00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with the bond market, questioning FED check Kevin Watch's inflation fighting credibility, sending thirty year bond yields to the highest level since two thousand and seven. Barbara Ryan Hardevoor Investment Management joins us now for more. Barbara, good morning, Good morning. What was your reaction to that yesterday afternoon. 00:00:51 Speaker 3: Look, he's falling into the same chap that's so many FED chair people fall into when they take the role, and it's a communication blunder. It's sending the wrong signals to the market. And this is what we were worried about with a nude fair chad person coming in is that equity markets are going to get nervous. You saw the same thing with Jerome pal there was an eighteen percent correction within the S and P five hundred when he said we're a long way from neutral, a very offhanded remark. And I think you do have a credibility issue at this point. So the Fed is going to need to either get inflation under control or the bond market's going to do it for it. And we do see on some of our forward looking indicators that inflation should be rolling over. Income growth is starting to slow, consumer spending is starting to slow, but the fact is is it may not be fast enough to stop. Probably more equity market weakness as a result of bond yields climbing. 00:01:42 Speaker 2: Lots of reaction coming from Wall Street. One of my favorite tastes came from aditya bave IV Bank for America. Duffed and confused, and he said the following, we think the need to re establish credibility increases the probability of a high con September. 00:01:54 Speaker 4: Do you agree, Well, I. 00:01:55 Speaker 3: Think the inflation data is going to come in a lot softer, So all of our inflation indicators are rolling over at this point, so the market may indeed do some of the Fed's work for it, which is what Warsh was confusing the markets about yesterday. I think this lack of forward guidance is coming at a particularly bad time, and I think that this kind of pulling back and relying on some of these task forces, While it's a great idea in theory, the execution of it seems a little bit murky at this point, which I think is also confusing the bond market. 00:02:25 Speaker 1: Given some of the confusion and concerns around a lack of credibility that the Fed's going to follow through and anchoring inflation expectations. Do you think that that puts the tech trade more at risk, considering that it's a higher duration asset increasingly. 00:02:37 Speaker 4: As a result of its capex plants. 00:02:39 Speaker 3: Well, I think we've got two things going on. So number one, the tech trade is really as a result of the hyperscalers burning through their cash flow not slowing down on their capex spending. Eventually, the memory shortage is going to get resolved with more memory. So there's this concern that you've got this big cash flow burn with the tech stocks. You're not seeing the big productivity lifts from AI just yet, although we all use it in our day to day lives and are finding it to be incredibly helpful. I think that you've got this concern that they're burning through so much cash flow, and additionally, this equity supply that's hitting the market is really big, and the buybacks and the mergers are just beginning to offset it. This is the first time since two thousand in this year that you're going to see net equity issuance and net equity demand kind of coming out of it, So buybacks and also mergers really being even so, it's a lot to hit the tech at the tech trade at this point. 00:03:36 Speaker 1: About a year ago, I was speaking with Howard Marks and he said, if you were going to get into the tech trade, even though he's typically a credit investor, he'd rather be in the equity than the credit because he's getting paid for the equity in. 00:03:44 Speaker 4: Terms of the potential upside. 00:03:45 Speaker 1: Sure, I wonder if that equation has flipped right now, whether potentially you're getting paid to be in the bond side of things and not necessarily on the equity side as a result of the dynamic, as a result of how high yields have gotten well, I. 00:03:56 Speaker 3: Think there is some there is some truth to that. However, you have to think of it this way. Credit spreads have just started to weaken really over the past ten days. You're about ten basis points wider on ig credit. But I think you have to do a lot of homework as a credit investor in these hyperscalers off balance sheet data center backed bonds that are being issued. You really need to find out whose balance sheet is being decked against these interest payments. And that's going to be a really tricky one even for the most astute of credit investors to look into. 00:04:25 Speaker 5: So you see something people want to stay away from for the remainder of the year. 00:04:29 Speaker 3: Well, you know, when we take a look at the internals of the market, look the S and P five hundred just slip below it's fifty day moving average. There's quite a ways to go until it hits its two hundred day. But the American Association of Individual Investors it's thirty percent bulls, it's forty two percent bears. That could mean that you have a little bit of a counter trend rally. But there's also one thing that we're not talking about. That's bugging the market, which is the midterm elections. You know, markets do not like uncertainty. Generally, those summers before the midterm elections can be very ugly. You don't necessarily need to get all the way to election day, but you probably need to get to maybe mid October for oil prices to come down, for the inflation data to roll over to really probably put in a more sustainable bottom. 00:05:13 Speaker 5: It's not also just the midterm election. It's also the conflict in the Middle East. The market thought the president was going to take a diplomatic group, and right now we actually see more strikes and it's spreading. Egypt's getting hit, you see attacks in the Black Sea and the Caspian. The market's starting to pay more attention to this than they were, say, two three weeks ago. 00:05:30 Speaker 3: You'd have to because of the price of oil. Right the price of oil is going to hit consumers pockets through the transition mechanism of gasoline prices and other distolate products, fuel, all those types of things. You're even starting to see I think probably some fatigue on behalf of many of the President's supporters right saying we've had a lot of this, We've had enough of it at this point, and you need to start to focus back on domestic policies as well, because domestic policies will come knocking out the doors sooner than you think. 00:06:00 Speaker 2: Let's not do the midterms yet. Still July, when people start talking about the terms, I'm not there. 00:06:05 Speaker 1: I think, you know, I'll take the you're off, so I'll start talking about it. 00:06:10 Speaker 4: You know what October first? 00:06:11 Speaker 3: Yes, actually Labor Day is that's. 00:06:13 Speaker 4: Where it started. 00:06:14 Speaker 5: Either day, I said, I give you till September seventh, and to September. 00:06:18 Speaker 3: All right, well Monday is August, so you're certainly getting there. But look, you have the underlying strength of earnings while look, the market's certainly to come for us. No, no, no, I'm just trying to give you some facts that. 00:06:28 Speaker 5: You need to think about. 00:06:28 Speaker 2: Let's take a therapy. 00:06:29 Speaker 4: Carry on, please, yes, that's. 00:06:31 Speaker 3: Right off term from portfolio manager to therapist. So, look, you do have the underlying strength of the equity market. You've got the underlying strength of earnings. Sales growth is really off the charts at this point, and the beats are being rewarded, which is signs of a healthy market. But look, we haven't had a ten percent correction in quite some time. Even the market down draft that you had in March or excuse me, late February into early March, that one wasn't a ten percent correction. So it's not surprising to see some some weakness, a lot of questions about the hyperscalers of the point. Those things need to get resolved, and the FED is not helping. 00:07:03 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this poor thank you Thanky research writing. We have been super bullish on refining and think there is a major crisis here. We argue people are looking at the wrong oil price. Crude is not the issue. Gasoline distolate and jeb are Paul joined us now for more porulgo mornic. How small? How thin is the cushion? How bad are things? 00:07:34 Speaker 6: Well, it's just that the refiners here, for example, refiners are running it's ninety six percent utilization. 00:07:39 Speaker 2: Usual it is that to run at ninety six percent, that's. 00:07:41 Speaker 6: What we want them and it's not unusual. I mean, for example, in Mexico that would be fifty percent, you know, but it's an amazing performance and it does raise the risk around refining because obviously when they're running that hard hurricane season coming up El Nino. We went through a couple of heat waves and that causes issues, so I'm worried that there may be more problems. But the big idea is that basically wholesale gasoline is one hundred and forty dollars a barrel. Brent is at ninety and that margin is absolutely massive in terms of profitability. As I say, it's a margin, not a price. The seventy dollars refining margin, and that's telling you that the tightness is in the refining system. So there's plenty, more or less plenty of crude, a lot of it driven by China's behavior and by the SPR which is another big turning point by the way, because when we run out of SPR, which should happen around September, that'll massively change the dynamics of the WTI market here in the US. And what it would be very bullish. 00:08:33 Speaker 5: When it comes to the products which is most vulnerable right now, Well, jet. 00:08:36 Speaker 6: Fuel sort of sits above distillate as the hardest to make, and the industry has done an amazing job of raising their yield and really addressing the jet fuel crisis. And the reason they do that is the highest margin product. So jet fuel has actually not been the problem that we anticipated, basically because we didn't realize the refining industry could generate so much more jet fuel than as they've been able to. The tightness at the moment, which is interesting is the area that's normally not that tight, which is gasoline. And that's where we're watching the infantries go way below the bottom of the range. And that's basically because they're pushing so much into jet and diesel that you're actually sucking down the biggest infantry, which is gasoline. And then of course I said, you're drawing down the spr very rapidly as well. 00:09:15 Speaker 5: But on the SPR and I'm just Secretary Chris Wright says, it's a quote long way from operational minimum. You think there's an issue coming in September. 00:09:23 Speaker 6: Well, that's depending on the rate that the weekly it's being pulled down. But the refiners now find it a great deal because they're basically taking physical barrels, they're not paying for them, and they owe physical barrels in the future, and as you pay back more barrels, but in the future, which is a much lower something of a lower price. So the refiners want the crude. There's a big debate that hasn't really been addressed by the DOE of where the bottom of the SPR lies. It's They put out a note about cushing, which is a different thing. Cushing is metal tanks above ground. The SPR is a salt cavern that you hollow out by dissolving the salt. Every time you take it down then push it back up, you push water under the and you dissolve more of the cavern. So there's actually a technical question is the cavern getting bigger? How low can it go? Is all basically not being addressed other than you know, Chris writes frankly, it has a lot of very high reputation in the oil industry, but as an energy sectory, he said some things that haven't turned out to be entirely true, particularly regarding the straits poor moves. So I'm not sure that you know what he says about the SPR is really definitive. Frankly, we just don't know when we're going to have to stop downloading it. 00:10:26 Speaker 1: Basically, so the SPR is like a bag of popcorn world half of its air and you open it up and you don't realize until you finally get in there. 00:10:32 Speaker 4: Okay, yeah, really convoluted here. It all seriousness. 00:10:42 Speaker 1: I am wondering how much creen is you put to the barrels that are still going through the straight and fromos and potentially through pipelines actually making it through, which has been in a huge. 00:10:50 Speaker 4: Offset to some of the drawdowns and people were expecting. 00:10:54 Speaker 6: Yeah, I mean, my latest researchers haven't published it actually, but it's on the UAE because the UA is actually exporting more oil now than it was before the crisis started, and that's been one of the most stunning dramas here. And I'd add that, you know, the frontlines in this conflict is shifting. If you just look overnight, what you've seen here is US and Saudi basically fighting Iraq versus Saudi. UAE seems to be at peace now. They've made some kind of peace for the Iranians. There's no issues in Abi Dabbi at the moment. And of course Israel Lebanon is quiet. And then the other big front which is going crazy is Russia Ukraine. That one is absolutely out of control. So the conflicts has shifted quite dramatically as any war would. And you know, I think the biggest one is that actually oil is coming out through the Hormos. So for example, UAE has been transhipping quite successfully. So what they're doing is using small and more discrete tankers zip around the Strait and then load bigger tankers, you know, to export actually more oil than they were before the crisis. 00:11:53 Speaker 1: Do you think that we need to be paying more attention to what's happening with Russia and Ukraine and that that's going to take more barrels off than a lot of people are expecting. 00:12:00 Speaker 6: Well, there's no question that one of the stunning aspects of this whole World War three, because I always say, if you're worried about World War three, you're in it, has been the emergence of Ukraine as a superpower, has a drone superpower that you wouldn't have thought. You know now that Ukraine is very popular in the Middle East. They're doing arm steels down in the Middle East. But what I will say is they're trashing Russia, and you know, I don't know how much longer Russia can handle this. It's getting intolerable for the Russian people. I'm sure stay with us. 00:12:26 Speaker 2: More Bloomberg Savannan's coming up after this under savannahs this morning, it was triggering the Bramo for questioning the north star. 00:12:43 Speaker 7: It was a real family fight. That's the better way to get policy right. That's our north star. If inflation continues to be elevated through the forecast period, interest rates could well be part of that solution. Market participants are learning to play the ball, not the referee. 00:13:00 Speaker 2: So here's the latest thirty year bondio. It's rising to the highest levels since two thousand and seven. As investors challenged the Fed's credibility fairing check Kevin Walsh one temper inflation fast enough? The former sen Lewis FED President Jim Bullatt joined us now for more. Jim for once. I imagine you were happy you went on the inside and you were sitting on the outside. What was your view of how that news conference went down yesterday? 00:13:21 Speaker 8: Well, unfortunately, I thought it was a little bit rocky. It's probably not unanticipated given that chair horse is new in the role. 00:13:31 Speaker 9: This is a. 00:13:31 Speaker 8: Second press conference. But I thought, you know, the seller the higher yields in the thirty year or you know, kind of nerve racking for a central banker. 00:13:45 Speaker 9: You know, dollars appreciation on the announcement. 00:13:49 Speaker 8: I think he needed to do more to create optionality in September, and he didn't. 00:13:55 Speaker 9: Do very much of that. 00:13:57 Speaker 8: He emphasized the inflation target and you weren't backing off the inflation target. Gave a little bit of a hint that, you know, the measurement, you know, might be a factor there. 00:14:11 Speaker 9: I don't think that was helpful. 00:14:14 Speaker 8: And you know, you might as well explain what the main arguments were around the table, because the members are going to go out and tell you what they are thinking. And basically what they're thinking is there are two more inflation reports to come, and we want to see those inflation reports. 00:14:33 Speaker 9: Before you get going on any kind of hiking campaign. 00:14:36 Speaker 8: So you might as well at least acknowledge, you know, the contours of the argument. I understand he doesn't want to give forward guidance, but it's a work in progress and he's very accomplished I think in many ways. 00:14:50 Speaker 9: But Marcus obviously didn't like this work. 00:14:53 Speaker 2: In progress implies there is some intent here, There is an objective. Jim, what do you think it is? What is the intent? What's the objective? 00:15:02 Speaker 9: Well, I think he says what he means. 00:15:05 Speaker 8: You know, he I would characterize interest rate policy in the US as being partly the Fed and partly the market, and he feels like it's become ninety percent Fed and ten percent market. He wants that back, to dial that back to fifty percent or something like that, and so that it's you can't get you can't drive either side to zero. Both sides have a role to play. But he feels like it's been too much fed, not enough market, and you know, maybe zerring in the other direction now, But I think we'll get to a good equilibrium eventually. 00:15:41 Speaker 1: Do you think, Jim, that there's a difference between Ford guidance and a reaction function? 00:15:46 Speaker 9: Yeah? I do. I think, you know, and we're struggling. 00:15:51 Speaker 8: I think to know what he means when he says, you don't want to get forward guidance, if you look at a tailor rule or something like a tailor rule that tells you what the that would do in every single state of the world, and so that's forward guidance in some sense. But I think what he means is like the chair would come out at a press conference and say, hey, it's highly likely we're going to move in September, or it's highly unlikely we're going to move in September. That's sort of forward guidance, I think is what he wants to. 00:16:19 Speaker 9: Get away from them. 00:16:21 Speaker 8: That might be warranted, especially when you want to have optionality to see how developments perceive. 00:16:27 Speaker 1: The reason why I asked Jim is because he seemed to say that we're conflating the two and that people are asking for a reaction function when actually all they're looking for is some sort of forward guidance. And I just wonder what you make of the way he answered questions or didn't answer questions. I mean, did you think that this was deliberate or do you think that there is a larger idea that the market is an understanding? 00:16:50 Speaker 9: Yeah? Well is it deliberate? 00:16:52 Speaker 8: Well, I'm sure he thought very carefully about how he wanted to handle things, and I thought, I guess one thing that stood out to me is that he didn't want to bring up okay, there are two inflation reports before the next meeting, because I think he was feeling like that would create too much data dependence and too much focus on that. But that's really the story here is can the committee count on inflation and coming down? Especially coming down core PC inflation coming down below three percent and being at tracked to go to two percent, or are they going to have to get on a tightening campaign to make sure that that happens. So you know, the data is going to be important over the next couple of months. 00:17:32 Speaker 2: Jim, do you think that performance makes it more likely though hike in September? 00:17:37 Speaker 8: Well, he steadfastly stayed away from that. I think I would have preferred that he say we're ready to move, you know, under certain circumstances, and we're definitely willing to move. Instead, you only talked about the inflation target itself without saying that we're ready to take action. Marcus didn't like that, and they actually the two year yield went down, and so now markets are less sure that the committee will actually follow through and try to drive inflation back to two percent. 00:18:12 Speaker 9: So I think it is a bit of erosion of credibility. 00:18:16 Speaker 8: I think it can all be managed, but unfortunately it was a little bit, a little bit rocky. 00:18:21 Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiopolitics. 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