Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz.
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Speaker 2: Deutsche Bank for David Folkritz Lando set in the intellectual
Speaker 2: structure on equities and asset allocation. Chief global strategist spin
Speaker 2: from Chauda joins us this morning.
Speaker 1: With dby Binkie.
Speaker 2: You nailed the bullmarket. Took a while to happen, the
Speaker 2: Chada market. The Chada bullmarket took a while to happen,
Speaker 2: and with a vengeance, you nailed this. And when we
Speaker 2: were talking going to go in live here, you may
Speaker 2: clear ten percent of the people have participated in ninety
Speaker 2: percent of the people have been left behind. What's the
Speaker 2: next leg look like for ninety percent of the people
Speaker 2: that have missed this October market?
Speaker 3: Yeah, so, I mean for them, you know, And the
Speaker 3: distinction that I was drawing was, you know, we've had
Speaker 3: to move up inequity positioning. So we have a simple
Speaker 3: sort of Z score plus minus one band and you know,
Speaker 3: we were at the bottom last year. That was the
Speaker 3: reason for the call for a positioning squeeze. Positioning today
Speaker 3: is sitting in the middle of the band. The entire
Speaker 3: move in positioning up has come really from systematic strategies
Speaker 3: as VOLL has come down from extremely elevated levels to
Speaker 3: still very elevated levels outside I would say, you know,
Speaker 3: especially driven by really rates VOLL discretionary investors, which you know,
Speaker 3: in terms of assets under management or I would say
Speaker 3: eight to one in terms of relative size to systematic strategies.
Speaker 3: Their positioning has been what I would describe as firmly
Speaker 3: underweight for the last year in you know, a very narrow.
Speaker 1: Can I translate firmly underweight just.
Speaker 3: So the participation has been you know, minimal to zero
Speaker 3: to non existing night this week, what we are seeing
Speaker 3: is basically some move up in what we put in
Speaker 3: our positioning measures, but it's really a sentiment indicator, and
Speaker 3: that's the aaii bullbear spread and that's moved up for
Speaker 3: the first time. Whether or not that actually translates into
Speaker 3: increased allocations we have to wait and see.
Speaker 4: The call from here. From where we are at about
Speaker 4: forty three hundred at of forty five, just written your
Speaker 4: research last night, from the last week or so, it
Speaker 4: feels like it's all about earnings. Can you pair this
Speaker 4: view about earnings with what's happening on the other side
Speaker 4: of the research team, with Mattlasli and Deutsche Bank ultimately
Speaker 4: looking for a recession. Can you pay the two views
Speaker 4: at the moment of Binki.
Speaker 1: Oh?
Speaker 3: Absolutely, So that's really easy because they are the same view.
Speaker 3: The view so my earnings numbers te off of our
Speaker 3: house economics forecast, but with a small twist, I would say,
Speaker 3: remember that the S and P five hundred gets thirty
Speaker 3: to forty percent of its earnings from the rest.
Speaker 5: Of the world.
Speaker 3: So I have you know, a sales weighted global GDP
Speaker 3: measure obviously for US equities, you know, the US economy
Speaker 3: matters a lot. We have a framework. I'm going to
Speaker 3: leave that aside for a second. That's exactly what it is.
Speaker 3: But it teas off of basically our house economics forecast.
Speaker 3: So it's really a translation issue if you want. It
Speaker 3: embodies a recession. In Q four and Q one, the
Speaker 3: things to note about it are that the forecast is
Speaker 3: for a pretty mild recession.
Speaker 1: Number two.
Speaker 3: You know, we do have growth happening until then, and
Speaker 3: that means that the recession kicks in form a higher
Speaker 3: level in terms of earnings. And you know, what I
Speaker 3: would emphasize is that the equity market, when it looks
Speaker 3: at aggregate earnings like the S and P five hundred earnings,
Speaker 3: tends to look year and year and in year, you know,
Speaker 3: we are still negative in terms of growth. It's slightly
Speaker 3: less negative than you know, the prior quarter, but it's
Speaker 3: still negative. But remember that, you know, when we look
Speaker 3: at all macro series, we look quarter on quarter, which
Speaker 3: in you know, equities, we call sequential growth, and our
Speaker 3: estimate of sequential growth in S and P five hundred
Speaker 3: earnings in Q one on a seasonally adjusted basis is
Speaker 3: a solid five percent. And I would emphasize that's not annualized.
Speaker 6: Markets are not the economy, and you have to just
Speaker 6: keep repeating that markets are not the economy. Markets. John
Speaker 6: was mentioning that earlier, and I am wondering whether this
Speaker 6: could be the start of a bull market, even though
Speaker 6: the US has not yet had a full blown recession.
Speaker 1: Yeah.
Speaker 3: So so you know, there's two sort of elements about
Speaker 3: the recession that I would emphasize.
Speaker 1: This is arguably the.
Speaker 3: Most well telegraphed recession. Recessions, in my view, in terms
Speaker 3: of their impact on financial markets, are not really about
Speaker 3: you know, a couple of quarters of negative growth where
Speaker 3: everybody agrees that it's modest and temporary because the market's
Speaker 3: going to look through that. The market's meant to look
Speaker 3: through that. You know, if you listen to corporates on
Speaker 3: earnings calls, we're at the point where we've been talking
Speaker 3: about recessions for at least three the impending recession basically
Speaker 3: for at least three quarters, and so you know, corporates
Speaker 3: are you know, already responding. And the idea I would
Speaker 3: put on the table is that, you know, it's very
Speaker 3: possible that the recession slow down. Part of that has
Speaker 3: already you know, been brought forward if you want. If
Speaker 3: a recession is very well anticipated, it's not very you know,
Speaker 3: the little shock value to make you risk averse. So
Speaker 3: there will be some negative impacts, but you know a
Speaker 3: lot of the multipliers come really from a risk aversion,
Speaker 3: and it's you know the concept of anticipated risk version.
Speaker 3: You know, an anticipated shock is not a shock.
Speaker 6: To tie this all together and to and where we began,
Speaker 6: do you think that we are seeing durable signs of
Speaker 6: a broadening out.
Speaker 3: I think that it gets pretty choppy from here because
Speaker 3: the positioning squeeze that I spoke about at the beginning,
Speaker 3: that's mostly basically been done. I mean, as you you know,
Speaker 3: as Tom mentioned a vix at fourteen and thirteen, you know,
Speaker 3: the biggest driver of systematic strategies is decline involved and
Speaker 3: we are not looking for a you know, vault to
Speaker 3: really go down from here. We're not really looking for
Speaker 3: discretionary investors to raise their positioning because as you said earlier,
Speaker 3: there is this very long list of concerns that they're
Speaker 3: focused on in on and I don't think the resolution
Speaker 3: of those is easy. So we're going to continue to
Speaker 3: have a tugger war. But the demand supply, the positioning
Speaker 3: squeeze is done, but the demand supply balance still looks,
Speaker 3: you know, constructive. So I would say a grind higher
Speaker 3: forty five hundred per year, it should be pretty sharp.
Speaker 3: Soft landing will easily give you five thousand. Yeah, we've
Speaker 3: said that before, we published that before.
Speaker 4: Think he's so measured out to take here. Last year,
Speaker 4: same time?
Speaker 5: Great?
Speaker 4: Yeah, this year, same time you had this year because.
Speaker 1: You make the call, but the exxies you never know.
Speaker 4: The life of a strategist. Think you just quickly Yeah?
Speaker 4: Does it feel a whole lot better when things are
Speaker 4: going right? Or do you get nervous that things are
Speaker 4: a bad to go wrong? Are you constantly paranoid? How
Speaker 4: do you think about it?
Speaker 5: Constantly paranoid?
Speaker 3: You're asking me this on air?
Speaker 4: Approach to that. Last year was tough. I've talked about
Speaker 4: that with you many times. This year is better. You know,
Speaker 4: how do you approach things when you're right.
Speaker 3: The same way as you approach them when you're wrong.
Speaker 3: You ask yourself, what have you got right? And I
Speaker 3: know you're right for the right reason, and what have
Speaker 3: you got wrong? And you were just your review accordingly, What.
Speaker 4: Was the lesson from last year that helped you with
Speaker 4: this year?
Speaker 3: The lesson from last year was a confirmation of my
Speaker 3: view earlier in the year that we would get a
Speaker 3: massive amount of anxiety from the FED. But the anxiety
Speaker 3: was of their own creation because they decided, for a
Speaker 3: variety of reasons to wait a long time. So when
Speaker 3: I listened to the fo mc now I hear calm.
Speaker 3: I mean, and that that really reaffirms my view that
Speaker 3: a lot of their nervousness, yes about inflation, still about inflation,
Speaker 3: but you know they were at zero to start the year.
Speaker 3: We are now at five and and and so there's
Speaker 3: a lot less reason to be anxious.
Speaker 1: Excuse to get out of the triple every doll case.
Speaker 4: I mean, first order, I think this was great, tons
Speaker 4: of respect for you, but it always grayst catch out.
Speaker 4: Thank you out of the Deutsche Bank.
Speaker 2: I get the Jones joins us right now their fixed
Speaker 2: income strategy. And I'm going to go to someone we
Speaker 2: were talking about with your exquisite ability to play piano,
Speaker 2: which is Gershwin George, where he said life is a
Speaker 2: lot like jazz boy, you better improvides. How do you
Speaker 2: improvise in the bond market with the oddity of post
Speaker 2: pandemic economics and the oddity of the ambiguity I.
Speaker 1: Should say almost about where we are right now.
Speaker 7: Yeah, I mean, I think that's really the challenge not
Speaker 7: only strategists have, but also the FED is facing right
Speaker 7: that how do they set policy in an environment that's
Speaker 7: really very unfamiliar. The way we've been doing it is
Speaker 7: simply either barbelling or laddering and not trying to play
Speaker 7: every little up and down in the market. So if
Speaker 7: you know you can stay short and try to roll
Speaker 7: out and time it perfectly, but there's a lot of
Speaker 7: reinvestment risk if you miss it because these moves are
Speaker 7: so fast.
Speaker 2: Are you doing this with combining your work with Lizae Saunders.
Speaker 2: Are you doing it with the understanding there will be
Speaker 2: a jump condition in the short end or even a
Speaker 2: dramatic movement in the long end, or do you see
Speaker 2: sort of stability out there as you barbell or.
Speaker 7: Ladder We think in the bond market it'll be more stable.
Speaker 7: We had huge volatility in the first half of the year,
Speaker 7: and I think that was the market readjusting to FED
Speaker 7: policy and all the surprises that we've had, and yet
Speaker 7: we haven't gone anywhere right. We had all this volatility,
Speaker 7: and yields pretty much from two years out are about
Speaker 7: the same as they were at the beginning of the year.
Speaker 7: But we think second half should be somewhat more stable.
Speaker 7: I mean, barring some sort of crazy financial market event
Speaker 7: that seems to happen every six weeks. But barring that,
Speaker 7: I think that we should have a fairly stable move here.
Speaker 6: There's this sort of renegade theory out there right now
Speaker 6: trying to justify perhaps some of the moves and some
Speaker 6: of the resilience in the economy or else it's just true,
Speaker 6: which is we've been talking about the lure of five
Speaker 6: to five and a half percent on cash as a negative,
Speaker 6: a sucking liquidity out of the market. But some people
Speaker 6: say it's actually stimulative because all of a sudden you
Speaker 6: can get returns on your cash, which gives you more
Speaker 6: money to go out and spend that much more. Which
Speaker 6: is it?
Speaker 7: I guess that's a tough question to answer. I think
Speaker 7: the five percent, the higher yields are more punishment than reward,
Speaker 7: right because the number of savers that are actually benefiting
Speaker 7: from that are doing fine. But you have a whole
Speaker 7: bunch of people who are companies and individuals trying to
Speaker 7: borrow either get a mortgage a car loan, companies trying
Speaker 7: to refinance at higher rates. I would say it's more
Speaker 7: negative than positive.
Speaker 6: It's negative in theory. But this is what I keep
Speaker 6: hearing from people that nobody who's buying a home is
Speaker 6: paying seven percent mortgage rate, everybody's getting some other mortgage rate.
Speaker 6: Companies can get pretty low rates if they're a good company.
Speaker 6: On average, they're high, but those companies that have to
Speaker 6: pay through the nose aren't borrowing at those rates. So
Speaker 6: this interest rate effect, the punishment isn't actually bleeding to
Speaker 6: the economy, and the reward is actually driving even more investment.
Speaker 6: Is that an accurate way to understand the dynamic that's
Speaker 6: been so confounding so far this year?
Speaker 7: Well, I would say, and the credit conditions have been
Speaker 7: easier if you go to the capital markets, then you
Speaker 7: know it would normally be under these circumstances. But if
Speaker 7: you're a like I say, are you a low credit borrower,
Speaker 7: those costs really are going up, and we're seeing a
Speaker 7: lot of weakness at the low end of the credit spectrum.
Speaker 7: And I think it's just a matter of time. It's
Speaker 7: hard to believe that we can have all this tightening
Speaker 7: five hundred basis points and a very short period of time,
Speaker 7: qt also at the same time and not have an
Speaker 7: economic effect one year forward.
Speaker 2: Letdered or bar belled, whatever the blend is. Full faith
Speaker 2: and credit corporate, are you clipping a coupon or can
Speaker 2: you actually manage and position for total return.
Speaker 7: I think that the bulk of what you'll get will
Speaker 7: come from the coupon, but you can position to get
Speaker 7: some total return.
Speaker 1: Youre going to give me a double digit total return?
Speaker 7: Not double dita? I think that I can't. I'm sorry
Speaker 7: now I think eleven percent.
Speaker 2: Well, that was just folks, I'm busting chops with Kathy Jones.
Speaker 2: That was a discussion from about ten, twelve, twenty years ago.
Speaker 1: That was fun, wasn't it.
Speaker 4: It was It was gott to give you a stamp.
Speaker 4: It's a bolt off. What Lisa say is one set
Speaker 4: of times in this country bulb of cash.
Speaker 1: I noticed that, Glad you bring that.
Speaker 4: Up high sharing like a decade. That was also the stamp,
Speaker 4: by the way, for the whole of last year. Two
Speaker 4: from redfins. So one third lease it to your point.
Speaker 6: Yeah, they're bought in cash, and then the others are
Speaker 6: bought from developers straight up that are offering them much
Speaker 6: lower rates, or they're refinancing existing or they're sort of
Speaker 6: taking on other loans for lower Again, the point being,
Speaker 6: the impulse isn't making its way into slowing the economy
Speaker 6: in a material way, and this is the reason why
Speaker 6: people are wondering, why hasn't it been more painful?
Speaker 4: Oh, they band new homes because they old ones out
Speaker 4: for sale exactly, They've got people in them with mortgages
Speaker 4: at three percent. This housing market is totally distorted completely.
Speaker 4: It's totally totally distorted it.
Speaker 2: I would suggest it's always been distorted in the pandemic
Speaker 2: made it shockingly. I mean, the rent now is foury
Speaker 2: three hundred something. Jonathan Miller Miller, it's nuts.
Speaker 4: But said this, Tom, this is a big question to ask,
Speaker 4: and it's connected to monetary policy and built on what
Speaker 4: Least is talking about because it's so important. Are the
Speaker 4: long and vailable lags longer, like thirty years long? Because
Speaker 4: mortgages three percent like thirty years long? And everyone did that?
Speaker 4: I hope you did that. I didn't do that. I
Speaker 4: wish I had done that. Using the term everyone loosely?
Speaker 4: Or are we just finding out this economy is way
Speaker 4: more resilient, Kathy in that five percent doesn't get it done.
Speaker 7: Yeah, I think it's the long and variable legs are longer.
Speaker 7: And you know, let's put housing aside and let's look
Speaker 7: at all the other costs. That are going up, and
Speaker 7: also the fact that we've had sub two percent growth
Speaker 7: now for several quarters. Manufacturing sector is really very weak,
Speaker 7: and we're starting to see the ism numbers on the
Speaker 7: service side come down as well new orders. So I
Speaker 7: think it's been longer because we had such a fiscal
Speaker 7: and monetary policy response to the pandemic that it's taking
Speaker 7: longer for it to work its way out. But it's
Speaker 7: hard for me to believe again that that's not going
Speaker 7: to happen over time. And I think that's that the
Speaker 7: Feds whole hold on to high rates because if inflation
Speaker 7: continues to come down, holding is tightening, and particularly with
Speaker 7: QT going out of this.
Speaker 4: That's such a good point that's missed by so many people,
Speaker 4: and I totally agree with you. You can keep the nominal
Speaker 4: right study, but the real right shifts. That's the point,
Speaker 4: right right, And.
Speaker 7: Real rates are up, and if they stay up for
Speaker 7: another year or so, that's going to have an impact
Speaker 7: on the.
Speaker 2: A ten year real rate one point five four percent,
Speaker 2: I modeled out two point zero five percent, and sort
Speaker 2: of before all this idiocy, do you people suggest we'll
Speaker 2: see a ten year real rate that will migrate back
Speaker 2: to the sort of the moving averages of another time
Speaker 2: and place.
Speaker 7: I think two percent might be a little bit on
Speaker 7: the high side for a ten year, but we'd be
Speaker 7: actually looking at tips right here and locking in some
Speaker 7: of those really yields.
Speaker 4: Interesting, Kathy, he's going to see Kathy John child swabble.
Speaker 2: What we're going to do is talk to somebody who
Speaker 2: has an immense respect for legal pros on this. Terry
Speaker 2: Haynes is founder of penjea policy with decades of duty
Speaker 2: on Capitol Hill.
Speaker 1: Terry, you know, I go to Law Fair like.
Speaker 2: Everybody else, because these guys are the adults in the room,
Speaker 2: and they say, wait for the document.
Speaker 1: What are we waiting for?
Speaker 8: Well, we're waiting to see what the actual indictment says
Speaker 8: and what the chargers actually are. You know, you and
Speaker 8: John are absolutely right. You know, there's a lot of
Speaker 8: dinner three sources to say, and you know, the former
Speaker 8: president wasted no time not only in getting out there
Speaker 8: and talking about it, but one thing I found significant
Speaker 8: was the first fundraising email showed up at about a
Speaker 8: half an hour after made that announcement, So you know,
Speaker 8: there's clearly an attempt by him not only to frame
Speaker 8: this thing, before the indictment whatever it is comes out
Speaker 8: as well as raised money, and you know it'd been
Speaker 8: gin up as followers.
Speaker 2: Terry, My experience here goes as far as Perry Mason,
Speaker 2: maybe law and order.
Speaker 1: So you're going to help us right now.
Speaker 2: To me, there's a massive distinguishing feature between state courts
Speaker 2: in New York or.
Speaker 1: Any other state for that matter, in a federal court anywhere.
Speaker 2: In this case in Miami, what is the state court
Speaker 2: versus federal court distinction for the former president.
Speaker 8: Well, it's a couple of things. One is the is
Speaker 8: the sorts of offenses. I mean, there are things that
Speaker 8: are that are exclusively federal offenses, and you have in
Speaker 8: the in the Trump case, you have not only documents
Speaker 8: but kind of also investigations about January sixth matters. A
Speaker 8: lot of the state court matters have to do with
Speaker 8: things like his business and whether whether his business records
Speaker 8: were on the up and up, the tax evasion matter
Speaker 8: that they went through in Manhattan, those sorts of things.
Speaker 8: But also the also one of the cases, which is
Speaker 8: a Georgia case, possibly has to do with whether or
Speaker 8: not he interfered with Georgia state election law as a
Speaker 8: result of the January sixth matter, asking Georgia officials to
Speaker 8: find him votes that sort of thing. So the matter
Speaker 8: really is kind of civil versus criminal, and it also
Speaker 8: has to do with the degree to which the former
Speaker 8: president can be punished, either by incarceration or fines or
Speaker 8: the like.
Speaker 6: Terry John picked up on the right point here, which is,
Speaker 6: how do the other Republican potential candidates really step up
Speaker 6: and respond to this. Do they embrace the sort of
Speaker 6: deep state conspiracy or do they say this just shows
Speaker 6: he's not fit to run?
Speaker 8: You know, the answer is, Lisa, is both. You know,
Speaker 8: they have to attack Trump head on. I think you'll
Speaker 8: see an intensification of what I call the pack swarm mentality,
Speaker 8: where the pack of these candidates all talk about Trump's
Speaker 8: unfitness to run and how he's not the best person
Speaker 8: and why. And at the same time they hedge their
Speaker 8: bets a little bit by raising concerns about out about
Speaker 8: the justice system, and there are questions unresolved questions about
Speaker 8: not only whether or not you know, the potential indictment
Speaker 8: here is different treatment. I mean, remember, Trump's not the
Speaker 8: only person that's had took records home with him, that
Speaker 8: includes his vice president that includes the sitting president potentially others.
Speaker 8: But also there's kind of a broader historical question about
Speaker 8: how these laws were enforced, and you know, the president,
Speaker 8: the President Trump is trying to make a case that
Speaker 8: both there's different treatment here for him, as well as
Speaker 8: a situation where these laws were never enforced in the
Speaker 8: way that the Justice Department is proposing to enforce those laws.
Speaker 8: You know, those are both questions that the Justice Department
Speaker 8: is going to have to answer as this case moves forward.
Speaker 6: Terry, you mentioned that the fundraising emails went out right
Speaker 6: after the announcement by the former president. Does this type
Speaker 6: of issue have the same resonance with voter that it
Speaker 6: used to?
Speaker 5: Oh?
Speaker 8: I think it has a residence. You noticed in the
Speaker 8: Trump's statement, he's pushing the buttons about you know, you know,
Speaker 8: they talked about the Russia hopes and that was wrong.
Speaker 8: They talked about this that was wrong, that this that
Speaker 8: was wrong. Now this is the He refers to this
Speaker 8: as the Box's hoax, so he's trying to gin that up.
Speaker 8: What I will say on the primary battle is that
Speaker 8: you know, forget about the national beauty contests. If you
Speaker 8: look at the early states, you've got Trump about forty
Speaker 8: percent in the field about sixty percent. And I think
Speaker 8: that what happens is that a lot of these candidates
Speaker 8: really kind of combined to take Trump down and at
Speaker 8: the same time appropriate the policies and say, hey, look,
Speaker 8: I'm your safer alternative.
Speaker 4: Terry is so messy don in Washington, DC, as you know,
Speaker 4: I just wonder how much pressure will build now on
Speaker 4: House Republicans to push up their investigations into the sitting president.
Speaker 4: How much pressure is going to be on them to
Speaker 4: do that now?
Speaker 8: Oh, I think there's no pressure on them. I think
Speaker 8: they put pressure on themselves to do that. Frankly, One
Speaker 8: thing I want to say here is that just because
Speaker 8: the Trumpet I think is less likely to become president
Speaker 8: as a result of all this, doesn't mean that Biden's
Speaker 8: more likely to become president. One reason for that is
Speaker 8: that those investigations I think intensify and ramp up. The
Speaker 8: other reason is should an alternative to Trump emerge? And
Speaker 8: we're really not going to know that for six months
Speaker 8: or more. I mean, but if the Republican nominee isn't Trump,
Speaker 8: you know that person is better able and better capable
Speaker 8: of putting Biden on the back foot on policies as
Speaker 8: well as his health and his age. So this doesn't
Speaker 8: mean this isn't unalloyed good news for Biden by any means.
Speaker 4: Terry Hines Panchee, Terry always appreciate it, said, thank you,
Speaker 4: just fantastic.
Speaker 2: Jeffrey Curry's going to come out with his version of
Speaker 2: full by randomness on oil goal out of commodity at
Speaker 2: Research at Gold and Sex. Jeff Curry, I say this
Speaker 2: with a men's respect for your bulletproof University of Chicago
Speaker 2: microeconomics and econometrics. How did oil fool you by its
Speaker 2: randomness in the last twelve months?
Speaker 5: Well, I have to say, we have never been this
Speaker 5: wrong for this long without seeing evidence to change our views. Now,
Speaker 5: obviously some of the upside has been taken away by
Speaker 5: recent events with you know, the sanctioned oil surprising to
Speaker 5: the upside, whether if it's Iran, Russia, Venezuela and more destocking,
Speaker 5: But the core thesis still very much remains intact, and
Speaker 5: I think one of the big drivers is you know,
Speaker 5: you've lost two hundred and fifty million barrels of paper
Speaker 5: link in this market. We're back to where the market
Speaker 5: was as is as short as it was during COVID
Speaker 5: when we saw negative prices, and you've erased the overall
Speaker 5: length going back into the early two thousand and I've
Speaker 5: chalked this up to you know, ultimately a broad what
Speaker 5: we call the great d stocking. High interest rates are
Speaker 5: forcing d stocking of physical barrels, D stocking the sanction barrels,
Speaker 5: d stocking of sprs, D stocking of finished goods, even
Speaker 5: de stocking of financial paper barrels. So we have been
Speaker 5: just continuously selling for about six months to nine months.
Speaker 6: Now, can you elaborate a little bit, because for people
Speaker 6: who are not in the nitty gritty, a lot of
Speaker 6: what you said was perhaps a bit opaque, the connection
Speaker 6: of high interest rates to a lack of interest in
Speaker 6: buying oil on a whole range of areas, or a
Speaker 6: lack of sort of stockpiling physical or paper crude.
Speaker 5: Let's just go yeah, let's go through the economics. Let's
Speaker 5: say to borrow money today to buy a barrel of oil,
Speaker 5: because you've got to you know, finance your your your
Speaker 5: physical inventory. Let's say it's seven eight percent somewhere like that.
Speaker 5: Live Or is paid you five and a quarter. That's
Speaker 5: your opportunity cost and putting your money into a risk
Speaker 5: free investment. So your net cost to holding physical inventory
Speaker 5: run somewhere around thirteen potentially even fifteen percent in this environment,
Speaker 5: Why are you going to do that? You've got Navidia
Speaker 5: and Nasdak going up. There's so many better places to
Speaker 5: put your money. And I think the other point too,
Speaker 5: Oil copper and the rest of these markets don't have
Speaker 5: a positive carry, so they cost you to own it,
Speaker 5: cost you to store it. You're going to drain down
Speaker 5: these inventories as much you can. So oil copper, they
Speaker 5: are a liability right now. They are not an asset,
Speaker 5: and until they become an asset, no one's going to
Speaker 5: want to hold them, hold them in an inventory, or
Speaker 5: hold them in a pay per form. And so you
Speaker 5: could just think about that the cost of holding these
Speaker 5: these commodities has risen so much that ultimately are de stocking.
Speaker 5: Now we've been waiting nearly a decade for the Iranian
Speaker 5: floating storage to discharge. It's finally discharging right now, which
Speaker 5: shows you no, nobody really wants to hold this commodity.
Speaker 5: We think that's going to change, and I think it
Speaker 5: has to start with lower inventories, forcing what we call
Speaker 5: a backwardation, which is a positive carry in the curve,
Speaker 5: then somebody will want to own it.
Speaker 6: This is fascinating because for years people were decrying the
Speaker 6: financialization of crude as sort of a bed on the macroeconomy.
Speaker 6: Are you saying that it is no longer in the
Speaker 6: same kind of way that this is basically where it
Speaker 6: is traded, but it's actually a liability now that the
Speaker 6: financialization has come to such a place where people look
Speaker 6: at it as comparable to an interest bearing type of instrument,
Speaker 6: and you're waiting for some sort of not I want
Speaker 6: to say crisis, but a complete lack of inventory to
Speaker 6: spur prices in such an extreme way that you get
Speaker 6: a violent shift up that really forces a hand of
Speaker 6: people who are left kind of in the dust.
Speaker 5: I'm not going to say it's one hundred percent interest rates.
Speaker 5: It's fear of recession why people don't want to own these.
Speaker 5: The government discharge their reserves do over fears of inflation.
Speaker 5: So there's other factors at play here, But I think
Speaker 5: your broader point is absolutely right. We think about when
Speaker 5: was oil financialized in the two thousands, when interest rates,
Speaker 5: you know, is right after September eleventh in two thousand
Speaker 5: and one, when interest rates first went to near zero.
Speaker 5: That's when you started to see the explosion in the
Speaker 5: financialization of oil and commodities. And we stayed into this
Speaker 5: loose money environment for nearly fifteen twenty years. And now
Speaker 5: money costs something.
Speaker 2: There are a set of world cluss leaders, and you're
Speaker 2: one of them, Jeff Curry on this and with the
Speaker 2: acuity of the what I'm going to call almost the
Speaker 2: general equilibrium theory of hydrocarbons, you parachute into riod right
Speaker 2: now and you have to advise the Saudis on the
Speaker 2: elasticities of supply and demand around this new world, which
Speaker 2: is the old world of a cost of money.
Speaker 1: How do you advise Saudi.
Speaker 2: Arabia in this new world of higher nominal and real
Speaker 2: interest rates.
Speaker 5: Their market power has never been higher. And one of
Speaker 5: the reasons why is you combine the higher cost of
Speaker 5: money combined with issues around the cost of funding hydrocarbon
Speaker 5: type of investments. They're the only game in town. They
Speaker 5: have no competition right now. When we look at the
Speaker 5: cut they made in October, that was the very first
Speaker 5: preemptive cut we've ever seen. Opak do, and we just
Speaker 5: saw two more cuts announced in the last the last
Speaker 5: three months. Why because they don't have fear of competition. Yes,
Speaker 5: the oil that's coming on market is Russian, Iranian, in
Speaker 5: Venezuelan sanctioned oil, and eventually you'll run out of it
Speaker 5: and there's nothing behind it. But is there competition from
Speaker 5: the rest of the world. The answer is really no.
Speaker 2: Is the United States not ignorant but unaware of the
Speaker 2: international dynamics of oil, of moving oil up to Japan,
Speaker 2: across the Pacific Rim and all the dynamics of the
Speaker 2: Middle East?
Speaker 1: Have we gotten lazy?
Speaker 5: I think it was a bigger focus on immediate term issues,
Speaker 5: things like inflation fighting, which is why we saw such
Speaker 5: a sharp rundown in the SPR And you know you're talking.
Speaker 5: You put all the sprs together, it was two hundred
Speaker 5: and fifty million barrels drawn down. That is a lot
Speaker 5: of oil. So I think the focus from a policy
Speaker 5: perspective is get the inflation down and keep it down.
Speaker 5: But here's a fact I like to throw out. You know,
Speaker 5: you look at core CPI at somewhere around five point five.
Speaker 5: It was at that level, you know, going back nearly
Speaker 5: two years ago, what's changed is oil prices went down,
Speaker 5: taking headline from nine down to four point.
Speaker 7: Five just quickly.
Speaker 6: Jeff, do you think that that's the reason why the
Speaker 6: US is not refilling the spr more aggressively because they're
Speaker 6: still concerned about inflation and that that could on the
Speaker 6: margins push prices up.
Speaker 5: Well, I think, with you know, the showdown over the
Speaker 5: debt ceiling, getting money to go buy oil would be
Speaker 5: really difficult to come by. But that aside. Listen to Frank,
Speaker 5: so listen to Germany. The focus now is building strategic
Speaker 5: reserves of green metals, you know, like battery metals like copper, lithium, cobal.
Speaker 5: So if you're going to build strategic reserves, you're probably
Speaker 5: gonna do it in you know, the green economy commodities,
Speaker 5: not in the old economy commodities.
Speaker 1: Jeffers oil in a year.
Speaker 2: I know it's an unfair question, given all the ambiguities
Speaker 2: out there right now, but I've got to ask. I mean,
Speaker 2: we're down, down, down, right wrong whatever scope out where
Speaker 2: we are in twelve months.
Speaker 5: Yeah, I our viewers are going to be seeing substantial
Speaker 5: physical inventory draws because of these OPEC production cuts, particularly
Speaker 5: during the third quarter. As well as in fourth quarter.
Speaker 5: That's going to push us up into the low nineties.
Speaker 5: Now the question is will you bring the investor back
Speaker 5: into this market? And by the way, I put a
Speaker 5: question mark on it because it'll have to be a
Speaker 5: new class of investor. It takes that investor buying to
Speaker 5: push you back up towards one hundred. We're not you know,
Speaker 5: I know a lot of them have gone left and
Speaker 5: it'll be difficul call to get them back. But I
Speaker 5: think the key question fundamentally, we can get this market higher,
Speaker 5: and I think it we get Once you turn oil
Speaker 5: into an asset, you'll track capital back to it. But
Speaker 5: I don't think it's going to be the same cast
Speaker 5: of characters.
Speaker 2: Jeffrey Curry, thank you so much. Just absolutely brilliant there
Speaker 2: with Goldman Sachs. Right now, we are going to digress
Speaker 2: and we are thrilled to bring in someone who runs
Speaker 2: an economy that is better than good. She's picking up
Speaker 2: a trophy in New York this evening. Nadia Calvino is
Speaker 2: Spanish Vice President Minister for the Economy and Digitalization of
Speaker 2: Number one performing always Spain in the continent of John
Speaker 2: Why is Spain always the number one performer, what what.
Speaker 4: Are talking about football?
Speaker 1: The pixie dust there we're.
Speaker 4: Talked about football?
Speaker 1: Well football, yeah.
Speaker 2: I mean there it is. But the answer is Spain
Speaker 2: is unique. We're thrilled that the Vice President could join
Speaker 2: us this morning. Thank you so much for joining us.
Speaker 2: I've got to go to the weather IMF for meat
Speaker 2: and Marrakesh and the idea is there is a drought
Speaker 2: in Africa coming over that will grossly destabilize the agricultural
Speaker 2: dynamo that is Spain and quite frankly, just worry about
Speaker 2: drinking water as well. How urgent is the drought in
Speaker 2: southern Spain.
Speaker 9: Well, it is a very serious issue because Spain is
Speaker 9: a world superpower in the agri food sector and so
Speaker 9: the drought is having an impact on the harvest in
Speaker 9: some areas, having to do with cereal for example. But
Speaker 9: drinking water is guaranteed and we're investing very heavily, actually
Speaker 9: more than six billion euros in the digitalization of water
Speaker 9: management and the efficient infrastructures for water management. You may
Speaker 9: know or not that Spain is the second most efficient
Speaker 9: country in the world after Israel in water management, and
Speaker 9: so we're heavily investing in that. So that we can
Speaker 9: continue to be highly performant.
Speaker 1: There's so many other issues.
Speaker 2: I'm going to leave it there that there's much to
Speaker 2: talk about, and that I'm sure we were on the
Speaker 2: coming months. What has changed is you and mister Sanchez
Speaker 2: have a snap election to deal with our landso Soto says,
Speaker 2: this is absolutely front and center. How will you approach
Speaker 2: the snap election?
Speaker 9: Well, you know, the economy is performing, is outstanding. As
Speaker 9: you rightly pointed out.
Speaker 5: It's good.
Speaker 1: I read the notes, did okay.
Speaker 9: Yeah, you did very well. Actually, no, it's better than good.
Speaker 9: And indeed, I mean the strong growth, strong job creation.
Speaker 9: Inflation is down to round three percent already in Spain.
Speaker 9: So the performance of the performance of the economy is outstanding,
Speaker 9: and I trust you know that Spanish citizens will Actually.
Speaker 2: Why I don't mean to interrupt, this is important. The
Speaker 2: political turmoil in Spain is tangible. Why given a good
Speaker 2: inflation and good economy picture.
Speaker 9: Well, we had regional and local elections and they what
Speaker 9: we saw there was a rise of the right and
Speaker 9: more importantly, the extreme right. This movement is not only
Speaker 9: is not only happening in Spain, you were talking about it.
Speaker 9: Of course, it's relevant here in the US. It is
Speaker 9: happening throughout the EU and this is a movement that
Speaker 9: I personally hope does not continue. And President Sanchez decided
Speaker 9: to call the snap election so that we can have clarity.
Speaker 9: Spain will take over the presidency of the EU in July,
Speaker 9: and we need to have clarity and a stable government
Speaker 9: and not be in the middle of a campaign for
Speaker 9: the presidency.
Speaker 4: It still work to do before we get there. Vice
Speaker 4: President Cavin, one thing you mentioned there was the drought
Speaker 4: and that's had an effect on price pressure. Now you've
Speaker 4: made some progress on inflation. You do have an anti
Speaker 4: inflation package due to expire at the end of this month.
Speaker 4: Is that something you're thinking about renewing.
Speaker 9: Well, we're assessing which measures we should continue to have
Speaker 9: in the second part of the year and which no
Speaker 9: longer make sense because the evolution in international energy markets.
Speaker 9: You are just discussing that energy prices have gone down.
Speaker 9: We are in pre war level already, so we have
Speaker 9: to see whether those measures should continue or not beyond June.
Speaker 9: And likewise for VAT so indirect taxes on food and others.
Speaker 4: Could you give me some insight on that now?
Speaker 9: No, because we're in the midst of the analysis, and
Speaker 9: we know what we have been doing since the pandemic
Speaker 9: hit us is it just measures every three or six months,
Speaker 9: so that we could have a flexible approach and an
Speaker 9: efficient use of public resources. I mean, we talked about
Speaker 9: public money when we reduce taxes or we give public support,
Speaker 9: so we have to be very focused and very efficient.
Speaker 9: This has worked well so far, and that explains why
Speaker 9: the Spanish economy is doing so well. And we should
Speaker 9: continue on the same line of responsibility and effectiveness.
Speaker 6: How much have you enjoyed the europe being weak versus
Speaker 6: a dollar and sort of the tourism boom that has
Speaker 6: a verged on the heels of that.
Speaker 9: Well, we've seen a very strong performance of the tourism sector, indeed,
Speaker 9: and April has been a record month in terms of
Speaker 9: number of visitors and in terms of the revenues of
Speaker 9: the sector. And we expect the summer to be so
Speaker 9: extremely positive. But the current account surplus that Spain is
Speaker 9: showing and this is a historical first. You know, never
Speaker 9: in history did we have the surplus, particularly when we
Speaker 9: have so strong growth. But what's remarkable is not the
Speaker 9: good performance of tourism experts, but non tourism related services,
Speaker 9: showing that the Spanish economy is gaining competitiveness and market share.
Speaker 9: Not only the goods sectors, but the non tourism related
Speaker 9: services are being very positive and pulling growth up.
Speaker 6: Is that what you're trying to emphasize right now, the
Speaker 6: sort of manufacturing side, the non tourism side, even as
Speaker 6: the tourism side really is one of the main drivers
Speaker 6: of the strength that has in some cases been unprecedented
Speaker 6: in Spain.
Speaker 9: What I think should be highlighted is what we're talking
Speaker 9: about is not just a bouncing back or a strong
Speaker 9: recovery from a macroeconomic or micro magnitude point of view,
Speaker 9: but that there is a structural modernization and transformation of
Speaker 9: the Spanish economy ongoing, which has to do with the
Speaker 9: new Green economy, which has to do with digitalization, and
Speaker 9: it has a lot to do with the European Funds
Speaker 9: Next Generation EU Investment and Reform program. We have front
Speaker 9: loaded that investment and reform plan and the results are
Speaker 9: already visible.
Speaker 4: If you had a chat with Elon muskets All, no,
Speaker 4: should you have a conversation with him, because he's reportedly
Speaker 4: in talks to build an EV factory in Spain.
Speaker 9: Yes, I mean we hear regularly. I should say, you know,
Speaker 9: we hear about a possible that.
Speaker 4: You try to reach out and have that conversation.
Speaker 9: I personally don't don't have a relationship with him, or
Speaker 9: I haven't had a chance to talk to him. But
Speaker 9: I am sure that the Prime Minister, the President's office
Speaker 9: is in contact with anybody that's interested in investing in Spain.
Speaker 9: Due to you know, thanks to the lower energy prices,
Speaker 9: high penetration of renewables and the competitiveness of the Spanish economy,
Speaker 9: we're attracting unprecedented investments.
Speaker 1: Ask you for a friend.
Speaker 2: I was in Washington and the Dutch Finance minister could
Speaker 2: not get us tickets to Vermire. The whole team wanted
Speaker 2: to go to Amsterdam and see the Vermire. Can we
Speaker 2: can you get us tickets to the Prado here with
Speaker 2: the Picasso opening up, I'm the fifteenth anniversary of this
Speaker 2: giant of Spain with old Greco.
Speaker 1: We need tickets to the Produn.
Speaker 9: I mean, Tom, anything you need, you.
Speaker 4: Know, you know, last week of June from Madrid Vice
Speaker 4: President Calvino Nadia, thank you good to see it.
Speaker 2: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and
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Speaker 2: Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening.
Speaker 2: I'm Tom Keane, and this is Bloomberg