WEBVTT - Surveillance: Euro Weakness with Rochester (Podcast)

0:00:05.120 --> 0:00:09.200
<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

0:00:09.200 --> 0:00:13.200
<v Speaker 1>with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you

0:00:13.280 --> 0:00:18.600
<v Speaker 1>insight from the best and economics, finance, investment, and international relations.

0:00:18.840 --> 0:00:23.840
<v Speaker 1>To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

0:00:23.920 --> 0:00:30.160
<v Speaker 1>and of course on the Bloomberg terminal. When we invented

0:00:30.160 --> 0:00:33.360
<v Speaker 1>Bloomberg Surveillance, folks, it's about bringing in the experts. John

0:00:33.400 --> 0:00:35.760
<v Speaker 1>and I think we can say John is Jordan Rochester

0:00:35.880 --> 0:00:39.239
<v Speaker 1>and Nomura is nuanced and different than George Saravellis at

0:00:39.240 --> 0:00:42.240
<v Speaker 1>Deutsche Bank, is nuanced and different than the giants Stephen

0:00:42.280 --> 0:00:45.199
<v Speaker 1>Englander over at Standard Charter. And to talk to all

0:00:45.200 --> 0:00:49.160
<v Speaker 1>those people to read their research helps us call a

0:00:49.159 --> 0:00:51.880
<v Speaker 1>around this shock that we have. Should we bring in

0:00:51.920 --> 0:00:53.880
<v Speaker 1>Jordan Rochester? We bring him in right now? You bring

0:00:53.960 --> 0:00:56.000
<v Speaker 1>him name Jordan. Why don't you get the extra down

0:00:56.040 --> 0:00:58.480
<v Speaker 1>side from on your daughter? From where we are down to,

0:00:58.560 --> 0:01:03.160
<v Speaker 1>say ninety five in August, warning everyone, afternoon, everyone. Well,

0:01:03.240 --> 0:01:05.959
<v Speaker 1>in terms of why we think euro carries on, the

0:01:06.040 --> 0:01:08.280
<v Speaker 1>risk is, of course these gas flows, but there's also

0:01:08.319 --> 0:01:11.280
<v Speaker 1>a global recession story building up. So I think most

0:01:11.319 --> 0:01:14.720
<v Speaker 1>analysts have now only just realized euro can keep heading lower.

0:01:14.760 --> 0:01:16.520
<v Speaker 1>There was actually quite a bit of a fight in

0:01:16.520 --> 0:01:18.959
<v Speaker 1>the sort of cell side community around the one oh

0:01:19.000 --> 0:01:22.040
<v Speaker 1>six level when the ECB turn hawk ish. Well now

0:01:22.080 --> 0:01:24.640
<v Speaker 1>it's quite clear the gas flows dominating, and the reason

0:01:24.720 --> 0:01:28.199
<v Speaker 1>it goes to is probably three reasons. The first one

0:01:28.360 --> 0:01:30.479
<v Speaker 1>is the gas flows. We think that there's a high

0:01:30.600 --> 0:01:33.600
<v Speaker 1>chance that not Turing doesn't resume its operations, and what

0:01:33.600 --> 0:01:37.000
<v Speaker 1>we're seeing is a fundamental macro story. Euro dollar is

0:01:37.040 --> 0:01:40.959
<v Speaker 1>heading lower because European importers of gas are buying whatever

0:01:41.040 --> 0:01:43.720
<v Speaker 1>they can buy from the US, from Qatar, from as

0:01:43.800 --> 0:01:45.959
<v Speaker 1>bai Jan. They're just throwing money at the wall to

0:01:46.040 --> 0:01:50.520
<v Speaker 1>make sure the EU achieves the gas storage aims the

0:01:50.680 --> 0:01:53.440
<v Speaker 1>roughly around sixty two or sixty six percent full, so

0:01:53.440 --> 0:01:55.680
<v Speaker 1>they've got a lot more to do and that's forced

0:01:55.680 --> 0:01:58.279
<v Speaker 1>euros selling all the way until that target is reached.

0:01:59.040 --> 0:02:03.000
<v Speaker 1>The second reason, it's China, Okay, continue, sorry, continue continue.

0:02:03.200 --> 0:02:06.919
<v Speaker 1>The second reason is China. China's COVID business cycle. Before

0:02:06.960 --> 0:02:08.760
<v Speaker 1>the break, we had a little first word. They're telling

0:02:08.840 --> 0:02:11.720
<v Speaker 1>us that Shanghai might be going into lockdowns again. That's

0:02:11.800 --> 0:02:14.480
<v Speaker 1>the biggest trading partner for the euro Area. So demand

0:02:14.520 --> 0:02:17.200
<v Speaker 1>has just come out of the curve for European exports.

0:02:17.360 --> 0:02:19.720
<v Speaker 1>And the third one is recession risks, the US raising

0:02:19.800 --> 0:02:21.800
<v Speaker 1>rates the way they have, the way the world has

0:02:21.800 --> 0:02:24.440
<v Speaker 1>moved to the supply chain, and inflation. The ECB is

0:02:24.440 --> 0:02:27.399
<v Speaker 1>going to raise rates in July, September, October, and so on.

0:02:27.720 --> 0:02:29.639
<v Speaker 1>But we're talking about rate cuts here at number of

0:02:29.720 --> 0:02:31.680
<v Speaker 1>next year. I think that's the next trade. And I

0:02:31.680 --> 0:02:34.360
<v Speaker 1>find it really interesting how there's so much fed cuts

0:02:34.360 --> 0:02:37.240
<v Speaker 1>price for next year. The curves inverted, but that hasn't

0:02:37.280 --> 0:02:39.600
<v Speaker 1>happened in euro yet. So that's the next story, and

0:02:39.600 --> 0:02:41.800
<v Speaker 1>that's gonna weigh on euro as well. So not just

0:02:41.919 --> 0:02:44.440
<v Speaker 1>all about gas flows. It's a bigger story. Two stents

0:02:44.440 --> 0:02:47.639
<v Speaker 1>spread moving from negative ten to a negative eleven basis points.

0:02:47.639 --> 0:02:50.079
<v Speaker 1>Get your attention, Jordan. You and I were wained on

0:02:50.240 --> 0:02:55.000
<v Speaker 1>reading Duly fokars landau Garber David fokars landau Over at

0:02:55.000 --> 0:02:57.799
<v Speaker 1>the big German Bank. Makes real clear at some point

0:02:58.320 --> 0:03:01.720
<v Speaker 1>we have to step in using euro as a praxie.

0:03:01.720 --> 0:03:05.560
<v Speaker 1>Are we anywhere near and a Jordan Rochester zero point

0:03:05.680 --> 0:03:10.640
<v Speaker 1>nine five where institutions will step in to stanch the

0:03:10.760 --> 0:03:15.240
<v Speaker 1>dollar strength it's definitely possible, but I think it's unlikely.

0:03:15.840 --> 0:03:17.760
<v Speaker 1>It's definitely not my base case. I can say that.

0:03:17.880 --> 0:03:21.280
<v Speaker 1>So when the euro was invented, there was FX intervention,

0:03:21.360 --> 0:03:24.160
<v Speaker 1>that was the authorities around the world stepped in the

0:03:24.160 --> 0:03:25.840
<v Speaker 1>Federal Reserve of the Bank of eng and so on

0:03:26.080 --> 0:03:28.360
<v Speaker 1>to help support the currency. That so that it didn't

0:03:28.360 --> 0:03:32.400
<v Speaker 1>spur a Eurozone crisis in its early infancy. So there

0:03:32.480 --> 0:03:34.640
<v Speaker 1>was a joint effort there, and at the same time,

0:03:34.639 --> 0:03:36.960
<v Speaker 1>inflation was not as much of a problem as it

0:03:37.040 --> 0:03:40.120
<v Speaker 1>is today. Right now, every central bank around the world

0:03:40.160 --> 0:03:43.520
<v Speaker 1>pretty much wants a stronger currency. It helps tame inflation

0:03:43.600 --> 0:03:46.320
<v Speaker 1>from from import costs. So that's why we're seeing even

0:03:46.320 --> 0:03:49.040
<v Speaker 1>the likes of the SMB, who have for years fought

0:03:49.080 --> 0:03:51.240
<v Speaker 1>the curve and try to not have a stronger currency,

0:03:51.320 --> 0:03:54.440
<v Speaker 1>they're pretty much asking for one. Well, the Eurozone, they

0:03:54.440 --> 0:03:56.520
<v Speaker 1>can do that via rate hikes, and I think that's

0:03:56.560 --> 0:03:59.120
<v Speaker 1>the main way they're going to possibly do that. But

0:03:59.200 --> 0:04:01.360
<v Speaker 1>as I said earlier, the growth story is much bigger

0:04:01.360 --> 0:04:03.640
<v Speaker 1>than just the rate hikes. Is what's going on gas

0:04:03.680 --> 0:04:07.280
<v Speaker 1>in China, but FX intervention is being talked about in

0:04:07.320 --> 0:04:10.480
<v Speaker 1>Japan as well. Another great example, the authorities there say

0:04:10.480 --> 0:04:12.880
<v Speaker 1>the move is detached from fundamentals, where most of the

0:04:12.960 --> 0:04:15.040
<v Speaker 1>charts we look at say actually the move is quite

0:04:15.040 --> 0:04:18.040
<v Speaker 1>in line with fundamentals. That's the same with the euro

0:04:18.160 --> 0:04:20.760
<v Speaker 1>We've had a huge terms of trade shot Tom and

0:04:20.920 --> 0:04:24.960
<v Speaker 1>German exports have now become very uncompetitive. The cost of

0:04:25.000 --> 0:04:29.440
<v Speaker 1>electricity and energy in Europe is roughly around six times

0:04:29.520 --> 0:04:32.560
<v Speaker 1>higher than America. So to make a piece of manufactured

0:04:32.560 --> 0:04:36.320
<v Speaker 1>equipment you're paying six times more in electricity costs. You're

0:04:36.440 --> 0:04:39.600
<v Speaker 1>uncompetitive versus an American firm. You need a weaker currency

0:04:39.600 --> 0:04:41.760
<v Speaker 1>to help you out. Jordan, I want to tease out

0:04:41.800 --> 0:04:44.479
<v Speaker 1>the potential cases that you lay out in euros. Recent

0:04:44.520 --> 0:04:47.880
<v Speaker 1>note is the most likely that you see by mid

0:04:48.000 --> 0:04:49.880
<v Speaker 1>August or the end of August. I should say that's

0:04:49.920 --> 0:04:52.640
<v Speaker 1>according cheer latest note. But you said that a ninety

0:04:52.760 --> 0:04:56.279
<v Speaker 1>print could actually be reasonable to look for over the winter.

0:04:56.440 --> 0:04:58.920
<v Speaker 1>If we do get a nord Stream one cut down

0:04:58.960 --> 0:05:02.240
<v Speaker 1>cut off, if a Russia does not restore the gas supplies,

0:05:02.600 --> 0:05:05.279
<v Speaker 1>at what point does something break? At what point is

0:05:05.320 --> 0:05:07.640
<v Speaker 1>there a level at which you start to see a

0:05:07.640 --> 0:05:12.200
<v Speaker 1>contagion that perhaps is not linear? Well, I think nine

0:05:12.600 --> 0:05:16.160
<v Speaker 1>five to ninety is non linear. What breaks well. I

0:05:16.160 --> 0:05:18.800
<v Speaker 1>think credit channels would be much more the area where

0:05:18.839 --> 0:05:21.520
<v Speaker 1>things breaks. The rise and interest rates we've seen and

0:05:21.600 --> 0:05:23.680
<v Speaker 1>the drying up a consumer demand, we're gonna see a

0:05:23.720 --> 0:05:27.080
<v Speaker 1>lot of business models really challenged, and that's where you

0:05:27.200 --> 0:05:29.600
<v Speaker 1>have something breaks. The irony of that is if you

0:05:29.640 --> 0:05:31.840
<v Speaker 1>have credit spreads wide and that leads to a dovish

0:05:31.920 --> 0:05:34.760
<v Speaker 1>central bank typically and that would mean in lower euro

0:05:34.880 --> 0:05:37.440
<v Speaker 1>So I still think the exchange rate is the release valve,

0:05:37.480 --> 0:05:39.240
<v Speaker 1>and I don't think the exchange rate is what's going

0:05:39.279 --> 0:05:42.880
<v Speaker 1>to cause that stress. It's coming from the supply and

0:05:42.920 --> 0:05:44.880
<v Speaker 1>the demand side of the equation when it comes to

0:05:44.880 --> 0:05:48.160
<v Speaker 1>those risks. But look, when we get to five, we're

0:05:48.240 --> 0:05:50.600
<v Speaker 1>kind of basing that on the north stream one flows

0:05:50.760 --> 0:05:55.440
<v Speaker 1>maybe coming back to of their capacity. What ninety cents

0:05:55.560 --> 0:05:58.320
<v Speaker 1>is that's the scenario where north Stream one does not

0:05:58.480 --> 0:06:01.159
<v Speaker 1>come back on and the euro area does not get

0:06:01.279 --> 0:06:04.719
<v Speaker 1>enough gas storage and the German manufacturers get their gas rationed.

0:06:04.960 --> 0:06:07.840
<v Speaker 1>The Bunder's Bank in Germany have already done the analysis.

0:06:07.920 --> 0:06:11.280
<v Speaker 1>They expect that's a five percent hit to German GDP

0:06:11.720 --> 0:06:14.599
<v Speaker 1>if we have gas rationing outside of COVID. That's one

0:06:14.600 --> 0:06:16.680
<v Speaker 1>of the biggest economic shocks we've ever seen. So that's

0:06:16.680 --> 0:06:18.960
<v Speaker 1>a crisis you need that we can currently to help

0:06:18.960 --> 0:06:20.960
<v Speaker 1>you out, John, and just quickly, we've got to squeeze

0:06:20.960 --> 0:06:23.560
<v Speaker 1>this in. We're rationing flight to Heathrow. He throw out

0:06:23.560 --> 0:06:26.839
<v Speaker 1>this morning, basically putting a cast passenger limit on airlines

0:06:26.960 --> 0:06:29.160
<v Speaker 1>through September eleventh. What did you make of that? How

0:06:29.160 --> 0:06:31.960
<v Speaker 1>important is that story for you? It's the summer of

0:06:32.000 --> 0:06:34.480
<v Speaker 1>discontent For a lot of people. This is a personal

0:06:34.520 --> 0:06:37.120
<v Speaker 1>story for their own lives. I'm flying next week. I'm

0:06:37.120 --> 0:06:40.480
<v Speaker 1>flying with British Airways, so maybe this will disrupt my flights.

0:06:40.680 --> 0:06:43.160
<v Speaker 1>But on on a on a macro scale for the UK,

0:06:43.800 --> 0:06:45.800
<v Speaker 1>it's going to lead to a summer of discontent. It

0:06:45.800 --> 0:06:49.000
<v Speaker 1>could lead to higher wages more broadly speaking, and that

0:06:49.040 --> 0:06:51.920
<v Speaker 1>makes life trickier for the central banks. They're looking at

0:06:52.000 --> 0:06:55.039
<v Speaker 1>high inflation, looking at rising wages. They should be raising

0:06:55.120 --> 0:06:58.000
<v Speaker 1>rates in that scenario, but they're also seeing economic crisis

0:06:58.320 --> 0:07:01.200
<v Speaker 1>building up in the future in their pipeline. If we have,

0:07:01.320 --> 0:07:03.599
<v Speaker 1>especially with the gas situation gets worse, so that the

0:07:03.640 --> 0:07:05.800
<v Speaker 1>center bank is in a really weird place. They need

0:07:05.839 --> 0:07:08.200
<v Speaker 1>to raise rates to tame inflation, but they'll be looking

0:07:08.200 --> 0:07:11.400
<v Speaker 1>at negative growth, so that's somewhere of discontent, just keeps

0:07:11.440 --> 0:07:14.440
<v Speaker 1>central bank in that weird place. What a tough spot, Jordan,

0:07:14.520 --> 0:07:21.640
<v Speaker 1>Thank you, Jordan Rochester the of the more Cathy Jones

0:07:21.680 --> 0:07:24.960
<v Speaker 1>with his chief fixed income strategist at CHERYLS. Schwab. Is

0:07:25.000 --> 0:07:27.560
<v Speaker 1>a great mystery here, Cathy, that we're gonna be want

0:07:27.600 --> 0:07:33.960
<v Speaker 1>to be in fixed income with price up, yield lower. Yeah.

0:07:34.040 --> 0:07:38.120
<v Speaker 1>I think that the time to to move into a

0:07:38.120 --> 0:07:42.560
<v Speaker 1>little bit more duration has come. And we've been suggesting

0:07:42.600 --> 0:07:44.560
<v Speaker 1>that for a while now. You know, when you get

0:07:44.640 --> 0:07:48.240
<v Speaker 1>tenure yields above three, especially up in that three and

0:07:48.280 --> 0:07:50.800
<v Speaker 1>a half percent area at a time when the featist

0:07:50.880 --> 0:07:54.320
<v Speaker 1>tightening and the economy, the global economy is under a

0:07:54.320 --> 0:07:57.760
<v Speaker 1>lot of stress, I think that that safe haven move

0:07:58.200 --> 0:08:01.640
<v Speaker 1>and that yield move uh is the way to go.

0:08:02.120 --> 0:08:05.480
<v Speaker 1>Cathy Anahn was on with a wonderful discussion of the

0:08:05.480 --> 0:08:09.119
<v Speaker 1>tail risk out there off Curtosis. We rarely talk about

0:08:09.200 --> 0:08:11.280
<v Speaker 1>tail risk in the bond market. I want to go

0:08:11.400 --> 0:08:16.360
<v Speaker 1>there right now. How uncertain is the determination of what

0:08:16.520 --> 0:08:20.920
<v Speaker 1>price will do in fixed income? Now? How malleable are

0:08:20.920 --> 0:08:25.400
<v Speaker 1>the tail risks of the bond market? Yeah, it's a

0:08:25.440 --> 0:08:28.240
<v Speaker 1>great question, Tom. I think the question is we're in

0:08:28.240 --> 0:08:31.120
<v Speaker 1>the bond market, are we talking about? So we still

0:08:31.160 --> 0:08:34.240
<v Speaker 1>see a lot of tail risk and credit, particularly lower

0:08:34.320 --> 0:08:38.080
<v Speaker 1>quality credit, high yield, and even in the private debt markets,

0:08:38.080 --> 0:08:40.760
<v Speaker 1>there's a building amount of stress there. So I think

0:08:40.800 --> 0:08:43.360
<v Speaker 1>the tail risk there is pretty high. I think in

0:08:43.440 --> 0:08:47.800
<v Speaker 1>treasuries obviously there's some. I don't think it's uh, it's

0:08:48.040 --> 0:08:51.640
<v Speaker 1>immense anymore, simply because we've had such a massive upward

0:08:52.040 --> 0:08:54.880
<v Speaker 1>parallel shift in the yield curve and we've got the

0:08:54.920 --> 0:09:00.280
<v Speaker 1>FED tightening. That combination typically will you know, flatten the curd,

0:09:00.320 --> 0:09:04.040
<v Speaker 1>invert the yield curve, and so that probably diminishes some

0:09:04.160 --> 0:09:07.440
<v Speaker 1>of the tail risk at the long end. Kathy, we

0:09:07.440 --> 0:09:10.680
<v Speaker 1>were talking earlier about Marko Klanovic being an uber bowl

0:09:10.679 --> 0:09:13.000
<v Speaker 1>and moving to being just a bull when it comes

0:09:13.000 --> 0:09:15.480
<v Speaker 1>to risk assets. If you look at his note, it's

0:09:15.520 --> 0:09:17.720
<v Speaker 1>actually really nuanced, and he has a pretty bold call

0:09:17.760 --> 0:09:20.720
<v Speaker 1>on credit saying that that is not pricing in as

0:09:20.800 --> 0:09:26.120
<v Speaker 1>much risk right now as stocks. Would you agree with that? Well,

0:09:26.160 --> 0:09:28.600
<v Speaker 1>I don't do stocks, so I can't compare the two,

0:09:28.600 --> 0:09:31.520
<v Speaker 1>but I will say I think credit still has some

0:09:32.360 --> 0:09:36.360
<v Speaker 1>ways to go in terms of pricing in recessionary conditions.

0:09:36.440 --> 0:09:42.079
<v Speaker 1>For a further deterioration in UM credit quality and credit performance,

0:09:42.520 --> 0:09:45.240
<v Speaker 1>both domestically globally. So when we look at the high

0:09:45.280 --> 0:09:48.200
<v Speaker 1>yield spread, you know it's moved up quite a bit,

0:09:48.320 --> 0:09:50.360
<v Speaker 1>but we think it can move up another hundred and

0:09:50.440 --> 0:09:53.480
<v Speaker 1>fifty basis points or so if we get into a

0:09:53.679 --> 0:09:57.959
<v Speaker 1>pretty sharp downturn here, which looks like that's where we're

0:09:58.000 --> 0:10:00.800
<v Speaker 1>headed towards the second half of the year, sounds like

0:10:00.840 --> 0:10:03.760
<v Speaker 1>it could be controlled or could be uncontrolled based on

0:10:03.800 --> 0:10:05.319
<v Speaker 1>the pace of it. And I think about what Michael

0:10:05.320 --> 0:10:07.439
<v Speaker 1>Schowell said yesterday on the show, where he was saying

0:10:07.640 --> 0:10:10.839
<v Speaker 1>that we could start to see real market dysfunction that

0:10:10.920 --> 0:10:13.680
<v Speaker 1>could actually get the fence attention. Do you see corporate

0:10:13.679 --> 0:10:17.560
<v Speaker 1>credit as being vulnerable to that type of fissure that

0:10:17.600 --> 0:10:21.600
<v Speaker 1>he's talking about. I think the problem in corporate credit

0:10:21.720 --> 0:10:25.360
<v Speaker 1>is the liquidity issue UM So, yes, at the at

0:10:25.360 --> 0:10:28.080
<v Speaker 1>the very low credit quality, we could run into some

0:10:28.280 --> 0:10:30.720
<v Speaker 1>problems there, and I think access to the market would

0:10:30.760 --> 0:10:33.400
<v Speaker 1>be really difficult and probably is getting more difficult for

0:10:33.480 --> 0:10:37.680
<v Speaker 1>say triple C rated low rate of UH corporate issuers.

0:10:37.760 --> 0:10:40.040
<v Speaker 1>But I think in the investment grade space, what we

0:10:40.080 --> 0:10:43.800
<v Speaker 1>worry about is just liquidity because the dealers are not

0:10:43.920 --> 0:10:46.240
<v Speaker 1>holding as much the banks. The dealers are not holding

0:10:46.240 --> 0:10:48.440
<v Speaker 1>as much. A lot of it has moved into the

0:10:48.480 --> 0:10:53.160
<v Speaker 1>private market. If there is a dislocation, it's simply the

0:10:53.200 --> 0:10:56.680
<v Speaker 1>inability for the market to get the liquidity it needs

0:10:56.720 --> 0:11:00.200
<v Speaker 1>to get that the price and yield right, and we

0:11:00.240 --> 0:11:03.400
<v Speaker 1>could see some problems. They're not anticipating it, but it

0:11:03.480 --> 0:11:07.240
<v Speaker 1>certainly could happen if things deteriorate quickly. Kathy, thank you,

0:11:07.400 --> 0:11:09.560
<v Speaker 1>always wonderful to catch out with you. One of my favorites,

0:11:09.640 --> 0:11:17.800
<v Speaker 1>Kathy Jones, that have challenged swamp and joining us now

0:11:17.800 --> 0:11:21.400
<v Speaker 1>I could he stranagis at Wells Fargo Securities and this volatility,

0:11:21.600 --> 0:11:23.720
<v Speaker 1>this mess, whatever you want to call it, do we

0:11:23.720 --> 0:11:26.120
<v Speaker 1>need to get comfortable, get used to it. Is it

0:11:26.120 --> 0:11:29.600
<v Speaker 1>going to stick with us for a while. Well, I

0:11:29.600 --> 0:11:31.760
<v Speaker 1>don't know if you can say comfortable, but we do

0:11:31.840 --> 0:11:33.960
<v Speaker 1>think it's going to stick around. John, I think a

0:11:33.960 --> 0:11:36.439
<v Speaker 1>lot of the volatility we're going to continue to see

0:11:36.520 --> 0:11:40.640
<v Speaker 1>somewhat ever outlier moves on the day. Aggressive rips up,

0:11:40.800 --> 0:11:44.680
<v Speaker 1>aggressive drops down, and that's gonna probably persist until we

0:11:44.760 --> 0:11:47.120
<v Speaker 1>really see a science from the said that they're easing

0:11:47.160 --> 0:11:50.280
<v Speaker 1>off the gas pedal in terms of their hiking schedule

0:11:50.679 --> 0:11:54.000
<v Speaker 1>and know your notice brilliant. It goes all massa tellub

0:11:54.080 --> 0:11:58.319
<v Speaker 1>where you say, forget about the probability distribution, forget about

0:11:58.360 --> 0:12:02.000
<v Speaker 1>the center tendency of crude hostess and such. Look at

0:12:02.040 --> 0:12:05.360
<v Speaker 1>the tails. Look at the tails. What does the left tail,

0:12:05.840 --> 0:12:08.200
<v Speaker 1>the sweat of the left tail, the fear of the

0:12:08.280 --> 0:12:12.440
<v Speaker 1>left tail. What's it look like right now? We would

0:12:12.480 --> 0:12:15.000
<v Speaker 1>put it in context of really what sort of investment

0:12:15.040 --> 0:12:17.960
<v Speaker 1>style we're thinking about. At the left tail, we're thinking

0:12:18.000 --> 0:12:20.400
<v Speaker 1>about what have been the worst performers. What does that

0:12:20.520 --> 0:12:23.760
<v Speaker 1>low momentum basket really signaling? And we have this kind

0:12:23.760 --> 0:12:26.360
<v Speaker 1>of stress scenario and what looks to be for us

0:12:26.559 --> 0:12:29.200
<v Speaker 1>base case of recession. You've heard it time and again,

0:12:29.320 --> 0:12:33.120
<v Speaker 1>base case base case. What's driving that you're seeing these

0:12:33.160 --> 0:12:36.880
<v Speaker 1>really poor performers be the broken stories here? And when

0:12:36.880 --> 0:12:39.800
<v Speaker 1>you have that situation, we think that can persist, so

0:12:39.920 --> 0:12:43.840
<v Speaker 1>to us where advising clients avoid that low momentum basket,

0:12:44.040 --> 0:12:47.559
<v Speaker 1>don't go bottom fishing here, and also avoid the high

0:12:47.679 --> 0:12:51.560
<v Speaker 1>risk basket and lean more towards that low volatility if

0:12:51.559 --> 0:12:54.079
<v Speaker 1>you're worried about that recession that's at least in the

0:12:54.120 --> 0:12:56.720
<v Speaker 1>investment styles but you also have to think of this

0:12:56.800 --> 0:13:00.200
<v Speaker 1>in context of inslation. What are the potential drive is

0:13:00.200 --> 0:13:02.720
<v Speaker 1>that might bring inflation off the boil? What are the

0:13:02.760 --> 0:13:07.160
<v Speaker 1>extreme cases and we don't see those extreme cases really

0:13:07.160 --> 0:13:10.200
<v Speaker 1>relieving us of a CPI print below eight and a

0:13:10.200 --> 0:13:12.280
<v Speaker 1>half for the rest of this year. Inflation has been

0:13:12.280 --> 0:13:13.960
<v Speaker 1>a story that a lot of people have been talking

0:13:14.000 --> 0:13:16.000
<v Speaker 1>about and obsessing over for most of the year. But

0:13:16.040 --> 0:13:18.440
<v Speaker 1>now it's the strong dollar and what that does to

0:13:18.480 --> 0:13:21.840
<v Speaker 1>the SMP two companies that derive about thirty percent of

0:13:21.880 --> 0:13:24.640
<v Speaker 1>their revenues from overseas. How much of that has been

0:13:24.640 --> 0:13:26.440
<v Speaker 1>baked in and how much do you expect that to

0:13:26.480 --> 0:13:29.440
<v Speaker 1>be really a headwind during the setting earning season for

0:13:29.520 --> 0:13:33.880
<v Speaker 1>what equity valuations do well, Lisa, I don't think it's

0:13:33.960 --> 0:13:36.040
<v Speaker 1>fully really baked in now, you know. I wish I

0:13:36.040 --> 0:13:38.080
<v Speaker 1>could pinpoint and put a number on it for you,

0:13:38.120 --> 0:13:40.240
<v Speaker 1>But you bring up a great point. You know, the

0:13:40.320 --> 0:13:43.439
<v Speaker 1>dollar is strengthening, and that strengthening is coming from the

0:13:43.520 --> 0:13:47.520
<v Speaker 1>different pace in which we are tightening monetary policy versus

0:13:47.520 --> 0:13:51.080
<v Speaker 1>countries in comparison, and what that does to earnings and

0:13:51.280 --> 0:13:54.200
<v Speaker 1>already earnings and margins that are under pressure, it's going

0:13:54.240 --> 0:13:57.880
<v Speaker 1>to add another weight to the US corporate earning season,

0:13:58.160 --> 0:14:00.600
<v Speaker 1>and I think that itself has cause some of that

0:14:00.679 --> 0:14:04.360
<v Speaker 1>volatility we're talking about. People are worried can we continue

0:14:04.400 --> 0:14:07.400
<v Speaker 1>to grow earnings at the pace at which people are

0:14:07.400 --> 0:14:10.440
<v Speaker 1>hoping for and what looks to be a slowing GDP

0:14:10.600 --> 0:14:14.439
<v Speaker 1>growth a weakening consumer and that growth is going to

0:14:14.520 --> 0:14:18.840
<v Speaker 1>be really what drives confidence and equities and what really

0:14:18.840 --> 0:14:20.840
<v Speaker 1>what dictates the direction for the rest of the year,

0:14:20.960 --> 0:14:22.880
<v Speaker 1>and the cause of a lot of this has been

0:14:22.960 --> 0:14:26.000
<v Speaker 1>the energy industry and the price accrued, the price of energy,

0:14:26.040 --> 0:14:27.960
<v Speaker 1>the price of gas. Do they become the victim of

0:14:27.960 --> 0:14:30.840
<v Speaker 1>the solution? Can I belong those names into year end?

0:14:30.880 --> 0:14:35.800
<v Speaker 1>If I'm expecting that kind of GDP deceleration, Well, I

0:14:35.840 --> 0:14:38.200
<v Speaker 1>think there are ways to be exposed to the energy

0:14:38.240 --> 0:14:41.400
<v Speaker 1>markets and play that carefully. But for us, we think

0:14:41.440 --> 0:14:44.440
<v Speaker 1>on a broad scale, looking at oil and commodities, they

0:14:44.520 --> 0:14:47.400
<v Speaker 1>may be peaking here. Now that doesn't mean that they're

0:14:47.400 --> 0:14:50.720
<v Speaker 1>going to be rolling over quickly or rolling over strong

0:14:50.880 --> 0:14:54.600
<v Speaker 1>enough that CPI comes down aggressively. But we do think

0:14:54.600 --> 0:14:57.640
<v Speaker 1>that in many instances and cases that we may be

0:14:57.760 --> 0:15:01.320
<v Speaker 1>seeing the top here and other aspect of that and

0:15:01.320 --> 0:15:03.680
<v Speaker 1>where we might see part of that being a hinted

0:15:03.720 --> 0:15:06.240
<v Speaker 1>at is you look at how much the market believes

0:15:06.280 --> 0:15:10.440
<v Speaker 1>that the impact of energy has on cp I might

0:15:10.440 --> 0:15:12.800
<v Speaker 1>be reduced. As you look at break evens, you see

0:15:12.840 --> 0:15:15.840
<v Speaker 1>break even rolling off from what had been above three

0:15:15.920 --> 0:15:19.520
<v Speaker 1>hundred basis points now down to maybe three seventy three

0:15:20.440 --> 0:15:24.640
<v Speaker 1>to thirty excuse me, two basis points now. That's telling

0:15:24.680 --> 0:15:27.720
<v Speaker 1>you that it's starting to weaken as an impact. And

0:15:27.800 --> 0:15:30.280
<v Speaker 1>that's where we're getting our signal that maybe oil and

0:15:30.360 --> 0:15:33.960
<v Speaker 1>commodities really are reaching their peak. An awesome stuff. As

0:15:33.960 --> 0:15:41.320
<v Speaker 1>always at once Founder Securities, thank you right now. Ellen

0:15:41.360 --> 0:15:44.440
<v Speaker 1>Wald was a senior fellow in Atlantic Council on Oil

0:15:44.720 --> 0:15:47.400
<v Speaker 1>on strong dollar, which harkens back to another time in

0:15:47.480 --> 0:15:51.320
<v Speaker 1>place and petro dollars. Ellen, what does a strong dollar

0:15:51.480 --> 0:15:55.560
<v Speaker 1>mean for your oil world? Yeah, it's you know, things

0:15:55.560 --> 0:16:00.000
<v Speaker 1>are things are quite uh incredible in oil right now.

0:16:00.200 --> 0:16:03.560
<v Speaker 1>And as we're seeing, um, you know, prices are kind

0:16:03.560 --> 0:16:06.120
<v Speaker 1>of going on on a rather almost like a roller

0:16:06.120 --> 0:16:10.080
<v Speaker 1>coaster up and down. Um. Fears of recession uh tend

0:16:10.120 --> 0:16:12.360
<v Speaker 1>to send the prices down because there's a sense that

0:16:12.480 --> 0:16:15.480
<v Speaker 1>this will reduce demand. But then the next thing you

0:16:15.560 --> 0:16:19.360
<v Speaker 1>hear is, you know, demand is so strong, uh still,

0:16:19.480 --> 0:16:21.520
<v Speaker 1>and so then you you see prices going up. I

0:16:21.560 --> 0:16:26.040
<v Speaker 1>think that the news of Heathrow reducing capacity could actually

0:16:26.440 --> 0:16:30.480
<v Speaker 1>are putting capacity limits. The idea that that could potentially

0:16:30.560 --> 0:16:35.440
<v Speaker 1>reverberate across other airports could put a damper on on

0:16:35.600 --> 0:16:38.480
<v Speaker 1>travel and jet fuel demand as well. Is there a

0:16:38.520 --> 0:16:43.640
<v Speaker 1>linkage of petro dollars to declining oil demand? You know,

0:16:43.720 --> 0:16:46.920
<v Speaker 1>that's a really good question, and I think at this point,

0:16:47.280 --> 0:16:51.400
<v Speaker 1>you know, we're not really seeing a drop in demand.

0:16:51.440 --> 0:16:54.320
<v Speaker 1>You know, we've looked at gasoline stats. You know, some

0:16:54.360 --> 0:16:56.960
<v Speaker 1>weeks we're seeing a drop, in other weeks we're seeing

0:16:56.960 --> 0:17:00.280
<v Speaker 1>an increase. So um, I think that we have seen

0:17:01.000 --> 0:17:04.800
<v Speaker 1>some declines in terms of demand instruction, but not a

0:17:04.840 --> 0:17:07.639
<v Speaker 1>whole lot. Uh. There's a lot of pent up demand.

0:17:07.720 --> 0:17:12.200
<v Speaker 1>It doesn't seem like the dollars really affecting demand all

0:17:12.240 --> 0:17:15.160
<v Speaker 1>that much at this point, Ellen, which raises a question

0:17:15.359 --> 0:17:17.520
<v Speaker 1>of when we're going to see a pop in oil prices,

0:17:17.600 --> 0:17:19.919
<v Speaker 1>given that even fought b role as we were just

0:17:20.000 --> 0:17:21.919
<v Speaker 1>hearing from the i A came out and said, this

0:17:22.000 --> 0:17:24.600
<v Speaker 1>is a global energy crisis in a sense that we

0:17:24.640 --> 0:17:27.360
<v Speaker 1>have never seen before in terms of complexity and speed.

0:17:27.440 --> 0:17:30.320
<v Speaker 1>When do we see that translate into the higher prices

0:17:30.320 --> 0:17:32.400
<v Speaker 1>that so many people are expecting and the prinkly you're

0:17:32.440 --> 0:17:36.200
<v Speaker 1>seeing in the physical market. You know, it's so interesting

0:17:36.200 --> 0:17:38.520
<v Speaker 1>because we're seeing a lot of calls for either you know,

0:17:38.560 --> 0:17:41.240
<v Speaker 1>oil will either go to two hundred and thirty dollars

0:17:41.240 --> 0:17:44.000
<v Speaker 1>of barrel or it could go down to sixty dollars

0:17:44.000 --> 0:17:47.600
<v Speaker 1>a barrel, and that's a that's a huge, huge margin here,

0:17:47.640 --> 0:17:49.679
<v Speaker 1>and I do think that it reflects a lot of

0:17:49.720 --> 0:17:53.840
<v Speaker 1>the uncertainty. Uh And and facty Bureau is correct to

0:17:53.880 --> 0:17:56.920
<v Speaker 1>call attention to a lot of the issues that we're

0:17:56.920 --> 0:17:59.720
<v Speaker 1>seeing today. I mean, look at what happened in Sri Lanka.

0:18:00.240 --> 0:18:04.840
<v Speaker 1>That could be next for many, many more countries and

0:18:05.280 --> 0:18:09.800
<v Speaker 1>not just developing nations. But we could absolutely see fuel

0:18:09.880 --> 0:18:13.720
<v Speaker 1>crisis around the globe. And uh you know, part of

0:18:13.800 --> 0:18:18.240
<v Speaker 1>that is due to historically low investment in fossil fuels,

0:18:18.320 --> 0:18:21.520
<v Speaker 1>and you know that that trend is not really reversing

0:18:21.560 --> 0:18:25.800
<v Speaker 1>itself at any point, and this is precipitating a huge

0:18:25.920 --> 0:18:30.000
<v Speaker 1>energy crisis. Ellen, does any part of the capping of

0:18:30.240 --> 0:18:33.000
<v Speaker 1>energy prices from rush or at least the energy prices

0:18:33.000 --> 0:18:35.280
<v Speaker 1>that they receive. Does it make sense to you in

0:18:35.359 --> 0:18:38.159
<v Speaker 1>terms of its feasibility and a rollout and getting everyone

0:18:38.200 --> 0:18:41.679
<v Speaker 1>on board. Or is this basically highlighting the lack of

0:18:41.720 --> 0:18:45.119
<v Speaker 1>tools right now available to really curtail the crisis that

0:18:45.160 --> 0:18:48.520
<v Speaker 1>people are talking about. Yeah, I I just don't see

0:18:48.560 --> 0:18:53.160
<v Speaker 1>how imposing a cap on Russian oil prices is at

0:18:53.160 --> 0:18:56.560
<v Speaker 1>all feasible because, uh, you know, say you even get

0:18:56.640 --> 0:18:59.280
<v Speaker 1>Indian China, which are the biggest buyers of Russian food

0:18:59.359 --> 0:19:01.959
<v Speaker 1>right now, you say to them, okay, only pay this

0:19:02.000 --> 0:19:05.000
<v Speaker 1>amount for Russian food. And the idea is that Indian

0:19:05.080 --> 0:19:07.520
<v Speaker 1>China will want to pay less. Of course they want

0:19:07.560 --> 0:19:09.720
<v Speaker 1>to pay less, but will the Russians want to sell

0:19:09.760 --> 0:19:13.240
<v Speaker 1>them for less? Russia's in. Russia's holding the cards right

0:19:13.280 --> 0:19:17.240
<v Speaker 1>now because if Indian China want their oil, they can say, sorry,

0:19:17.359 --> 0:19:19.280
<v Speaker 1>you know, we're not going to sell it for you know,

0:19:19.359 --> 0:19:24.399
<v Speaker 1>forty under under the benchmark. We're offering you a twenty

0:19:24.440 --> 0:19:27.359
<v Speaker 1>dollar discount. And our Indian China really going to say no.

0:19:27.440 --> 0:19:30.480
<v Speaker 1>Are they going to risk, especially India, having a fuel

0:19:30.560 --> 0:19:35.119
<v Speaker 1>crisis in their country? Uh? Just because the West is

0:19:35.160 --> 0:19:38.520
<v Speaker 1>saying we want you to cap the price of Russian

0:19:38.520 --> 0:19:41.199
<v Speaker 1>oil so that you know it'll hurt putin In his

0:19:41.240 --> 0:19:44.320
<v Speaker 1>war against Ukraine. They're they're probably looking at saying Ukraine,

0:19:44.359 --> 0:19:48.760
<v Speaker 1>what Ellen you just mentioned Sri Lanka. And I'm very

0:19:48.800 --> 0:19:54.399
<v Speaker 1>curious about the contagion effect here. When a given poorer country,

0:19:54.560 --> 0:20:00.280
<v Speaker 1>beleaguered by high oil prices provide subsidies domestically, where do

0:20:00.359 --> 0:20:02.520
<v Speaker 1>they get that money? Do they issue debt or is

0:20:02.560 --> 0:20:06.000
<v Speaker 1>it a bail out from the I m F. I'm

0:20:06.040 --> 0:20:08.600
<v Speaker 1>guessing that they first issue debt and then they're hoping

0:20:08.640 --> 0:20:10.680
<v Speaker 1>for a bail out from the I m F. And

0:20:10.800 --> 0:20:14.400
<v Speaker 1>if that's not, you know, coming uh, then then they're

0:20:14.400 --> 0:20:17.679
<v Speaker 1>gonna see some serious problems. And we're seeing not just uh,

0:20:17.880 --> 0:20:20.239
<v Speaker 1>you know, developing countries do this, but we're seeing it

0:20:20.280 --> 0:20:24.119
<v Speaker 1>in more developed countries as well. Offering these kind of subsidies,

0:20:24.119 --> 0:20:27.359
<v Speaker 1>are trying to to subsidize their cap energy prices, and

0:20:27.560 --> 0:20:31.399
<v Speaker 1>in some cases they're saying to the utilities, you can't

0:20:31.480 --> 0:20:34.840
<v Speaker 1>charge more than X. Well, if the utilities have to

0:20:34.920 --> 0:20:38.480
<v Speaker 1>pay more than X for their fuel, then that's just

0:20:38.520 --> 0:20:42.919
<v Speaker 1>gonna put the utilities in a bankruptcy situation and likely

0:20:42.960 --> 0:20:45.399
<v Speaker 1>cause them to be nationalized. And then the government's going

0:20:45.480 --> 0:20:48.760
<v Speaker 1>to take that debt and uh, so on and so forth.

0:20:48.800 --> 0:20:51.280
<v Speaker 1>So they're not really solving the problem. They're just kind

0:20:51.280 --> 0:20:54.240
<v Speaker 1>of kicking it to UH, to other people or to

0:20:54.359 --> 0:20:57.280
<v Speaker 1>other entities. And well and the Amanti cant so, and

0:20:57.400 --> 0:21:01.280
<v Speaker 1>thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening.

0:21:01.640 --> 0:21:05.000
<v Speaker 1>Join us live weekdays from seven to ten am Eastern

0:21:05.240 --> 0:21:09.280
<v Speaker 1>on Bloomberg Radio and on Bloomberg Television each day from

0:21:09.320 --> 0:21:14.600
<v Speaker 1>six to nine am for insight from the best in economics, finance, investment,

0:21:14.720 --> 0:21:19.760
<v Speaker 1>and international relations. And subscribe to the Surveillance podcast on

0:21:19.840 --> 0:21:23.639
<v Speaker 1>Apple podcast, SoundCloud, Bloomberg dot com, and of course on

0:21:23.760 --> 0:21:27.960
<v Speaker 1>the terminal. I'm Tom keene In. This is Bloomberg