WEBVTT - Perry's Coal Subsidy Is a Solution in Search of a Problem, Denning Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.440 Along with my co host Lisa A. Brahmowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg p m 0:00:20.680 --> 0:00:31.479 L Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. 0:00:31.480 --> 0:00:35.040 Looking at proposals from the Energy Secretary Rick Perry, has 0:00:35.040 --> 0:00:40.360 it tries to reform the power markets? Is it nuts? Well? So, 0:00:40.479 --> 0:00:43.280 says our next guest, Liam Denning. He is our Energy, 0:00:43.440 --> 0:00:47.680 Mining and Commodities column. This for Bloomberg Gadfly, Liam, a pleasure, 0:00:47.720 --> 0:00:51.000 Thank you for being here at the Monaco Government Tourism's 0:00:51.200 --> 0:00:56.480 sustainability focus the luncheon here at Bloomberg World headquarters. Is 0:00:56.560 --> 0:01:00.120 this really a plan of reform or is it a 0:01:00.280 --> 0:01:03.640 plan of relief? I mean, I think you have to 0:01:03.680 --> 0:01:07.160 put quote marks around the words reform and maybe even 0:01:07.319 --> 0:01:12.319 plan here that was that was something else? Love it? Okay, 0:01:12.360 --> 0:01:14.520 go ahead, then back up, and you've got to tell 0:01:14.560 --> 0:01:17.640 us what is it? What? What? What are the proposals? 0:01:17.640 --> 0:01:23.760 So ostensibly this is all about keeping the power market 0:01:24.480 --> 0:01:28.039 quote unquote resilient, and the general thrust of it is 0:01:28.160 --> 0:01:31.120 we had the polar bortex a few years ago. Um 0:01:31.200 --> 0:01:35.400 some gas power plants during that shut down because they 0:01:35.440 --> 0:01:38.319 couldn't get enough gas because it was being diverted to 0:01:38.360 --> 0:01:42.680 heat people's homes, and um Rick Perrus sees the pond 0:01:42.760 --> 0:01:47.760 this to try and institute a subsidy for coal fire 0:01:47.760 --> 0:01:50.280 power plants which have been struggling, as you may or 0:01:50.280 --> 0:01:55.080 may not know, And it's being done under this pretense 0:01:55.120 --> 0:01:57.760 that they basically need to keep a bunch of coal 0:01:57.840 --> 0:02:01.240 lying around so that if we get an other, uh, 0:02:01.480 --> 0:02:05.640 polar ortex, they've got coal on hand to generate power. Now, 0:02:05.760 --> 0:02:09.280 this is something of a solution in search of a problem, 0:02:09.320 --> 0:02:13.840 because all sorts of studies and all sorts of companies, 0:02:13.880 --> 0:02:17.639 including the operator of the regional grid that we're talking about, 0:02:17.680 --> 0:02:20.920 which covers about seventy million people, have said that this 0:02:21.080 --> 0:02:23.960 really isn't a problem. Um And in fact, if you 0:02:23.960 --> 0:02:26.000 look at what happened in the polar vortex, a lot 0:02:26.000 --> 0:02:28.400 of coal fired power plants shut down as well because 0:02:28.560 --> 0:02:31.359 it was too cold for them to to run their systems. 0:02:31.440 --> 0:02:35.200 So it's really just a cold subsidy. So liam um 0:02:35.240 --> 0:02:37.760 I love just trying to imagine where you have air 0:02:37.840 --> 0:02:39.400 quotes as you speak now, and I'm going to be 0:02:39.480 --> 0:02:42.000 doing that for the rest of the segment. Actually every word, Yeah, 0:02:42.280 --> 0:02:44.680 pretty much, you're putting every word into air quotes. Um, 0:02:45.560 --> 0:02:49.960 the plan calls for for a subsidy for unregulated power 0:02:49.960 --> 0:02:53.080 plans holding ninety days worth of fuel on site. This 0:02:53.160 --> 0:02:57.120 talks specifically to the fossil fuel companies, right, who else 0:02:57.200 --> 0:03:01.120 keeps that kind of sort of physical resources is on hand. 0:03:01.639 --> 0:03:04.440 I'm just wondering that you know, you you raised an issue. 0:03:04.480 --> 0:03:07.960 This isn't a conservative principle. In fact, this is somewhat radical. 0:03:08.040 --> 0:03:11.480 So if this, if this particular administration adheres to her 0:03:11.600 --> 0:03:14.800 or says that they adhere to conservative ideas, this kind 0:03:14.800 --> 0:03:17.200 of flies in the face of that, right, I mean, 0:03:17.240 --> 0:03:20.440 it's it's not conservative in any form. In fact, I 0:03:20.440 --> 0:03:22.440 mean it's not conservative on on a couple of fronts. 0:03:22.440 --> 0:03:26.000 So one is, Um, you're rolling back twenty or thirty 0:03:26.120 --> 0:03:29.720 years of power market deregulation, which the last I heard 0:03:29.720 --> 0:03:33.160 conservatives generally favor that sort of thing, you know, markets 0:03:33.240 --> 0:03:36.320 prices supply and dimand that sort of thing, So you'd 0:03:36.360 --> 0:03:39.800 be rolling that back. It's also it's it's just sort 0:03:39.800 --> 0:03:43.760 of fundamentally intellectually dishonest on a couple of levels. I mean, 0:03:45.280 --> 0:03:50.520 we're talking about pricing what economists will call an externality. 0:03:50.680 --> 0:03:54.480 So so this resilience thing apparently isn't captured in power prices. 0:03:54.520 --> 0:03:57.680 Therefore we need a subsidy. And the energy market is 0:03:57.680 --> 0:04:00.920 full of all sorts of subsidies, but generally expect conservatives 0:04:00.960 --> 0:04:05.440 trying to take subsidies out and regulations. So can you 0:04:05.440 --> 0:04:08.280 just give us what the defenses of this? I mean before, 0:04:08.320 --> 0:04:12.320 but just like, what is the argument for why Rick 0:04:12.360 --> 0:04:14.960 Perry is calling for this, you know, aside from we 0:04:15.000 --> 0:04:18.080 want to finance core companies. Is it purely the sort 0:04:18.120 --> 0:04:20.680 of pullar of voritex or is there something else about 0:04:21.360 --> 0:04:23.680 that that they're saying here? No, I mean it really 0:04:23.720 --> 0:04:27.440 does rely on this argument that power prices as they 0:04:27.480 --> 0:04:31.400 are currently set do not reward um certain types of 0:04:31.440 --> 0:04:35.600 power plant for just being there in case we need them. 0:04:35.640 --> 0:04:38.240 And you know, the market operator has said there is 0:04:38.680 --> 0:04:41.200 there is a problem with the way power is being priced, 0:04:41.200 --> 0:04:44.400 and we are perhaps setting ourselves up for a problem. However, 0:04:44.440 --> 0:04:49.200 the market operator has also instituted other market based ways 0:04:49.240 --> 0:04:51.599 of doing this and has talked about some other things. 0:04:51.680 --> 0:04:54.960 What they certainly haven't done is said, let's just abandon 0:04:55.360 --> 0:04:59.000 power pricing altogether and shove a bunch of money towards 0:04:59.000 --> 0:05:01.720 these qualified power so they can buy more coal, so 0:05:01.800 --> 0:05:05.480 it can sit around in a big pile. I've been 0:05:05.480 --> 0:05:08.240 taking a look at the value of coal stocks. Console 0:05:08.360 --> 0:05:12.800 energy is just one stock has not sort of grabbed 0:05:12.800 --> 0:05:15.720 any fabulous attention. I mean, stocks down more than twelve 0:05:16.160 --> 0:05:17.760 so far this year. So it doesn't look like the 0:05:17.760 --> 0:05:20.800 coal stocks have gotten a pop from uh, from any 0:05:20.839 --> 0:05:25.800 of these efforts, right, I mean, okay, right, okay, So 0:05:25.880 --> 0:05:29.080 let's talk about the political vortex, right from the polar 0:05:29.160 --> 0:05:32.800 vortex to the political uh vortex. I was on the 0:05:32.839 --> 0:05:35.960 impression that the grid needs upgrading and that natural gas 0:05:36.279 --> 0:05:38.280 is the wave of the future because it's inexpensive and 0:05:38.400 --> 0:05:40.280 we have a lot of it. Why doesn't the money 0:05:40.320 --> 0:05:42.760 go to those things? The money is going to those things. 0:05:42.880 --> 0:05:47.080 So that's precisely why Perry wants a subsidy for cold 0:05:47.120 --> 0:05:51.320 because everyone should. So the way, well, no gas gas 0:05:51.360 --> 0:05:53.839 is getting money because it's competing because it's very cheap. 0:05:54.080 --> 0:05:57.159 I mean, that's that's why we're seeing gas fired power 0:05:57.240 --> 0:06:00.680 plants get built and coal fire power plants being retired. 0:06:00.720 --> 0:06:03.200 The fact is, who at this point is going to 0:06:03.320 --> 0:06:05.839 invest in a new coal fired plant that won't even 0:06:05.839 --> 0:06:09.320 begin operation operations for three or four years, by which 0:06:09.320 --> 0:06:13.760 time the political landscape could be looking different. In general, 0:06:13.960 --> 0:06:16.760 no one is going to invest that money because these 0:06:16.800 --> 0:06:19.440 plants run for thirty or forty years, and everyone expects 0:06:19.480 --> 0:06:22.520 that over time we're going to see things like carbon 0:06:22.560 --> 0:06:25.200 pricing or at least tighter regulations on call. I mean, 0:06:25.240 --> 0:06:28.520 the market is only really going one way. Liam Debting, 0:06:28.760 --> 0:06:30.760 thank you so much for joining us. Liam Debting is 0:06:30.880 --> 0:06:34.760 energy mining and commodities calumnist for Bloomberg gad Fly talking 0:06:34.760 --> 0:06:51.280 about quote Cole, thank you so much for joining us. Well, 0:06:51.279 --> 0:06:53.920 we're starting to get a sense of how much money 0:06:54.000 --> 0:06:57.760 US Congress is putting aside to recover from the very 0:06:57.839 --> 0:07:01.440 active hurricane season. We're talking about Hurricanes Harvey and Maria 0:07:01.760 --> 0:07:05.200 and others that have battered the South as well as 0:07:05.279 --> 0:07:07.920 the Caribbean islands. Here to look at it from the 0:07:07.960 --> 0:07:12.120 private side is Jonathan Adams, senior insurance industry analyst from 0:07:12.200 --> 0:07:15.480 Bloomberg Intelligence. Jonathan, thank you so much for joining us. 0:07:15.520 --> 0:07:19.480 We're starting to get some earnings reports from reinsurance companies. 0:07:19.720 --> 0:07:23.440 Excel Group, for example, reported last night, Access Capital reports tonight, 0:07:23.640 --> 0:07:26.000 Ballads Holding reports tomorrow, and there are others that come 0:07:26.080 --> 0:07:29.880 next week. Are we getting any greater insight into just 0:07:30.080 --> 0:07:33.400 how expansive the damages are going to be for reinsurance 0:07:33.400 --> 0:07:37.360 companies and what the costs will be. Well, the costs 0:07:37.520 --> 0:07:41.680 are so far largely in line with what had been 0:07:41.720 --> 0:07:45.360 expected by those companies, so I don't think we're going 0:07:45.400 --> 0:07:50.000 to see major surprises in terms of the individual company costs. 0:07:50.040 --> 0:07:53.360 They do a pretty good job of um estimating and 0:07:53.560 --> 0:07:56.040 what that is. So for the example for Excel, the 0:07:56.080 --> 0:07:59.240 net cost was one and a half billion dollars, which 0:07:59.320 --> 0:08:02.920 is white significant and probably about one and a half 0:08:02.960 --> 0:08:05.920 percent of the total industry loss. So I think on 0:08:06.000 --> 0:08:10.480 that score, um the the industry has done pretty well 0:08:10.560 --> 0:08:13.520 in in estimating what those losses will be for them. 0:08:13.560 --> 0:08:17.080 The big question is what to do next? Well, and 0:08:17.120 --> 0:08:19.840 maybe go go into that because maybe you could describe 0:08:19.880 --> 0:08:24.280 what happens in a typical cycle after a catastrophe or 0:08:24.320 --> 0:08:29.400 a hurricane, and what might happen this time that's different. Absolutely, 0:08:29.520 --> 0:08:32.840 you look at the price increases that were put through 0:08:33.040 --> 0:08:36.800 after Hurricane Katrina, which is a normal, normal response because 0:08:36.840 --> 0:08:40.920 you need to recover those losses, and they were upwards 0:08:40.960 --> 0:08:46.360 of or more for US catastrophe reinsurance UH. This cycle, 0:08:46.559 --> 0:08:49.440 it's unlikely to be anywhere near that. And even though 0:08:50.040 --> 0:08:53.600 UH management teams are talking about double digit increases, those 0:08:53.640 --> 0:08:56.640 are going to be pretty low double digit increases. And 0:08:56.960 --> 0:09:00.640 the problem here is that we have an ample supply 0:09:00.720 --> 0:09:04.040 of capital that is willing to take this risk, and 0:09:04.120 --> 0:09:08.400 because of that, you simply can't pass on the kind 0:09:08.440 --> 0:09:12.800 of steep price increases that we're passed on a decade 0:09:12.800 --> 0:09:16.559 ago with Hurricane Katrina, because there'll be someone else willing 0:09:16.600 --> 0:09:19.959 to take that risk for less money. And this is 0:09:20.040 --> 0:09:22.880 this is super important. I mean, this is a huge 0:09:22.920 --> 0:09:27.800 issue because if reinsurance companies and others are not able 0:09:27.880 --> 0:09:33.120 to demand high enough risk premium from investors, from from 0:09:33.160 --> 0:09:35.680 clients who are taking out these policies, then they're that 0:09:35.760 --> 0:09:38.320 much more exposed. I mean, does this make the reinsurance 0:09:38.360 --> 0:09:40.800 company is more fragile going forward because they've got that 0:09:40.880 --> 0:09:44.320 much lower of a buffer If there are a bigger 0:09:44.320 --> 0:09:48.760 than expected number of catastrophes, it could. I don't think 0:09:48.760 --> 0:09:53.680 we're at a point so far where there's a heightened 0:09:53.800 --> 0:09:57.760 risk of eating into their capital base. But I do 0:09:57.880 --> 0:10:03.720 think that there's clearly high risk of those individual companies 0:10:03.720 --> 0:10:06.440 in that industry having much lower returns, and it could 0:10:06.520 --> 0:10:09.480 ultimately get to the point that you've indicated where you 0:10:09.559 --> 0:10:11.920 begin to have a more fragile industry and a more 0:10:11.920 --> 0:10:16.920 fragile capital base. At the moment, we do have investors 0:10:16.920 --> 0:10:20.520 from the capital markets willing to buy catastrophe bonds and 0:10:20.559 --> 0:10:24.599 that's been a major source of competition for the traditional 0:10:24.720 --> 0:10:29.360 reinsurance companies, and that's really what has been um driving 0:10:29.440 --> 0:10:31.640 the influx of capital and what I think will be 0:10:33.240 --> 0:10:38.160 a depression on price increases going into eighteen. As we 0:10:38.200 --> 0:10:42.160 know with how the capital markets act, it certainly could 0:10:42.200 --> 0:10:44.200 be the case that they pushed that too far, and 0:10:44.240 --> 0:10:47.640 in fact you do have a more fragile industry sometime 0:10:47.679 --> 0:10:51.600 in the future. Hey, Hey, Jonathan, wondering if indeed this 0:10:51.720 --> 0:10:55.760 new capital continues to flow into the insurance industry, You're 0:10:55.760 --> 0:10:57.440 going to find that a lot of people who have 0:10:57.520 --> 0:10:59.680 never been in the insurance industry are going to be 0:10:59.720 --> 0:11:02.240 kept evated by whatever yield is sort of dangled in 0:11:02.240 --> 0:11:05.920 front of them. Right. Uh, is there a question, or 0:11:06.080 --> 0:11:09.160 is there something you would suggest to them newbies in 0:11:09.200 --> 0:11:12.240 the industry that they need to ask the sponsors or 0:11:12.280 --> 0:11:14.600 any of the people putting these deals together a question 0:11:14.600 --> 0:11:16.800 that they should ask before they jump in in an 0:11:16.800 --> 0:11:20.040 industry they don't know a lot about, absolutely, and that 0:11:20.160 --> 0:11:25.480 question is, UM, how do you understand volatility? Because it's 0:11:25.520 --> 0:11:30.240 really um For many bond investors that that are looking 0:11:30.320 --> 0:11:32.520 at credit, they think they may have a loss, but 0:11:32.559 --> 0:11:37.079 there's always some kind of recovery with catastrophe bonds. UH. 0:11:37.160 --> 0:11:39.480 If you have a full loss, you can go from 0:11:40.000 --> 0:11:43.560 UH an expectation of receiving all your capital back to 0:11:43.640 --> 0:11:45.600 getting half of it back or none of it back. 0:11:45.760 --> 0:11:49.880 And it's really that volatility that should demand a higher 0:11:49.920 --> 0:11:53.120 return and isn't always getting it because we don't see 0:11:53.160 --> 0:11:55.480 that volatility year to year. You only see it over 0:11:55.840 --> 0:11:58.800 a decade or more. So that's the key question, Jonathan, 0:11:58.840 --> 0:12:01.720 Just real quick, who are these other investors who are 0:12:01.760 --> 0:12:07.840 pouring into these this industry? Well, um, it's a broad 0:12:07.920 --> 0:12:12.600 smattering of UM individuals. They want somewhat higher returns and 0:12:12.760 --> 0:12:17.040 some diversification, So it could be anywhere from individual hedge 0:12:17.080 --> 0:12:21.200 funds that understand the insurance market to pension funds that 0:12:21.920 --> 0:12:24.719 have less of an understanding but certainly want to diversify 0:12:24.840 --> 0:12:30.240 their UM, their investments UM or other traditional UH fixed 0:12:30.240 --> 0:12:33.520 income investors. But those two um you know, stand out 0:12:33.559 --> 0:12:37.720 as as individuals that have been buying this type of asset. 0:12:38.160 --> 0:12:40.480 Thanks very much for spending time with us. Jonathan Adams 0:12:40.520 --> 0:12:58.560 as our senior insurance industry analyst for Bloomberg Intelligence. The 0:12:58.640 --> 0:13:00.920 bond market at the government by market to sell off 0:13:00.960 --> 0:13:03.040 at the long end, a little bit of buying at 0:13:03.120 --> 0:13:05.920 the short end, something that seems to have been going 0:13:05.960 --> 0:13:08.360 on for quite a while, turning that teeter totter perhaps 0:13:08.400 --> 0:13:11.160 into a flat board. Here to tell us more. Scott Dorf. 0:13:11.240 --> 0:13:14.000 He is a Bloomberg Profit and managing director at AMers 0:13:14.120 --> 0:13:17.000 Pierrepont Security. Scott, thanks very much for being with us. 0:13:17.400 --> 0:13:19.959 Thanks for having me. Your latest column is called by 0:13:20.040 --> 0:13:24.960 the dip is a losing strategy in the bond market. Why, Well, 0:13:25.000 --> 0:13:28.600 we've had a situation where the fundamentals for the bond 0:13:28.600 --> 0:13:31.760 markets have been deteriorating pretty steadily, but we didn't really 0:13:31.800 --> 0:13:35.160 see that in the prices until starting about a month ago, 0:13:35.480 --> 0:13:38.000 and ten ure yields actually hit the two oh one 0:13:38.080 --> 0:13:41.720 level in early September, and I think that was a 0:13:41.760 --> 0:13:44.240 cathartic stop out for a lot of a lot of 0:13:44.240 --> 0:13:47.959 traders in particularly speculative investors who you know, had been 0:13:47.960 --> 0:13:51.240 betting on higher rates through the summer. Those positions got 0:13:51.320 --> 0:13:54.120 taken out, and over the last month we've moved up, 0:13:54.400 --> 0:13:57.400 you know, forty basis points and yields with a pretty 0:13:57.440 --> 0:14:02.280 consistent and not really significantly changing economic and inflation picture 0:14:02.320 --> 0:14:05.240 in the UF. Yeah, Scott, thanks so much for joining 0:14:05.320 --> 0:14:07.240 us today. There are a lot of people saying that 0:14:07.280 --> 0:14:10.520 we're reaching kind of a sort of moment of truth. 0:14:10.760 --> 0:14:13.079 That was what Jeff Gunlock said, a moment of truth 0:14:13.160 --> 0:14:17.040 for the US Treasury market yields crossing that to two 0:14:17.080 --> 0:14:20.880 point four percent threshold and just continuing on up. How 0:14:20.960 --> 0:14:24.080 high can they go at this point with no fundamental 0:14:24.440 --> 0:14:26.680 change in the backdrop? I mean, yes, the ECB mayn 0:14:26.680 --> 0:14:29.160 NodD some kind of tapering. Uh, that's more hawkers than 0:14:29.200 --> 0:14:33.560 people are expecting tomorrow. Yes, potentially inflation could pick up, 0:14:34.000 --> 0:14:35.920 and yes there could be a more hawkish FED chair. 0:14:36.160 --> 0:14:38.600 All of that does not negate the trillions of dollars 0:14:38.600 --> 0:14:42.680 of cash slashing around the financial system. Well, I think 0:14:42.920 --> 0:14:45.560 you know, It's probably a bit of a triple whammy 0:14:45.560 --> 0:14:48.080 in terms of a number of you know, kind of 0:14:48.400 --> 0:14:51.880 in the background events occurring. I mean, the largest one 0:14:51.920 --> 0:14:54.960 being you know, the taper and you know the shrinkage 0:14:54.960 --> 0:14:57.320 of the fet balance sheet, which SET has told this 0:14:57.520 --> 0:14:59.160 is going to be very much in the background and 0:14:59.200 --> 0:15:01.640 we're not going to note us. But I think you know, 0:15:01.720 --> 0:15:04.520 they protest a little bit too much, and you know, 0:15:04.600 --> 0:15:08.880 by certainly over two nineteen they're gonna have the Treasury 0:15:08.920 --> 0:15:11.800 is going to have to find four hundred billion dollars 0:15:11.800 --> 0:15:15.040 extra that if the paper wasn't occurring, that the SET 0:15:15.080 --> 0:15:18.160 would have absorbed. That comes on top of a huge 0:15:18.200 --> 0:15:20.680 increase in the deficit already this year, where eight you know, 0:15:20.720 --> 0:15:23.320 we were eighty billion over for this fiscal year, and 0:15:23.760 --> 0:15:26.480 some of the estimates are that the deficit and the 0:15:26.560 --> 0:15:29.840 numbers are going to be fifty to higher in terms 0:15:29.880 --> 0:15:31.560 of what the Treasury has to raise in net new 0:15:31.600 --> 0:15:34.000 money next year. And that comes at the same time 0:15:34.000 --> 0:15:36.080 that we have very solid two and a half three 0:15:36.120 --> 0:15:39.360 percent growth in the second half of the year. The 0:15:39.400 --> 0:15:42.800 one outlier has obviously been these core CPI inflation numbers, 0:15:42.800 --> 0:15:45.680 and I think that is what prevented people from you know, 0:15:46.280 --> 0:15:50.040 betting too too aggressively on you know, on higher rates. 0:15:50.440 --> 0:15:51.840 But the set is made it clear they're going to 0:15:51.920 --> 0:15:56.520 look through that core CPI and they see signs, you know, 0:15:56.720 --> 0:16:01.240 certainly was an unemployment rate at four and probably headed 0:16:01.280 --> 0:16:03.880 under four percent next year. They see signs that you know, 0:16:03.920 --> 0:16:06.520 inflation is going to be more of a problem ongoing. Okay, 0:16:06.560 --> 0:16:08.680 So since you think that by the dip is not 0:16:08.720 --> 0:16:10.800 a strategy, it's going to work with this treasury sell off, 0:16:11.080 --> 0:16:13.160 Where do you think the tenure yield is heading by 0:16:13.160 --> 0:16:16.800 a year end? Well, the first target for certainly for 0:16:16.840 --> 0:16:18.800 the people who look at charts is the year to 0:16:18.880 --> 0:16:21.320 date highs in the in the two and two sixty 0:16:21.520 --> 0:16:24.720 two sixty five area. Uh, you know, I don't think 0:16:24.800 --> 0:16:27.360 that's necessarily, you know, a stopping point. This has not 0:16:27.480 --> 0:16:30.640 been been a panicky sell off by any sense. And 0:16:30.680 --> 0:16:33.080 while the a lot of measures show that the leverage 0:16:33.120 --> 0:16:36.800 world is extremely short the futures you know, in in 0:16:36.840 --> 0:16:39.600 the two to five year sector, it doesn't anecdotally, it 0:16:39.600 --> 0:16:41.800 doesn't feel to me like the a lot of the 0:16:41.840 --> 0:16:45.400 shorts are you know, are overdone here. So I think 0:16:45.440 --> 0:16:46.880 it will be more a little bit more of an 0:16:46.960 --> 0:16:49.600 order continue to be an orderly. It's been a low 0:16:49.720 --> 0:16:51.920 volume sell off. You know that you have not seen 0:16:51.960 --> 0:16:55.360 signs of panic at all yet. Well, well, Scott, you know, 0:16:55.440 --> 0:16:57.760 just maybe just a little bit more, because if you're saying, 0:16:57.760 --> 0:16:59.800 all right, yields are going to go higher, despite what 0:16:59.880 --> 0:17:03.680 we read about inflation, despite what we hear about any 0:17:03.800 --> 0:17:05.879 effort on the part of the U. S. Treasury to 0:17:05.920 --> 0:17:08.480 reign in spending, which clearly doesn't seem to be working out. 0:17:09.840 --> 0:17:12.560 Is there a possibility that there'll just be a lot 0:17:12.600 --> 0:17:15.040 of buyers who come in because people don't want to 0:17:15.080 --> 0:17:17.840 take any risk and they want to just match their 0:17:17.840 --> 0:17:21.360 future liabilities and they want to hold on to their job. Well, 0:17:21.359 --> 0:17:24.800 it's you know, with a kurve this flat um. You know, 0:17:25.160 --> 0:17:29.119 a lot of people view the level of rates in 0:17:29.119 --> 0:17:31.360 the long end as something of a conundrum that has 0:17:31.359 --> 0:17:35.640 been supported by massive flows from overseas because their markets 0:17:35.800 --> 0:17:41.280 are incredibly unattractive yield levels due to quantitative easing. And 0:17:41.640 --> 0:17:43.399 but we're going to be looking at the end of 0:17:43.400 --> 0:17:46.480 that program. There obviously behind the US in terms on 0:17:46.600 --> 0:17:50.040 the calendar, in terms of removing that access accommodation, but 0:17:50.160 --> 0:17:52.440 it's coming in tomorrow with the ECB, we should get 0:17:52.800 --> 0:17:55.439 you know, you know, some clarity there. So you have 0:17:56.040 --> 0:18:01.320 global central banks in coordination raising rates worldwide, a massively 0:18:01.359 --> 0:18:06.880 expanding deficit, very solid growth, an incredibly tight labor market. Um. 0:18:07.000 --> 0:18:09.399 I think that combination will keep the pressure on the 0:18:09.440 --> 0:18:11.760 back end of the of the treasury market. Yeah, I 0:18:11.800 --> 0:18:16.360 can imagine. So going forward, A quick question about John Taylor. 0:18:16.560 --> 0:18:19.800 Yesterday President Trump asked the Senate if for a show 0:18:19.840 --> 0:18:22.560 of hands for who they would support as the next 0:18:22.840 --> 0:18:26.120 FED share nominee. John Taylor was their selection. What would 0:18:26.119 --> 0:18:29.399 that mean for for bond markets? Well, you know, I 0:18:29.400 --> 0:18:31.920 think no matter of who we get in there, assuming 0:18:31.960 --> 0:18:34.720 that we don't get a renomination of Janet Yellen, I 0:18:34.760 --> 0:18:38.320 think you'll have a more hawk is FED next year. 0:18:38.600 --> 0:18:40.439 And you know, the markets are aware that, but I 0:18:40.440 --> 0:18:42.440 think a lot of people are very unwilling to bet 0:18:42.480 --> 0:18:45.480 on it given the you know, the randomness of the 0:18:45.520 --> 0:18:49.480 selection process. Um in Washington, d C. Do you think 0:18:49.480 --> 0:18:51.399 that you think a show of hands as random? Is 0:18:51.440 --> 0:18:54.400 that so? But I think that a show of hands 0:18:54.400 --> 0:18:58.600 won't necessarily affect the decider on the issue. Well, thank you, 0:18:59.000 --> 0:19:01.080 Scott Dorth, Thank you so much for joining us and 0:19:01.359 --> 0:19:04.280 for your insightful columns as always. Scott Dorf is a 0:19:04.280 --> 0:19:08.240 Bloomberg profit and managing director at amerst pure Pont Securities, 0:19:08.720 --> 0:19:12.240 also a longtime trader in the bond market. With a 0:19:12.240 --> 0:19:28.199 lot of insight into what we should be expecting. We 0:19:28.320 --> 0:19:31.920 turned now to the world of Apple and smartphones. Alex web, 0:19:32.000 --> 0:19:36.120 technology reporter for Bloomberg, joins us now from San Francisco, 0:19:36.480 --> 0:19:38.199 and Alex, I wonder if you could just tell us 0:19:38.240 --> 0:19:41.080 about the supply chain that it currently exists and how 0:19:41.119 --> 0:19:45.240 it has changed in order to bring these new iPhones 0:19:45.280 --> 0:19:47.960 to market. So whenever Apple brings a new phone to 0:19:48.040 --> 0:19:51.440 market and they have a headline new technology, often that technology, 0:19:51.560 --> 0:19:53.679 the core of it is not really designed by Apple. 0:19:53.720 --> 0:19:56.440 They take components from all over the place, piece them together, 0:19:56.720 --> 0:19:58.400 and then they say, look at this thing that we've 0:19:58.440 --> 0:20:01.360 come up with. Well, the technology in the new iPhone 0:20:01.400 --> 0:20:03.560 ten is written as an x but the iPhone tent 0:20:04.000 --> 0:20:06.159 is um is actually very similar to what was in 0:20:06.200 --> 0:20:09.360 the original Microsoft Connect. You know that that censor which 0:20:09.400 --> 0:20:11.800 went on top of an xbox and detect movement. What 0:20:11.880 --> 0:20:13.840 they did was they took that right the way down 0:20:13.880 --> 0:20:16.400 and made tiny, tiny versions of it just a few 0:20:16.400 --> 0:20:19.360 millimeters by centimeters across rather than the size of say 0:20:19.359 --> 0:20:21.280 a small book, and that's been a bit of a 0:20:21.359 --> 0:20:24.160 challenge for the for the suppliers to really meet those 0:20:24.200 --> 0:20:26.840 standards in time for the production. Alex, you know what 0:20:26.920 --> 0:20:30.160 struck me with the piece that you wrote today which 0:20:30.200 --> 0:20:33.760 was fascinating, is this tension between Apple wanting to push 0:20:33.840 --> 0:20:38.080 the envelope and come up with newer and more groundbreaking 0:20:38.119 --> 0:20:42.960 technologies and the supplier's inability to really mass produce those 0:20:43.080 --> 0:20:45.360 at the same level. And I'm just wondering, I mean, 0:20:45.400 --> 0:20:47.959 is this going to be a pretty big pitfall for 0:20:48.000 --> 0:20:51.800 Apple as it tries to meet very high expectations from 0:20:51.840 --> 0:20:54.880 the market about its ability to evolve and to continue 0:20:55.000 --> 0:20:58.240 to sell its iPhone. So as we've seen, the stock 0:20:58.280 --> 0:21:00.919 hasn't taken a massive power ending on on this kind 0:21:00.960 --> 0:21:03.800 of drip drip of news over recent months about the 0:21:03.800 --> 0:21:08.040 supply chain problems. But because the expectation is that once 0:21:08.040 --> 0:21:10.600 those supply chain dromas are ironed out, it will feed 0:21:10.600 --> 0:21:13.600 into a product cycle of maybe two years. But then 0:21:13.640 --> 0:21:16.320 comes the question what comes after those two years? How 0:21:16.400 --> 0:21:19.920 much more can they really innovate and deliver the sort 0:21:19.920 --> 0:21:23.240 of new technologies which will drive customers to keep buying 0:21:23.280 --> 0:21:27.240 new phones. There's a widespread fear that the smartphone market 0:21:27.280 --> 0:21:29.480 is now saturated. This is one of the reasons why 0:21:29.480 --> 0:21:32.680 Tim Cook, CEO starts talking a lot about augmented reality. 0:21:32.720 --> 0:21:36.000 And we've reported that Apple's working on smart glasses, for instance, 0:21:36.000 --> 0:21:38.000 and those sort of new products are going to be 0:21:38.040 --> 0:21:41.000 crucial in the it's sort of mid to long term, 0:21:41.040 --> 0:21:42.560 you know, Alex, I'm wondering if you could tell us 0:21:42.600 --> 0:21:46.399 about the individual pieces of the supply chain that have 0:21:46.560 --> 0:21:49.360 been the most problematic for Apple. Is it the three 0:21:49.440 --> 0:21:52.159 D sensor unit, the one that recognizes your face and 0:21:52.280 --> 0:21:55.720 unlocks the phone. Yes, absolutely, so there's one particular component 0:21:55.760 --> 0:21:58.800 in that. The way this technology works is one of 0:21:58.840 --> 0:22:02.439 the components Flashy is thirty thousand laser dots onto the 0:22:02.520 --> 0:22:05.280 user's face and uses that to map it and work 0:22:05.280 --> 0:22:07.360 out who's who is in front of it and whether 0:22:07.400 --> 0:22:10.280 to unlock the phone. Now, that component has a very 0:22:10.400 --> 0:22:13.800 very small margin of error in the micron range that's 0:22:13.800 --> 0:22:16.239 a fraction of the breadth of a hair, and so 0:22:16.320 --> 0:22:19.240 if it's placed slightly awry, the technology doesn't work, and 0:22:19.280 --> 0:22:23.040 that's created huge problems for the assemblers them the companies 0:22:23.080 --> 0:22:26.040 who take all these disparate components, piece them together, then 0:22:26.040 --> 0:22:29.040 ship them to Fox con to to to build into 0:22:29.040 --> 0:22:31.240 the phone itself. And these are companies like lg inn 0:22:31.359 --> 0:22:34.320 Techer Korean Company, and Sharp of course, the Japanese company. 0:22:34.480 --> 0:22:37.600 In fact, timing with our story today just coincidental. Lg 0:22:37.720 --> 0:22:39.760 inn a Tech admitted on their call that they've had 0:22:39.760 --> 0:22:44.200 problems making these modules and that it will affect supply 0:22:44.359 --> 0:22:46.399 of the iPhone ten come November the third, when it 0:22:46.480 --> 0:22:49.600 hits stores. There will be supply constraints. Alex, can you 0:22:49.640 --> 0:22:52.560 just give us some perspective about how unusual this is 0:22:52.760 --> 0:22:56.119 for Apple to have supply chain challenges, because you know 0:22:56.200 --> 0:22:59.040 it hasn't it's not unheard of for Apple. But are 0:22:59.160 --> 0:23:02.920