1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 2 00:00:08,760 --> 00:00:11,440 Speaker 1: Along with my co host Lisa A. Brahmowitz. Each day 3 00:00:11,480 --> 00:00:15,000 Speaker 1: we bring you the most important, noteworthy, and useful interviews 4 00:00:15,040 --> 00:00:17,520 Speaker 1: for you and your money, whether you're at the grocery 5 00:00:17,560 --> 00:00:20,560 Speaker 1: store or the trading floor. Find the Bloomberg p m 6 00:00:20,680 --> 00:00:31,479 Speaker 1: L Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. 7 00:00:31,480 --> 00:00:35,040 Speaker 1: Looking at proposals from the Energy Secretary Rick Perry, has 8 00:00:35,040 --> 00:00:40,360 Speaker 1: it tries to reform the power markets? Is it nuts? Well? So, 9 00:00:40,479 --> 00:00:43,280 Speaker 1: says our next guest, Liam Denning. He is our Energy, 10 00:00:43,440 --> 00:00:47,680 Speaker 1: Mining and Commodities column. This for Bloomberg Gadfly, Liam, a pleasure, 11 00:00:47,720 --> 00:00:51,000 Speaker 1: Thank you for being here at the Monaco Government Tourism's 12 00:00:51,200 --> 00:00:56,480 Speaker 1: sustainability focus the luncheon here at Bloomberg World headquarters. Is 13 00:00:56,560 --> 00:01:00,120 Speaker 1: this really a plan of reform or is it a 14 00:01:00,280 --> 00:01:03,640 Speaker 1: plan of relief? I mean, I think you have to 15 00:01:03,680 --> 00:01:07,160 Speaker 1: put quote marks around the words reform and maybe even 16 00:01:07,319 --> 00:01:12,319 Speaker 1: plan here that was that was something else? Love it? Okay, 17 00:01:12,360 --> 00:01:14,520 Speaker 1: go ahead, then back up, and you've got to tell 18 00:01:14,560 --> 00:01:17,640 Speaker 1: us what is it? What? What? What are the proposals? 19 00:01:17,640 --> 00:01:23,760 Speaker 1: So ostensibly this is all about keeping the power market 20 00:01:24,480 --> 00:01:28,039 Speaker 1: quote unquote resilient, and the general thrust of it is 21 00:01:28,160 --> 00:01:31,120 Speaker 1: we had the polar bortex a few years ago. Um 22 00:01:31,200 --> 00:01:35,400 Speaker 1: some gas power plants during that shut down because they 23 00:01:35,440 --> 00:01:38,319 Speaker 1: couldn't get enough gas because it was being diverted to 24 00:01:38,360 --> 00:01:42,680 Speaker 1: heat people's homes, and um Rick Perrus sees the pond 25 00:01:42,760 --> 00:01:47,760 Speaker 1: this to try and institute a subsidy for coal fire 26 00:01:47,760 --> 00:01:50,280 Speaker 1: power plants which have been struggling, as you may or 27 00:01:50,280 --> 00:01:55,080 Speaker 1: may not know, And it's being done under this pretense 28 00:01:55,120 --> 00:01:57,760 Speaker 1: that they basically need to keep a bunch of coal 29 00:01:57,840 --> 00:02:01,240 Speaker 1: lying around so that if we get an other, uh, 30 00:02:01,480 --> 00:02:05,640 Speaker 1: polar ortex, they've got coal on hand to generate power. Now, 31 00:02:05,760 --> 00:02:09,280 Speaker 1: this is something of a solution in search of a problem, 32 00:02:09,320 --> 00:02:13,840 Speaker 1: because all sorts of studies and all sorts of companies, 33 00:02:13,880 --> 00:02:17,639 Speaker 1: including the operator of the regional grid that we're talking about, 34 00:02:17,680 --> 00:02:20,920 Speaker 1: which covers about seventy million people, have said that this 35 00:02:21,080 --> 00:02:23,960 Speaker 1: really isn't a problem. Um And in fact, if you 36 00:02:23,960 --> 00:02:26,000 Speaker 1: look at what happened in the polar vortex, a lot 37 00:02:26,000 --> 00:02:28,400 Speaker 1: of coal fired power plants shut down as well because 38 00:02:28,560 --> 00:02:31,359 Speaker 1: it was too cold for them to to run their systems. 39 00:02:31,440 --> 00:02:35,200 Speaker 1: So it's really just a cold subsidy. So liam um 40 00:02:35,240 --> 00:02:37,760 Speaker 1: I love just trying to imagine where you have air 41 00:02:37,840 --> 00:02:39,400 Speaker 1: quotes as you speak now, and I'm going to be 42 00:02:39,480 --> 00:02:42,000 Speaker 1: doing that for the rest of the segment. Actually every word, Yeah, 43 00:02:42,280 --> 00:02:44,680 Speaker 1: pretty much, you're putting every word into air quotes. Um, 44 00:02:45,560 --> 00:02:49,960 Speaker 1: the plan calls for for a subsidy for unregulated power 45 00:02:49,960 --> 00:02:53,080 Speaker 1: plans holding ninety days worth of fuel on site. This 46 00:02:53,160 --> 00:02:57,120 Speaker 1: talks specifically to the fossil fuel companies, right, who else 47 00:02:57,200 --> 00:03:01,120 Speaker 1: keeps that kind of sort of physical resources is on hand. 48 00:03:01,639 --> 00:03:04,440 Speaker 1: I'm just wondering that you know, you you raised an issue. 49 00:03:04,480 --> 00:03:07,960 Speaker 1: This isn't a conservative principle. In fact, this is somewhat radical. 50 00:03:08,040 --> 00:03:11,480 Speaker 1: So if this, if this particular administration adheres to her 51 00:03:11,600 --> 00:03:14,800 Speaker 1: or says that they adhere to conservative ideas, this kind 52 00:03:14,800 --> 00:03:17,200 Speaker 1: of flies in the face of that, right, I mean, 53 00:03:17,240 --> 00:03:20,440 Speaker 1: it's it's not conservative in any form. In fact, I 54 00:03:20,440 --> 00:03:22,440 Speaker 1: mean it's not conservative on on a couple of fronts. 55 00:03:22,440 --> 00:03:26,000 Speaker 1: So one is, Um, you're rolling back twenty or thirty 56 00:03:26,120 --> 00:03:29,720 Speaker 1: years of power market deregulation, which the last I heard 57 00:03:29,720 --> 00:03:33,160 Speaker 1: conservatives generally favor that sort of thing, you know, markets 58 00:03:33,240 --> 00:03:36,320 Speaker 1: prices supply and dimand that sort of thing, So you'd 59 00:03:36,360 --> 00:03:39,800 Speaker 1: be rolling that back. It's also it's it's just sort 60 00:03:39,800 --> 00:03:43,760 Speaker 1: of fundamentally intellectually dishonest on a couple of levels. I mean, 61 00:03:45,280 --> 00:03:50,520 Speaker 1: we're talking about pricing what economists will call an externality. 62 00:03:50,680 --> 00:03:54,480 Speaker 1: So so this resilience thing apparently isn't captured in power prices. 63 00:03:54,520 --> 00:03:57,680 Speaker 1: Therefore we need a subsidy. And the energy market is 64 00:03:57,680 --> 00:04:00,920 Speaker 1: full of all sorts of subsidies, but generally expect conservatives 65 00:04:00,960 --> 00:04:05,440 Speaker 1: trying to take subsidies out and regulations. So can you 66 00:04:05,440 --> 00:04:08,280 Speaker 1: just give us what the defenses of this? I mean before, 67 00:04:08,320 --> 00:04:12,320 Speaker 1: but just like, what is the argument for why Rick 68 00:04:12,360 --> 00:04:14,960 Speaker 1: Perry is calling for this, you know, aside from we 69 00:04:15,000 --> 00:04:18,080 Speaker 1: want to finance core companies. Is it purely the sort 70 00:04:18,120 --> 00:04:20,680 Speaker 1: of pullar of voritex or is there something else about 71 00:04:21,360 --> 00:04:23,680 Speaker 1: that that they're saying here? No, I mean it really 72 00:04:23,720 --> 00:04:27,440 Speaker 1: does rely on this argument that power prices as they 73 00:04:27,480 --> 00:04:31,400 Speaker 1: are currently set do not reward um certain types of 74 00:04:31,440 --> 00:04:35,600 Speaker 1: power plant for just being there in case we need them. 75 00:04:35,640 --> 00:04:38,240 Speaker 1: And you know, the market operator has said there is 76 00:04:38,680 --> 00:04:41,200 Speaker 1: there is a problem with the way power is being priced, 77 00:04:41,200 --> 00:04:44,400 Speaker 1: and we are perhaps setting ourselves up for a problem. However, 78 00:04:44,440 --> 00:04:49,200 Speaker 1: the market operator has also instituted other market based ways 79 00:04:49,240 --> 00:04:51,599 Speaker 1: of doing this and has talked about some other things. 80 00:04:51,680 --> 00:04:54,960 Speaker 1: What they certainly haven't done is said, let's just abandon 81 00:04:55,360 --> 00:04:59,000 Speaker 1: power pricing altogether and shove a bunch of money towards 82 00:04:59,000 --> 00:05:01,720 Speaker 1: these qualified power so they can buy more coal, so 83 00:05:01,800 --> 00:05:05,480 Speaker 1: it can sit around in a big pile. I've been 84 00:05:05,480 --> 00:05:08,240 Speaker 1: taking a look at the value of coal stocks. Console 85 00:05:08,360 --> 00:05:12,800 Speaker 1: energy is just one stock has not sort of grabbed 86 00:05:12,800 --> 00:05:15,720 Speaker 1: any fabulous attention. I mean, stocks down more than twelve 87 00:05:16,160 --> 00:05:17,760 Speaker 1: so far this year. So it doesn't look like the 88 00:05:17,760 --> 00:05:20,800 Speaker 1: coal stocks have gotten a pop from uh, from any 89 00:05:20,839 --> 00:05:25,800 Speaker 1: of these efforts, right, I mean, okay, right, okay, So 90 00:05:25,880 --> 00:05:29,080 Speaker 1: let's talk about the political vortex, right from the polar 91 00:05:29,160 --> 00:05:32,800 Speaker 1: vortex to the political uh vortex. I was on the 92 00:05:32,839 --> 00:05:35,960 Speaker 1: impression that the grid needs upgrading and that natural gas 93 00:05:36,279 --> 00:05:38,280 Speaker 1: is the wave of the future because it's inexpensive and 94 00:05:38,400 --> 00:05:40,280 Speaker 1: we have a lot of it. Why doesn't the money 95 00:05:40,320 --> 00:05:42,760 Speaker 1: go to those things? The money is going to those things. 96 00:05:42,880 --> 00:05:47,080 Speaker 1: So that's precisely why Perry wants a subsidy for cold 97 00:05:47,120 --> 00:05:51,320 Speaker 1: because everyone should. So the way, well, no gas gas 98 00:05:51,360 --> 00:05:53,839 Speaker 1: is getting money because it's competing because it's very cheap. 99 00:05:54,080 --> 00:05:57,159 Speaker 1: I mean, that's that's why we're seeing gas fired power 100 00:05:57,240 --> 00:06:00,680 Speaker 1: plants get built and coal fire power plants being retired. 101 00:06:00,720 --> 00:06:03,200 Speaker 1: The fact is, who at this point is going to 102 00:06:03,320 --> 00:06:05,839 Speaker 1: invest in a new coal fired plant that won't even 103 00:06:05,839 --> 00:06:09,320 Speaker 1: begin operation operations for three or four years, by which 104 00:06:09,320 --> 00:06:13,760 Speaker 1: time the political landscape could be looking different. In general, 105 00:06:13,960 --> 00:06:16,760 Speaker 1: no one is going to invest that money because these 106 00:06:16,800 --> 00:06:19,440 Speaker 1: plants run for thirty or forty years, and everyone expects 107 00:06:19,480 --> 00:06:22,520 Speaker 1: that over time we're going to see things like carbon 108 00:06:22,560 --> 00:06:25,200 Speaker 1: pricing or at least tighter regulations on call. I mean, 109 00:06:25,240 --> 00:06:28,520 Speaker 1: the market is only really going one way. Liam Debting, 110 00:06:28,760 --> 00:06:30,760 Speaker 1: thank you so much for joining us. Liam Debting is 111 00:06:30,880 --> 00:06:34,760 Speaker 1: energy mining and commodities calumnist for Bloomberg gad Fly talking 112 00:06:34,760 --> 00:06:51,280 Speaker 1: about quote Cole, thank you so much for joining us. Well, 113 00:06:51,279 --> 00:06:53,920 Speaker 1: we're starting to get a sense of how much money 114 00:06:54,000 --> 00:06:57,760 Speaker 1: US Congress is putting aside to recover from the very 115 00:06:57,839 --> 00:07:01,440 Speaker 1: active hurricane season. We're talking about Hurricanes Harvey and Maria 116 00:07:01,760 --> 00:07:05,200 Speaker 1: and others that have battered the South as well as 117 00:07:05,279 --> 00:07:07,920 Speaker 1: the Caribbean islands. Here to look at it from the 118 00:07:07,960 --> 00:07:12,120 Speaker 1: private side is Jonathan Adams, senior insurance industry analyst from 119 00:07:12,200 --> 00:07:15,480 Speaker 1: Bloomberg Intelligence. Jonathan, thank you so much for joining us. 120 00:07:15,520 --> 00:07:19,480 Speaker 1: We're starting to get some earnings reports from reinsurance companies. 121 00:07:19,720 --> 00:07:23,440 Speaker 1: Excel Group, for example, reported last night, Access Capital reports tonight, 122 00:07:23,640 --> 00:07:26,000 Speaker 1: Ballads Holding reports tomorrow, and there are others that come 123 00:07:26,080 --> 00:07:29,880 Speaker 1: next week. Are we getting any greater insight into just 124 00:07:30,080 --> 00:07:33,400 Speaker 1: how expansive the damages are going to be for reinsurance 125 00:07:33,400 --> 00:07:37,360 Speaker 1: companies and what the costs will be. Well, the costs 126 00:07:37,520 --> 00:07:41,680 Speaker 1: are so far largely in line with what had been 127 00:07:41,720 --> 00:07:45,360 Speaker 1: expected by those companies, so I don't think we're going 128 00:07:45,400 --> 00:07:50,000 Speaker 1: to see major surprises in terms of the individual company costs. 129 00:07:50,040 --> 00:07:53,360 Speaker 1: They do a pretty good job of um estimating and 130 00:07:53,560 --> 00:07:56,040 Speaker 1: what that is. So for the example for Excel, the 131 00:07:56,080 --> 00:07:59,240 Speaker 1: net cost was one and a half billion dollars, which 132 00:07:59,320 --> 00:08:02,920 Speaker 1: is white significant and probably about one and a half 133 00:08:02,960 --> 00:08:05,920 Speaker 1: percent of the total industry loss. So I think on 134 00:08:06,000 --> 00:08:10,480 Speaker 1: that score, um the the industry has done pretty well 135 00:08:10,560 --> 00:08:13,520 Speaker 1: in in estimating what those losses will be for them. 136 00:08:13,560 --> 00:08:17,080 Speaker 1: The big question is what to do next? Well, and 137 00:08:17,120 --> 00:08:19,840 Speaker 1: maybe go go into that because maybe you could describe 138 00:08:19,880 --> 00:08:24,280 Speaker 1: what happens in a typical cycle after a catastrophe or 139 00:08:24,320 --> 00:08:29,400 Speaker 1: a hurricane, and what might happen this time that's different. Absolutely, 140 00:08:29,520 --> 00:08:32,840 Speaker 1: you look at the price increases that were put through 141 00:08:33,040 --> 00:08:36,800 Speaker 1: after Hurricane Katrina, which is a normal, normal response because 142 00:08:36,840 --> 00:08:40,920 Speaker 1: you need to recover those losses, and they were upwards 143 00:08:40,960 --> 00:08:46,360 Speaker 1: of or more for US catastrophe reinsurance UH. This cycle, 144 00:08:46,559 --> 00:08:49,440 Speaker 1: it's unlikely to be anywhere near that. And even though 145 00:08:50,040 --> 00:08:53,600 Speaker 1: UH management teams are talking about double digit increases, those 146 00:08:53,640 --> 00:08:56,640 Speaker 1: are going to be pretty low double digit increases. And 147 00:08:56,960 --> 00:09:00,640 Speaker 1: the problem here is that we have an ample supply 148 00:09:00,720 --> 00:09:04,040 Speaker 1: of capital that is willing to take this risk, and 149 00:09:04,120 --> 00:09:08,400 Speaker 1: because of that, you simply can't pass on the kind 150 00:09:08,440 --> 00:09:12,800 Speaker 1: of steep price increases that we're passed on a decade 151 00:09:12,800 --> 00:09:16,559 Speaker 1: ago with Hurricane Katrina, because there'll be someone else willing 152 00:09:16,600 --> 00:09:19,959 Speaker 1: to take that risk for less money. And this is 153 00:09:20,040 --> 00:09:22,880 Speaker 1: this is super important. I mean, this is a huge 154 00:09:22,920 --> 00:09:27,800 Speaker 1: issue because if reinsurance companies and others are not able 155 00:09:27,880 --> 00:09:33,120 Speaker 1: to demand high enough risk premium from investors, from from 156 00:09:33,160 --> 00:09:35,680 Speaker 1: clients who are taking out these policies, then they're that 157 00:09:35,760 --> 00:09:38,320 Speaker 1: much more exposed. I mean, does this make the reinsurance 158 00:09:38,360 --> 00:09:40,800 Speaker 1: company is more fragile going forward because they've got that 159 00:09:40,880 --> 00:09:44,320 Speaker 1: much lower of a buffer If there are a bigger 160 00:09:44,320 --> 00:09:48,760 Speaker 1: than expected number of catastrophes, it could. I don't think 161 00:09:48,760 --> 00:09:53,680 Speaker 1: we're at a point so far where there's a heightened 162 00:09:53,800 --> 00:09:57,760 Speaker 1: risk of eating into their capital base. But I do 163 00:09:57,880 --> 00:10:03,720 Speaker 1: think that there's clearly high risk of those individual companies 164 00:10:03,720 --> 00:10:06,440 Speaker 1: in that industry having much lower returns, and it could 165 00:10:06,520 --> 00:10:09,480 Speaker 1: ultimately get to the point that you've indicated where you 166 00:10:09,559 --> 00:10:11,920 Speaker 1: begin to have a more fragile industry and a more 167 00:10:11,920 --> 00:10:16,920 Speaker 1: fragile capital base. At the moment, we do have investors 168 00:10:16,920 --> 00:10:20,520 Speaker 1: from the capital markets willing to buy catastrophe bonds and 169 00:10:20,559 --> 00:10:24,599 Speaker 1: that's been a major source of competition for the traditional 170 00:10:24,720 --> 00:10:29,360 Speaker 1: reinsurance companies, and that's really what has been um driving 171 00:10:29,440 --> 00:10:31,640 Speaker 1: the influx of capital and what I think will be 172 00:10:33,240 --> 00:10:38,160 Speaker 1: a depression on price increases going into eighteen. As we 173 00:10:38,200 --> 00:10:42,160 Speaker 1: know with how the capital markets act, it certainly could 174 00:10:42,200 --> 00:10:44,200 Speaker 1: be the case that they pushed that too far, and 175 00:10:44,240 --> 00:10:47,640 Speaker 1: in fact you do have a more fragile industry sometime 176 00:10:47,679 --> 00:10:51,600 Speaker 1: in the future. Hey, Hey, Jonathan, wondering if indeed this 177 00:10:51,720 --> 00:10:55,760 Speaker 1: new capital continues to flow into the insurance industry, You're 178 00:10:55,760 --> 00:10:57,440 Speaker 1: going to find that a lot of people who have 179 00:10:57,520 --> 00:10:59,680 Speaker 1: never been in the insurance industry are going to be 180 00:10:59,720 --> 00:11:02,240 Speaker 1: kept evated by whatever yield is sort of dangled in 181 00:11:02,240 --> 00:11:05,920 Speaker 1: front of them. Right. Uh, is there a question, or 182 00:11:06,080 --> 00:11:09,160 Speaker 1: is there something you would suggest to them newbies in 183 00:11:09,200 --> 00:11:12,240 Speaker 1: the industry that they need to ask the sponsors or 184 00:11:12,280 --> 00:11:14,600 Speaker 1: any of the people putting these deals together a question 185 00:11:14,600 --> 00:11:16,800 Speaker 1: that they should ask before they jump in in an 186 00:11:16,800 --> 00:11:20,040 Speaker 1: industry they don't know a lot about, absolutely, and that 187 00:11:20,160 --> 00:11:25,480 Speaker 1: question is, UM, how do you understand volatility? Because it's 188 00:11:25,520 --> 00:11:30,240 Speaker 1: really um For many bond investors that that are looking 189 00:11:30,320 --> 00:11:32,520 Speaker 1: at credit, they think they may have a loss, but 190 00:11:32,559 --> 00:11:37,079 Speaker 1: there's always some kind of recovery with catastrophe bonds. UH. 191 00:11:37,160 --> 00:11:39,480 Speaker 1: If you have a full loss, you can go from 192 00:11:40,000 --> 00:11:43,560 Speaker 1: UH an expectation of receiving all your capital back to 193 00:11:43,640 --> 00:11:45,600 Speaker 1: getting half of it back or none of it back. 194 00:11:45,760 --> 00:11:49,880 Speaker 1: And it's really that volatility that should demand a higher 195 00:11:49,920 --> 00:11:53,120 Speaker 1: return and isn't always getting it because we don't see 196 00:11:53,160 --> 00:11:55,480 Speaker 1: that volatility year to year. You only see it over 197 00:11:55,840 --> 00:11:58,800 Speaker 1: a decade or more. So that's the key question, Jonathan, 198 00:11:58,840 --> 00:12:01,720 Speaker 1: Just real quick, who are these other investors who are 199 00:12:01,760 --> 00:12:07,840 Speaker 1: pouring into these this industry? Well, um, it's a broad 200 00:12:07,920 --> 00:12:12,600 Speaker 1: smattering of UM individuals. They want somewhat higher returns and 201 00:12:12,760 --> 00:12:17,040 Speaker 1: some diversification, So it could be anywhere from individual hedge 202 00:12:17,080 --> 00:12:21,200 Speaker 1: funds that understand the insurance market to pension funds that 203 00:12:21,920 --> 00:12:24,719 Speaker 1: have less of an understanding but certainly want to diversify 204 00:12:24,840 --> 00:12:30,240 Speaker 1: their UM, their investments UM or other traditional UH fixed 205 00:12:30,240 --> 00:12:33,520 Speaker 1: income investors. But those two um you know, stand out 206 00:12:33,559 --> 00:12:37,720 Speaker 1: as as individuals that have been buying this type of asset. 207 00:12:38,160 --> 00:12:40,480 Speaker 1: Thanks very much for spending time with us. Jonathan Adams 208 00:12:40,520 --> 00:12:58,560 Speaker 1: as our senior insurance industry analyst for Bloomberg Intelligence. The 209 00:12:58,640 --> 00:13:00,920 Speaker 1: bond market at the government by market to sell off 210 00:13:00,960 --> 00:13:03,040 Speaker 1: at the long end, a little bit of buying at 211 00:13:03,120 --> 00:13:05,920 Speaker 1: the short end, something that seems to have been going 212 00:13:05,960 --> 00:13:08,360 Speaker 1: on for quite a while, turning that teeter totter perhaps 213 00:13:08,400 --> 00:13:11,160 Speaker 1: into a flat board. Here to tell us more. Scott Dorf. 214 00:13:11,240 --> 00:13:14,000 Speaker 1: He is a Bloomberg Profit and managing director at AMers 215 00:13:14,120 --> 00:13:17,000 Speaker 1: Pierrepont Security. Scott, thanks very much for being with us. 216 00:13:17,400 --> 00:13:19,959 Speaker 1: Thanks for having me. Your latest column is called by 217 00:13:20,040 --> 00:13:24,960 Speaker 1: the dip is a losing strategy in the bond market. Why, Well, 218 00:13:25,000 --> 00:13:28,600 Speaker 1: we've had a situation where the fundamentals for the bond 219 00:13:28,600 --> 00:13:31,760 Speaker 1: markets have been deteriorating pretty steadily, but we didn't really 220 00:13:31,800 --> 00:13:35,160 Speaker 1: see that in the prices until starting about a month ago, 221 00:13:35,480 --> 00:13:38,000 Speaker 1: and ten ure yields actually hit the two oh one 222 00:13:38,080 --> 00:13:41,720 Speaker 1: level in early September, and I think that was a 223 00:13:41,760 --> 00:13:44,240 Speaker 1: cathartic stop out for a lot of a lot of 224 00:13:44,240 --> 00:13:47,959 Speaker 1: traders in particularly speculative investors who you know, had been 225 00:13:47,960 --> 00:13:51,240 Speaker 1: betting on higher rates through the summer. Those positions got 226 00:13:51,320 --> 00:13:54,120 Speaker 1: taken out, and over the last month we've moved up, 227 00:13:54,400 --> 00:13:57,400 Speaker 1: you know, forty basis points and yields with a pretty 228 00:13:57,440 --> 00:14:02,280 Speaker 1: consistent and not really significantly changing economic and inflation picture 229 00:14:02,320 --> 00:14:05,240 Speaker 1: in the UF. Yeah, Scott, thanks so much for joining 230 00:14:05,320 --> 00:14:07,240 Speaker 1: us today. There are a lot of people saying that 231 00:14:07,280 --> 00:14:10,520 Speaker 1: we're reaching kind of a sort of moment of truth. 232 00:14:10,760 --> 00:14:13,079 Speaker 1: That was what Jeff Gunlock said, a moment of truth 233 00:14:13,160 --> 00:14:17,040 Speaker 1: for the US Treasury market yields crossing that to two 234 00:14:17,080 --> 00:14:20,880 Speaker 1: point four percent threshold and just continuing on up. How 235 00:14:20,960 --> 00:14:24,080 Speaker 1: high can they go at this point with no fundamental 236 00:14:24,440 --> 00:14:26,680 Speaker 1: change in the backdrop? I mean, yes, the ECB mayn 237 00:14:26,680 --> 00:14:29,160 Speaker 1: NodD some kind of tapering. Uh, that's more hawkers than 238 00:14:29,200 --> 00:14:33,560 Speaker 1: people are expecting tomorrow. Yes, potentially inflation could pick up, 239 00:14:34,000 --> 00:14:35,920 Speaker 1: and yes there could be a more hawkish FED chair. 240 00:14:36,160 --> 00:14:38,600 Speaker 1: All of that does not negate the trillions of dollars 241 00:14:38,600 --> 00:14:42,680 Speaker 1: of cash slashing around the financial system. Well, I think 242 00:14:42,920 --> 00:14:45,560 Speaker 1: you know, It's probably a bit of a triple whammy 243 00:14:45,560 --> 00:14:48,080 Speaker 1: in terms of a number of you know, kind of 244 00:14:48,400 --> 00:14:51,880 Speaker 1: in the background events occurring. I mean, the largest one 245 00:14:51,920 --> 00:14:54,960 Speaker 1: being you know, the taper and you know the shrinkage 246 00:14:54,960 --> 00:14:57,320 Speaker 1: of the fet balance sheet, which SET has told this 247 00:14:57,520 --> 00:14:59,160 Speaker 1: is going to be very much in the background and 248 00:14:59,200 --> 00:15:01,640 Speaker 1: we're not going to note us. But I think you know, 249 00:15:01,720 --> 00:15:04,520 Speaker 1: they protest a little bit too much, and you know, 250 00:15:04,600 --> 00:15:08,880 Speaker 1: by certainly over two nineteen they're gonna have the Treasury 251 00:15:08,920 --> 00:15:11,800 Speaker 1: is going to have to find four hundred billion dollars 252 00:15:11,800 --> 00:15:15,040 Speaker 1: extra that if the paper wasn't occurring, that the SET 253 00:15:15,080 --> 00:15:18,160 Speaker 1: would have absorbed. That comes on top of a huge 254 00:15:18,200 --> 00:15:20,680 Speaker 1: increase in the deficit already this year, where eight you know, 255 00:15:20,720 --> 00:15:23,320 Speaker 1: we were eighty billion over for this fiscal year, and 256 00:15:23,760 --> 00:15:26,480 Speaker 1: some of the estimates are that the deficit and the 257 00:15:26,560 --> 00:15:29,840 Speaker 1: numbers are going to be fifty to higher in terms 258 00:15:29,880 --> 00:15:31,560 Speaker 1: of what the Treasury has to raise in net new 259 00:15:31,600 --> 00:15:34,000 Speaker 1: money next year. And that comes at the same time 260 00:15:34,000 --> 00:15:36,080 Speaker 1: that we have very solid two and a half three 261 00:15:36,120 --> 00:15:39,360 Speaker 1: percent growth in the second half of the year. The 262 00:15:39,400 --> 00:15:42,800 Speaker 1: one outlier has obviously been these core CPI inflation numbers, 263 00:15:42,800 --> 00:15:45,680 Speaker 1: and I think that is what prevented people from you know, 264 00:15:46,280 --> 00:15:50,040 Speaker 1: betting too too aggressively on you know, on higher rates. 265 00:15:50,440 --> 00:15:51,840 Speaker 1: But the set is made it clear they're going to 266 00:15:51,920 --> 00:15:56,520 Speaker 1: look through that core CPI and they see signs, you know, 267 00:15:56,720 --> 00:16:01,240 Speaker 1: certainly was an unemployment rate at four and probably headed 268 00:16:01,280 --> 00:16:03,880 Speaker 1: under four percent next year. They see signs that you know, 269 00:16:03,920 --> 00:16:06,520 Speaker 1: inflation is going to be more of a problem ongoing. Okay, 270 00:16:06,560 --> 00:16:08,680 Speaker 1: So since you think that by the dip is not 271 00:16:08,720 --> 00:16:10,800 Speaker 1: a strategy, it's going to work with this treasury sell off, 272 00:16:11,080 --> 00:16:13,160 Speaker 1: Where do you think the tenure yield is heading by 273 00:16:13,160 --> 00:16:16,800 Speaker 1: a year end? Well, the first target for certainly for 274 00:16:16,840 --> 00:16:18,800 Speaker 1: the people who look at charts is the year to 275 00:16:18,880 --> 00:16:21,320 Speaker 1: date highs in the in the two and two sixty 276 00:16:21,520 --> 00:16:24,720 Speaker 1: two sixty five area. Uh, you know, I don't think 277 00:16:24,800 --> 00:16:27,360 Speaker 1: that's necessarily, you know, a stopping point. This has not 278 00:16:27,480 --> 00:16:30,640 Speaker 1: been been a panicky sell off by any sense. And 279 00:16:30,680 --> 00:16:33,080 Speaker 1: while the a lot of measures show that the leverage 280 00:16:33,120 --> 00:16:36,800 Speaker 1: world is extremely short the futures you know, in in 281 00:16:36,840 --> 00:16:39,600 Speaker 1: the two to five year sector, it doesn't anecdotally, it 282 00:16:39,600 --> 00:16:41,800 Speaker 1: doesn't feel to me like the a lot of the 283 00:16:41,840 --> 00:16:45,400 Speaker 1: shorts are you know, are overdone here. So I think 284 00:16:45,440 --> 00:16:46,880 Speaker 1: it will be more a little bit more of an 285 00:16:46,960 --> 00:16:49,600 Speaker 1: order continue to be an orderly. It's been a low 286 00:16:49,720 --> 00:16:51,920 Speaker 1: volume sell off. You know that you have not seen 287 00:16:51,960 --> 00:16:55,360 Speaker 1: signs of panic at all yet. Well, well, Scott, you know, 288 00:16:55,440 --> 00:16:57,760 Speaker 1: just maybe just a little bit more, because if you're saying, 289 00:16:57,760 --> 00:16:59,800 Speaker 1: all right, yields are going to go higher, despite what 290 00:16:59,880 --> 00:17:03,680 Speaker 1: we read about inflation, despite what we hear about any 291 00:17:03,800 --> 00:17:05,879 Speaker 1: effort on the part of the U. S. Treasury to 292 00:17:05,920 --> 00:17:08,480 Speaker 1: reign in spending, which clearly doesn't seem to be working out. 293 00:17:09,840 --> 00:17:12,560 Speaker 1: Is there a possibility that there'll just be a lot 294 00:17:12,600 --> 00:17:15,040 Speaker 1: of buyers who come in because people don't want to 295 00:17:15,080 --> 00:17:17,840 Speaker 1: take any risk and they want to just match their 296 00:17:17,840 --> 00:17:21,360 Speaker 1: future liabilities and they want to hold on to their job. Well, 297 00:17:21,359 --> 00:17:24,800 Speaker 1: it's you know, with a kurve this flat um. You know, 298 00:17:25,160 --> 00:17:29,119 Speaker 1: a lot of people view the level of rates in 299 00:17:29,119 --> 00:17:31,360 Speaker 1: the long end as something of a conundrum that has 300 00:17:31,359 --> 00:17:35,640 Speaker 1: been supported by massive flows from overseas because their markets 301 00:17:35,800 --> 00:17:41,280 Speaker 1: are incredibly unattractive yield levels due to quantitative easing. And 302 00:17:41,640 --> 00:17:43,399 Speaker 1: but we're going to be looking at the end of 303 00:17:43,400 --> 00:17:46,480 Speaker 1: that program. There obviously behind the US in terms on 304 00:17:46,600 --> 00:17:50,040 Speaker 1: the calendar, in terms of removing that access accommodation, but 305 00:17:50,160 --> 00:17:52,440 Speaker 1: it's coming in tomorrow with the ECB, we should get 306 00:17:52,800 --> 00:17:55,439 Speaker 1: you know, you know, some clarity there. So you have 307 00:17:56,040 --> 00:18:01,320 Speaker 1: global central banks in coordination raising rates worldwide, a massively 308 00:18:01,359 --> 00:18:06,880 Speaker 1: expanding deficit, very solid growth, an incredibly tight labor market. Um. 309 00:18:07,000 --> 00:18:09,399 Speaker 1: I think that combination will keep the pressure on the 310 00:18:09,440 --> 00:18:11,760 Speaker 1: back end of the of the treasury market. Yeah, I 311 00:18:11,800 --> 00:18:16,360 Speaker 1: can imagine. So going forward, A quick question about John Taylor. 312 00:18:16,560 --> 00:18:19,800 Speaker 1: Yesterday President Trump asked the Senate if for a show 313 00:18:19,840 --> 00:18:22,560 Speaker 1: of hands for who they would support as the next 314 00:18:22,840 --> 00:18:26,120 Speaker 1: FED share nominee. John Taylor was their selection. What would 315 00:18:26,119 --> 00:18:29,399 Speaker 1: that mean for for bond markets? Well, you know, I 316 00:18:29,400 --> 00:18:31,920 Speaker 1: think no matter of who we get in there, assuming 317 00:18:31,960 --> 00:18:34,720 Speaker 1: that we don't get a renomination of Janet Yellen, I 318 00:18:34,760 --> 00:18:38,320 Speaker 1: think you'll have a more hawk is FED next year. 319 00:18:38,600 --> 00:18:40,439 Speaker 1: And you know, the markets are aware that, but I 320 00:18:40,440 --> 00:18:42,440 Speaker 1: think a lot of people are very unwilling to bet 321 00:18:42,480 --> 00:18:45,480 Speaker 1: on it given the you know, the randomness of the 322 00:18:45,520 --> 00:18:49,480 Speaker 1: selection process. Um in Washington, d C. Do you think 323 00:18:49,480 --> 00:18:51,399 Speaker 1: that you think a show of hands as random? Is 324 00:18:51,440 --> 00:18:54,400 Speaker 1: that so? But I think that a show of hands 325 00:18:54,400 --> 00:18:58,600 Speaker 1: won't necessarily affect the decider on the issue. Well, thank you, 326 00:18:59,000 --> 00:19:01,080 Speaker 1: Scott Dorth, Thank you so much for joining us and 327 00:19:01,359 --> 00:19:04,280 Speaker 1: for your insightful columns as always. Scott Dorf is a 328 00:19:04,280 --> 00:19:08,240 Speaker 1: Bloomberg profit and managing director at amerst pure Pont Securities, 329 00:19:08,720 --> 00:19:12,240 Speaker 1: also a longtime trader in the bond market. With a 330 00:19:12,240 --> 00:19:28,199 Speaker 1: lot of insight into what we should be expecting. We 331 00:19:28,320 --> 00:19:31,920 Speaker 1: turned now to the world of Apple and smartphones. Alex web, 332 00:19:32,000 --> 00:19:36,120 Speaker 1: technology reporter for Bloomberg, joins us now from San Francisco, 333 00:19:36,480 --> 00:19:38,199 Speaker 1: and Alex, I wonder if you could just tell us 334 00:19:38,240 --> 00:19:41,080 Speaker 1: about the supply chain that it currently exists and how 335 00:19:41,119 --> 00:19:45,240 Speaker 1: it has changed in order to bring these new iPhones 336 00:19:45,280 --> 00:19:47,960 Speaker 1: to market. So whenever Apple brings a new phone to 337 00:19:48,040 --> 00:19:51,440 Speaker 1: market and they have a headline new technology, often that technology, 338 00:19:51,560 --> 00:19:53,679 Speaker 1: the core of it is not really designed by Apple. 339 00:19:53,720 --> 00:19:56,440 Speaker 1: They take components from all over the place, piece them together, 340 00:19:56,720 --> 00:19:58,400 Speaker 1: and then they say, look at this thing that we've 341 00:19:58,440 --> 00:20:01,360 Speaker 1: come up with. Well, the technology in the new iPhone 342 00:20:01,400 --> 00:20:03,560 Speaker 1: ten is written as an x but the iPhone tent 343 00:20:04,000 --> 00:20:06,159 Speaker 1: is um is actually very similar to what was in 344 00:20:06,200 --> 00:20:09,360 Speaker 1: the original Microsoft Connect. You know that that censor which 345 00:20:09,400 --> 00:20:11,800 Speaker 1: went on top of an xbox and detect movement. What 346 00:20:11,880 --> 00:20:13,840 Speaker 1: they did was they took that right the way down 347 00:20:13,880 --> 00:20:16,400 Speaker 1: and made tiny, tiny versions of it just a few 348 00:20:16,400 --> 00:20:19,360 Speaker 1: millimeters by centimeters across rather than the size of say 349 00:20:19,359 --> 00:20:21,280 Speaker 1: a small book, and that's been a bit of a 350 00:20:21,359 --> 00:20:24,160 Speaker 1: challenge for the for the suppliers to really meet those 351 00:20:24,200 --> 00:20:26,840 Speaker 1: standards in time for the production. Alex, you know what 352 00:20:26,920 --> 00:20:30,160 Speaker 1: struck me with the piece that you wrote today which 353 00:20:30,200 --> 00:20:33,760 Speaker 1: was fascinating, is this tension between Apple wanting to push 354 00:20:33,840 --> 00:20:38,080 Speaker 1: the envelope and come up with newer and more groundbreaking 355 00:20:38,119 --> 00:20:42,960 Speaker 1: technologies and the supplier's inability to really mass produce those 356 00:20:43,080 --> 00:20:45,360 Speaker 1: at the same level. And I'm just wondering, I mean, 357 00:20:45,400 --> 00:20:47,959 Speaker 1: is this going to be a pretty big pitfall for 358 00:20:48,000 --> 00:20:51,800 Speaker 1: Apple as it tries to meet very high expectations from 359 00:20:51,840 --> 00:20:54,880 Speaker 1: the market about its ability to evolve and to continue 360 00:20:55,000 --> 00:20:58,240 Speaker 1: to sell its iPhone. So as we've seen, the stock 361 00:20:58,280 --> 00:21:00,919 Speaker 1: hasn't taken a massive power ending on on this kind 362 00:21:00,960 --> 00:21:03,800 Speaker 1: of drip drip of news over recent months about the 363 00:21:03,800 --> 00:21:08,040 Speaker 1: supply chain problems. But because the expectation is that once 364 00:21:08,040 --> 00:21:10,600 Speaker 1: those supply chain dromas are ironed out, it will feed 365 00:21:10,600 --> 00:21:13,600 Speaker 1: into a product cycle of maybe two years. But then 366 00:21:13,640 --> 00:21:16,320 Speaker 1: comes the question what comes after those two years? How 367 00:21:16,400 --> 00:21:19,920 Speaker 1: much more can they really innovate and deliver the sort 368 00:21:19,920 --> 00:21:23,240 Speaker 1: of new technologies which will drive customers to keep buying 369 00:21:23,280 --> 00:21:27,240 Speaker 1: new phones. There's a widespread fear that the smartphone market 370 00:21:27,280 --> 00:21:29,480 Speaker 1: is now saturated. This is one of the reasons why 371 00:21:29,480 --> 00:21:32,680 Speaker 1: Tim Cook, CEO starts talking a lot about augmented reality. 372 00:21:32,720 --> 00:21:36,000 Speaker 1: And we've reported that Apple's working on smart glasses, for instance, 373 00:21:36,000 --> 00:21:38,000 Speaker 1: and those sort of new products are going to be 374 00:21:38,040 --> 00:21:41,000 Speaker 1: crucial in the it's sort of mid to long term, 375 00:21:41,040 --> 00:21:42,560 Speaker 1: you know, Alex, I'm wondering if you could tell us 376 00:21:42,600 --> 00:21:46,399 Speaker 1: about the individual pieces of the supply chain that have 377 00:21:46,560 --> 00:21:49,360 Speaker 1: been the most problematic for Apple. Is it the three 378 00:21:49,440 --> 00:21:52,159 Speaker 1: D sensor unit, the one that recognizes your face and 379 00:21:52,280 --> 00:21:55,720 Speaker 1: unlocks the phone. Yes, absolutely, so there's one particular component 380 00:21:55,760 --> 00:21:58,800 Speaker 1: in that. The way this technology works is one of 381 00:21:58,840 --> 00:22:02,439 Speaker 1: the components Flashy is thirty thousand laser dots onto the 382 00:22:02,520 --> 00:22:05,280 Speaker 1: user's face and uses that to map it and work 383 00:22:05,280 --> 00:22:07,360 Speaker 1: out who's who is in front of it and whether 384 00:22:07,400 --> 00:22:10,280 Speaker 1: to unlock the phone. Now, that component has a very 385 00:22:10,400 --> 00:22:13,800 Speaker 1: very small margin of error in the micron range that's 386 00:22:13,800 --> 00:22:16,239 Speaker 1: a fraction of the breadth of a hair, and so 387 00:22:16,320 --> 00:22:19,240 Speaker 1: if it's placed slightly awry, the technology doesn't work, and 388 00:22:19,280 --> 00:22:23,040 Speaker 1: that's created huge problems for the assemblers them the companies 389 00:22:23,080 --> 00:22:26,040 Speaker 1: who take all these disparate components, piece them together, then 390 00:22:26,040 --> 00:22:29,040 Speaker 1: ship them to Fox con to to to build into 391 00:22:29,040 --> 00:22:31,240 Speaker 1: the phone itself. And these are companies like lg inn 392 00:22:31,359 --> 00:22:34,320 Speaker 1: Techer Korean Company, and Sharp of course, the Japanese company. 393 00:22:34,480 --> 00:22:37,600 Speaker 1: In fact, timing with our story today just coincidental. Lg 394 00:22:37,720 --> 00:22:39,760 Speaker 1: inn a Tech admitted on their call that they've had 395 00:22:39,760 --> 00:22:44,200 Speaker 1: problems making these modules and that it will affect supply 396 00:22:44,359 --> 00:22:46,399 Speaker 1: of the iPhone ten come November the third, when it 397 00:22:46,480 --> 00:22:49,600 Speaker 1: hits stores. There will be supply constraints. Alex, can you 398 00:22:49,640 --> 00:22:52,560 Speaker 1: just give us some perspective about how unusual this is 399 00:22:52,760 --> 00:22:56,119 Speaker 1: for Apple to have supply chain challenges, because you know 400 00:22:56,200 --> 00:22:59,040 Speaker 1: it hasn't it's not unheard of for Apple. But are 401 00:22:59,160 --> 00:23:02,920 Speaker 1: the I Phone ten or the challenges here much greater 402 00:23:03,000 --> 00:23:06,960 Speaker 1: than usual. Yes, basically they are. The It's always the 403 00:23:06,960 --> 00:23:10,159 Speaker 1: case that Apple has a very effective supply chain management system. 404 00:23:10,320 --> 00:23:12,479 Speaker 1: They do not want to have too much supply. They 405 00:23:12,480 --> 00:23:14,760 Speaker 1: do not want to have millions of iPhones sitting in 406 00:23:14,800 --> 00:23:18,200 Speaker 1: warehouses around the world getting dusty, so they often constrained 407 00:23:18,240 --> 00:23:21,000 Speaker 1: supply a little bit means they can create some more 408 00:23:21,000 --> 00:23:24,480 Speaker 1: appetite amongst the consumers, and also they can tell investors 409 00:23:24,520 --> 00:23:26,600 Speaker 1: that way, we've sold out of iPhones on first weekend 410 00:23:26,680 --> 00:23:29,080 Speaker 1: or whatever it might be. So the but in this 411 00:23:29,160 --> 00:23:32,520 Speaker 1: case it seems not to be something of Apple's own creation. 412 00:23:32,560 --> 00:23:35,520 Speaker 1: They are they cannot meet the demand that they had 413 00:23:35,520 --> 00:23:37,399 Speaker 1: hoped to be able to meet, and that is the 414 00:23:37,400 --> 00:23:40,280 Speaker 1: sense going into it. Nonetheless, they will be iPhones available 415 00:23:40,359 --> 00:23:44,440 Speaker 1: next week. It's just that analysts locally in Asia seem 416 00:23:44,480 --> 00:23:46,480 Speaker 1: to expect it will be between twenty five and thirty 417 00:23:46,520 --> 00:23:50,200 Speaker 1: million in the whole quarter, rather than perhaps the fifty 418 00:23:50,280 --> 00:23:54,560 Speaker 1: sixty million which which might typically be expected. Alex, are 419 00:23:54,600 --> 00:23:58,000 Speaker 1: you going to get in line for your new iPhone? Personally? 420 00:23:58,040 --> 00:24:00,320 Speaker 1: I'm not no. I mean it may maybe you can 421 00:24:00,320 --> 00:24:01,760 Speaker 1: write all that it's my editors tell them to pay 422 00:24:01,800 --> 00:24:05,919 Speaker 1: me a little bit more. But the the uh, I honestly, 423 00:24:05,960 --> 00:24:08,960 Speaker 1: I'm not that. I think Touch I D work just fine. 424 00:24:09,040 --> 00:24:11,320 Speaker 1: I'm gonna say that it's a different kind of three 425 00:24:11,440 --> 00:24:14,240 Speaker 1: D sensor, the one that gets you the race. I 426 00:24:14,240 --> 00:24:16,359 Speaker 1: don't have that on my phone, honestly, Alex, I love it. 427 00:24:16,440 --> 00:24:19,080 Speaker 1: The public appeal for a raise, We're we're all there 428 00:24:19,080 --> 00:24:20,879 Speaker 1: with you, Alex web. Thank you so much for joining US. 429 00:24:20,920 --> 00:24:24,359 Speaker 1: Alex Webb is our technology reporter for Bloomberg News. Coming 430 00:24:24,359 --> 00:24:26,760 Speaker 1: to uh to, coming to us from our nine sixties 431 00:24:26,760 --> 00:24:29,400 Speaker 1: studio in San Francisco, and uh this is a little 432 00:24:29,400 --> 00:24:31,800 Speaker 1: bit different than usual, and it is fascinating and it 433 00:24:31,840 --> 00:24:35,240 Speaker 1: raises a question to me whether eventually it will create 434 00:24:35,320 --> 00:24:37,720 Speaker 1: more demand for the iPhone eight, which has had trouble 435 00:24:37,760 --> 00:24:39,439 Speaker 1: selling because people realize they're not going to get their 436 00:24:39,440 --> 00:24:42,560 Speaker 1: iPhone ten so quickly. Right now, let's see you online. 437 00:24:43,119 --> 00:24:47,879 Speaker 1: Let's see you online for this. Thanks for listening to 438 00:24:47,920 --> 00:24:50,800 Speaker 1: the Bloomberg P and L podcast. You can subscribe and 439 00:24:50,840 --> 00:24:54,840 Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast 440 00:24:54,840 --> 00:24:58,320 Speaker 1: platform you prefer. I'm pim Fox, I'm on Twitter at 441 00:24:58,520 --> 00:25:01,640 Speaker 1: pim Fox, I'm on it, or at Lisa Abramo. It's 442 00:25:01,720 --> 00:25:04,719 Speaker 1: one before the podcast. You can always catch us worldwide 443 00:25:04,760 --> 00:25:05,680 Speaker 1: on Bloomberg Radio.