that?
Speaker 5: Nothing that we can see right now, But by the
Speaker 5: nature of those types of events, they are places you
Speaker 5: can't see them. So at a five ten year treasury
Speaker 5: it's much more likely than it was when we were
Speaker 5: at three point fifty. So where it is lurking that
Speaker 5: leveraged investor who is caught off guard, we don't know.
Speaker 5: We don't see that happening at this moment, but it's
Speaker 5: on our horizon.
Speaker 1: Bottle at tom Soasaurus. There are statigas there and fixed
Speaker 1: income the effect across all of the American economy. Kathleen
Speaker 1: Bes johnsik joins us now Chief Economists Nationwide Mutual Insurance. Kathy,
Speaker 1: once again you have failed and everybody else with a
Speaker 1: bang up third quarter GDP modeled out at five percent.
Speaker 1: You're gonna tell me we can't sustain that? All my
Speaker 1: radars up. Why can't we sustain above average? That's real GDP?
Speaker 6: Good morning, Tom, Well, it is unsustainable, and the main
Speaker 6: reason is that we just don't have enough workers. Really,
Speaker 6: if you break down GDP growth, right, you look at
Speaker 6: the number of workers and how productive unless we're getting
Speaker 6: a real boom and productivity growth, really hard to sustain
Speaker 6: five percent growth. And what it also does in the meantime,
Speaker 6: as you know, is overheats the economy and makes it
Speaker 6: more difficult for the Fed Reserve to lower inflation, and
Speaker 6: that's their primary goal. So I think one way or
Speaker 6: the other said will lower inflation and continue to lower it.
Speaker 6: But that may you know, that means that five percent
Speaker 6: is not very sustainable.
Speaker 4: Where are you on that good morning, good to see you.
Speaker 4: Where are you on the outlook for wages is the
Speaker 4: heat and I suppose the fury of wage negotiation. Is
Speaker 4: that in the rear view mirror as you look into
Speaker 4: twenty twenty four?
Speaker 1: Yeah?
Speaker 6: Good, good question, manis So we'll keep and I on
Speaker 6: wage growth. But what we have seen, despite the numerous
Speaker 6: strikes that have popped up and concerns there, we've actually
Speaker 6: seen wage growth decelerate. It's come down from six to
Speaker 6: seven percent. It's still running too high for the FEDS comfort, right,
Speaker 6: it's running around four percent or so, a little bit
Speaker 6: above that. They'd really like to see that between three
Speaker 6: and three and a half, to be consisted with two
Speaker 6: percent inflation. But you know, going back to labor market
Speaker 6: is the key right now in terms of wage growth.
Speaker 6: But also how long this you know, strong growth continues.
Speaker 6: It's not ultimately sustainable. But do we see some meaningful
Speaker 6: slowdown in the fourth quarter. That's that's really what's important.
Speaker 4: Tom chasing me a little bit earlier on. There's a
Speaker 4: great phrase that I use of its grand. It depends
Speaker 4: how I say the word grand. Grand can mean many
Speaker 4: different things. I said, the US consumer is grand, and
Speaker 4: Tom rightly chasing me, he said, did you look at
Speaker 4: the delinquencies on subprime in the auto industry? Did you
Speaker 4: look perhaps the underbelly of what is going on? We're
Speaker 4: going to get retail sales, you know, they remain grand
Speaker 4: in inverted commas, but suddenly we're dealing with a shift
Speaker 4: in rates to above five percent. Would you describe the
Speaker 4: consumer as grand or high challenge? Does the consumer become
Speaker 4: in a world of world rates actually tightening tightening, tightening?
Speaker 1: Yeah?
Speaker 6: I think the way I would say it is the
Speaker 6: consumer looks to be grand, but there are a lot
Speaker 6: of headwinds hitting the consumer now. The tailwind has been
Speaker 6: the labor market very strong. Right, as long as the
Speaker 6: labor market is churning out the jobs, you know two
Speaker 6: hundred thousand, three hundred thousand, right, the consumer is going
Speaker 6: to keep spending. But you have still elevated inflation. You
Speaker 6: have a consumer loan payments, you know, kicking in and
Speaker 6: as you said, certain demographics are really challenged right now,
Speaker 6: and delinquencies picking up a little bit. So it's not
Speaker 6: a completely rosy picture here. But I would say say
Speaker 6: you got to follow the labor market. That is the key.
Speaker 1: So if I'm the FED, I'm going to follow the
Speaker 1: labor market. I'm data dependent, But I would suggest November
Speaker 1: one ish is upon us, and you know we're gonna
Speaker 1: sort of have a post Halloween party. I guess it's
Speaker 1: a non meeting December for Kathy bus johnsick. How key
Speaker 1: is the December meeting?
Speaker 6: Oh, it's important, you know, I think each meeting is
Speaker 6: important in the sense not what they do, but it's
Speaker 6: what Chairman pal guides is right, what do we hear
Speaker 6: in the press conference? But December, we'll get the revised forecast, right,
Speaker 6: We'll get the macro forecast and the doc lot estimate,
Speaker 6: even though those aren't you know, golden rule.
Speaker 7: Right.
Speaker 6: It doesn't mean that's exactly what the FED is going
Speaker 6: to do, right, but it's guidance. And you know, it'd
Speaker 6: be interesting to see. Our view is growth closed by
Speaker 6: more than half? Right in the fourth quarter, we see
Speaker 6: it running a bit above two percent. But I have
Speaker 6: to say that handoff. You know, men have talked about
Speaker 6: retail sales. The handoff consumer spending to the fourth quarter
Speaker 6: was a bit firmer than we thought. We really need
Speaker 6: to see consumer We need to see growth for the
Speaker 6: fedly feel comfortable below two percent. I mean Chairman Palell
Speaker 6: told us he thinks more potential growth is two percent, right,
Speaker 6: so he wants it on a sub same basis.
Speaker 1: I mean, Kathy, you're with Nationwide. Do you have tickets
Speaker 1: to Michigan right around Thanksgiving? I mean it's at Michigan.
Speaker 1: I get that, But you're Kathy Bus Johnsick. Can you
Speaker 1: get us into one hundred thousand people at ann Arbor.
Speaker 6: Only if you're voting for Ohio state? It can only
Speaker 6: do that very good.
Speaker 1: We're from Columbus and Nationwide, Kathleen Bus Johnsick. Let's get
Speaker 1: right too. It's your definitive brief here on this transaction
Speaker 1: sixty billion of a total enterprise value. Emrita send expert
Speaker 1: at the micro foundations of the price of oil and
Speaker 1: also expert out of the geography of oil. Emrita. I
Speaker 1: was up to speed on this in a fake O way,
Speaker 1: and I'm getting up to speed quickly. Guyana twenty fifteen.
Speaker 1: Exxon finds more oil than God in the Gulf of
Speaker 1: Mexico off of South America. This is hess and this
Speaker 1: is a Guiana acquisition by mister Worth and Chevron explain
Speaker 1: to our audience the magnitude of the Guiana oil fields.
Speaker 7: I think it's a fantastic acquisition if you ask me,
Speaker 7: given the fact that Guyana is actually going to be
Speaker 7: the most prolific non OPEC supply growth in the coming years. Exon,
Speaker 7: like you said, already has footprint and as does hes
Speaker 7: so Chevron now through Hess gets exposure to that. You know,
Speaker 7: Guyana's production has been growing by two to three hundred
Speaker 7: thousand barrels per day. It's got several new fbsos planned
Speaker 7: in the coming years. We're talking about production reaching and
Speaker 7: breaching a million barrels for day and continuing to grow.
Speaker 7: So it is, like I said, the most promising non
Speaker 7: OPEC supply prospect. You know, we've had Brazil take that
Speaker 7: position for the last few years and that's now flipped
Speaker 7: to Guyana. So again, in that sense, a fantastic acquisition.
Speaker 1: What is the distinction of Guyana? And then I believe
Speaker 1: it is too. You're going to get my map out, manus,
Speaker 1: I'm going down in flames here. What is the distinction
Speaker 1: between Guyana and Venezuela on the southern side of the Caribbean.
Speaker 7: I mean, of course, there's political stability, for one, and
Speaker 7: the quality of oil. The quality of oil Guyana producers
Speaker 7: is actually very good quality. It's sweeter. It's really liked
Speaker 7: by even European refiners who sometimes struggle to process a
Speaker 7: lot of the heavier barrels. Venezuela and oil is very
Speaker 7: very heavy oil. It's like by a lot of refiners
Speaker 7: who like in the US Golf Coast, that have the
Speaker 7: capacity to process that. It requires what you call cocas,
Speaker 7: but not every refiner has that. So Guyana's oil is
Speaker 7: actually easier to process in that sense, of course, in
Speaker 7: today's day and age, though, because we have a lot
Speaker 7: of refineries around the world who need that heavy oil,
Speaker 7: the lifting of sanctions on Venezuela would actually be welcome,
Speaker 7: of course, if that is to be sustained and if
Speaker 7: there are free and fair Eleans. There are lots of
Speaker 7: question marks around now.
Speaker 1: I'm reda Surveyllance correction. You're Guiana to the east of
Speaker 1: Venezuela by six hundred miles between Caracas and Georgetown. Thank you,
Speaker 1: nail On that. One of our interns just saved me, and.
Speaker 4: Then I'm going to fly with you.
Speaker 3: There is a question seeing why are we seeing so
Speaker 3: many of these acquisitions right now in the oil patch.
Speaker 7: I mean, you know, this is something our team, our
Speaker 7: US upstream team has been pointing out since July. We
Speaker 7: actually identified eighty companies that we thought was up for grabs.
Speaker 7: I'll happily share that list with you guys, and I
Speaker 7: think of that about seventeen eighteen have already happened. This
Speaker 7: is if you think about the shale patch of the
Speaker 7: last decade, it was fueled by zero interest rates, and
Speaker 7: it was fueled by focusing on not shareholder a growth
Speaker 7: or cash flow. But it was all about production growth.
Speaker 7: So it didn't matter whether you made money or not,
Speaker 7: just come pump and produce as much oil. That's changed
Speaker 7: now over the last few years, we've seen actually shareholders
Speaker 7: say no, you actually need to return money to us,
Speaker 7: which means a lot of the acreage and a lot
Speaker 7: of the companies that had poor acreage just produced anyways.
Speaker 7: They have to get basically integrated with bigger companies who
Speaker 7: have economies of scale, because that's the only way you
Speaker 7: can generate cash. So that's the that's the main reason
Speaker 7: why we are seeing this. And then of course as
Speaker 7: interest rates go up, servicing a lot of these debts
Speaker 7: that they have, a lot of the companies have very
Speaker 7: very high debts, just isn't feasible, and that's why you
Speaker 7: will continue to see consolidation. We think this is just
Speaker 7: the start and we're going to see a lot more
Speaker 7: going forward.
Speaker 3: So, Amrita, how much is this also a result of
Speaker 3: maybe anti trust agents in the US looking more favorably
Speaker 3: at some of these tie ups because there is this
Speaker 3: goal to usset some of the supply fluctuations in the
Speaker 3: Middle East.
Speaker 4: I mean, look, I.
Speaker 7: Think that's at the margin, right if you think about
Speaker 7: the kind of deals being done, or look at the
Speaker 7: deals being done. It started with occidental back not this year,
Speaker 7: but previously. It's always about getting the acreage which is
Speaker 7: right next to yours so that you can have economies
Speaker 7: of scale. And I think that's the underlying reason for that.
Speaker 7: And of course even with these acquisitions, it doesn't necessarily
Speaker 7: mean you're going to get more production. More often than not,
Speaker 7: one plus one rigs is making giving us one point
Speaker 7: two rigs, not two, because a lot of the rigs,
Speaker 7: like I was saying earlier, is actually poor quality. So
Speaker 7: that bigger companies simply saying we're not going to produce
Speaker 7: from here, and therefore overall production actually goes down. Exon
Speaker 7: and Pioneer are the exception there. Every other MNA we've
Speaker 7: seen actually is leading to lowering overall guidance of the
Speaker 7: two companies rather than raising it.
Speaker 4: I'm really good to see this morning. Does any of
Speaker 4: this deal making that you see go through reflect anticipation
Speaker 4: of it change or a material change in US energy
Speaker 4: policy we're coming I don't know whether we're coming to
Speaker 4: the end of a Biden administration, but we're going into
Speaker 4: an election year. Policy may change. America oil independence is key.
Speaker 4: Any of the political aspects play into the potential for
Speaker 4: deal making.
Speaker 7: I don't think so in the sense again, these are
Speaker 7: kind of company specific deals that we're talking about. I
Speaker 7: think the bigger challenge, of course, we have is I mean, look,
Speaker 7: the US is producing about thirteen million baros fill in,
Speaker 7: which is a record high anyways, and US production continues
Speaker 7: to grow. The challenge I was saying is that you
Speaker 7: do have sanctions being lifted on Venezuela even though elections
Speaker 7: haven't been held and there are still bands on the
Speaker 7: opposition candidate. That raises more questions around the shale guys
Speaker 7: and saying why are we not being given the opportunity
Speaker 7: to produce even more rather than you going and doing
Speaker 7: deals elsewhere.
Speaker 4: I'm Rida, I'll see you in a month's time. In Vienna.
Speaker 4: There is an official video of I'mrita and I dancing
Speaker 4: in Opec during COVID going toe to toe the line. Yeah,
Speaker 4: we are so living the life in Vienna. Quick question
Speaker 4: on Vienna. As we go to Vienna. The theory is
Speaker 4: this that the US goes to refill the spr over
Speaker 4: the next couple of months, give Saudi and Russia some
Speaker 4: kind of caveat to release some of the unilateral cuts.
Speaker 4: Is that pie in the sky hopeful thinking? What is
Speaker 4: your anticipation as we go to buy that. You don't
Speaker 4: buy that, do not buy that? I don't I do
Speaker 4: not buy that.
Speaker 7: I think Soudi Arabia has been very clear in saying
Speaker 7: they're keeping the cuts in place because of the macroeconomic concerns. Look,
Speaker 7: the US has said this before as well, that we're
Speaker 7: going to buy it when it was kind of you know,
Speaker 7: less than eighty dollars, and they didn't. They've only managed
Speaker 7: to refill four point eight million barrels and they've come
Speaker 7: out and said, oh, we'll buy the oil when it's
Speaker 7: you know, seventy nine. I don't think they're going to
Speaker 7: get there.
Speaker 1: Richison, thank you so much and on behalf of John
Speaker 1: Fair and Lisa team Surveillance. Really looks forward to interviewing
Speaker 1: you and Vienna here at the next cranny. Right now,
Speaker 1: we're going to begin here manus Crany, Lisa Brahminson, Tom
Speaker 1: King with our definitive call on the day on global
Speaker 1: fixed income Way lead as global chief investment strategists of Blackrock,
Speaker 1: prodigious in mathematics and joins us here on our fears
Speaker 1: of price down and yield up. Waly, thank you so
Speaker 1: much for finding the time. Where is the bid on bonds?
Speaker 1: To me? The bid is walked away? Is that true?
Speaker 1: Is there just a dearth of bid across all of
Speaker 1: fixed income?
Speaker 2: There are lots of moving parts right now, Good morning everyone.
Speaker 2: In terms of our review on long bonds long duration,
Speaker 2: we have been underweight US long duration for three years now,
Speaker 2: since late twenty twenty one ten year yields was below
Speaker 2: one percent, and last week we closed the underweight to
Speaker 2: get to neutral. There are a couple of moving parts
Speaker 2: in terms of why rates have reprised, so very meaningfully.
Speaker 2: The first piece is policy path repricing, and a second
Speaker 2: piece is term premier repricing, and within that, inflation premier
Speaker 2: is part of term premier. So where we are now
Speaker 2: with ten year yields testing five percent in our assessment,
Speaker 2: policy path is not that different from where we think
Speaker 2: it should be. But term premier, depending on which measure
Speaker 2: you use, we're looking at somewhere between twenty basis point
Speaker 2: forty basis point. Different methodology actually could push even higher
Speaker 2: over the strategic horizon. So we're talking about term premier
Speaker 2: over the strategic horizon at one hundred basis point, not
Speaker 2: out of this world because of fiscal imbalance, because of
Speaker 2: insurance dynamics, because of higher rate environment, rate volatility, as
Speaker 2: well as because of higher inflationary environment. So when you
Speaker 2: bring all of that together, strategically was still underweight, but
Speaker 2: technically we're not neutral because risks have now become more balanced.
Speaker 2: And when we think about kind of the reader cross
Speaker 2: of weight repricing to risk assets, actually, policy paths repricing
Speaker 2: can be negative for equities because it impacts the discount
Speaker 2: rates directly, but time premier repricing doesn't have to be
Speaker 2: negative for equities because it's more an assessment of the
Speaker 2: relative appeal of duration in portfolios.
Speaker 3: Do you think way, I know that you've been leaning
Speaker 3: into the whole AI discussion and the whole AI thesis,
Speaker 3: and that's been driving some of your equity bets. Do
Speaker 3: you think that that area is completely immune to turn
Speaker 3: premium in these discussions of yields given the cash cows
Speaker 3: that they've become.
Speaker 2: Well, what has been very interesting with regards to this
Speaker 2: mega tech and AI theme is that on the one hand,
Speaker 2: they benefit from the growth grade earnings upgrades that we're
Speaker 2: seeing coming through. So for example, next year, ten percent
Speaker 2: EPs podcasts for S and P five hundred. Half of
Speaker 2: that is driven by mega tech names. Five percent is
Speaker 2: coming from the tech names. So they're definitely benefiting from
Speaker 2: earning's upgrades, which we pay a lot of attention to.
Speaker 2: But at the same time, they are more long douration
Speaker 2: compared with the broader acquity market, So when the rate reprices,
Speaker 2: it pressures down on long duration a little bit more.
Speaker 2: Everything else in equal, But when you bring the two
Speaker 2: factors together, actually the growth prospect and the AIME gathering
Speaker 2: momentum and the earnings upgrades actually trunk the douration sensitivity
Speaker 2: as we have seen so far earlier in the year,
Speaker 2: but also in recent periods of repricing. Actually, the AI theme,
Speaker 2: the nastacs have been holding up better than you would
Speaker 2: have expected given the rate volatility.
Speaker 1: Well, good morning.
Speaker 4: Just to carry on from that, this week they're going
Speaker 4: to see sixteen trillion dollars worth of equity reports and
Speaker 4: the magnificent part of the magnificent seven of tech are
Speaker 4: going to be in there. What Tom, Lisa and myself
Speaker 4: what we're talking about was the balance sheets, the cash
Speaker 4: on the balance sheets, the cash on Apple's balance sheets,
Speaker 4: the cash on the other big tech. Is that another
Speaker 4: defensive hallmark and a reason to endure and stay long
Speaker 4: big tech.
Speaker 2: That is why we are still overweight to the big
Speaker 2: tech and AI theme, because when we think about kind
Speaker 2: of quality characteristics as rows slows down reacts to the
Speaker 2: tightening environment that we're all experiencing, actually having cash on
Speaker 2: your balance sheet and not being as geared up in
Speaker 2: this environment is a definite is a definite plus. And
Speaker 2: more broadly, we're talking about kind of the impression of
Speaker 2: the earning season that the feeling is that it's holding
Speaker 2: up better, but actually not forget the broader backdrop, which
Speaker 2: is the earnings. Actually, the three quarters have been stagnating,
Speaker 2: and we're just talking about incremental rebound from the stagnating.
Speaker 2: That's the big picture here.
Speaker 1: Well, Lawrence from New York emails in and says, ask
Speaker 1: way Lee, if an institutional for marks to market and
Speaker 1: everything else is on the balance sheet, and the rationalization
Speaker 1: is I can own it forever and I'll get paid
Speaker 1: back eventually. Blowning, how do you do the math and
Speaker 1: the midpoint of where the stuff you hold on the
Speaker 1: balance sheet gets a valuation. If I've got eight years
Speaker 1: of maturity, how close is it to where you get
Speaker 1: a tipping point where you've got to confront what's on
Speaker 1: the balance sheet.
Speaker 2: Well, first say hello to Lawrence, and second, yes, indeed
Speaker 2: we haven't. We have to see more repricing of risk
Speaker 2: assets reflecting the higher rate environment. We look at the
Speaker 2: rational work kind of almost there, which is why toxically
Speaker 2: we turned neutral. But if you look at equities, it
Speaker 2: has yet to reflect the higher rate environment. By our
Speaker 2: basin kind of aristhmetic kind of praise and put back
Speaker 2: of the envelope analysis, you know, like a further five
Speaker 2: percent to ten percent adjustment is not, you know, unthinkable,
Speaker 2: And then you think about private markets, there is also
Speaker 2: further reprising to go, which is why greater dispersion, greater
Speaker 2: selectivity is really warranted as we think about kind of
Speaker 2: deploying your risk budget in this environment, because there is
Speaker 2: a different rate sensitivity across risk spectrum, which is why
Speaker 2: we're very selective when it comes to ours. We're focusing
Speaker 2: on sceptor cell growing earnings, but also very selective in
Speaker 2: terms of the private market. We like private credit, we
Speaker 2: like infrastructure that all these parts, and private markets that
Speaker 2: benefits secular sail.
Speaker 1: Wings on your full faith and credit there Wayley, thank
Speaker 1: you so much of black Crack. Subscribe to the Bloomberg
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