WEBVTT - Surveillance: Phase One Chances Are Slim, Says NABE's Hunter 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.880 Bloomberg dot Com, and of course on the Bloomberg No Question. 0:00:27.960 --> 0:00:30.440 December fifteen is a key Dad I'd also mentioned, and 0:00:30.480 --> 0:00:33.120 there John, and You've had real leadership on this, Madame 0:00:33.200 --> 0:00:35.760 le guard with some real key decisions towards the end 0:00:35.760 --> 0:00:38.200 of the week. With that and maybe to migrate away 0:00:38.240 --> 0:00:39.960 from the politics at the moment, we are thrown to 0:00:40.040 --> 0:00:42.400 Queen Victoria Street to bring Alberto Gallo. He is with 0:00:42.479 --> 0:00:46.560 Algebras UH with Lisa Bramowitz and John Farrow in UH 0:00:46.680 --> 0:00:49.600 New York. Alberto, good morning to you. Let me start 0:00:49.600 --> 0:00:51.760 with an open question given the news flow, John just 0:00:51.840 --> 0:00:55.319 spoke about, how are you positioned in the year end? 0:00:55.360 --> 0:00:58.800 Are you in full Gallo vacation mode? Are you actually 0:00:58.840 --> 0:01:01.360 trying to find elf towards the end of the year 0:01:01.640 --> 0:01:05.400 and in January? Good morning, Tom, Lisa, John, you get 0:01:05.400 --> 0:01:08.200 a closer Rundom make good morning. There you go. So 0:01:08.440 --> 0:01:14.920 the the market has moved from fears of um melt down, 0:01:15.160 --> 0:01:18.360 as Lisa was saying earlier in September and October to 0:01:18.880 --> 0:01:21.960 fear to two hopes of a meltop. The meltop has happened. 0:01:22.080 --> 0:01:25.600 Now we're in a fear of missing out mode. Investors 0:01:25.600 --> 0:01:29.280 are afraid of missing the gains. Um. There is a 0:01:29.280 --> 0:01:33.520 consensus about an extension of the tariffs on the fifteenth, 0:01:34.120 --> 0:01:38.360 there is some consensus about a soft Brexit, and there's 0:01:38.360 --> 0:01:39.920 a lot of things that can go wrong, so we're 0:01:39.920 --> 0:01:43.640 more cautious. We've taken profits on things that we owned 0:01:43.800 --> 0:01:48.280 during the year, and we are looking at We're increasingly 0:01:48.280 --> 0:01:51.240 looking at things that could go wrong and areas of 0:01:51.240 --> 0:01:55.320 the market which are overvalued. UM. I think in the 0:01:55.440 --> 0:01:59.600 UK the market underestimates the execution risk of a soft 0:01:59.600 --> 0:02:02.160 Brexit it even if the Tories win. And also the 0:02:02.160 --> 0:02:08.079 market underestimates a quick US China underestimates the difficulty of 0:02:08.360 --> 0:02:11.760 making a US China Phase one deal because also the 0:02:11.800 --> 0:02:16.440 Trump administration needs a Phase one deal to play negotiations 0:02:16.520 --> 0:02:18.919 throughout the next year to use it as a bait 0:02:19.000 --> 0:02:20.560 into election. I want to go to John with this 0:02:20.680 --> 0:02:23.480 great knowledge on the credit market versus the full faith 0:02:23.520 --> 0:02:27.959 in credit market. But alberta very simply, here are there 0:02:28.040 --> 0:02:32.480 bubble characteristics in fixed income? Is someone suggest we see 0:02:32.480 --> 0:02:36.760 in equities because the central banks have imparted that huge 0:02:36.919 --> 0:02:40.640 urgency to put cash to work, we are investors in 0:02:40.720 --> 0:02:44.440 a manipulated market. So if you think about government bonds, 0:02:45.040 --> 0:02:48.200 definitely yields are two low real yields. Look at the UK, 0:02:48.440 --> 0:02:51.840 real yields are very negative. Inflation is a two and 0:02:51.840 --> 0:02:54.240 a half three percent. You know, yields are below one 0:02:54.280 --> 0:02:59.400 percent for guilt. So there's there's hardly value in sovereigns, 0:02:59.480 --> 0:03:02.960 with a few exceptions like treasuries in the US, Canada, 0:03:03.000 --> 0:03:07.760 Australia areas where central banks can still cut um. At 0:03:07.800 --> 0:03:10.000 the other hand, at the other end of the spectrum, 0:03:10.040 --> 0:03:14.239 if you look at private debt loan funds clos, you 0:03:14.680 --> 0:03:18.720 have a similar picture. Actually, investors are trying to get 0:03:18.760 --> 0:03:21.480 away from mark to market and the size of private 0:03:21.480 --> 0:03:24.359 debt funds has doubled in the last one and a 0:03:24.360 --> 0:03:27.120 half years. So where we operate is in the five 0:03:27.160 --> 0:03:29.640 to ten percent of the bond market, which is still 0:03:29.680 --> 0:03:33.560 training a positive yields um and we think there's value there, 0:03:33.600 --> 0:03:36.080 but you have to be very careful because many of 0:03:36.080 --> 0:03:40.280 the positive yielding bonds are could be zombies companies that 0:03:40.320 --> 0:03:43.440 have survived because of of an ear of low interest 0:03:43.520 --> 0:03:46.120 rates and some of them fall down. Quee is no 0:03:46.160 --> 0:03:49.120 longer lifting or boats. This year we had a crisis 0:03:49.120 --> 0:03:52.160 in Argentina, crisis in Lebanon. You know, Thomas Cooke, very 0:03:52.200 --> 0:03:55.680 large UK retailer going into restructuring, many names in high 0:03:55.720 --> 0:03:59.600 yield in the US ending up upside down for the 0:03:59.640 --> 0:04:03.320 same Johnett destroyed my vacation to the Elgarith that I 0:04:03.400 --> 0:04:05.440 was scheduling for January. Well, let me tell you what 0:04:05.560 --> 0:04:07.560 Betta is going to have one hand of a vacation 0:04:07.560 --> 0:04:11.400 after Bonus sees and Alberta gallows Algebras macro credit fund. 0:04:11.440 --> 0:04:16.560 Is that more than Alberta. That's a massive year in 0:04:16.680 --> 0:04:20.120 fixed income and more broadly credit is really really delivered 0:04:20.320 --> 0:04:22.320 on the year in both Europe and in the United 0:04:22.360 --> 0:04:24.960 States as well. The big question I'm here and again 0:04:25.040 --> 0:04:27.159 and again and again is whether you should trim some 0:04:27.200 --> 0:04:30.200 of your winners and rotate some cash into some of 0:04:30.240 --> 0:04:32.680 the losing areas of the market. What do you do, 0:04:32.720 --> 0:04:35.160 albert So after you've had the year that you've just had. 0:04:36.000 --> 0:04:39.080 This year, a lot of the returns, especially in the 0:04:39.080 --> 0:04:42.320 first half were driven by duration in the market and 0:04:42.480 --> 0:04:45.600 by what you know, what you would call safe credit 0:04:46.240 --> 0:04:51.040 companies that are not two levered um, they're really junkie companies. 0:04:51.040 --> 0:04:54.240 The single bees and the triple sees haven't rallied until 0:04:54.279 --> 0:04:57.960 the last few weeks. Now we're seeing investors that were 0:04:58.000 --> 0:05:01.960 behind essentially reaching down the capital structure, down the rating 0:05:02.040 --> 0:05:04.800 quality to buy companies that are you know, over five 0:05:04.839 --> 0:05:08.640 times levered. They don't have equity, uh sometimes they're privately owned, 0:05:08.720 --> 0:05:11.560 They have you know, flat or negative free cash flows, 0:05:11.880 --> 0:05:15.080 and these are you know, these are potentially zombies. So 0:05:15.240 --> 0:05:17.760 we are a bit more cautious when people reached down 0:05:17.760 --> 0:05:21.560 the barrel of the rating quality. UM, we really need 0:05:21.680 --> 0:05:24.640 a growth upside for these parts of the market to perform. 0:05:24.880 --> 0:05:29.200 So we're cautious, UM, and we are trimming risk. We're 0:05:29.240 --> 0:05:32.039 still positive that we're going to potentially have you know, 0:05:32.120 --> 0:05:35.320 a year end rally, a January rally, but we are 0:05:35.440 --> 0:05:38.400 not seeing the cheapness that we saw a year ago. 0:05:38.480 --> 0:05:41.080 So we're a lot more cautious, and we have dry powder. 0:05:41.760 --> 0:05:43.919 With the political volatility of next year, we think there 0:05:43.920 --> 0:05:46.159 will be there will be better entry points. Yeah, I 0:05:46.200 --> 0:05:48.400 love the word zombies, by the way, zombie companies. It's 0:05:48.400 --> 0:05:49.960 one of my favorite terms. I will say. There was 0:05:49.960 --> 0:05:52.120 a story of the Financial Times this morning about a 0:05:52.200 --> 0:05:56.080 number of big bond firms HIMCO among them c QS 0:05:56.600 --> 0:06:01.679 uh in Hafen Capital Management, all raising special opportunity funds 0:06:01.760 --> 0:06:05.200 that have structures like private equity funds to go into companies, 0:06:05.480 --> 0:06:07.400 buy up some of this distress debt that you were 0:06:07.440 --> 0:06:09.720 just talking about and actually work with the company's to 0:06:09.720 --> 0:06:13.240 restructure them. Do you see an opportunity there too? There 0:06:13.360 --> 0:06:18.280 is an opportunity. But let's remember distressed funds are out 0:06:18.279 --> 0:06:21.680 of out of business mostly because there was no distressed 0:06:21.680 --> 0:06:24.000 in the last ten years because interest rates were very low. 0:06:24.360 --> 0:06:27.800 So we need some shocks to the market UH, and 0:06:27.880 --> 0:06:31.039 we'll probably have them next year to create these opportunities. 0:06:31.040 --> 0:06:33.560 For example, one shock could be US elections. If you 0:06:33.640 --> 0:06:38.240 see a lead by the Democrats, then some um, some 0:06:38.520 --> 0:06:41.440 sectors like energy or healthcare could be due for a 0:06:41.480 --> 0:06:44.640 big disruption. Similarly in the UK, depending on who wins 0:06:44.640 --> 0:06:48.320 elections UH this week. So there is a lot of 0:06:48.360 --> 0:06:54.640 sectors which are still you know, running an old business model. 0:06:55.000 --> 0:06:58.240 They have survived because of low interest rates and as 0:06:58.279 --> 0:07:01.040 soon as the economy shakes up, these companies need to 0:07:01.040 --> 0:07:04.440 restructure their debt, so there is there's an opportunity there 0:07:05.320 --> 0:07:09.000 over time. We need a catalyst to make this happen. Alberta, 0:07:09.040 --> 0:07:11.080 this has been wonderful and as John mention is, just 0:07:11.080 --> 0:07:14.120 just you know what we know with you, with your excellence. 0:07:14.120 --> 0:07:17.360 It's not once in a lifetime, but that's superb. Superb 0:07:17.360 --> 0:07:20.800 performance is sure far outdistancing so much what we see 0:07:20.840 --> 0:07:23.640 in fixed income and certainly in the hedge fun world. 0:07:23.760 --> 0:07:39.640 Mr Gallo is with Algebras too many people. The outlook 0:07:39.640 --> 0:07:42.200 at the moment is still finally balanced. The US consumers 0:07:42.200 --> 0:07:45.600 still very resilient see paint rolls last Friday. The global 0:07:45.600 --> 0:07:47.880 outlooks still just a little bit soft. You can see 0:07:47.880 --> 0:07:52.680 the Chinese export data. That storyteld pretty clearly over the weekend. Overall, 0:07:52.760 --> 0:07:56.480 we haven't totally shaken off these trade jitters. Tuesday's bond 0:07:56.560 --> 0:07:59.800 market action a real reminder of that. To weighing on 0:07:59.800 --> 0:08:02.360 the look on the remainder of the year. Into police 0:08:02.400 --> 0:08:03.920 to say that joining us from New York on the 0:08:03.960 --> 0:08:07.040 phone is Cathy Judge, Child Swap, Chief Fixed incomes strategist. 0:08:07.080 --> 0:08:09.960 Good morning to Kathy. Good morning, John. What are your 0:08:09.960 --> 0:08:12.520 talent clients going into year end as the happy talk 0:08:12.560 --> 0:08:17.600 about is already in full swing. Yeah. Our outlook is 0:08:17.640 --> 0:08:20.560 that there's some room for raiths to move up as 0:08:20.560 --> 0:08:23.400 we get into and that's assuming we do get some 0:08:23.480 --> 0:08:25.360 sort of a trade deal, even if it's just to 0:08:25.520 --> 0:08:28.080 kick the can down the road kind of thing where 0:08:28.080 --> 0:08:32.120 we don't impose increase in in tariffs as a next 0:08:32.160 --> 0:08:35.360 week or this week, I guess with the decision would 0:08:35.360 --> 0:08:37.880 have to be made um and then you know, we're 0:08:37.880 --> 0:08:40.840 setting a pretty resilient economy. Maybe a little bit of 0:08:40.840 --> 0:08:43.640 an uptick in inflation expectation, so we could see the 0:08:43.679 --> 0:08:45.520 ten year yield getting up to about two and a 0:08:45.640 --> 0:08:49.960 quarter next year. Why how I mean, in other words, 0:08:50.000 --> 0:08:51.240 is it going to be inflation? Is it going to 0:08:51.320 --> 0:08:54.160 be really yields? What's this going to be driving the increase? Um? 0:08:54.240 --> 0:08:56.000 We think it would be a little bit of inflation 0:08:56.080 --> 0:08:59.760 expectation picking up that the strength and the labor market 0:09:00.160 --> 0:09:05.320 is exceeding expectations. We have very very low inflation expectations 0:09:05.320 --> 0:09:06.920 now if you look at the five year five year 0:09:06.960 --> 0:09:10.800 forward rate, it's well below two percent. Just a little 0:09:10.800 --> 0:09:12.920 bit of a pop there could get us up to 0:09:12.960 --> 0:09:15.319 two percent plus in the tenure. Again, we're not looking 0:09:15.320 --> 0:09:18.000 for a huge rising yields. We're just looking for a 0:09:18.080 --> 0:09:21.600 return to a recapture of some of the decline in 0:09:21.679 --> 0:09:23.600 yields that we saw last year. So what did you 0:09:23.600 --> 0:09:25.559 make a Friday's price sanction? We had to blow out 0:09:25.559 --> 0:09:28.400 payrolls report in America, Cathy, and yield it's on a 0:09:28.440 --> 0:09:30.640 ten year ended the end of the day higher by 0:09:30.720 --> 0:09:35.120 a couple of basis points at that to me is 0:09:35.120 --> 0:09:37.280 not a market that's thinking about a better or comedy 0:09:37.320 --> 0:09:41.719 translating into high yields. You know, that's absolutely true. Um. 0:09:41.760 --> 0:09:43.960 I think it's muted by the fact that we still 0:09:44.000 --> 0:09:48.040 have the ongoing trade conflict going on and nobody really 0:09:48.040 --> 0:09:50.760 wants to take a position ahead of that. Um. And 0:09:50.800 --> 0:09:53.319 we also have even though you know, the job's report 0:09:53.400 --> 0:09:57.040 was strong, the wage gains were still pretty moderate. So 0:09:57.120 --> 0:10:00.280 there's not this inflation expectation building up from a tight 0:10:00.360 --> 0:10:03.560 labor market, and there's no prospect that the Fed's going 0:10:03.600 --> 0:10:06.240 to change policy anytime soon. Kathy, can you give a 0:10:06.320 --> 0:10:09.160 narrative to is what we saw in the bond market. 0:10:09.240 --> 0:10:13.360 The incredible rally and duration really due to decreasing expectations 0:10:13.400 --> 0:10:16.440 of growth and inflation, or is this all due to 0:10:16.720 --> 0:10:20.079 increasing stimulus from central banks? And I'm wondering. You see 0:10:20.120 --> 0:10:21.960 the FED expanding its balance sheet by more than three 0:10:22.320 --> 0:10:27.079 billion dollars, in the ECB continuing to buy bonds. Yeah, 0:10:27.120 --> 0:10:30.480 you know, I think that certainly both factors worked on 0:10:30.520 --> 0:10:33.280 the market, but I think the ample liquidity and the 0:10:33.360 --> 0:10:35.880 easing from central banks was the major driver. I mean, 0:10:35.960 --> 0:10:38.559 we had huge cuts from the FED, We've had huge 0:10:38.559 --> 0:10:42.320 cuts from other central banks. We've had increased liquidity, and 0:10:42.360 --> 0:10:44.320 then on top of that, you have the narrative that 0:10:44.360 --> 0:10:47.480 the economy was, the global economy was really much softer 0:10:47.600 --> 0:10:50.559 than people believe coming into the year. I think when 0:10:50.600 --> 0:10:53.720 you look back at where we started last year, where 0:10:53.720 --> 0:10:56.800 we were a year ago in the fourth quarter, things 0:10:56.840 --> 0:10:59.679 are very much different today than they were then. So 0:10:59.720 --> 0:11:01.640 we have a lot of room for raids to come down. 0:11:01.880 --> 0:11:03.920 So let's look forward to this week, and we have 0:11:03.960 --> 0:11:05.640 the FED, We've got the e c B. We've got 0:11:05.679 --> 0:11:08.400 perhaps a little bit more foresight into what their plans 0:11:08.400 --> 0:11:11.920 are for if they just stay put. I'm talking about 0:11:11.920 --> 0:11:14.959 the FED mainly here. Is that going to be enough 0:11:15.320 --> 0:11:19.160 to keep driving the fixed income rally without let's say, 0:11:19.200 --> 0:11:23.400 some positive upside surprise due to trade agreements, I think 0:11:23.440 --> 0:11:25.800 you're not going to see the kind of duration rally 0:11:25.840 --> 0:11:28.160 that we saw this here. I mean, it's almost impossible 0:11:28.200 --> 0:11:30.280 to get a peaked a trough move of a hundred 0:11:30.360 --> 0:11:34.000 basis points or so unless we're going into a global recession. 0:11:34.120 --> 0:11:37.280 And I don't think we're going into recession. So I 0:11:37.320 --> 0:11:40.520 think that being on hold allows, you know, returns to 0:11:40.559 --> 0:11:43.880 be positive, but more in line with coupon income than 0:11:44.160 --> 0:11:47.199 with some big gains and duration or a lot more 0:11:47.240 --> 0:11:50.920 spread tightening from here. So we have a positive outlook 0:11:50.920 --> 0:11:53.320 for next year in terms of total return, but mostly 0:11:53.360 --> 0:11:56.640 driven by coupon income, not the factors that drove the 0:11:56.679 --> 0:11:59.560 market in. Kathy want to wrap up with a question 0:11:59.600 --> 0:12:01.440 that note out. We'll be asking all of our guests 0:12:01.480 --> 0:12:03.480 through this week as we count you down to December 0:12:03.559 --> 0:12:06.319 fift in that trade deadline, big line in the sand, 0:12:06.600 --> 0:12:11.440 what are your Talan clients about it? Yeah, um, well, 0:12:11.480 --> 0:12:15.440 you know, we think the most likely outcome is either 0:12:16.080 --> 0:12:19.040 a delay of additional tariffs and more talk or some 0:12:19.160 --> 0:12:23.160 sort of you know, phase one light agreement. Um, simply 0:12:23.200 --> 0:12:26.160 because it's in everybody's best interest for that to happen. 0:12:26.280 --> 0:12:29.040 But you know this is this is probably the most 0:12:29.120 --> 0:12:33.400 unpredictable policy factor right now in the US. Cathy Jones 0:12:33.480 --> 0:12:35.640 going to catch up your charge to our Chief Fixed Incomes. 0:12:35.679 --> 0:12:49.960 Trying to just one of the best guests we could 0:12:49.960 --> 0:12:53.040 possibly get on this program to break down the all market. 0:12:53.200 --> 0:12:56.120 Jeff Curry joining us in New York, Goldman sax International, 0:12:56.160 --> 0:12:59.760 Global Head of Commodities Research. Good morning to Jeff. Before 0:12:59.840 --> 0:13:01.839 we get into the commodity market, I just want to 0:13:01.880 --> 0:13:05.840 get my hands around this December fifteen trade deadline and 0:13:05.960 --> 0:13:08.560 what you guys are sounding clients at the moment about it. 0:13:08.640 --> 0:13:11.000 How are you characterizing gays a line of the sand, 0:13:11.360 --> 0:13:14.200 Is it a firm deadline? Just how much risk is 0:13:14.240 --> 0:13:17.760 around that date? Well, in terms of thinking about our space, 0:13:18.280 --> 0:13:20.600 you know that the impact is relatively limited. It really 0:13:20.679 --> 0:13:24.360 impacts the agriculture markets to the most extensive extent. You know, 0:13:24.400 --> 0:13:26.280 there's a lot of noise right now whether or not 0:13:26.360 --> 0:13:29.240 this is going to lead to improvement in soy demand. 0:13:29.559 --> 0:13:31.920 But I think the key point there is that you 0:13:31.960 --> 0:13:35.160 have structural issues going on in the trade war is 0:13:35.240 --> 0:13:38.320 exacerbating these structural issues. It's not so much the cause. 0:13:38.400 --> 0:13:40.640 Let's take, for example, let's say if they were to 0:13:40.840 --> 0:13:44.800 increase the demand for soybeans, Asian swine flu has taken 0:13:44.840 --> 0:13:47.600 out the demand because there's no more hogs who actually 0:13:47.600 --> 0:13:50.480 consume the soybeans. That's more of a structural problem. Um. 0:13:50.520 --> 0:13:53.640 You look across the commodity space, it's much more structural 0:13:53.679 --> 0:13:56.080 issues that are plaguing in which and and sort of 0:13:56.520 --> 0:13:59.320 embedded in that question is a supplied demand dynamic, right, 0:13:59.360 --> 0:14:01.640 And that's a demand on side a question where in 0:14:01.640 --> 0:14:03.160 other words, if you get it amping up of the 0:14:03.240 --> 0:14:06.520 of the trade wars that potentially lowers demand, is that 0:14:06.600 --> 0:14:09.360 the right side of the equation to be looking at 0:14:09.360 --> 0:14:11.240 in terms of oil prices or should we be looking 0:14:11.240 --> 0:14:13.800 more at the supply side? Much more at the supply side. 0:14:13.920 --> 0:14:16.959 And what we're seeing is a substantial drop off in 0:14:17.040 --> 0:14:19.040 cap X. And again I'm gonna argue that that's much 0:14:19.040 --> 0:14:21.960 more structural than being driven by the trade boards. Sail 0:14:22.000 --> 0:14:25.040 prayers are biggest sail players in particular, you look at 0:14:25.080 --> 0:14:27.640 the rig counts in the US, they've been in a 0:14:27.680 --> 0:14:31.920 steady decline since December of last year. UM, and that 0:14:32.000 --> 0:14:35.880 reflects one is that these companies still have structural problems, 0:14:35.880 --> 0:14:39.720 poor returns, too much debt. But also you think about 0:14:39.720 --> 0:14:42.360 the trade boards ascerbated, and the other big factor that's 0:14:42.360 --> 0:14:45.800 coming into play is E s G investing. UM. You know, 0:14:45.880 --> 0:14:52.119 we estimate that in trillion dollars of assets under management 0:14:52.160 --> 0:14:55.360 will integrate E s G strategies into the portfolio. What's 0:14:55.360 --> 0:14:58.680 the two lowest hanging fruit fossil fuels and medals in mining? 0:14:59.120 --> 0:15:03.120 How can foss of fuels be within E s G. 0:15:03.400 --> 0:15:07.320 They've tried to manage the social message. How do they 0:15:07.360 --> 0:15:11.080 actually manage a strategic plan to be E s G 0:15:11.960 --> 0:15:15.080 sensitive five or ten years from now. Well, you look 0:15:15.120 --> 0:15:19.480 at the UM, the big oils and Europe, they've basically 0:15:19.520 --> 0:15:25.440 reinvented themselves as big energy, incorporating renewables, power and other 0:15:25.520 --> 0:15:29.000 more sustainable energy sources. Bio Fuels are added into that 0:15:29.080 --> 0:15:31.840 mix UM. So they're doing that in a way to 0:15:31.920 --> 0:15:34.440 be able to attract that capital back into the sector. 0:15:35.040 --> 0:15:37.800 But when you look at the shale players in particular, UM, 0:15:37.840 --> 0:15:40.320 they don't have that kind of optionality. I'm not gonna 0:15:40.320 --> 0:15:42.880 blame it all on E s G shale players. You know, 0:15:42.960 --> 0:15:46.640 too much leverage, bad returns, and you know, not a 0:15:46.640 --> 0:15:51.080 great future. Jeff. You know you taught micro economics in Chicago, 0:15:51.120 --> 0:15:53.480 which is an a mental hunter and also really rigorous 0:15:53.520 --> 0:15:57.840 as well. Give us the rigorous single point microeconomics of 0:15:57.920 --> 0:16:02.320 the oil price that Saudia Arabia needs. What's their best 0:16:02.520 --> 0:16:06.200 oil price right now? Well, in terms of thinking about 0:16:06.200 --> 0:16:08.840 what they can control and what they can't control, they 0:16:08.880 --> 0:16:12.000 can control the shape of the forward curve, they cannot 0:16:12.080 --> 0:16:14.640 control the price level. And the agreement they came to 0:16:14.760 --> 0:16:19.040 on Friday really exemplified that understanding, because what they did 0:16:19.280 --> 0:16:23.880 is they did a much deeper but um sharper um 0:16:23.960 --> 0:16:26.200 shorter term cut, which is telling you that they're going 0:16:26.240 --> 0:16:28.760 to deal with that near term surplus. They even went 0:16:28.800 --> 0:16:31.240 as far as to create a threat to any cheater, 0:16:31.360 --> 0:16:34.280 so it's best successful. But the third and most important 0:16:34.320 --> 0:16:37.400 aspect of that cut is they didn't offer an extension 0:16:37.400 --> 0:16:40.160 and they didn't talk about the future. Oil is a 0:16:40.200 --> 0:16:44.080 spot asset. It's not an anticipatory asset like financial markets, 0:16:44.360 --> 0:16:47.600 so having a focus on forward guidance is really not necessary. 0:16:47.840 --> 0:16:50.480 Focusing on cleaning up the front end is really important, 0:16:50.760 --> 0:16:53.560 and that's what they did, which increases the backwardation, and 0:16:53.600 --> 0:16:56.160 we raised our price target to sixty three dollars a 0:16:56.200 --> 0:16:59.400 barrel on Brent from UM sixty really driven by that 0:16:59.480 --> 0:17:02.280 backwarda let's talk about that threat from the Sound East. 0:17:02.280 --> 0:17:03.840 Woke us through that threat, Jeff, And what do you 0:17:03.840 --> 0:17:07.199 think that threat is credible? Well, when you look at 0:17:07.240 --> 0:17:13.000 who was cheating, it was Iraq, Russia, UM, Nigeria and Kurdistan. 0:17:13.359 --> 0:17:15.800 And what we've seen so far for the month of November, 0:17:15.840 --> 0:17:18.359 both Iraq and Russia have got their numbers back down 0:17:18.359 --> 0:17:20.520 in line with with with their quotas. But I think 0:17:20.520 --> 0:17:22.919 it's also a broader threat to the rest of the 0:17:22.960 --> 0:17:27.160 peripheral of OPEC that hey, they do have the capacity 0:17:27.240 --> 0:17:29.920 and they're willing to do it UM as we go forward, 0:17:30.080 --> 0:17:34.040 and that their ability UM to manage the front end 0:17:34.040 --> 0:17:36.679 because they've actually been the leaders in terms of cutting 0:17:36.720 --> 0:17:38.480 back on the front end. You know, they're running four 0:17:38.520 --> 0:17:41.199 hundred thousand barrels a day below their quota UM. So 0:17:41.240 --> 0:17:43.600 I think, you know, in terms of the outlook going forward, 0:17:43.720 --> 0:17:47.320 because it's not a long term commitment here, it's like, hey, 0:17:47.400 --> 0:17:50.520 let's balance these near term surpluses, it becomes much more 0:17:50.640 --> 0:17:54.080 easy to create a credible threat. You live and breathe 0:17:54.080 --> 0:17:56.920 this market. I don't so just naively, I'll say, from 0:17:56.920 --> 0:17:59.960 my perspective from the outside looking again, I was surprised 0:18:00.000 --> 0:18:03.119 paced about the absence of a conversation around Saudi a 0:18:03.200 --> 0:18:06.639 Ramco in Vienna, Austria at the OPEQ matsing. Can you 0:18:06.680 --> 0:18:09.879 really draw a distinction between a Saudi Arabia that joins 0:18:09.880 --> 0:18:12.760 opex plus to manage an oil price and a Saudi 0:18:12.760 --> 0:18:15.240 Arabia that needs to manage the price of its crown 0:18:15.320 --> 0:18:19.840 jewels listed in react? Yes, look at what oil equities 0:18:19.880 --> 0:18:22.600 have done since two thousand and fifteen. Do you actually 0:18:22.640 --> 0:18:25.360 do you realize oil equities on a level basis are 0:18:25.400 --> 0:18:27.359 lower today than what they were in the troughs of 0:18:27.400 --> 0:18:30.920 fifteen and sixteen oil prices you know, sixty three the 0:18:30.960 --> 0:18:33.840 oil prices twenty six then UM and you know I 0:18:33.840 --> 0:18:35.840 tell this to our equity analyst. Does the oil price 0:18:35.880 --> 0:18:37.960 really matter? Yeah? It does in a long term sense. 0:18:38.200 --> 0:18:39.960 And I think this goes back to my point. What 0:18:40.040 --> 0:18:44.400 did the OPEC plus members do UM this last on Friday? 0:18:44.680 --> 0:18:47.960 They separated that long term view from the short term view. UM. 0:18:48.080 --> 0:18:51.800 Oil price is a spot asset. Equities are an anticipatory asset. 0:18:51.920 --> 0:18:54.119 What they did on Friday. Was not going to change 0:18:54.320 --> 0:18:58.400 those expectations on forward oil prices. However, it could rebalance 0:18:58.400 --> 0:19:00.639 the market and help near term cash flows go. I 0:19:00.720 --> 0:19:03.879 absolutely agree you need to disconnected to and if the 0:19:03.960 --> 0:19:07.000 markets aren't a testament to the fact that oil price 0:19:07.040 --> 0:19:08.720 can do what it wants and the and you know, 0:19:08.800 --> 0:19:10.560 the equities can do. Another thing I can point out 0:19:10.720 --> 0:19:14.000 equities do not have an arbitrage condition oil prices do. 0:19:14.080 --> 0:19:16.440 There are arbitrage to the real supply and demand today, 0:19:16.640 --> 0:19:20.320 equities can do whatever they want based upon expectations. That's 0:19:20.320 --> 0:19:23.080 a whole different discussion. So Jeff, you were just saying 0:19:23.080 --> 0:19:25.560 that Brent, uh, you're expecting it to go to sixty 0:19:25.560 --> 0:19:29.080 three dollars. It's currently fifty six dollars and fifty seven cents. 0:19:29.080 --> 0:19:30.600 Where do you see w T I go And it's 0:19:30.640 --> 0:19:33.320 fifty eight dollars and cents right now. I'm almost right 0:19:33.359 --> 0:19:36.560 on where it's trading right now, basically. But that's not 0:19:36.640 --> 0:19:40.520 the story in oil. The story in oil is the 0:19:40.560 --> 0:19:43.400 shape of the forward curve. It's the returns where you um, 0:19:43.440 --> 0:19:46.160 you know, we expect to see returns and being long 0:19:46.200 --> 0:19:48.320 oil with this thing trading flat over the rest of 0:19:48.359 --> 0:19:50.600 the year. One thing, one thing that I want to 0:19:50.600 --> 0:19:52.560 follow up on. When you say that you're expecting CAPEX 0:19:52.600 --> 0:19:55.199 to decline over in the shale patch, I'm wondering, do 0:19:55.240 --> 0:19:57.840 you expect the fate of those companies to improve. We've 0:19:57.840 --> 0:20:00.639 seen the bankruptcies really increas east. Do you think that 0:20:00.680 --> 0:20:02.520 would just continue or do you think that we're starting 0:20:02.520 --> 0:20:04.440 to see a bottom. Well, I think when you look 0:20:04.440 --> 0:20:06.239 at what has to happen in that sector, you need 0:20:06.280 --> 0:20:09.320 to see consolidation. UM. I like to point out the 0:20:09.359 --> 0:20:13.919 top five oil companies in the US UM they represent 0:20:14.080 --> 0:20:16.480 the market cap, but only a third of the production. 0:20:16.800 --> 0:20:20.840 The other fifty companies that represent the other um of 0:20:20.880 --> 0:20:22.639 the market cap is where all the growth is and 0:20:22.640 --> 0:20:25.639 it's uneconomic. UM. So what likely has to happen is 0:20:25.640 --> 0:20:28.120 you have to consolidate those companies. I like to point 0:20:28.119 --> 0:20:30.760 out when people make the point about the CEO confidence 0:20:30.840 --> 0:20:33.200 numbers me and down, it's because there's too many old 0:20:33.240 --> 0:20:36.840 company ceo s versus the very few new company CEOs, 0:20:36.880 --> 0:20:38.639 and a lot of consolidation needs to happen on the 0:20:38.640 --> 0:20:41.240 old cop It's my birthday and Jeff Curry goes to 0:20:41.280 --> 0:20:46.080 the old CEOs of the old companies as well. Jeff 0:20:46.160 --> 0:20:50.679 very quickly here on gold Golden Sex talking about a lift. 0:20:50.880 --> 0:20:54.199 When do we see a lift on gold Well, we 0:20:54.359 --> 0:20:56.720 argue it's going to be real steady across the course 0:20:56.720 --> 0:20:59.439 of I think one of the biggest factors driving our 0:20:59.480 --> 0:21:02.600 bullish few you is the D dollarization. We're seeing that 0:21:02.600 --> 0:21:06.880 across the central banks, particularly the emerging market central banks. 0:21:06.880 --> 0:21:10.639 They're physically buying goal. We expect seven fifty tons of 0:21:10.760 --> 0:21:14.240 physical goal buying in UM and that's going to be 0:21:14.320 --> 0:21:17.800 driven by D dollarization. Jeff, super smart, always great to 0:21:17.800 --> 0:21:20.560 get your insight. Jeff carry their Goldman SAX International, Global 0:21:20.560 --> 0:21:37.280 head of Commodities Research. A FETE decision this Wednesday, and 0:21:37.440 --> 0:21:40.320 ECB decision coming up on Thursday, and a big trade 0:21:40.320 --> 0:21:43.320 deadline coming up on Sunday as well. On in between 0:21:43.400 --> 0:21:46.000 all of that, sprinkled in between, we get some decent 0:21:46.000 --> 0:21:48.560 amount and he canot be data in America, including US 0:21:48.640 --> 0:21:52.040 retail sales Lisa coming up in this Friday. Yeah, with 0:21:52.160 --> 0:21:55.040 a lot of data. The question is how should traders 0:21:55.480 --> 0:21:58.040 position ahead of that. Constance Hunter joining us now KEPMG 0:21:58.160 --> 0:22:02.280 chief economist and NAB President Constance I'm wondering right now 0:22:02.280 --> 0:22:06.200