WEBVTT - Saudis Go In For The Kill As They Target U.S. Oil Producers 0:00:02.640 --> 0:00:05.360 Welcome to the Bloomberg Penl podcast. I'm Paul Swee you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa brahma Witz. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.320 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.040 at Bloomberg dot com. Well, it has been an historic 0:00:22.120 --> 0:00:24.279 forty eight hours for the global energy markets. We have 0:00:24.480 --> 0:00:27.760 w t I crewed yesterday trading well negative for the 0:00:27.880 --> 0:00:30.640 first time ever. We're a little bit positive today on 0:00:30.680 --> 0:00:33.200 that May contract. That's the last day for the trading 0:00:33.240 --> 0:00:35.320 of the May contract. To give us a sense of 0:00:35.360 --> 0:00:38.239 what is going on in the global oil markets. Who 0:00:38.280 --> 0:00:41.199 welcome John Kilduff, founding partner of Again Capital, based in 0:00:41.240 --> 0:00:43.599 New York City, New York City, John, thanks so much 0:00:43.640 --> 0:00:47.360 for joining us. What does negative oil negative? W t A. 0:00:47.600 --> 0:00:52.360 What did that mean yesterday? Well, it meant that there's 0:00:52.400 --> 0:00:57.040 just an abject gluts of oil uh in the US, 0:00:57.760 --> 0:01:01.800 particularly you're in the Gulf Coast in the Pushing Oklahoma region, 0:01:02.520 --> 0:01:07.000 that any more additional barrels are having a problem finding 0:01:07.000 --> 0:01:11.520 a home. Basically, the folks who have storage all of 0:01:11.560 --> 0:01:14.640 a sudden found themselves not sitting on a oil tank, 0:01:14.680 --> 0:01:18.000 but sits sitting in the penthouse. And uh, we're able 0:01:18.040 --> 0:01:21.840 to charge accordingly. Other words, not only am I going 0:01:21.880 --> 0:01:24.000 to get free oil, you're gonna pay me to take 0:01:24.040 --> 0:01:27.080 your oil. And again, it's because of what's happened here 0:01:27.080 --> 0:01:29.479 over the past number of weeks now, and it's just 0:01:29.760 --> 0:01:33.720 crash in demand both globally and hearing United States, where, 0:01:33.760 --> 0:01:38.200 for example, gasoline demand has so John, I'm looking right 0:01:38.240 --> 0:01:40.880 now at the June contract w T I, which has 0:01:40.959 --> 0:01:45.160 plummeted to about fourteen dollars of barrel, just to give 0:01:45.200 --> 0:01:47.520 you a sense. Back in March, when things we're not 0:01:47.520 --> 0:01:50.880 looking too pretty, Uh, they were twenty almost twenty four 0:01:50.920 --> 0:01:55.000 dollars a barrel, comparatively high. Um where we headed here. 0:01:55.000 --> 0:01:56.520 Are we going to see the same kind of trading 0:01:56.560 --> 0:01:58.520 activity in the June contract as we did in the 0:01:58.560 --> 0:02:01.400 May one? Yeah, it's very much my sense that we 0:02:01.400 --> 0:02:03.720 we will. I mean that this is going to be 0:02:03.760 --> 0:02:07.640 a steady march lower. The physical market conditions are only 0:02:07.640 --> 0:02:10.520 going to worsen over the next several weeks for a 0:02:10.520 --> 0:02:14.400 couple of reasons. Um, even though we have the US 0:02:14.440 --> 0:02:17.280 recount plunging and we are starting to finally see some 0:02:17.400 --> 0:02:20.480 US oil production get get reined in and decline by 0:02:20.480 --> 0:02:23.680 about seven thousand barrels from the recent peak by the way, 0:02:24.400 --> 0:02:27.360 but this market is going to have to stare down 0:02:27.680 --> 0:02:32.600 a massive amount of Saddi Arabian crude. Oh, the Sadie's 0:02:32.600 --> 0:02:34.240 are going in for the kill here. It looks like, 0:02:34.720 --> 0:02:37.960 and um really just you know, put a knockout blow 0:02:38.000 --> 0:02:42.520 onto our domestic producers, particularly the shale players, because they 0:02:42.560 --> 0:02:46.480 have barrel schedule to be heading our way over the 0:02:46.480 --> 0:02:49.040 course of the next couple of months here that are 0:02:49.080 --> 0:02:53.000 going to compete for what little available storage space remains, 0:02:53.520 --> 0:02:55.960 uh and use that crew to run it through their 0:02:56.000 --> 0:02:59.560 refinery in Texas. That will preclude them from you know 0:02:59.600 --> 0:03:01.600 what they usually do, which is by at least some 0:03:02.160 --> 0:03:06.320 US Gulf of Mexico produced crude oil. So, Um, this 0:03:06.360 --> 0:03:08.320 is gonna get a lot worse still before it gets better, 0:03:08.880 --> 0:03:10.640 all right, So give us a sense of what that's 0:03:10.639 --> 0:03:13.680 going to mean for the US oil producers, the shale 0:03:13.720 --> 0:03:18.359 patch uh companies. Um, you expect a wave of bankruptcies 0:03:18.440 --> 0:03:22.919 consolidation if in fact this does come to pass unless 0:03:22.960 --> 0:03:25.640 the administration comes through with some kind of aid package. 0:03:25.680 --> 0:03:29.080 There's been some hint of that. Yes, there's there's no 0:03:29.120 --> 0:03:31.440 one there's no way around it that these and these 0:03:31.480 --> 0:03:35.680 negative prices are are just uh, they're problematic for even 0:03:35.960 --> 0:03:38.720 companies as large as Conuco and Exxon Mobile, although they 0:03:38.720 --> 0:03:41.680 will withstand it, uh, and they will you know, be 0:03:41.800 --> 0:03:43.400 on the other side of this thing and probably be 0:03:43.560 --> 0:03:45.640 the ones picking up the pieces. Here. You're going to 0:03:45.720 --> 0:03:50.320 see a consolidation and concentration u emerge in the industry 0:03:50.600 --> 0:03:54.360 where there's probably only be a handful of really significant 0:03:54.640 --> 0:03:57.600 the large players because they're the ones with the deep 0:03:57.600 --> 0:04:00.280 pockets that can afford to a whether this arm and 0:04:00.320 --> 0:04:02.840 then you know, buy out or or buy these assets 0:04:02.840 --> 0:04:07.400 out from the auctions and bankruptcies that ensue. So, John, 0:04:07.440 --> 0:04:10.920 you did mention President Trump's uh pledged support of the 0:04:11.080 --> 0:04:14.160 energy industry. So let's go there, President Trump tweeting earlier 0:04:14.200 --> 0:04:16.320 this morning, we will never let the great US oil 0:04:16.360 --> 0:04:18.760 and gas industry down. I have instructed the Secretary of 0:04:18.880 --> 0:04:21.120 Energy and Secretary of the Treasury to formulate a plan 0:04:21.160 --> 0:04:23.719 which will make funds available so that these very important 0:04:23.760 --> 0:04:27.640 companies and jobs will be secured long into the future. 0:04:27.800 --> 0:04:31.240 How much do you sort of uh foresee that helping 0:04:31.279 --> 0:04:34.760 things given the fact that, yes, federal law does authorize 0:04:35.080 --> 0:04:37.719 the Energy Department to set aside emergency supplies, but the 0:04:37.760 --> 0:04:41.080 agency has only ever used about two thirds of that capacity. 0:04:41.240 --> 0:04:46.240 So how much are we can actually end up seeing here? Well, 0:04:46.240 --> 0:04:49.040 I mean, for starters, you know, you know that the 0:04:49.080 --> 0:04:51.640 Saudi Arabia has never been a friend of ours. Whenever 0:04:51.720 --> 0:04:55.080 there's oil market turmoil, when the prices are sky high, 0:04:55.080 --> 0:04:57.200 they're very slow to put moral on the market to 0:04:57.240 --> 0:05:00.680 help us out. And then and and right now, Um, 0:05:00.720 --> 0:05:02.279 I don't you know, I don't want to be over 0:05:02.279 --> 0:05:04.400 the top about what they're doing, but I mean they 0:05:04.400 --> 0:05:07.000 are really coming at us hard here. Uh. This is 0:05:07.040 --> 0:05:10.520 not something an ally or a friend were certainly a 0:05:10.600 --> 0:05:14.360 country that benefits from our protection should be doing. If 0:05:14.400 --> 0:05:16.039 I was the president, I had urged the president to 0:05:16.080 --> 0:05:19.400 embargo there oil and keep these forty tankers off and 0:05:19.440 --> 0:05:22.360 away from this market. But um, what we don't want 0:05:22.360 --> 0:05:25.719 to have happened here, um, is for the oil industry 0:05:25.760 --> 0:05:29.480 to get wrecked and then we find ourselves once again 0:05:30.120 --> 0:05:34.760 vulnerable to the policies of OPEC. Plus and Russia and UM, 0:05:34.800 --> 0:05:37.000 and we get a tight market where consumers, the US 0:05:37.040 --> 0:05:39.360 consumers get squeezed again, we go through the whole cycle 0:05:39.440 --> 0:05:42.200 one more time. UM. That's what I'm concerned about. And 0:05:42.240 --> 0:05:44.920 I think to the extent that the administration can lend 0:05:45.040 --> 0:05:46.719 some kind of aid and prop up at least a 0:05:46.800 --> 0:05:49.520 portion of the industry, they should. They should definitely do it. 0:05:49.760 --> 0:05:52.640 They should get oil into the Strategic Patrolling Reserve. I 0:05:52.720 --> 0:05:55.880 have always been an advocate of using that aggressively because 0:05:55.880 --> 0:05:59.279 we're up against the cartel. Um. You know, we least 0:05:59.279 --> 0:06:03.320 the oil when when when OPEC is tightening the spigot, 0:06:04.080 --> 0:06:06.960 and build it up now when prices are super low, 0:06:07.120 --> 0:06:09.279 and we'll have an insurance policy in the future, so 0:06:09.560 --> 0:06:11.880 you know, hopefully they'll get aggressive on an administration we 0:06:11.880 --> 0:06:14.120 can do something about this. This is not an entirely 0:06:14.200 --> 0:06:17.000 free market. That's the problem. John Kildeff, thank you so 0:06:17.080 --> 0:06:19.160 much for being with us. John kilda founder of Again 0:06:19.240 --> 0:06:23.480 Capital on the oil markets not entirely a free market. 0:06:23.560 --> 0:06:25.800 Although you can get oil for free if you can 0:06:25.839 --> 0:06:27.919 store it somewhere, in fact, someone will pay you to 0:06:27.960 --> 0:06:29.840 take it off their hands. At least when it came 0:06:29.920 --> 0:06:32.599 to the main contract. Interesting to see whether we'll see 0:06:32.640 --> 0:06:35.560 the same dynamic again play out with the June contract. 0:06:35.760 --> 0:06:38.680 John Kilduff saying it looks like it's the very likely 0:06:38.720 --> 0:06:41.640 possibility given the supplied to Man dynamic and the glut 0:06:41.920 --> 0:06:47.160 out there of crude. Well, one thing I think investors 0:06:47.160 --> 0:06:50.479 are beginning to become accustomed to in this coronavirus era 0:06:50.839 --> 0:06:53.160 in terms of the markets is volatility. I'm looking at 0:06:53.160 --> 0:06:55.520 the VIX right now up a little more than three 0:06:55.600 --> 0:06:58.159 full points here to forty seven. That's a long way, 0:06:58.360 --> 0:07:02.320 certainly from the peak several weeks ago about eighty, but 0:07:02.360 --> 0:07:04.920 it's also a long way from where we've historically been 0:07:05.000 --> 0:07:08.560 trading in the thirteen fifteen kind of level, So a 0:07:08.680 --> 0:07:12.840 higher risk environment for short. Someone to give us some perspective, 0:07:12.840 --> 0:07:15.440 there's nobody better than David Kotok. He's a chairman and 0:07:15.560 --> 0:07:19.040 chief investment officer of Kumblan Advisors, about three billion dollars 0:07:19.120 --> 0:07:21.200 under management. So David, thanks so much for joining us. 0:07:21.200 --> 0:07:23.440 I don't think we've really chatted much at all since 0:07:23.480 --> 0:07:26.600 this coronavirus has really become the narrative of not only 0:07:26.680 --> 0:07:30.120 our lives but also financial markets as well. I would 0:07:30.200 --> 0:07:32.800 love to get your long term perspective on kind of 0:07:32.840 --> 0:07:36.600 how you're thinking about this new world that that we're 0:07:36.640 --> 0:07:40.720 in and how to allocate capital. Well, thank you, Paul. 0:07:40.960 --> 0:07:45.040 We are hunker down as everyone else in the world 0:07:45.080 --> 0:07:48.920 who can hunker down just doing our view is a 0:07:49.080 --> 0:07:56.880 cash reserve in equity portfolios is necessary in bond portfolios 0:07:57.520 --> 0:08:02.720 highest grade credits. We are about to watch the dismemberment 0:08:02.960 --> 0:08:08.160 of the credits related to lower grade energy sector, and 0:08:08.240 --> 0:08:13.120 we expect that to be a worldwide phenomenon. And we 0:08:13.200 --> 0:08:18.800 have to wait for the elements that we know we 0:08:19.000 --> 0:08:27.000 must obtain, and they are testing, testing, testing, immune system 0:08:27.160 --> 0:08:35.720 enhancement antibodies, vaccines, and robust, credible treatments. And as soon 0:08:35.760 --> 0:08:39.000 as we have those, we can open up and we 0:08:39.040 --> 0:08:44.040 can get back to work and we can eventually fully recover. 0:08:44.640 --> 0:08:50.880 We cannot recover before we have these things, and any 0:08:50.960 --> 0:08:56.880 attempts to recover before you have them is a high 0:08:57.320 --> 0:09:02.000 risk gamut. We're about to tell that in the United States, 0:09:02.720 --> 0:09:08.560 where we see people in bowling alleys in Georgia and 0:09:08.640 --> 0:09:15.240 on the beaches in Jacksonville and assembled at state capitals protesting, 0:09:15.840 --> 0:09:18.080 and we're gonna find out in two or three or 0:09:18.120 --> 0:09:24.520 four weeks. If there are infectious surges in those locations 0:09:24.720 --> 0:09:31.080 or tied to people who participated in those activities, we're 0:09:31.080 --> 0:09:34.480 going to have that evidence very soon. And a lot 0:09:34.480 --> 0:09:37.240 of people are worried about what the economic damage would 0:09:37.280 --> 0:09:40.440 be from a resurgence of cases. You're saying that it's 0:09:40.440 --> 0:09:43.840 important to hide out in the safest of investments through 0:09:43.880 --> 0:09:48.040 this all as there is a washout effect of the shutdowns, 0:09:48.160 --> 0:09:50.440 and we're seeing that certainly in the bond market today. 0:09:50.720 --> 0:09:54.200 Tenure treasure yelled back at near all time lows zero 0:09:54.280 --> 0:09:58.240 point five FO. You've been covering treasuries, you could cover. 0:09:58.320 --> 0:10:01.920 You understood the FED inside now for decades. Where do 0:10:01.960 --> 0:10:05.960 you think the tenure yield is going basis points here, Oh, 0:10:06.040 --> 0:10:12.439 I don't know, because the FED is trying to follow 0:10:12.640 --> 0:10:16.800 a world war to model. Lisa and the World Work 0:10:16.920 --> 0:10:20.080 to model essentially took the FED and said, we're going 0:10:20.120 --> 0:10:23.840 to help the Treasury finance all it has to finance, 0:10:24.480 --> 0:10:27.720 and we're going to become partners with Treasury, and we're 0:10:27.720 --> 0:10:32.960 gonna set aside moral hazard discussions for later. We're gonna 0:10:33.040 --> 0:10:38.080 set aside FED independence for later, and we'll deal with 0:10:38.120 --> 0:10:42.960 that after the crisis and that's what's it worked. So 0:10:43.640 --> 0:10:48.079 in World War Two, the FED stabilize the entire treasury 0:10:48.160 --> 0:10:52.000 curve within a few basis points and it became predictable 0:10:52.400 --> 0:10:55.880 and a reference point. My expectation is the FED will 0:10:55.920 --> 0:10:59.319 get to that here as well, and we'll have a 0:10:59.400 --> 0:11:06.200 positive of lee sloped full yield curve of treasuries managed 0:11:06.240 --> 0:11:09.920 and stabilized by the FED. I sure hope so, because 0:11:10.000 --> 0:11:15.440 that will then become a platform reference for high grade 0:11:15.559 --> 0:11:19.720 credit for the entire world, and it is much needed 0:11:20.120 --> 0:11:24.280 right now. David Kotalk, this is fantastic and really interesting. 0:11:24.320 --> 0:11:27.480 In other words, yield curve control will be the policy 0:11:27.600 --> 0:11:31.200 from the Federal Reserve, as it essentially monetizes the debts 0:11:31.280 --> 0:11:35.199 of the United States by buying up the excess treasuries 0:11:35.520 --> 0:11:38.440 that the US government sells cells to plug its deficit. 0:11:38.920 --> 0:11:42.720 Given that model, how big can the Federal Reserve balance 0:11:42.760 --> 0:11:47.520 sheet get? My estimate is the Federal Reserve balance sheet 0:11:47.600 --> 0:11:51.679 could grow to between eight and eleven or twelve trillion, 0:11:52.920 --> 0:11:56.400 and it would be able to be financed and managed 0:11:57.240 --> 0:12:03.560 and maybe larger. In World War two, when once Pearl 0:12:03.600 --> 0:12:10.560 Harbor occurred and the FED policy changed in it went 0:12:10.640 --> 0:12:15.240 on for four years. The Federal Reserve assisted the United 0:12:15.280 --> 0:12:19.720 States of America in financing the war, and the debt 0:12:19.760 --> 0:12:24.320 to GDP exceeded a hundred percent, and it had to 0:12:24.400 --> 0:12:27.040 do it, and we were able at the end to 0:12:27.120 --> 0:12:30.360 be victorious in a war. This is a different kind 0:12:30.400 --> 0:12:34.840 of war, but the models of the same and federal 0:12:34.920 --> 0:12:38.880 finances needed. It's needed in the states and hospitals, in 0:12:38.960 --> 0:12:44.240 the cities, in agencies and nonprofits for assistance to business 0:12:44.440 --> 0:12:48.479 or else. We will have a mass of financial failures 0:12:48.520 --> 0:12:52.840 and bankruptcies and there's no reason to have them. If 0:12:52.880 --> 0:12:57.280 the policy is to gap across the valley to the 0:12:57.360 --> 0:13:02.240 other side of the crisis in science and medicine will 0:13:02.400 --> 0:13:05.920 fit this. So, David, about thirty seconds, just give us 0:13:05.960 --> 0:13:09.440 your sense of what the government's fiscal stimulus to date 0:13:09.440 --> 0:13:12.200 and what else you think needs happen. Well, we have 0:13:12.320 --> 0:13:15.440 two trillion direct, we have an argument of three or 0:13:15.480 --> 0:13:19.000 four trillion which would be indirect, and we have a 0:13:19.080 --> 0:13:22.560 current debate for another half a trillion. My view is 0:13:22.600 --> 0:13:26.400 will need a number of more chanchas of that, and 0:13:26.559 --> 0:13:31.439 sooner is better than later. So I hope politicians realize 0:13:31.480 --> 0:13:34.800 it and deliver it. David Kotalk, thank you so much 0:13:34.840 --> 0:13:36.720 for taking the time. All my best to your family 0:13:37.040 --> 0:13:40.160 and to yourself as you manage through this. David Kotalk, 0:13:40.240 --> 0:13:44.880 chairman and chief investment officer at Cumberland Advisers talking yield control, 0:13:45.040 --> 0:13:47.440 your guild, curve control, and that's actually something that a 0:13:47.480 --> 0:13:50.680 number of strategists are saying. We seem to be headed 0:13:50.720 --> 0:13:54.120 towards with the federal reserve buying. The bulk of the 0:13:54.200 --> 0:13:57.040 treasury issue is that the federal that the U. S. 0:13:57.080 --> 0:14:01.160 Treasury is selling to plug the skill deficit that we 0:14:01.240 --> 0:14:05.760 are developing to pay for some of these necessary bridges 0:14:05.880 --> 0:14:08.560 to get together side. Paul, Yeah, and David suggested it 0:14:08.600 --> 0:14:11.920 from a fiscal stimulus perspective, there's very likely going to 0:14:12.000 --> 0:14:14.240 need to be more just given our sense of timing 0:14:14.280 --> 0:14:17.360 of how this may play out here. So you know, 0:14:17.400 --> 0:14:18.719 it looks like the government is going to have to 0:14:18.760 --> 0:14:21.400 remain pretty active here. The Fed has certainly done its 0:14:21.480 --> 0:14:28.520 job as the dollar continues to strengthen. In light of 0:14:28.600 --> 0:14:32.040 this flight to haven, flight to quality is the fate 0:14:32.080 --> 0:14:35.280 of emerging markets, and especially given the fact that the 0:14:35.320 --> 0:14:38.880 developed nations really have been strapped on their own and 0:14:38.960 --> 0:14:42.160 dealing with the coronavirus We're so lucky Eric Fine joining 0:14:42.200 --> 0:14:45.040 US portfolio manager of focusing on Emerging markets fixed income 0:14:45.080 --> 0:14:47.880 strategy at van Eck Global. We have touched with it, 0:14:47.960 --> 0:14:50.720 based with him yesterday after the I M F meetings 0:14:50.720 --> 0:14:54.040 and some of the focuses that everyone is looking at. 0:14:54.280 --> 0:14:57.040 I just want to start with the flight of cash 0:14:57.320 --> 0:15:01.840 from developing markets. How much appetite are you hearing from 0:15:01.840 --> 0:15:05.360 your colleagues and from frankly uh staff within your own 0:15:05.360 --> 0:15:08.960 company about putting money to work within the developing world 0:15:09.200 --> 0:15:12.320 given the pain that we're seeing in in places like 0:15:12.360 --> 0:15:14.920 the United States and Europe and the lack of wellness 0:15:14.960 --> 0:15:19.280 to take risk. Thanks for the question, and uh So, 0:15:19.360 --> 0:15:21.960 first of all, last week saw the first influence e 0:15:22.080 --> 0:15:25.600 M bond funds UM. So that's a narrow answer to 0:15:25.600 --> 0:15:29.800 your question. Second, I'd say more broadly, e M is 0:15:29.840 --> 0:15:34.440 different from the pre global financial crisis e M. Before 0:15:34.480 --> 0:15:37.400 the before the Global financial crisis, when I spent about 0:15:37.400 --> 0:15:41.080 half of my career UM when something went wrong in 0:15:41.120 --> 0:15:43.240 the world, all the money flowed out and that was 0:15:43.320 --> 0:15:47.080 the end of the story. UM. After the Global financial crisis, 0:15:47.160 --> 0:15:52.040 markets learned that having high real interest rates, independent central banks, 0:15:52.120 --> 0:15:56.520 good fiscal policy. UM actually generated good returns. And so 0:15:56.960 --> 0:15:59.920 the big change from this I m US meeting compared 0:16:00.000 --> 0:16:04.320 to UH past crisis meetings was the discussion was very 0:16:04.400 --> 0:16:07.000 much who are the winners? Who are the losers? Obviously 0:16:07.120 --> 0:16:09.880 everything is kind of a loser, right, so it's going 0:16:09.920 --> 0:16:13.400 to be a big relative question to a big extent. Um. 0:16:13.440 --> 0:16:17.240 But uh, last week we saw the first inflows in general. Right. 0:16:17.280 --> 0:16:21.000 I can't talk specifically about my company, of course, um. 0:16:21.080 --> 0:16:25.840 Um yet um, because that's a matter of official timing issues. Um. 0:16:25.840 --> 0:16:29.720 But uh, but it hasn't been as bad as it's 0:16:29.840 --> 0:16:31.320 as it's been in the past. And the other thing, 0:16:31.360 --> 0:16:34.320 I'd say official support. A lot of this official support 0:16:34.680 --> 0:16:38.000 is not just to their own economies, it's to the 0:16:38.080 --> 0:16:41.640 e m s and that's also a big change. So, Eric, 0:16:41.680 --> 0:16:45.000 we've seen just unprecedented volatility and energy markets over the 0:16:45.080 --> 0:16:47.840 last couple of days. How does that kind of impact 0:16:47.880 --> 0:16:53.240 emerging markets broadly defined? Great question? Um. The problem with 0:16:53.400 --> 0:16:56.320 oil is it tends to correlate with everything, and when 0:16:56.360 --> 0:16:59.560 the markets seat oiled down, they think it's risk down 0:16:59.600 --> 0:17:03.080 because they think it's demand down. Um. I think that's 0:17:03.120 --> 0:17:07.560 generally right, but I don't think that's the right characterization 0:17:07.600 --> 0:17:10.439 of why oil is down right now. Um, it is 0:17:10.480 --> 0:17:14.560 about a storage capacity, and it is about a supply shock, 0:17:15.000 --> 0:17:18.200 not necessarily a demand shock. So that's the broadest point 0:17:18.240 --> 0:17:20.800 I'd made. The second point I'd make is there are 0:17:20.880 --> 0:17:25.520 winners and losers. UM. Consumer the consumption basket. The typical 0:17:25.520 --> 0:17:29.639 consumption basket in an emerging economy is food and energy. 0:17:30.040 --> 0:17:32.879 So a lot of these countries are seeing their inflation 0:17:33.000 --> 0:17:35.679 going down. UM. They are not just a bunch of 0:17:35.680 --> 0:17:39.960 oil exporters. UM. There are even some explicit winners, like 0:17:40.040 --> 0:17:42.919 South Africa. Strikes me, so I thought that it's complicated 0:17:42.920 --> 0:17:47.359 and all these countries, but they export gold and their 0:17:47.400 --> 0:17:51.840 import of oil. UM. So the oil story generally correlates 0:17:51.880 --> 0:17:56.400 badly and for legitimate reasons. But for me, it's all 0:17:56.440 --> 0:18:00.200 about the details. UM. And there are winners and losers. 0:18:00.240 --> 0:18:02.119 And I was glad to see and I m meetings 0:18:02.320 --> 0:18:06.639 that the focus was not oh, just exit and sell everything. UM, 0:18:06.680 --> 0:18:10.159 it was very much careful analysis of country by country 0:18:10.160 --> 0:18:12.479 and what it means. One of the biggest countries in 0:18:12.480 --> 0:18:15.840 this complex is China, and I've heard a real bullcase 0:18:15.960 --> 0:18:18.840 made that China will recover first, given the fact that 0:18:18.920 --> 0:18:23.440 they were first to experience the coronavirus, and we did 0:18:23.520 --> 0:18:26.560 see signs of that in the economic data. However, they 0:18:26.560 --> 0:18:29.680 are now facing the decline into band for the supply 0:18:29.760 --> 0:18:32.320 chain items that they have previously supplied. Given the fact 0:18:32.359 --> 0:18:34.400 that the rest of the world is shut down, what's 0:18:34.440 --> 0:18:39.119 the prospect there? Yeah, China is UM. China is one 0:18:39.160 --> 0:18:41.639 of the most important countries, not just because it's the 0:18:41.720 --> 0:18:45.560 largest economy and PPP terms from you know, second biggest UM, 0:18:45.600 --> 0:18:49.000 but UH, if you're going to see a V recovery anyway, 0:18:49.040 --> 0:18:52.240 it seems to me it's most likely a V shaped recovery. 0:18:52.640 --> 0:18:55.440 Letters are probably not the best way to answer economic 0:18:55.520 --> 0:18:58.520 questions this time around, but the most likely to see V. 0:18:58.680 --> 0:19:01.679 This is the biggest fiscal sting know US they've had ever. Basically, 0:19:02.240 --> 0:19:05.960 UMU the lockdown team to have been working and they're 0:19:06.040 --> 0:19:09.040 unwinding and the early data, as you refer to is 0:19:09.119 --> 0:19:12.400 has been positive. Another key feature of China is it's 0:19:12.440 --> 0:19:16.000 acting as a global stabilizer. UM. They are keeping their 0:19:16.040 --> 0:19:19.320 effects stable. That is a very unusual role and it's 0:19:19.320 --> 0:19:23.560 an important anchor for UH for the e m UM. 0:19:23.640 --> 0:19:27.760 You will also, I think a big signal will be 0:19:27.840 --> 0:19:31.439 on whether the Policy Committee coming up gets delayed or 0:19:31.520 --> 0:19:33.879 not on the last one I see on China is 0:19:34.280 --> 0:19:38.520 look for lower rates in our framework. Real interest rates 0:19:38.560 --> 0:19:41.000 are too low there, but you know what frameworks. There's 0:19:41.000 --> 0:19:42.840 a time for frameworks, and then there's a time for 0:19:43.280 --> 0:19:46.480 sort of more narrative common sense thinking. UM. I would 0:19:46.520 --> 0:19:49.639 I I don't think looking at zero percent or a 0:19:49.760 --> 0:19:53.199 zero is an extreme sort of UH grabbing statement. But 0:19:53.359 --> 0:19:56.119 I think much much lower interest rates in China as 0:19:56.160 --> 0:20:00.200 it stimulates fiscally is a very very reasonable um uestion 0:20:00.359 --> 0:20:02.440 to be asking, and that would boost it. But I 0:20:02.480 --> 0:20:05.080 would say it's the likeliest to be UM. There are 0:20:05.160 --> 0:20:10.040 some early signs UM and UH, and so this some 0:20:10.200 --> 0:20:14.360 of this optimism UM is not unfounded. Hey, Eric, thanks 0:20:14.359 --> 0:20:17.840 so much for joining us. Really appreciate your thoughts. Eric Fine, 0:20:17.880 --> 0:20:21.360 portfolio manager for Emerging Markets fixed Income Strategy at van 0:20:21.440 --> 0:20:24.760 Eck Global, based in UH New York City. So it's 0:20:24.800 --> 0:20:27.560 interestingly so you think about the risk UH that emerging 0:20:27.600 --> 0:20:30.679 market investors typically take on for that presumably better return. 0:20:30.960 --> 0:20:33.200 One could argue there's quite amount of risk of potential 0:20:33.240 --> 0:20:36.680 return in more developed markets. Now, given some of the 0:20:36.680 --> 0:20:39.080 pullbacks we've seen in the volatility, we've seen. Yeah. I 0:20:39.119 --> 0:20:41.560 think what Eric was saying though about the details is important. 0:20:41.600 --> 0:20:44.919 The idea that lower oil prices will be beneficial for 0:20:45.800 --> 0:20:49.199 countries that import, even though they could decimate, say the 0:20:49.200 --> 0:20:53.200 budgets of the likes of Nigeria. Yeah exactly, yeah, exactly. 0:20:53.240 --> 0:20:56.359 So one one one hand, it's good in terms of inflation. 0:20:56.400 --> 0:20:59.760 On the other hand, if you're producing that commodity like 0:20:59.800 --> 0:21:02.760 a lot of the emerging markets do clearly a big issue. 0:21:02.760 --> 0:21:06.640 Market selling off today SMP off two point nine. We'll 0:21:06.680 --> 0:21:14.240 have more. This is Bloomberg. As we watch oil prices plunge, 0:21:14.320 --> 0:21:17.920 the question is what does this mean for inflation when 0:21:17.960 --> 0:21:19.840 you see that the FED is trying to fight it 0:21:19.880 --> 0:21:23.199 with everything that they have. The idea of this disinflationary trend, 0:21:23.440 --> 0:21:25.919 the FED would like to see more inflation. We are 0:21:26.000 --> 0:21:30.479 yet seeing inflation expectations fall once again. Ira Jersey joining us. 0:21:30.480 --> 0:21:33.480 He's been talking about the disinflationary pressures. He's chief US 0:21:33.520 --> 0:21:37.360 interest rate strategist for Bloomberg Intelligence. I want to start there. 0:21:37.480 --> 0:21:40.800 Given the price of oil, what we're seeing, how correlated 0:21:40.880 --> 0:21:44.119 has that been to inflation expectations in the near and 0:21:44.240 --> 0:21:47.879 long term and the fedsibility to change that yeah, so, 0:21:47.880 --> 0:21:51.879 so traditionally it's been very high. So the correlation between 0:21:51.880 --> 0:21:54.560 short term inflation expectations, like you know one year and 0:21:54.560 --> 0:22:00.200 two year is at times over well over correlated. Now, 0:22:00.359 --> 0:22:02.560 I think the issue with the current move is that 0:22:03.000 --> 0:22:08.160 even though UH front end contracts of oil so you know, May, June, July, 0:22:08.720 --> 0:22:10.840 those are all coming down, but when you look at 0:22:10.880 --> 0:22:16.240 what the markets still expecting for oil in say UH January, 0:22:16.680 --> 0:22:19.760 it's still over thirty dollars. So the so the thing is, 0:22:19.800 --> 0:22:21.679 even though we might have a short term dip in 0:22:21.800 --> 0:22:25.080 headline inflation because of what's going on with the spot 0:22:25.080 --> 0:22:27.560 oil price, and then your trim oil prices, if they 0:22:27.600 --> 0:22:30.560 do go back up to those kind of thirty ish levels, 0:22:30.800 --> 0:22:34.200 then you wind up seeing um basically an unchanged energy 0:22:34.520 --> 0:22:37.840 component of cp I. So so actually today, ironically and 0:22:37.880 --> 0:22:41.200 even yesterday, you didn't get significant moves in the market's 0:22:41.240 --> 0:22:45.240 expectations of inflation. So I were thinking about, you know, 0:22:45.280 --> 0:22:47.040 all the money that the government is spending here in 0:22:47.119 --> 0:22:51.720 fiscal stimulus, how concerned is the treasury market for you know, 0:22:51.800 --> 0:22:54.879 the US budget deficit made quadruple this year to almost 0:22:54.880 --> 0:22:58.600 four trillion dollars. How's that being reflected in the market place. 0:22:58.600 --> 0:23:00.240 At some point, we gotta start paying this stuff back. 0:23:00.760 --> 0:23:04.080 It's not being reflected at all, UM And in fact, 0:23:04.160 --> 0:23:06.120 it's just the other way. So that you know what 0:23:06.119 --> 0:23:08.680 what tends to happen with treasuries. So unless you think 0:23:08.720 --> 0:23:12.440 that the federal government actually will be UM in default 0:23:12.480 --> 0:23:15.520 at some point in the future, what what tends to 0:23:15.520 --> 0:23:17.920 happen is treasure yields tend to go down as the 0:23:17.960 --> 0:23:20.080 Treasury is issuing more and more debt. And the reason 0:23:20.119 --> 0:23:23.800 for that is because they're issuing that debt into economic weakness. 0:23:23.840 --> 0:23:26.600 So two things occurred during during those periods. One is 0:23:26.920 --> 0:23:30.520 there's a lack of appetite for other fixed income assets, 0:23:30.560 --> 0:23:32.679 and people want to be in the safest assets, so 0:23:32.720 --> 0:23:35.640 they jumping in by treasuries. And that's exactly what you've seen. 0:23:35.640 --> 0:23:38.320 That's the flight the quality bid that UM that's been 0:23:38.320 --> 0:23:40.359 in a lot of the government bond markets over the 0:23:40.400 --> 0:23:43.920 past couple of weeks. UM. The other the other thing 0:23:44.000 --> 0:23:47.000