Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Always with Michael McKee. Daily we bring you insight from
Speaker 1: the best in economics, finance, investment, and international relations. Find
Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of
Speaker 1: course on the Bloomberg. So the trend remains in place
Speaker 1: for oil to continue falling, does it go much farther?
Speaker 1: What's the what's the next support level? And cannot break
Speaker 1: through it? With Mackenzie's let skip your kids with us
Speaker 1: and skip People are saying forty dollars that because it's
Speaker 1: a round number, or or is there some significance to
Speaker 1: forty as as the next resistance point. Well, I think
Speaker 1: it's helpful that that forty is a round number. But
Speaker 1: when we look at our wellhead economic so we see
Speaker 1: there just isn't a lot of oil that works sub forty.
Speaker 1: So forty is a good number to hang to because
Speaker 1: now that non OPEQ is in decline and demand continues
Speaker 1: to grow, at some point we're gonna need new supply
Speaker 1: to come into the market to keep it balanced out.
Speaker 1: If your cheapest oil UH in the non OPAQ world
Speaker 1: is in the forty dollar range. Then that's probably a
Speaker 1: fairly good Florida to hang your hat on. Well, Mike
Speaker 1: can I interrupt? Well, had Economics was a great band.
Speaker 1: I saw them open for sleep at the wheel. They
Speaker 1: were great. Um, we have had reports lately the oil
Speaker 1: more oil is starting to come to market and uh,
Speaker 1: the drig jill rigg count is up. And our friend
Speaker 1: Alex Steele, who is our oil commodities nerds, as you know,
Speaker 1: the fractors are coming back. Now, well, well we're starting
Speaker 1: to see is how we're starting to see some rigs
Speaker 1: creeping back in. Uh, We're starting to see oil kind
Speaker 1: of starting to slow. The declines are slowing down. So
Speaker 1: what the first well those rigs that are coming into
Speaker 1: the field will do is they won't return the US
Speaker 1: supply back to a growth mode, but it will start
Speaker 1: slowing down the rate of decline. And we're starting to
Speaker 1: see that activity is starting to come in. When we
Speaker 1: talk to those small producers, the ones that are procuring
Speaker 1: the rigs, their concern is they can get two or
Speaker 1: three rigs today, They might be able to get two
Speaker 1: or three rigs tomorrow, but could they get a hundred rigs?
Speaker 1: And just in terms of you know, is the equipment
Speaker 1: still there? Uh and in working condition? And the second
Speaker 1: one is how am I going to hire people? I
Speaker 1: think what's important for people to remember is that when
Speaker 1: we went through the last the tight oil surge in
Speaker 1: two thousand nine and two thousand ten, when that started,
Speaker 1: unemployment was at nine and a half percent. Today unemployment's
Speaker 1: four point nine. So it's gonna be a much tighter
Speaker 1: labor market in general. And uh, you know, anecdotally, a
Speaker 1: lot of those guys that were released over the last
Speaker 1: eighteen months have wandered off and found other jobles. Is
Speaker 1: it true? Do you buy the idea we hear from
Speaker 1: some that the income statement mix of a given oil
Speaker 1: company is okay because yes, prices down, but the expense
Speaker 1: of doing business is down as well. Is that true? Well,
Speaker 1: it is true, but you know, prices have fallen more
Speaker 1: than their than the cost basis have fallen down, so,
Speaker 1: you know, and you see, you see earnings under a
Speaker 1: lot of pressure. You saw that last week with you know,
Speaker 1: with VP Chevron, And so when you see those announcements,
Speaker 1: are they one offs or is there a chronic nature
Speaker 1: to the carnage we saw? Yeah, I'm gonna I'm gonna
Speaker 1: be a true economist and say it's both. On the
Speaker 1: one handed, it's the one off because we know the
Speaker 1: prices were low. We knew that we earnings ought to
Speaker 1: be weak. What you need to be watching is do
Speaker 1: they have a strategy. You know, oil companies should not
Speaker 1: be managing their their income statements on a quarter by
Speaker 1: quarter basis. So do you have belief that, yes, the
Speaker 1: second quarter was bad, but I believe that you've got
Speaker 1: plans in place it's going to either stem the decline
Speaker 1: in the third or fourth quarter or actually then eventually
Speaker 1: turn things around. What is the time frame for eventually
Speaker 1: turning things around? I think you're looking you know, from
Speaker 1: a corporate perspective. You know, you're probably looking into seventeen
Speaker 1: at this point. You know, a lot of sixteen is
Speaker 1: pretty much locked in, uh, from an activity basis, even
Speaker 1: if oil prices rise. We've sort of seen that is
Speaker 1: that as oil prices doubled from February, we didn't see
Speaker 1: a lot of activity on the physical side. We saw
Speaker 1: you know, riggs didn't really recover until mayor So is
Speaker 1: this is important? What Mike brought up is a pro
Speaker 1: we went twenty nine worlds coming to an end to
Speaker 1: great everybody was saying we'd have a workout in the
Speaker 1: second half of two thousand and sixteen. I just heard
Speaker 1: you say, that's not gonna happen. Are you surprised that
Speaker 1: didn't happen. Well, what we're surprised is we're not really
Speaker 1: surprised with it with a lack of activity because you know,
Speaker 1: a lot of the oil outside of the US, and
Speaker 1: you know, the forty or oil, the oil that works
Speaker 1: in the forties is largely concentrated in the non OPEC world.
Speaker 1: It's largely concentrated in West Texas, and that's where the
Speaker 1: rigs are coming back. But we didn't expect to see
Speaker 1: a lot of activity in the outside of the Permian,
Speaker 1: whether it be in the US or in the other
Speaker 1: parts of the non OPAQ world, because you know, we
Speaker 1: just didn't hit a threshold that told them to trigger. Actually,
Speaker 1: something I wanted to ask you about when I knew
Speaker 1: you were coming on today, and that is the non
Speaker 1: OPEC world. We haven't paid a whole lot of attention
Speaker 1: to what's been going on in Russia lately. The ruble
Speaker 1: this morning at sixty uh, it's moved into the sixties
Speaker 1: and sort of stabilized there. What's their production like and
Speaker 1: are they making any money on oil right now? Well,
Speaker 1: they're probably you know that they're probably making money on
Speaker 1: oil because the cost basis last year resets so so
Speaker 1: dramatically UH in Russia and it and what it did
Speaker 1: is is it was one of the few places where
Speaker 1: the cost basis actually fell faster than oil prices fell.
Speaker 1: And that's why we saw so much activity in their
Speaker 1: Their production is held up so far. The question is,
Speaker 1: you know, can they can they lock those costs in
Speaker 1: when outside of the outside of the US and outside
Speaker 1: of the rest of the rest of Russia, you know,
Speaker 1: you're seeing the climbs in the rest of the world.
Speaker 1: You know, we're off about a million barrels a day
Speaker 1: in the U S we're off about five thousand barrels
Speaker 1: a day, and the rest of the non OPAQ world.
Speaker 1: And then we get these unplanned outages that show up
Speaker 1: in in places like wildfires in Canada which have largely
Speaker 1: recovered UH. And then Nigeria is off four hundred thousand
Speaker 1: barrels a day. So there's oil coming out out of
Speaker 1: the supply side. Some of it is being driven by
Speaker 1: economic subfit's being driven by above ground issues like political
Speaker 1: turmoil in Nigeria. But you know, the non opaque world
Speaker 1: is contracting, uh, and that's what's driving this market. And
Speaker 1: it's a slow process, but that's what's driving this market
Speaker 1: into balance. Do you have a calculated terminal value at
Speaker 1: five years? It's part of what you guys do. Yeah,
Speaker 1: so if we're out five years, we think we're in.
Speaker 1: You know the low also called the low eighties eight
Speaker 1: to eighty five coffee. There be careful skip climbing. This
Speaker 1: is for the week well and eighty dollars well because
Speaker 1: when you know that there just isn't enough sixty dollar
Speaker 1: oil to work. When you think about between now and
Speaker 1: global supply needs to replace nine and a half million
Speaker 1: barrels a day of supply, and that there just isn't
Speaker 1: nine and a half million barrels a day of new
Speaker 1: supply at sixty dollars. We're gonna get an education right
Speaker 1: now from Skip York of Wyoming in Virginia. Dr York,
Speaker 1: I want to talk to you about downstream Baytown Refinery
Speaker 1: nineteen nineteen exonmobile capacity five or eighty four thousand dollars
Speaker 1: barrels a day. I would assume ninety nine point nine
Speaker 1: percent of the surveillance audience would know a refinery if
Speaker 1: they drove by it. First of all, is it a rusted,
Speaker 1: rusted halk because it was built in nineteen nineteen, or
Speaker 1: is it like state of the art modern It would
Speaker 1: be a state of the art facility in particular, if
Speaker 1: you you know, the thing to remember is that if
Speaker 1: a refinery was built in nineteen it's probably been rebuilt
Speaker 1: three or four times in a hundred years. And so
Speaker 1: if you went down into along the Houston Ship Channel,
Speaker 1: you know, you're around a lot of refineries that have
Speaker 1: been around a hundred years. But you wouldn't know it
Speaker 1: by looking at them. They'd be shiny steel. Uh you know,
Speaker 1: you wouldn't see a lot of rust around them because
Speaker 1: you know, rust is corrosion. Corrosion can create uh, you know, leakages,
Speaker 1: and that's just something that you know that's not healthy
Speaker 1: for an oil refinery. And so you see that they're
Speaker 1: actually fairly welcomed. I don't do this to be snarky,
Speaker 1: but with immense respect, particularly when I think of our
Speaker 1: images of refineries in Eastern Europe and Russia and all
Speaker 1: that are these polluters well, certainly there there there is
Speaker 1: an an emissions profile to them. There's just no escaping it.
Speaker 1: When you're converting hydrocarbons, you're going to release smaller hydrocarbons
Speaker 1: and carbon and those things go into the atmosphere. I
Speaker 1: think that the important thing to remember is how much
Speaker 1: cleaner they are now than say, fift years ago. Uh
Speaker 1: so that they've there isn't emissions pro file, but it's
Speaker 1: a much smaller profile than it has been historically, and
Speaker 1: it continues that profile continues to shrink. If you don't
Speaker 1: mean to catch on, help us with three emotions. Los Angeles.
Speaker 1: I couldn't see the mountains when I was a kid,
Speaker 1: Now I can. I guess that's autos, trucks, you have refineries,
Speaker 1: and you've got the dawning awareness that everybody's flying around
Speaker 1: in jet aircraft, which I believe are polluting. Which is
Speaker 1: the biggest defender without pinning it down, which is the
Speaker 1: which is the one you think about is being the
Speaker 1: bad guy or a none of them because they're relatively better.
Speaker 1: They're all relatively better, but sort of which one you know?
Speaker 1: Probably if you think about autos in particular in California,
Speaker 1: the California autos, they're they're probably the biggest improvement. Refineries
Speaker 1: are probably number two. And I would sort of say that,
Speaker 1: you know that the jet fuel is probably the less improvement.
Speaker 1: But we're making now, we're making efforts in jet fuel
Speaker 1: that we were making an years ago. What does big
Speaker 1: oil want? Obviously they want to make more money and
Speaker 1: more return on invested capital. I get that, But do
Speaker 1: they want to do it within a green upstream to
Speaker 1: downstream profile or is it just sort of a pr
Speaker 1: stunt off? You know, you guys take care of that. Well,
Speaker 1: we go make the marginal barrel. Now, I think if
Speaker 1: you ask the refine you know, if you ask refiners,
Speaker 1: are you asked the integrated oil companies? What do they want?
Speaker 1: They want regulatory certainty, and they want let's regulate the end.
Speaker 1: Let's regulate the tailpipe, not regulate the process. So tell
Speaker 1: me what it is you want. Let me figure out
Speaker 1: what's the most cost effective way because because of the
Speaker 1: margin environment, let me figure out the most cost effective
Speaker 1: way to get that emission reduction that you're looking for.
Speaker 1: And part of it is, and this is a word
Speaker 1: from Secretary Clinton. Fair play Hillary Clinton years ago, folks,
Speaker 1: is I'm gonna say a senator, I can't remember when
Speaker 1: talked about fair trade. Are the refineries eight to state?
Speaker 1: And then looking at Canada, Mexico and Europe, are we
Speaker 1: fair or are we trying to be too strict with
Speaker 1: ours where they can't compete? Well, I think, um, what
Speaker 1: we're discovering is that are you know our refineries, Our
Speaker 1: refineries can compete even with a more stringent regulatory environment
Speaker 1: that we see in other parts of the world because
Speaker 1: the cost basis a different. In particular, natural gas is
Speaker 1: a huge advantage. It's worth probably four dollars a barrel
Speaker 1: to the US refinery. But when you look at the
Speaker 1: regulatory structure around the world, it's it's a checkerboard. I mean,
Speaker 1: the new refineries tend to be much more in emissions
Speaker 1: efficient just because their state of the art refineries, but
Speaker 1: not every refinery has the second, when you see a
Speaker 1: research note saying we're switching from summer fuel to winter fuel,
Speaker 1: is that noise in the forty a barrel debate or
Speaker 1: is it actually something that can move price and move
Speaker 1: the rate of change of price? It should be it
Speaker 1: should be noise in terms of crude oil prices. It
Speaker 1: should it should be in the noise because we we
Speaker 1: make that summer to winter shift every year. So and
Speaker 1: and it's and it's a blending issue. It's not that
Speaker 1: we're going to refine a different crude. We're gonna it's
Speaker 1: not we're refining less crude. It's that we're going to
Speaker 1: blend the gasoline differently, using different blending components in the winter,
Speaker 1: that we're doing the fault than we do in the summer.
Speaker 1: But it's still do But Mike, this is a huge issue.
Speaker 1: I'm having more and more trouble finding decent gas for
Speaker 1: the Nash Rambler. I mean, I'm sorry, the blends are
Speaker 1: like his cast his car runs unleaded gas. Yeah, serious problem.
Speaker 1: It's not funny you go over to skip yard is
Speaker 1: always great. Mentioned earlier the idea that the equity markets
Speaker 1: in the bond markets are sort of seeing the possibility
Speaker 1: of the FED different ways, although I don't want to
Speaker 1: make too much of it because the moves aren't that big.
Speaker 1: But Ira Jersey is uh senior portfolio manager at Oppenheimer Funds,
Speaker 1: and he has to follow both sides of the argument,
Speaker 1: and he joins us now here in the studio era,
Speaker 1: the equity markets seem to be thinking the GDP report
Speaker 1: bad news is good news. The Fed won't tighten, and
Speaker 1: therefore we can continue to buy stocks, whereas in the
Speaker 1: bond market they're sort of a little unsure about what's
Speaker 1: going on now with Bill Dudley and Robert Kaplan out saying, hey,
Speaker 1: don't rule out September. Yeah, I think I think there's
Speaker 1: always some confusion when you get FED speak and you
Speaker 1: have presidents like especially big names like Bill Dudley, who
Speaker 1: are considered one of the three kind of primary um
Speaker 1: primary members of the Federal Open Market Committee that helps
Speaker 1: set policy, and and people follow them closely. So when
Speaker 1: he says, hey, September is alive meeting, you can't completely
Speaker 1: disc out that. I think what they're trying to do here, Mike,
Speaker 1: because bring back some optionality. I mean they basically the
Speaker 1: markets have completely discounted all of their talk. They've discounted UM,
Speaker 1: the dot plot, and all of the statements that they've
Speaker 1: made at at the June meeting and even the July meeting.
Speaker 1: So they were in a real quandary because they want
Speaker 1: to be able to hike and then prep the market
Speaker 1: for them to be able to hike. But they have
Speaker 1: a real problem doing it. And some of this Fed
Speaker 1: speak is the way that they attempt that when your
Speaker 1: traders come to you and say, what's the FED gonna do?
Speaker 1: What are you telling? So? I I think that the
Speaker 1: Fed probably well, I think the Fed's not gonna hike
Speaker 1: in September. Um. I think that's pretty clear. The market's
Speaker 1: not prepped for it. Yes, you get too employment numbers
Speaker 1: before them, but um, but generally speaking, you're not going
Speaker 1: to have enough confidence in order to uh in order
Speaker 1: to hike again. UH. And but by then I think
Speaker 1: December is a distinct possibility. Um. You continue with the
Speaker 1: trends that we've had in the US, and you wind
Speaker 1: up with um, with it becoming clear that that Brexit's
Speaker 1: not going to affect Europe in in such a significantly
Speaker 1: detrimental way that they will actually be able to hike. UM.
Speaker 1: You know, one of the things about Europe in particular
Speaker 1: is that they've always surprised to the upside over the
Speaker 1: last three years. UM, that that growth there has has
Speaker 1: picked up. It might slow a tenth or two, but
Speaker 1: a tenth or two is not going to be enough
Speaker 1: for for the Fed to say, Hey, things really bad,
Speaker 1: let's uh, let's remain unhold forever. Well, the September meeting approaches. UM,
Speaker 1: could the market start to price something in if we
Speaker 1: get better numbers that then gives them the optionality or
Speaker 1: is it just uh too far off the radar. I
Speaker 1: think it's probably too far off. You probably won't. I
Speaker 1: don't think that you'll price in more than more than
Speaker 1: a fifty percent chance, which is you know that that
Speaker 1: doesn't mean that they can't hike. Certainly, the Federal Up
Speaker 1: and Market Committee controls interest rates, so they can do
Speaker 1: what they'd like to do. But the market, I don't think, well,
Speaker 1: well should they mean? Are they getting pushed around by
Speaker 1: the market. It's in a in a way that is
Speaker 1: not good for monetary policy making. So this is always
Speaker 1: the conndrum when you sit in my seat on a
Speaker 1: you know, by side shop as a fixed income strategist,
Speaker 1: is you know, is it my job to opine on
Speaker 1: what the Fed should do or what the Fed will do?
Speaker 1: And what the Fed will do is more important to
Speaker 1: us because that's the way that we wind up positioning
Speaker 1: our portfolio for UM, for for any central bank movements,
Speaker 1: I think that they probably shouldn't. UM. You know, when
Speaker 1: you when you talk to our Chief Investment Officer, Christian Mamani,
Speaker 1: and we look at, um, you know, everything going on
Speaker 1: in the world and some of the fragilities in the
Speaker 1: global financial world. Still the FED needs to go very
Speaker 1: slowly and very cautiously because you know they are concerned.
Speaker 1: When you talk to some FED officials and you ask them, hey,
Speaker 1: what is your biggest concern, it's financial tightening. Um, well,
Speaker 1: they won't be tightening financial policy if that's your big concern.
Speaker 1: It's math. August, let's get started the school year. Yeah, yeah,
Speaker 1: fe it starts every day? Is the school year? At
Speaker 1: the key household? F the equals PV one plus R
Speaker 1: to the T. What if there's no t iro Jersey
Speaker 1: on perpetual bonds? The math of this is is not sobering,
Speaker 1: but is something to be respected. How do you respond
Speaker 1: when your responsible people say what we need is perpetual bonds. Well,
Speaker 1: you know, the the question is if we do have
Speaker 1: perpetual bonds, will they have other features like call features
Speaker 1: and the like. You know, one of the things that
Speaker 1: if you go back in the forever history I'm going
Speaker 1: a nerd out here a little bit, but if you
Speaker 1: go back to the six seventeen hundreds and early eighteen hundreds,
Speaker 1: you didn't have maturities on bonds um. You know, bonds
Speaker 1: were issued by governments and they were perpetuals, and they
Speaker 1: all had call features, so so the governments could recall
Speaker 1: them at at any at any point, and of course
Speaker 1: they did that when interest rates became lower and they
Speaker 1: became better credit quality, so then they would call them,
Speaker 1: you know, when we do have a lot of them
Speaker 1: outstanding today. In fact, a lot of bank capital notes
Speaker 1: UM have to be issued with very either extremely long
Speaker 1: maturities or as perpetuals. So they you know, these types
Speaker 1: of securities still exist. They all have call features. Whether
Speaker 1: they can be called every five years or every ten years,
Speaker 1: they can still be called. But but they still do exist,
Speaker 1: and you know they do they have more risk than
Speaker 1: say a thirty year or fifty year bond. You know,
Speaker 1: the bond math says no, UM in reality, you know,
Speaker 1: they could be outstanding for a very long period of time,
Speaker 1: but as long as they keep on paying their coupon,
Speaker 1: then the investors should be should be okay with that,
Speaker 1: But but they do provide a certain amount of special risk.
Speaker 1: What do you see happening as far as yields going
Speaker 1: through the rest of the year, shall we say, well,
Speaker 1: I think I think long term yields, you know, ten
Speaker 1: year yields, thirty year yields in the US will wind
Speaker 1: up being relatively range bound. UM. There's the possibility that
Speaker 1: they could even move lower. UM. I think there's two
Speaker 1: two ways that they can move lower. One is that
Speaker 1: you wind up with slowing economic environment and UM people
Speaker 1: other central banks wind up cutting interest rates further. Uh.
Speaker 1: You can see that potentially in Europe and and in
Speaker 1: some of the emerging markets. UM. If that were to happen,
Speaker 1: the US being again the high yielder visa VI, some
Speaker 1: of these other jurisdictions ends up being a beneficiary of that.
Speaker 1: So ten year yields can move lower. UM. The second way,
Speaker 1: which is I think less likely, uh if if for
Speaker 1: yields to move move lower in the long end, would
Speaker 1: be if the Federal reserve war to hike in September
Speaker 1: and then potentially in December. So you wind up with
Speaker 1: a lot of calls that the Feds making a policy mistake.
Speaker 1: They're going to be UM more calls that that this
Speaker 1: will be deflationary or disinflationary, and you wind up with
Speaker 1: a much flatter yield curve, so two year front end
Speaker 1: yields go moving higher while long end yields like tens
Speaker 1: and thirties wind up moving lower UM just because of
Speaker 1: the UH, you know, the outlook that that the Feds
Speaker 1: making a mistake UM. Ultimately, though, I think that that
Speaker 1: ten ure yields probably your range bound between you know,
Speaker 1: call at the one forty up to up to maybe
Speaker 1: one sixty one seventy UM for for the remainder of
Speaker 1: the year. What do you think the Fed needs to
Speaker 1: see from the markets before they feel comfortable. I don't
Speaker 1: know if it's so much the markets. I think they
Speaker 1: have to be extremely comfortable, and it has to they
Speaker 1: have to have clear and convincing evidence from UM, from
Speaker 1: the economy, from from the data side in order to
Speaker 1: for for the markets to be convinced that the Federal
Speaker 1: Reserve is able to hike. And it's not only data
Speaker 1: here in the US, but it is UH data globally
Speaker 1: that really matters. I think the removal one thing that
Speaker 1: I found really interesting in the statement last week from
Speaker 1: the from the Federal Market Committee statement was the removal
Speaker 1: of this you know, the their fear about what was
Speaker 1: going on in the global global economy. UM. I think
Speaker 1: that there was a big fear that you know, breggsit
Speaker 1: would wind up being very detrimental to both markets and
Speaker 1: the real economy in Europe. UM. And the expectations are that, yes,
Speaker 1: it's gonna maybe lead to a slight slowdown, but it's
Speaker 1: not really uh, it's not really the worst case scenario
Speaker 1: is not likely to play out. We're are you on
Speaker 1: the adjustment of our GDP quietly. The shock last week
Speaker 1: was the Atlanta derby went under two percent and a
Speaker 1: day later that's what we saw. That was a big surprise.
Speaker 1: It was I mean, particularly on the investment side and
Speaker 1: on the inventory side, so that that was really the
Speaker 1: weak part of the economy. You wound up and you know,
Speaker 1: you wind up looking at things like personal consumption, which
Speaker 1: is the largest part of GDP. The expectations were for
Speaker 1: to be um, you know, relatively robust, and it came
Speaker 1: in a little bit lower than expectations, but it wasn't
Speaker 1: wasn't so low that if the rest of the UM,
Speaker 1: if the rest of the data and the report had
Speaker 1: had kept up pace, then then you know, you wind
Speaker 1: up with more or less and as expected report. I
Speaker 1: think that the real worrying thing is the business investment side.
Speaker 1: So the business investment was down UM on an annualized
Speaker 1: basis almost ten percent. That's really worrying because if you
Speaker 1: don't have animal spirits, if you don't have businesses growing,
Speaker 1: and that means that you the likelihood that you have
Speaker 1: UM extended employment owth and uh and and a more
Speaker 1: robust economy is is unlikely. But you know where the
Speaker 1: risk rey rate is. I mean, if they're running a
Speaker 1: dividend discount, you know, if they're running something a net
Speaker 1: present value rather analysis. Could you give them a plug
Speaker 1: in number to do on a net present value analysis
Speaker 1: of a project? Well, I guess that depends on you know,
Speaker 1: the growth rate of the of that that you UM
Speaker 1: that you subscribe to, what you're um, what your sales
Speaker 1: are going to be, or how you're gonna make revenue
Speaker 1: from that particular project to right, So the risk free
Speaker 1: rates near zero, credit spreads are very low. So so
Speaker 1: the borrowing environment is UM is extremely positive. But that
Speaker 1: doesn't mean that if if your expectations are for growth
Speaker 1: the slow and for personal consumption the slow, then you're
Speaker 1: not going to invest. Mike, here's a British triple B
Speaker 1: SMP triple B piece out to two thousand seventy three. Mike,
Speaker 1: you're gonna be doing the show solo in two thousand
Speaker 1: seventy three. It's gone from a hundred to a hundred
Speaker 1: and twelve. So the bonds appreciated twelve off a five
Speaker 1: and five eights coupon to yield four percent four point
Speaker 1: zero zero percent. So that's like a perpetual yield. I
Speaker 1: guess you could almost base you're net present value study
Speaker 1: out what sixty years? Well, yeah, I mean for us
Speaker 1: it's perpetual. Maybe some people in the millennium. I don't
Speaker 1: know where, I don't know how. I do know how
Speaker 1: you do investment analysis adults CF. Well, that isn't It's
Speaker 1: an interesting the whole topic, you know, with people talk
Speaker 1: about hundred year bonds and I mean, how do you analyzed?
Speaker 1: I mean you're not around, you know, yeah. I mean
Speaker 1: it's funny when when companies have issued bonds um that
Speaker 1: were you know, older, that that matured, um well beyond
Speaker 1: what they had already existed. You know, Disney did a
Speaker 1: hundred year bond a few years ago, and you know
Speaker 1: they've been in existence for sixty odd years um, and
Speaker 1: they issued a hundred year bond. Um. I think those
Speaker 1: very long term bonds. I mean, they do have some
Speaker 1: value to someone, but um, you know, for most people,
Speaker 1: when you're trying to why do you buy a bond?
Speaker 1: You buy a bond because you either need income or
Speaker 1: you have some liability that you need to to match.
Speaker 1: So if you're an insurance company and you say, Okay,
Speaker 1: the average person who I am ensuring their life is
Speaker 1: going to live for thirty years, so therefore I need
Speaker 1: to buy thirty year bonds, you know, the people who
Speaker 1: buy a hundred year bond are you know, thinking that, hey,
Speaker 1: I just need income. Um. They're not someone who's matching
Speaker 1: any type of reliability. And that's one of the reasons
Speaker 1: why people always say, like, why aren't is in the
Speaker 1: U s. Government issuing fifty year bonds or sixty year bonds.
Speaker 1: And one is that it really for the people who
Speaker 1: tend to buy very long dated assets, it doesn't do
Speaker 1: much for them because they don't really have a need
Speaker 1: to buy fifty and sixty year bonds. The need is
Speaker 1: in the more thirty year space. So the government's just decided, hey,
Speaker 1: I'll issue more thirty years instead of anything longer. Uh,
Speaker 1: very quickly about thirty seconds? Is anything overseas look attractively?
Speaker 1: A lot of central banks meaning this week? Yeah, so
Speaker 1: so overseas we like some some emerging market debt is
Speaker 1: pretty attractive to us. Um are big? Are big? Like?
Speaker 1: Kind of non consensus is India? Um? We way you
Speaker 1: can actually get seven percent yields. And I know your
Speaker 1: eyes are probably gonna bug out of your head when
Speaker 1: you hear, Oh my goodness, there's seven percent yields somewhere
Speaker 1: in the world. You know, it's investment. Great country and
Speaker 1: uh it's liberalizing their economy. They they're doing some economic reforms. Um,
Speaker 1: you know, slowly but also steadily. Um so places like that.
Speaker 1: We were were overweight in uh in places like India. Right, Jersey,
Speaker 1: thank you so much, particularly for the perpetual interview. Mr
Speaker 1: Jersey is with an Appenheimer Funds. James Trevitis with us
Speaker 1: with a Fletcher School. In the previous life he was
Speaker 1: an admiral. You know something about this linkage of our
Speaker 1: military to our power ticks. Um, I've got to rip
Speaker 1: up the script. Admiral STEVINUS, good morning, and uh look
Speaker 1: at the idea of the military at conventions. All I
Speaker 1: could think about with General Dempsey's criticism of General Allen
Speaker 1: and others being at a convention was I believe in
Speaker 1: my collective memory, someone named Eisenhower wandered in as a
Speaker 1: retired general and made an impact at a convention. Should
Speaker 1: people like Stravins be at political conventions? Well, first, I'll
Speaker 1: say I think these are intensely personal decisions for the
Speaker 1: officers involved. Number two, every citizen, whether a military officer
Speaker 1: or a butcher, baker, candlestick maker, certainly has the right
Speaker 1: to do that. That's why we have a military to
Speaker 1: defend those rights. And number three, I think that it
Speaker 1: depends on the election, depends on the time. So when
Speaker 1: you point, I think correctly, Tom to somebody like Ike
Speaker 1: who comes in as at a moment of national desire
Speaker 1: to embody that greatest generation and make someone a president,
Speaker 1: I think that works. I think for General Allen, I
Speaker 1: support what he did at the convention. I think he
Speaker 1: did the right thing. He feels very strongly about this election. Well,
Speaker 1: that was the argument that he made that this is
Speaker 1: a one off, that he wouldn't do this ordinarily, But
Speaker 1: the danger he sees is so great that he felt
Speaker 1: he had to get involved. But the other generals who
Speaker 1: have been quoted on this say it makes it harder
Speaker 1: for those of us still on active duty. Um can
Speaker 1: you from that point of view? I can, Although having
Speaker 1: served thirty seven years on active duty, and in the
Speaker 1: course of that period we saw generals like Wes clark
Speaker 1: Land for president, I never felt that that particularly tinged
Speaker 1: the politics of my life, even as a very senior officer. Again,
Speaker 1: I don't think we're going to see a rash of
Speaker 1: generals and admirals leaping into the political fray. But to
Speaker 1: give particular officer feel strongly and feels this is an
Speaker 1: election everyone matters and wants to do it, and I
Speaker 1: am supportive of that. Could could I point out, Mike,
Speaker 1: and the biggest problem with you guys, with all the
Speaker 1: brass at your shoulders as your bios are too damn
Speaker 1: long buried in the middle of the strafetus bio is
Speaker 1: a single trench. In sentence, Mr McKee, he was the
Speaker 1: longest serving combatant commander in recent US history. That goes
Speaker 1: back I think the Washington crossing the Delaware Mike, pick
Speaker 1: it up. I'm not sure what that exactly means. But
Speaker 1: it sounds like a pretty good thing. Um, well, what
Speaker 1: it means is, you know we have these, uh we
Speaker 1: have nine combatan commands around the world, US European Command,
Speaker 1: US Southern Commands for Latin America, Central Command for the
Speaker 1: Middle East, etcetera. I happen to hold two of those
Speaker 1: over the course of seven years Southern Command, Latin America,
Speaker 1: European Command, while I was concurrently the NATO commander. I
Speaker 1: tribute that to a computer error of some kind of
Speaker 1: tom I was. I was fascinated listening to General Allen
Speaker 1: over the weekend when he was asked, what happens if
Speaker 1: we get a President Trump and he follows through on
Speaker 1: what he says he will do, ordering the military to
Speaker 1: do things like torture or or kill families of the enemy,
Speaker 1: that sort of thing, And he said, we would have
Speaker 1: a a military civilian crisis. What what would that mean
Speaker 1: and how would you deal with that? I think the
Speaker 1: first thing that would happen is you would see resignations
Speaker 1: of extremely senior officers. Secondly, I think you'd see the Congress,
Speaker 1: which regardless of party, I think would overwhelmingly not support
Speaker 1: using the military for torture i e. Water Boarding, using
Speaker 1: the military to kill the families of terrorists, or any
Speaker 1: of the other things have been mentioned. Um, and this
Speaker 1: is why we have checks and balances in the system.
Speaker 1: I actually think it would be more of a legislative
Speaker 1: executive branch kind of crisis than a civil military crisis.
Speaker 1: You don't think we would get that far. I don't.
Speaker 1: I don't think you'd see a military and revolt because
Speaker 1: I think the Congress would act immediately. And let's say
Speaker 1: said waterboarding is illegal. It's against the laws of the
Speaker 1: United States. So the Congress would never continence, the executive
Speaker 1: branch overturning the law, and the judicial branch would not
Speaker 1: support it. Roll could you place in context the number
Speaker 1: of Muslims in our military. There has been a terrific
Speaker 1: focus on one brave soul. But I think a lot
Speaker 1: of Americans say, Okay, there's like seven people in the army.
Speaker 1: I mean, that's like the knee jerk reaction. And yet
Speaker 1: that can't be true. You've got experience at work College,
Speaker 1: You've got experience at Fletcher. Of course, your Navy and
Speaker 1: Pentagon experience is l How does the military actually deal
Speaker 1: with a diverse set of people, and particular with Muslims.
Speaker 1: I mean, it's just they're just another person, right, Yeah, exactly, Tom,
Speaker 1: And I think in so many ways the military tends
Speaker 1: to be the canary and the tunnel for society. We
Speaker 1: sort of led the way on integration in the military,
Speaker 1: like the way in many ways on women, and I
Speaker 1: think Muslims the same. Tom. We have conversations these days
Speaker 1: about wickens, uh, you know, pagan worshippers in the military.
Speaker 1: We have very small numbers of a lot of different religions.
Speaker 1: We have a more moderate number of Muslims, but it's
Speaker 1: not an overwhelming number, but in my experience, are extremely
Speaker 1: well accepted. But this goes and why you again, our
Speaker 1: producer comes up with a statistic fifty d Muslims within
Speaker 1: the military, I mean, Admiral. This goes back to outside
Speaker 1: the Thayer Hotel at West Point is where the Buffalo
Speaker 1: soldiers practiced, where they got ready. I mean, you guys,
Speaker 1: the military is way out front of general society, right
Speaker 1: it is. And and the reasons for that are simply
Speaker 1: because we're better organized and if you make a decision,
Speaker 1: you actually can implement it down through the ranks and
Speaker 1: you don't have huge amounts of pushback look at the
Speaker 1: integration of gays and now more recently transsexuals into the military.
Speaker 1: It's all going very well. We do this, it's called
Speaker 1: following orders and it's um it works out pretty well
Speaker 1: in the military. Doesn't mean we don't have problems. We
Speaker 1: continue to in all of these categories, but we meet
Speaker 1: those challenges. We put in programs, and I think generally
Speaker 1: people in the military join the military because they believe
Speaker 1: in freedom and the ability to express yourself in that
Speaker 1: kind of way. Mike, West Point March is when the
Speaker 1: Cavalry UH and the Buffalo Soldiers happened and before that. Yeah,
Speaker 1: and people may not know who the Buffalo Soldiers are.
Speaker 1: You certainly do. These who are a very great set
Speaker 1: of cavalry troops who fought in the American West uh
Speaker 1: and with great deal of distinction over the years, the
Speaker 1: first all black units to go into major combat. Like
Speaker 1: there we are talking with Admiral James trevitas Din of
Speaker 1: the Fletcher School. We've been gossips university, we've been gossiping.
Speaker 1: Now we have to talk about real stuff. Yeah, we're
Speaker 1: gonna talk about some specific issues. Over the weekend. Foreign
Speaker 1: policy certainly came up in the news with one of
Speaker 1: the candidates demonstrating sort of lack of knowledge about what's
Speaker 1: going on, but raising at least a question worth exploring,
Speaker 1: and that is, uh, does NATO have the value it
Speaker 1: once had? Is it worthwhile? Could it be changed? Should
Speaker 1: it be changed? And uh, you know, are are we
Speaker 1: being short changed by our NATO involvement? Yeah, I don't
Speaker 1: think we're being short changed. And you know, I'll stipulate
Speaker 1: that I'm a former Supreme Allied Commander in NATO for
Speaker 1: four years, so UM, I am predisposed to admire the organization.
Speaker 1: But let me give you some facts. UM. NATO as
Speaker 1: an organization has been involved in founter terrorism in Afghanistan
Speaker 1: and in Iraq. It continues to deter adventurism on the
Speaker 1: part of Vladimir Putin to the east. It's very engaged
Speaker 1: in the Arctic in the north, and it's also involved
Speaker 1: in the crisis of migrants moving across the Mediterranean. It's
Speaker 1: a big, muscular organization, twenty nine nations, fifty two percent
Speaker 1: of the world's GDP, three million soldiers under arms, almost
Speaker 1: all volunteers. Why would we want to walk away from
Speaker 1: an organization like that? There is truth in the argument
Speaker 1: that some of those countries are not spending what they
Speaker 1: have committed to spend in terms of providing military or
Speaker 1: or money to support the organization. You know that's true.
Speaker 1: But let's keep it in perspective and let me just
Speaker 1: do the numbers. This is Bloomberg. You guys respect numbers.
Speaker 1: We love numbers. I know. Okay, here we go. So
Speaker 1: the US spent six hundred billion dollars a year on defense,
Speaker 1: which is a lot of money. The Russians spend about
Speaker 1: eighty billion. The Chinese spend about a hundred and twenty billions.
Speaker 1: So Russian and Chinese spending together is two hundred billions.
Speaker 1: How much do you think those Europeans spend. They spend
Speaker 1: three hundred billion dollars a year on defense, so they
Speaker 1: spend a ton of money. They they spend more than
Speaker 1: Russia and China combined. Now, it is true they have
Speaker 1: set a goal of two percent of GDP. They're floating
Speaker 1: below that at about one point six percent of GDP.
Speaker 1: They have put in place plans as of the Worst
Speaker 1: SAW summit a month ago to hit those targets by
Speaker 1: and I think they will so on balance, despite the
Speaker 1: fact that yeah, they could spend a bit more. I
Speaker 1: think it's pretty good value for the money. And will
Speaker 1: you mentioned a word I love, adventurism. I looked at
Speaker 1: the Oxford English Dictionary. Was was the first feeling of that,
Speaker 1: and it really hearkens back to a Westphalian world in
Speaker 1: the tradition of a traditional military. Is that really what
Speaker 1: we're going back to. We're showing the flag and fleets
Speaker 1: and soldiers planted on foreign territory will be the new new.
Speaker 1: I think there will be a fair amount of that.
Speaker 1: Tom what's gonna be new, really new? Alongside it is
Speaker 1: going to be conflict in cyberspace with special forces with
Speaker 1: unmanned vehicles. So we're gonna have a kind of high
Speaker 1: tech version of that great game that you recall from
Speaker 1: the nineteenth century. And we need to be careful that
Speaker 1: we don't stumble back into some kind of a full
Speaker 1: blown Cold war. I think we have the tools to
Speaker 1: navigate this, but we are going to see challenges from
Speaker 1: both Russia and China. What do you consider crimea That
Speaker 1: was one of the themes this weekend. Is crimea part
Speaker 1: of the Ukraine that Russia's annexed? Is that the right word?
Speaker 1: Your lecturing and Fletcher, how do you draw Crimea on
Speaker 1: the map? Crimea is in every sense under international law
Speaker 1: part of the sovereign state of Ukraine. It has been
Speaker 1: uh annexed is the correct word, by Russia, which has
Speaker 1: passed a law in the Duma, their parliament that now
Speaker 1: says Crimea is part of Russia. There are some historical
Speaker 1: antecedents and arguments that lend support to that, but under
Speaker 1: international law this is a clear violation. Any international lawyer
Speaker 1: will tell you that what can you do about it?
Speaker 1: I think from a pragmatic perspective, it's highly unlikely that
Speaker 1: Crimea is going to be returned to Ukraine. The Russian
Speaker 1: population there is making a very strong successionist case um
Speaker 1: and what you can do about it is put in
Speaker 1: place to sanctions that we have. And I think the
Speaker 1: trade space in the end will not be Crimea. The
Speaker 1: trade space is going to be Russian troops in the
Speaker 1: southeastern portion of Ukraine the don Bass they're going to
Speaker 1: have to go. I think Ukraine in the end is
Speaker 1: gonna have to swallow hard and accept that deal. Abrol Stravitz,
Speaker 1: thank you very much for joining us. Never enough time
Speaker 1: such a big world where you have to get it
Speaker 1: back soon to continue. It never ends the Foreign Policy Tour.
Speaker 1: Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and
Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm on Twitter at Tom Keane, Michael McKee
Speaker 1: is at Economy Before the podcast. You can always catch
Speaker 1: us worldwide. I'm Bloomberg Radio