WEBVTT - Surveillance: York, Jersey, Stavridis 0:00:01.360 --> 0:00:13.119 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 0:00:13.240 --> 0:00:17.440 Always with Michael McKee. Daily we bring you insight from 0:00:17.480 --> 0:00:22.279 the best in economics, finance, investment, and international relations. Find 0:00:22.320 --> 0:00:26.880 Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 0:00:26.920 --> 0:00:33.720 course on the Bloomberg. So the trend remains in place 0:00:33.800 --> 0:00:38.640 for oil to continue falling, does it go much farther? 0:00:38.720 --> 0:00:41.640 What's the what's the next support level? And cannot break 0:00:41.640 --> 0:00:44.279 through it? With Mackenzie's let skip your kids with us 0:00:44.280 --> 0:00:48.519 and skip People are saying forty dollars that because it's 0:00:48.520 --> 0:00:51.920 a round number, or or is there some significance to 0:00:52.000 --> 0:00:55.080 forty as as the next resistance point. Well, I think 0:00:55.120 --> 0:00:57.600 it's helpful that that forty is a round number. But 0:00:58.120 --> 0:01:00.440 when we look at our wellhead economic so we see 0:01:00.480 --> 0:01:02.920 there just isn't a lot of oil that works sub forty. 0:01:03.000 --> 0:01:06.880 So forty is a good number to hang to because 0:01:07.160 --> 0:01:10.360 now that non OPEQ is in decline and demand continues 0:01:10.400 --> 0:01:13.120 to grow, at some point we're gonna need new supply 0:01:13.160 --> 0:01:15.000 to come into the market to keep it balanced out. 0:01:15.160 --> 0:01:18.200 If your cheapest oil UH in the non OPAQ world 0:01:18.280 --> 0:01:20.440 is in the forty dollar range. Then that's probably a 0:01:20.560 --> 0:01:24.360 fairly good Florida to hang your hat on. Well, Mike 0:01:24.400 --> 0:01:28.640 can I interrupt? Well, had Economics was a great band. 0:01:28.800 --> 0:01:32.000 I saw them open for sleep at the wheel. They 0:01:32.040 --> 0:01:35.679 were great. Um, we have had reports lately the oil 0:01:36.640 --> 0:01:39.720 more oil is starting to come to market and uh, 0:01:40.120 --> 0:01:43.000 the drig jill rigg count is up. And our friend 0:01:43.040 --> 0:01:47.040 Alex Steele, who is our oil commodities nerds, as you know, 0:01:47.480 --> 0:01:50.559 the fractors are coming back. Now, well, well we're starting 0:01:50.600 --> 0:01:52.440 to see is how we're starting to see some rigs 0:01:52.480 --> 0:01:56.000 creeping back in. Uh, We're starting to see oil kind 0:01:56.040 --> 0:01:59.080 of starting to slow. The declines are slowing down. So 0:01:59.080 --> 0:02:01.880 what the first well those rigs that are coming into 0:02:01.880 --> 0:02:05.240 the field will do is they won't return the US 0:02:05.280 --> 0:02:07.280 supply back to a growth mode, but it will start 0:02:07.280 --> 0:02:10.080 slowing down the rate of decline. And we're starting to 0:02:10.120 --> 0:02:12.280 see that activity is starting to come in. When we 0:02:12.360 --> 0:02:14.960 talk to those small producers, the ones that are procuring 0:02:15.000 --> 0:02:18.799 the rigs, their concern is they can get two or 0:02:18.840 --> 0:02:21.160 three rigs today, They might be able to get two 0:02:21.240 --> 0:02:23.480 or three rigs tomorrow, but could they get a hundred rigs? 0:02:23.600 --> 0:02:25.880 And just in terms of you know, is the equipment 0:02:25.919 --> 0:02:29.080 still there? Uh and in working condition? And the second 0:02:29.080 --> 0:02:30.600 one is how am I going to hire people? I 0:02:30.600 --> 0:02:33.760 think what's important for people to remember is that when 0:02:33.760 --> 0:02:36.720 we went through the last the tight oil surge in 0:02:36.760 --> 0:02:39.280 two thousand nine and two thousand ten, when that started, 0:02:39.360 --> 0:02:43.240 unemployment was at nine and a half percent. Today unemployment's 0:02:43.240 --> 0:02:45.680 four point nine. So it's gonna be a much tighter 0:02:45.760 --> 0:02:49.280 labor market in general. And uh, you know, anecdotally, a 0:02:49.320 --> 0:02:51.280 lot of those guys that were released over the last 0:02:51.320 --> 0:02:54.600 eighteen months have wandered off and found other jobles. Is 0:02:54.639 --> 0:02:56.560 it true? Do you buy the idea we hear from 0:02:56.680 --> 0:03:01.000 some that the income statement mix of a given oil 0:03:01.080 --> 0:03:06.160 company is okay because yes, prices down, but the expense 0:03:06.680 --> 0:03:10.600 of doing business is down as well. Is that true? Well, 0:03:10.639 --> 0:03:13.000 it is true, but you know, prices have fallen more 0:03:13.040 --> 0:03:15.519 than their than the cost basis have fallen down, so, 0:03:16.000 --> 0:03:18.080 you know, and you see, you see earnings under a 0:03:18.080 --> 0:03:20.160 lot of pressure. You saw that last week with you know, 0:03:20.160 --> 0:03:23.640 with VP Chevron, And so when you see those announcements, 0:03:23.639 --> 0:03:27.000 are they one offs or is there a chronic nature 0:03:27.680 --> 0:03:30.040 to the carnage we saw? Yeah, I'm gonna I'm gonna 0:03:30.080 --> 0:03:32.080 be a true economist and say it's both. On the 0:03:32.120 --> 0:03:34.760 one handed, it's the one off because we know the 0:03:34.880 --> 0:03:37.120 prices were low. We knew that we earnings ought to 0:03:37.120 --> 0:03:39.560 be weak. What you need to be watching is do 0:03:39.640 --> 0:03:42.760 they have a strategy. You know, oil companies should not 0:03:42.920 --> 0:03:45.560 be managing their their income statements on a quarter by 0:03:45.640 --> 0:03:48.280 quarter basis. So do you have belief that, yes, the 0:03:48.320 --> 0:03:51.560 second quarter was bad, but I believe that you've got 0:03:51.560 --> 0:03:54.840 plans in place it's going to either stem the decline 0:03:54.880 --> 0:03:57.040 in the third or fourth quarter or actually then eventually 0:03:57.120 --> 0:04:01.040 turn things around. What is the time frame for eventually 0:04:01.040 --> 0:04:04.440 turning things around? I think you're looking you know, from 0:04:04.440 --> 0:04:07.600 a corporate perspective. You know, you're probably looking into seventeen 0:04:07.640 --> 0:04:09.640 at this point. You know, a lot of sixteen is 0:04:09.680 --> 0:04:13.640 pretty much locked in, uh, from an activity basis, even 0:04:13.680 --> 0:04:16.159 if oil prices rise. We've sort of seen that is 0:04:16.200 --> 0:04:19.800 that as oil prices doubled from February, we didn't see 0:04:19.800 --> 0:04:21.920 a lot of activity on the physical side. We saw 0:04:22.440 --> 0:04:25.680 you know, riggs didn't really recover until mayor So is 0:04:25.839 --> 0:04:27.920 this is important? What Mike brought up is a pro 0:04:28.680 --> 0:04:31.520 we went twenty nine worlds coming to an end to 0:04:32.640 --> 0:04:35.960 great everybody was saying we'd have a workout in the 0:04:36.040 --> 0:04:38.880 second half of two thousand and sixteen. I just heard 0:04:38.880 --> 0:04:42.240 you say, that's not gonna happen. Are you surprised that 0:04:42.360 --> 0:04:45.480 didn't happen. Well, what we're surprised is we're not really 0:04:45.520 --> 0:04:48.360 surprised with it with a lack of activity because you know, 0:04:48.560 --> 0:04:51.400 a lot of the oil outside of the US, and 0:04:51.600 --> 0:04:55.120 you know, the forty or oil, the oil that works 0:04:55.120 --> 0:04:58.680 in the forties is largely concentrated in the non OPEC world. 0:04:58.680 --> 0:05:01.240 It's largely concentrated in West Texas, and that's where the 0:05:01.320 --> 0:05:04.360 rigs are coming back. But we didn't expect to see 0:05:04.360 --> 0:05:07.880 a lot of activity in the outside of the Permian, 0:05:07.920 --> 0:05:10.039 whether it be in the US or in the other 0:05:10.080 --> 0:05:12.880 parts of the non OPAQ world, because you know, we 0:05:12.960 --> 0:05:15.880 just didn't hit a threshold that told them to trigger. Actually, 0:05:16.120 --> 0:05:18.200 something I wanted to ask you about when I knew 0:05:18.240 --> 0:05:19.839 you were coming on today, and that is the non 0:05:19.880 --> 0:05:22.200 OPEC world. We haven't paid a whole lot of attention 0:05:22.240 --> 0:05:24.240 to what's been going on in Russia lately. The ruble 0:05:24.320 --> 0:05:28.920 this morning at sixty uh, it's moved into the sixties 0:05:29.080 --> 0:05:32.560 and sort of stabilized there. What's their production like and 0:05:32.560 --> 0:05:36.240 are they making any money on oil right now? Well, 0:05:36.279 --> 0:05:39.240 they're probably you know that they're probably making money on 0:05:39.279 --> 0:05:42.720 oil because the cost basis last year resets so so 0:05:42.800 --> 0:05:46.480 dramatically UH in Russia and it and what it did 0:05:46.520 --> 0:05:48.479 is is it was one of the few places where 0:05:48.520 --> 0:05:51.920 the cost basis actually fell faster than oil prices fell. 0:05:51.960 --> 0:05:53.920 And that's why we saw so much activity in their 0:05:53.960 --> 0:05:57.599 Their production is held up so far. The question is, 0:05:57.760 --> 0:06:00.160 you know, can they can they lock those costs in 0:06:00.800 --> 0:06:03.039 when outside of the outside of the US and outside 0:06:03.040 --> 0:06:04.880 of the rest of the rest of Russia, you know, 0:06:05.040 --> 0:06:07.400 you're seeing the climbs in the rest of the world. 0:06:07.440 --> 0:06:10.240 You know, we're off about a million barrels a day 0:06:10.240 --> 0:06:12.440 in the U S we're off about five thousand barrels 0:06:12.440 --> 0:06:14.119 a day, and the rest of the non OPAQ world. 0:06:14.520 --> 0:06:16.800 And then we get these unplanned outages that show up 0:06:16.839 --> 0:06:20.120 in in places like wildfires in Canada which have largely 0:06:20.160 --> 0:06:23.440 recovered UH. And then Nigeria is off four hundred thousand 0:06:23.440 --> 0:06:26.080 barrels a day. So there's oil coming out out of 0:06:26.120 --> 0:06:28.760 the supply side. Some of it is being driven by 0:06:28.800 --> 0:06:32.760 economic subfit's being driven by above ground issues like political 0:06:32.760 --> 0:06:36.279 turmoil in Nigeria. But you know, the non opaque world 0:06:36.440 --> 0:06:40.040 is contracting, uh, and that's what's driving this market. And 0:06:40.400 --> 0:06:43.080 it's a slow process, but that's what's driving this market 0:06:43.360 --> 0:06:46.680 into balance. Do you have a calculated terminal value at 0:06:46.760 --> 0:06:49.720 five years? It's part of what you guys do. Yeah, 0:06:49.760 --> 0:06:51.839 so if we're out five years, we think we're in. 0:06:52.000 --> 0:06:54.279 You know the low also called the low eighties eight 0:06:54.360 --> 0:06:59.480 to eighty five coffee. There be careful skip climbing. This 0:06:59.520 --> 0:07:03.560 is for the week well and eighty dollars well because 0:07:03.600 --> 0:07:06.760 when you know that there just isn't enough sixty dollar 0:07:06.839 --> 0:07:09.760 oil to work. When you think about between now and 0:07:11.080 --> 0:07:13.840 global supply needs to replace nine and a half million 0:07:13.840 --> 0:07:16.120 barrels a day of supply, and that there just isn't 0:07:16.200 --> 0:07:17.720 nine and a half million barrels a day of new 0:07:17.760 --> 0:07:21.360 supply at sixty dollars. We're gonna get an education right 0:07:21.400 --> 0:07:25.240 now from Skip York of Wyoming in Virginia. Dr York, 0:07:25.320 --> 0:07:30.320 I want to talk to you about downstream Baytown Refinery 0:07:30.960 --> 0:07:35.760 nineteen nineteen exonmobile capacity five or eighty four thousand dollars 0:07:36.120 --> 0:07:39.200 barrels a day. I would assume ninety nine point nine 0:07:39.200 --> 0:07:41.840 percent of the surveillance audience would know a refinery if 0:07:41.840 --> 0:07:45.280 they drove by it. First of all, is it a rusted, 0:07:45.760 --> 0:07:49.960 rusted halk because it was built in nineteen nineteen, or 0:07:50.000 --> 0:07:52.440 is it like state of the art modern It would 0:07:52.480 --> 0:07:54.680 be a state of the art facility in particular, if 0:07:54.680 --> 0:07:56.360 you you know, the thing to remember is that if 0:07:56.360 --> 0:08:00.000 a refinery was built in nineteen it's probably been rebuilt 0:08:00.160 --> 0:08:03.640 three or four times in a hundred years. And so 0:08:03.760 --> 0:08:06.320 if you went down into along the Houston Ship Channel, 0:08:06.720 --> 0:08:08.800 you know, you're around a lot of refineries that have 0:08:08.840 --> 0:08:11.120 been around a hundred years. But you wouldn't know it 0:08:11.160 --> 0:08:14.280 by looking at them. They'd be shiny steel. Uh you know, 0:08:14.320 --> 0:08:16.280 you wouldn't see a lot of rust around them because 0:08:16.400 --> 0:08:20.800 you know, rust is corrosion. Corrosion can create uh, you know, leakages, 0:08:20.960 --> 0:08:23.360 and that's just something that you know that's not healthy 0:08:23.360 --> 0:08:25.280 for an oil refinery. And so you see that they're 0:08:25.360 --> 0:08:29.120 actually fairly welcomed. I don't do this to be snarky, 0:08:29.160 --> 0:08:32.000 but with immense respect, particularly when I think of our 0:08:32.040 --> 0:08:35.000 images of refineries in Eastern Europe and Russia and all 0:08:35.040 --> 0:08:39.120 that are these polluters well, certainly there there there is 0:08:39.120 --> 0:08:43.000 an an emissions profile to them. There's just no escaping it. 0:08:43.080 --> 0:08:47.400 When you're converting hydrocarbons, you're going to release smaller hydrocarbons 0:08:47.440 --> 0:08:50.679 and carbon and those things go into the atmosphere. I 0:08:50.720 --> 0:08:53.360 think that the important thing to remember is how much 0:08:53.480 --> 0:08:57.840 cleaner they are now than say, fift years ago. Uh 0:08:58.000 --> 0:09:00.520 so that they've there isn't emissions pro file, but it's 0:09:00.520 --> 0:09:03.920 a much smaller profile than it has been historically, and 0:09:03.960 --> 0:09:07.360 it continues that profile continues to shrink. If you don't 0:09:07.360 --> 0:09:11.720 mean to catch on, help us with three emotions. Los Angeles. 0:09:11.760 --> 0:09:13.680 I couldn't see the mountains when I was a kid, 0:09:13.760 --> 0:09:18.440 Now I can. I guess that's autos, trucks, you have refineries, 0:09:19.040 --> 0:09:21.880 and you've got the dawning awareness that everybody's flying around 0:09:21.920 --> 0:09:25.720 in jet aircraft, which I believe are polluting. Which is 0:09:25.720 --> 0:09:30.400 the biggest defender without pinning it down, which is the 0:09:30.480 --> 0:09:34.360 which is the one you think about is being the 0:09:34.440 --> 0:09:38.360 bad guy or a none of them because they're relatively better. 0:09:38.520 --> 0:09:41.640 They're all relatively better, but sort of which one you know? 0:09:41.720 --> 0:09:45.160 Probably if you think about autos in particular in California, 0:09:45.200 --> 0:09:49.760 the California autos, they're they're probably the biggest improvement. Refineries 0:09:49.800 --> 0:09:51.640 are probably number two. And I would sort of say that, 0:09:51.640 --> 0:09:55.679 you know that the jet fuel is probably the less improvement. 0:09:55.679 --> 0:09:58.560 But we're making now, we're making efforts in jet fuel 0:09:58.640 --> 0:10:01.920 that we were making an years ago. What does big 0:10:01.960 --> 0:10:04.800 oil want? Obviously they want to make more money and 0:10:04.960 --> 0:10:08.200 more return on invested capital. I get that, But do 0:10:08.280 --> 0:10:11.800 they want to do it within a green upstream to 0:10:12.000 --> 0:10:15.840 downstream profile or is it just sort of a pr 0:10:15.920 --> 0:10:18.440 stunt off? You know, you guys take care of that. Well, 0:10:18.480 --> 0:10:21.120 we go make the marginal barrel. Now, I think if 0:10:21.160 --> 0:10:23.480 you ask the refine you know, if you ask refiners, 0:10:23.480 --> 0:10:25.840 are you asked the integrated oil companies? What do they want? 0:10:25.920 --> 0:10:30.520 They want regulatory certainty, and they want let's regulate the end. 0:10:31.200 --> 0:10:34.560 Let's regulate the tailpipe, not regulate the process. So tell 0:10:34.600 --> 0:10:37.640 me what it is you want. Let me figure out 0:10:37.640 --> 0:10:40.320 what's the most cost effective way because because of the 0:10:40.360 --> 0:10:42.960 margin environment, let me figure out the most cost effective 0:10:42.960 --> 0:10:46.200 way to get that emission reduction that you're looking for. 0:10:46.440 --> 0:10:48.160 And part of it is, and this is a word 0:10:48.160 --> 0:10:52.840 from Secretary Clinton. Fair play Hillary Clinton years ago, folks, 0:10:52.920 --> 0:10:55.840 is I'm gonna say a senator, I can't remember when 0:10:56.240 --> 0:11:00.960 talked about fair trade. Are the refineries eight to state? 0:11:01.160 --> 0:11:04.520 And then looking at Canada, Mexico and Europe, are we 0:11:04.679 --> 0:11:06.920 fair or are we trying to be too strict with 0:11:06.960 --> 0:11:10.559 ours where they can't compete? Well, I think, um, what 0:11:10.600 --> 0:11:13.120 we're discovering is that are you know our refineries, Our 0:11:13.160 --> 0:11:16.960 refineries can compete even with a more stringent regulatory environment 0:11:17.000 --> 0:11:18.439 that we see in other parts of the world because 0:11:18.440 --> 0:11:22.320 the cost basis a different. In particular, natural gas is 0:11:22.559 --> 0:11:25.600 a huge advantage. It's worth probably four dollars a barrel 0:11:25.640 --> 0:11:27.800 to the US refinery. But when you look at the 0:11:27.800 --> 0:11:31.120 regulatory structure around the world, it's it's a checkerboard. I mean, 0:11:31.360 --> 0:11:35.720 the new refineries tend to be much more in emissions 0:11:35.760 --> 0:11:38.240 efficient just because their state of the art refineries, but 0:11:38.320 --> 0:11:41.280 not every refinery has the second, when you see a 0:11:41.320 --> 0:11:44.880 research note saying we're switching from summer fuel to winter fuel, 0:11:45.440 --> 0:11:48.800 is that noise in the forty a barrel debate or 0:11:48.840 --> 0:11:52.000 is it actually something that can move price and move 0:11:52.040 --> 0:11:54.240 the rate of change of price? It should be it 0:11:54.240 --> 0:11:56.679 should be noise in terms of crude oil prices. It 0:11:56.720 --> 0:11:59.080 should it should be in the noise because we we 0:11:59.200 --> 0:12:03.120 make that summer to winter shift every year. So and 0:12:03.120 --> 0:12:05.560 and it's and it's a blending issue. It's not that 0:12:05.559 --> 0:12:07.880 we're going to refine a different crude. We're gonna it's 0:12:07.920 --> 0:12:10.439 not we're refining less crude. It's that we're going to 0:12:10.559 --> 0:12:14.680 blend the gasoline differently, using different blending components in the winter, 0:12:14.720 --> 0:12:16.560 that we're doing the fault than we do in the summer. 0:12:16.600 --> 0:12:19.240 But it's still do But Mike, this is a huge issue. 0:12:19.360 --> 0:12:23.320 I'm having more and more trouble finding decent gas for 0:12:23.320 --> 0:12:27.520 the Nash Rambler. I mean, I'm sorry, the blends are 0:12:27.559 --> 0:12:34.000 like his cast his car runs unleaded gas. Yeah, serious problem. 0:12:34.040 --> 0:12:41.800 It's not funny you go over to skip yard is 0:12:41.840 --> 0:12:58.680 always great. Mentioned earlier the idea that the equity markets 0:12:58.679 --> 0:13:02.000 in the bond markets are sort of seeing the possibility 0:13:02.040 --> 0:13:05.280 of the FED different ways, although I don't want to 0:13:05.280 --> 0:13:07.800 make too much of it because the moves aren't that big. 0:13:07.840 --> 0:13:12.000 But Ira Jersey is uh senior portfolio manager at Oppenheimer Funds, 0:13:12.160 --> 0:13:14.920 and he has to follow both sides of the argument, 0:13:15.120 --> 0:13:17.520 and he joins us now here in the studio era, 0:13:18.559 --> 0:13:21.240 the equity markets seem to be thinking the GDP report 0:13:21.280 --> 0:13:24.720 bad news is good news. The Fed won't tighten, and 0:13:24.760 --> 0:13:29.560 therefore we can continue to buy stocks, whereas in the 0:13:29.600 --> 0:13:33.560 bond market they're sort of a little unsure about what's 0:13:33.559 --> 0:13:37.000 going on now with Bill Dudley and Robert Kaplan out saying, hey, 0:13:37.000 --> 0:13:40.360 don't rule out September. Yeah, I think I think there's 0:13:40.360 --> 0:13:42.920 always some confusion when you get FED speak and you 0:13:42.960 --> 0:13:46.120 have presidents like especially big names like Bill Dudley, who 0:13:46.160 --> 0:13:49.880 are considered one of the three kind of primary um 0:13:50.160 --> 0:13:53.120 primary members of the Federal Open Market Committee that helps 0:13:53.120 --> 0:13:57.040 set policy, and and people follow them closely. So when 0:13:57.040 --> 0:13:59.679 he says, hey, September is alive meeting, you can't completely 0:13:59.679 --> 0:14:01.600 disc out that. I think what they're trying to do here, Mike, 0:14:01.600 --> 0:14:04.560 because bring back some optionality. I mean they basically the 0:14:04.600 --> 0:14:08.760 markets have completely discounted all of their talk. They've discounted UM, 0:14:08.800 --> 0:14:12.280 the dot plot, and all of the statements that they've 0:14:12.320 --> 0:14:15.280 made at at the June meeting and even the July meeting. 0:14:15.640 --> 0:14:18.400 So they were in a real quandary because they want 0:14:18.440 --> 0:14:21.760 to be able to hike and then prep the market 0:14:22.000 --> 0:14:23.760 for them to be able to hike. But they have 0:14:23.840 --> 0:14:26.240 a real problem doing it. And some of this Fed 0:14:26.320 --> 0:14:28.720 speak is the way that they attempt that when your 0:14:28.760 --> 0:14:31.680 traders come to you and say, what's the FED gonna do? 0:14:32.160 --> 0:14:34.480 What are you telling? So? I I think that the 0:14:34.520 --> 0:14:37.000 Fed probably well, I think the Fed's not gonna hike 0:14:37.040 --> 0:14:39.920 in September. Um. I think that's pretty clear. The market's 0:14:39.960 --> 0:14:43.040 not prepped for it. Yes, you get too employment numbers 0:14:43.080 --> 0:14:46.720 before them, but um, but generally speaking, you're not going 0:14:46.760 --> 0:14:49.800 to have enough confidence in order to uh in order 0:14:49.840 --> 0:14:52.560 to hike again. UH. And but by then I think 0:14:52.560 --> 0:14:55.680 December is a distinct possibility. Um. You continue with the 0:14:55.720 --> 0:14:58.680 trends that we've had in the US, and you wind 0:14:58.760 --> 0:15:02.600 up with um, with it becoming clear that that Brexit's 0:15:02.640 --> 0:15:05.280 not going to affect Europe in in such a significantly 0:15:05.840 --> 0:15:08.640 detrimental way that they will actually be able to hike. UM. 0:15:08.680 --> 0:15:10.560 You know, one of the things about Europe in particular 0:15:10.640 --> 0:15:12.720 is that they've always surprised to the upside over the 0:15:12.800 --> 0:15:16.560 last three years. UM, that that growth there has has 0:15:16.560 --> 0:15:18.560 picked up. It might slow a tenth or two, but 0:15:18.640 --> 0:15:20.240 a tenth or two is not going to be enough 0:15:20.280 --> 0:15:22.920 for for the Fed to say, Hey, things really bad, 0:15:23.040 --> 0:15:30.040 let's uh, let's remain unhold forever. Well, the September meeting approaches. UM, 0:15:30.280 --> 0:15:33.680 could the market start to price something in if we 0:15:33.720 --> 0:15:36.640 get better numbers that then gives them the optionality or 0:15:36.720 --> 0:15:40.160 is it just uh too far off the radar. I 0:15:40.200 --> 0:15:43.040 think it's probably too far off. You probably won't. I 0:15:43.360 --> 0:15:45.720 don't think that you'll price in more than more than 0:15:45.760 --> 0:15:48.120 a fifty percent chance, which is you know that that 0:15:48.160 --> 0:15:51.040 doesn't mean that they can't hike. Certainly, the Federal Up 0:15:51.040 --> 0:15:52.920 and Market Committee controls interest rates, so they can do 0:15:52.960 --> 0:15:56.280 what they'd like to do. But the market, I don't think, well, 0:15:56.640 --> 0:15:59.640 well should they mean? Are they getting pushed around by 0:15:59.640 --> 0:16:01.160 the market. It's in a in a way that is 0:16:01.200 --> 0:16:04.120 not good for monetary policy making. So this is always 0:16:04.120 --> 0:16:06.360 the conndrum when you sit in my seat on a 0:16:06.400 --> 0:16:08.720 you know, by side shop as a fixed income strategist, 0:16:08.960 --> 0:16:11.640 is you know, is it my job to opine on 0:16:12.160 --> 0:16:13.920 what the Fed should do or what the Fed will do? 0:16:14.000 --> 0:16:15.800 And what the Fed will do is more important to 0:16:15.880 --> 0:16:18.440 us because that's the way that we wind up positioning 0:16:18.440 --> 0:16:23.240 our portfolio for UM, for for any central bank movements, 0:16:23.520 --> 0:16:26.200 I think that they probably shouldn't. UM. You know, when 0:16:26.280 --> 0:16:29.760 you when you talk to our Chief Investment Officer, Christian Mamani, 0:16:29.800 --> 0:16:32.280 and we look at, um, you know, everything going on 0:16:32.320 --> 0:16:34.320 in the world and some of the fragilities in the 0:16:34.320 --> 0:16:37.720 global financial world. Still the FED needs to go very 0:16:37.720 --> 0:16:40.960 slowly and very cautiously because you know they are concerned. 0:16:40.960 --> 0:16:44.440 When you talk to some FED officials and you ask them, hey, 0:16:44.480 --> 0:16:48.040 what is your biggest concern, it's financial tightening. Um, well, 0:16:48.440 --> 0:16:50.880 they won't be tightening financial policy if that's your big concern. 0:16:51.040 --> 0:16:55.880 It's math. August, let's get started the school year. Yeah, yeah, 0:16:55.920 --> 0:16:58.120 fe it starts every day? Is the school year? At 0:16:58.120 --> 0:17:02.560 the key household? F the equals PV one plus R 0:17:02.920 --> 0:17:07.639 to the T. What if there's no t iro Jersey 0:17:07.680 --> 0:17:13.719 on perpetual bonds? The math of this is is not sobering, 0:17:13.800 --> 0:17:18.160 but is something to be respected. How do you respond 0:17:18.240 --> 0:17:22.880 when your responsible people say what we need is perpetual bonds. Well, 0:17:23.560 --> 0:17:25.560 you know, the the question is if we do have 0:17:25.600 --> 0:17:28.560 perpetual bonds, will they have other features like call features 0:17:28.600 --> 0:17:30.960 and the like. You know, one of the things that 0:17:31.720 --> 0:17:33.600 if you go back in the forever history I'm going 0:17:33.680 --> 0:17:35.600 a nerd out here a little bit, but if you 0:17:35.640 --> 0:17:39.320 go back to the six seventeen hundreds and early eighteen hundreds, 0:17:39.640 --> 0:17:42.320 you didn't have maturities on bonds um. You know, bonds 0:17:42.320 --> 0:17:44.720 were issued by governments and they were perpetuals, and they 0:17:44.760 --> 0:17:47.719 all had call features, so so the governments could recall 0:17:47.800 --> 0:17:51.120 them at at any at any point, and of course 0:17:51.160 --> 0:17:53.400 they did that when interest rates became lower and they 0:17:53.400 --> 0:17:56.080 became better credit quality, so then they would call them, 0:17:56.320 --> 0:17:57.520 you know, when we do have a lot of them 0:17:57.520 --> 0:18:00.920 outstanding today. In fact, a lot of bank capital notes 0:18:01.119 --> 0:18:04.880 UM have to be issued with very either extremely long 0:18:04.960 --> 0:18:08.119 maturities or as perpetuals. So they you know, these types 0:18:08.160 --> 0:18:11.120 of securities still exist. They all have call features. Whether 0:18:11.160 --> 0:18:13.240 they can be called every five years or every ten years, 0:18:13.560 --> 0:18:15.919 they can still be called. But but they still do exist, 0:18:16.000 --> 0:18:18.120 and you know they do they have more risk than 0:18:18.160 --> 0:18:20.399 say a thirty year or fifty year bond. You know, 0:18:20.440 --> 0:18:23.919 the bond math says no, UM in reality, you know, 0:18:23.960 --> 0:18:26.760 they could be outstanding for a very long period of time, 0:18:27.040 --> 0:18:28.679 but as long as they keep on paying their coupon, 0:18:28.800 --> 0:18:31.480 then the investors should be should be okay with that, 0:18:31.600 --> 0:18:35.280 But but they do provide a certain amount of special risk. 0:18:35.840 --> 0:18:39.240 What do you see happening as far as yields going 0:18:40.119 --> 0:18:42.760 through the rest of the year, shall we say, well, 0:18:42.800 --> 0:18:44.439 I think I think long term yields, you know, ten 0:18:44.520 --> 0:18:46.720 year yields, thirty year yields in the US will wind 0:18:46.800 --> 0:18:50.359 up being relatively range bound. UM. There's the possibility that 0:18:50.400 --> 0:18:53.440 they could even move lower. UM. I think there's two 0:18:53.840 --> 0:18:56.280 two ways that they can move lower. One is that 0:18:56.320 --> 0:19:00.879 you wind up with slowing economic environment and UM people 0:19:01.760 --> 0:19:04.800 other central banks wind up cutting interest rates further. Uh. 0:19:04.840 --> 0:19:07.359 You can see that potentially in Europe and and in 0:19:07.480 --> 0:19:10.680 some of the emerging markets. UM. If that were to happen, 0:19:10.760 --> 0:19:14.199 the US being again the high yielder visa VI, some 0:19:14.280 --> 0:19:17.440 of these other jurisdictions ends up being a beneficiary of that. 0:19:17.520 --> 0:19:20.480 So ten year yields can move lower. UM. The second way, 0:19:20.520 --> 0:19:23.320 which is I think less likely, uh if if for 0:19:23.400 --> 0:19:26.560 yields to move move lower in the long end, would 0:19:26.560 --> 0:19:28.600 be if the Federal reserve war to hike in September 0:19:28.640 --> 0:19:30.920 and then potentially in December. So you wind up with 0:19:31.280 --> 0:19:33.679 a lot of calls that the Feds making a policy mistake. 0:19:33.760 --> 0:19:37.119 They're going to be UM more calls that that this 0:19:37.160 --> 0:19:40.840 will be deflationary or disinflationary, and you wind up with 0:19:41.160 --> 0:19:43.600 a much flatter yield curve, so two year front end 0:19:43.680 --> 0:19:46.680 yields go moving higher while long end yields like tens 0:19:46.680 --> 0:19:49.320 and thirties wind up moving lower UM just because of 0:19:49.359 --> 0:19:52.600 the UH, you know, the outlook that that the Feds 0:19:52.680 --> 0:19:55.800 making a mistake UM. Ultimately, though, I think that that 0:19:55.880 --> 0:19:58.639 ten ure yields probably your range bound between you know, 0:19:58.720 --> 0:20:01.879 call at the one forty up to up to maybe 0:20:01.880 --> 0:20:05.280 one sixty one seventy UM for for the remainder of 0:20:05.280 --> 0:20:07.359 the year. What do you think the Fed needs to 0:20:07.440 --> 0:20:10.800 see from the markets before they feel comfortable. I don't 0:20:10.800 --> 0:20:12.640 know if it's so much the markets. I think they 0:20:12.640 --> 0:20:15.320 have to be extremely comfortable, and it has to they 0:20:15.359 --> 0:20:18.199 have to have clear and convincing evidence from UM, from 0:20:18.240 --> 0:20:21.199 the economy, from from the data side in order to 0:20:21.480 --> 0:20:23.560 for for the markets to be convinced that the Federal 0:20:23.560 --> 0:20:25.360 Reserve is able to hike. And it's not only data 0:20:25.440 --> 0:20:28.359 here in the US, but it is UH data globally 0:20:28.400 --> 0:20:31.119 that really matters. I think the removal one thing that 0:20:31.160 --> 0:20:33.600 I found really interesting in the statement last week from 0:20:33.600 --> 0:20:37.400 the from the Federal Market Committee statement was the removal 0:20:37.440 --> 0:20:40.520 of this you know, the their fear about what was 0:20:40.560 --> 0:20:43.720 going on in the global global economy. UM. I think 0:20:43.720 --> 0:20:45.560 that there was a big fear that you know, breggsit 0:20:45.640 --> 0:20:48.200 would wind up being very detrimental to both markets and 0:20:48.440 --> 0:20:52.240 the real economy in Europe. UM. And the expectations are that, yes, 0:20:52.280 --> 0:20:54.640 it's gonna maybe lead to a slight slowdown, but it's 0:20:54.680 --> 0:20:58.119 not really uh, it's not really the worst case scenario 0:20:58.240 --> 0:21:00.480 is not likely to play out. We're are you on 0:21:00.600 --> 0:21:04.639 the adjustment of our GDP quietly. The shock last week 0:21:04.840 --> 0:21:09.000 was the Atlanta derby went under two percent and a 0:21:09.160 --> 0:21:12.680 day later that's what we saw. That was a big surprise. 0:21:13.280 --> 0:21:15.719 It was I mean, particularly on the investment side and 0:21:15.800 --> 0:21:18.080 on the inventory side, so that that was really the 0:21:18.080 --> 0:21:20.560 weak part of the economy. You wound up and you know, 0:21:20.600 --> 0:21:23.400 you wind up looking at things like personal consumption, which 0:21:23.400 --> 0:21:26.199