Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: oil demand, as you said, dropping about three billion, three
Speaker 1: billion bill barrels a day of total consumption, the largest
Speaker 1: demand shock the oil market has suffered since the global
Speaker 1: financial crisis of two thousand and eight. Why are we
Speaker 1: seeing oil prices getting a bit of a bid today?
Speaker 1: Why are they having a lift? Why are they slightly up?
Speaker 1: Because the thing was so bad? But what is that
Speaker 1: really pricing it in? I mean, last week was not
Speaker 1: a blood bath. Last week was the sell off, but
Speaker 1: it was not less because not just apeople don't know
Speaker 1: what to price in. They don't know how long this
Speaker 1: will go on for. They don't know how much worse
Speaker 1: it will get. Let's ask the economists what to do.
Speaker 1: John Riding bring capital chief economic advice that you want
Speaker 1: to get around the table here in New York. Good
Speaker 1: morning to John, Good morning Johnathan. What do you tell clients? Well, look,
Speaker 1: what has to train I think recognized. First of all,
Speaker 1: the coronavirus is it's like all illnesses. It's terrible. It's
Speaker 1: spreading rapidly. Um. But one has to put it in perspective.
Speaker 1: So what what is it analytically? And I've argued that
Speaker 1: it's more a supply shock than it is a demand shock,
Speaker 1: at least for the rest of the world that we
Speaker 1: have integrated global supply chains. We had a shock to
Speaker 1: the supply chain last year from tariffs in the trade wars.
Speaker 1: Um we got that behind us, and now we have
Speaker 1: a uh supply chain shock coming out of the factory
Speaker 1: stain closed, which is a Chinese decision in terms of
Speaker 1: limiting the spread. Then of course us to the travel
Speaker 1: band and soul. But if we go back to looking
Speaker 1: at stars, it will, no doubt we got under control
Speaker 1: with that. The timeline in the case of stars from
Speaker 1: who are declaring it an international mergency I think was
Speaker 1: that March thirteenth, two thousand three too, being sounding the
Speaker 1: old clear was in July of two thousand three. Um,
Speaker 1: we don't know if it's got the same timeline. It
Speaker 1: spreads more rapidly because we've now had double the cases
Speaker 1: than there were a total number of stars cases, it
Speaker 1: doesn't appear to be as deadly. Um. But that said,
Speaker 1: a lot of people are pushed back on using Stars
Speaker 1: as an example of what to expect here, saying the
Speaker 1: Chinese economy is much more pivotal in the world. We
Speaker 1: also have the backdrop of all of these tensions. And
Speaker 1: I think it's interesting that John and and really salient
Speaker 1: that John started on the blowback that the US is
Speaker 1: getting from China on the response, how much is this
Speaker 1: going to potentially rise to a political issue and cause
Speaker 1: tensions on the trade front at a time when we had,
Speaker 1: you know, had some sort of resolution. We've we had
Speaker 1: phase one deal, Phase one deal sign now we move
Speaker 1: on to phase two, and you know, the coronavirus has
Speaker 1: created some uncomfortable mood music for those negotiations, especially when
Speaker 1: the side of the administration that has been more anti China,
Speaker 1: more pro tariff makes comments. Uh you know that you
Speaker 1: referred to earlier being made. But that being said, common
Speaker 1: heads provided prevailed in the trail talks, the trade talks,
Speaker 1: and I think that will uh you know, that will
Speaker 1: happen here. Um, there will be an impact on growth
Speaker 1: in the first quarter. As I said in the US
Speaker 1: I think will primarily see it in the supply chain,
Speaker 1: not in the consequences of reduced demand for China, that
Speaker 1: that will have an impact. But the US is still
Speaker 1: a relatively closed economy, and you work in the demand
Speaker 1: numbers and they're they're pretty small for the US. The
Speaker 1: erruption to supply maybe more, maybe more significant, but without
Speaker 1: having a crystal ball and looking at stars and think
Speaker 1: about this, that it's probably going to be hopefully going
Speaker 1: to be a first quarter event, and then the economy
Speaker 1: does Jonathan, many people share that hope. The difficulty they
Speaker 1: might have be having at this point is that we
Speaker 1: spent much of last year with this tug of war
Speaker 1: between the consumer, this resilient consumer, this resilient services sector,
Speaker 1: and this really really soft manufacturing sector, not just a
Speaker 1: story for the United States, but a story for much
Speaker 1: of the developed world, including China as well, and we
Speaker 1: never quite resolved the question. There were hopes that we'd
Speaker 1: come into this year and that manufacturing would start to
Speaker 1: pick up and to stabilize, but it was never quite resolved,
Speaker 1: and that an issue like this, a shock like this,
Speaker 1: can derail things again. What do you say about that
Speaker 1: particular dilemmon John I think the key thing is to
Speaker 1: watch jobs, because what keeps the consumer in aime is employment,
Speaker 1: and employment growth has remainder of us. The signals for
Speaker 1: January is that has continued in the first quarter. Very
Speaker 1: strong readings on the labor market out of the consumer
Speaker 1: Confidence report UH, the initial jobless claims data remain extremely low.
Speaker 1: So I see, we have to watch jobs and that's
Speaker 1: the key thing here. UM. And the payrolls report this Friday, John,
Speaker 1: how important this payrolls this Friday? Given a lot of
Speaker 1: this though predate a lot of this particular survey will
Speaker 1: just predate any of the stress that we see in
Speaker 1: the global economy right now. But economic momentum is very important.
Speaker 1: And you know when when when you're you're looking at
Speaker 1: the impact of something like sorts, it's like, what is
Speaker 1: the what what does the momentum in the economy that's
Speaker 1: been impacted? And the job's momentum has been strong, UM,
Speaker 1: and if it remains strong, then the US will power
Speaker 1: through this um and that's key. And I think there
Speaker 1: are some signs we'll see what you know, we had
Speaker 1: very weak Chicago p M I reading last week on
Speaker 1: manufacturing that may have been distorted by Bowing, given the
Speaker 1: Bowing is headquartered in Chicago. We had a very strong
Speaker 1: reading out of the Richmond Fed Manufacturing Indicator, which we
Speaker 1: found to be statistically a fairly useful indicator of manufacturing.
Speaker 1: And we will get to know this morning with the
Speaker 1: I S M reading later on what what the January
Speaker 1: manufacturing numbers like. Absolutely the difference between an economy that
Speaker 1: doesn't have manufacturers at two percent growing economy and we
Speaker 1: saw that last year and one word, capital spending comes back,
Speaker 1: uh and manufacturing kicks in and then that becomes two
Speaker 1: and a half percent maybe better economic growth, but um,
Speaker 1: the construction numbers, the residents numbers look good that I
Speaker 1: think I was going to continue to drive the economy
Speaker 1: and I think everything comes down to employment growth. Here
Speaker 1: for a while, John, great, catch up with you to
Speaker 1: get your thoughts. As always, John Riding Bring Capital, Chief
Speaker 1: Economic Advisor, the focus of global markets and the world
Speaker 1: on the coronavirus coming out of China. Joining us now,
Speaker 1: I'm really pleased to say is Dr Amish Adalga JOHNS. Hopkins,
Speaker 1: Bloomberg School of Public Health, Senior Scholar, doctor. Fantastic to
Speaker 1: have you with us on the program to get your
Speaker 1: brilliant insight. Let's just begin with a rather simple question
Speaker 1: that deserves, I'm sure a complex answer. What makes this
Speaker 1: coronavirus just so difficult to contain? What makes it so
Speaker 1: difficult to contain is that it is spreading between humans efficiently.
Speaker 1: That means a person can get infected and pass it
Speaker 1: on to somebody else and then maybe pass it on
Speaker 1: to somebody else. So it's spreading in the community and
Speaker 1: that makes it very hard. And it's also spread through
Speaker 1: the respiratory route coughs and sneezes, which are much harder
Speaker 1: to really contain than something that spread a different manner.
Speaker 1: So there's a lot of characteristics that are kind of
Speaker 1: pushing that case count higher. To the last few weeks,
Speaker 1: a lot of people have been trying to understand the
Speaker 1: so called incubation period, the length of it, and whether
Speaker 1: you're contagious durre in it. Do we know anything more
Speaker 1: about that? Now? We have seen some data coming from
Speaker 1: Germany that is really suggestive of transmission during the incubation period,
Speaker 1: when someone who wasn't sick at all passed it on
Speaker 1: to somebody somebody and then they got ill. This is
Speaker 1: something we hadn't seen with coronavirus is and it is
Speaker 1: something that makes control very hard because if you don't
Speaker 1: know who is who is contagious, you can't isolate them,
Speaker 1: you can't quote, you can't do any type of social
Speaker 1: distancing to keep them away from other people. It usually
Speaker 1: doesn't cause the force of the epidemic. It's not going
Speaker 1: to spread, it's not going to be a big force
Speaker 1: in the spread of it, but it becomes very hard
Speaker 1: to completely eliminate the infection if you have these asymptomatic
Speaker 1: people who are able to bread during your incubation period.
Speaker 1: What's the fatality rate been, Like, I've heard a lot
Speaker 1: of arguments saying that that common flu is incredibly fatal
Speaker 1: and has had a much broader impact, yet it hasn't
Speaker 1: necessarily created the same sort of hysteria. So the fatality
Speaker 1: rate that we're often quoting now is two percent, But
Speaker 1: that's a very skewed number because that number is derived
Speaker 1: from the cases that are being diagnosed in China, which
Speaker 1: are going to be selected from the more sick group
Speaker 1: of people. They're not testing people that are out in
Speaker 1: the in the community who have maybe more like common
Speaker 1: cold like symptoms which coronaviruses can cause versus testing. People
Speaker 1: that are in the hospital with pneumonia need to be hospitalized,
Speaker 1: so you're getting what's called a severity bias. So that
Speaker 1: two percent we expect to come down as more and
Speaker 1: more people who have mild symptoms are tested, and as
Speaker 1: you've seen, the rate has been coming down as we
Speaker 1: get the case council higher and there have been there's
Speaker 1: only been one death outside of China, so that really
Speaker 1: argues that this is going to be less severe in
Speaker 1: terms of fatality, much less severe than Stars. For example.
Speaker 1: Dr Dodga, do you think that the action that we've
Speaker 1: seen in terms of stopping flights and just in general
Speaker 1: recommending people don't go to China has been an overreaction
Speaker 1: based on what you just said. It's one thing to
Speaker 1: have travel advisories for individuals that are going to China
Speaker 1: so that they are aware of what the risks may
Speaker 1: be and what protective actions to take, but it's quite
Speaker 1: another to basically enact the travel ban against China and
Speaker 1: people coming from from China. That I think is not warranted,
Speaker 1: and we've learned that from many outbreaks that those travel
Speaker 1: bands do not work. They dive, they divert precious public
Speaker 1: health resources to enforcing a travel ban and and really
Speaker 1: looking at travelers versus actually ramping up our health system
Speaker 1: to be able to deal with these cases when they
Speaker 1: do occur in the United States, and it ends up
Speaker 1: making things worse in China because it creates economic damage,
Speaker 1: It creates stigmatization, and make logistically harder to get resources
Speaker 1: into that area, and it will not really have a
Speaker 1: measurable impact on on a respiratory disease that's spreading this
Speaker 1: well in the community and over and almost two dozen countries.
Speaker 1: I think that we have to prepare for the event
Speaker 1: reality that this will come to the United States and
Speaker 1: we will have an outbreak of it here, and it
Speaker 1: may not be very severe, but it can be very
Speaker 1: disruptive to our health system, which runs basically at capacity
Speaker 1: on every day. This is a take that I think
Speaker 1: a lot of people outside of the medical world struggle with.
Speaker 1: They look at the quarantine measures within China, massive cities
Speaker 1: effectually being shut down, and asked them, sounds okay, if
Speaker 1: they've got quarantine measures, why wouldn't we shut down our
Speaker 1: borders to the epicenter of where this disease, where this
Speaker 1: virus has come from, and they're just from someone from
Speaker 1: outside the medical world. That's kind of the response to
Speaker 1: what you've just said. What do you say back to that? Well,
Speaker 1: first of all, I would say that China's quarantining a
Speaker 1: fifty million people was also unwarranted. That made conditions much
Speaker 1: worse than Wuhan, with shortages, with shortages of food, medical
Speaker 1: bed shortages, physician shortages, had people fled that area, lots
Speaker 1: of mistrust of public health authority, so that that on
Speaker 1: what China did was also wrong as well. But the
Speaker 1: point what I'm trying to make is that this has
Speaker 1: probably been spreading for some time in China before it
Speaker 1: was noticed. At least in November, it was spreading and
Speaker 1: there were many many travelers leaving Wuhan. And remember that
Speaker 1: the spectrum of illness at this that the coronavirus causes
Speaker 1: includes things like the common cold, very mild type of symptoms,
Speaker 1: and many patients. I suspect that there are more cases
Speaker 1: in the world that have not been diagnosed because they recovered,
Speaker 1: or they were very mild or mixed in with flu
Speaker 1: and not diagnosed because they're very poor diagnosing viral infections.
Speaker 1: So it's likely that this is already spread and is
Speaker 1: not completely containable. And what we want to do now
Speaker 1: while we have time is actually prepare our hospitals, make
Speaker 1: sure our supply chains are good, make sure that that
Speaker 1: diagnostic testing is scaled up. Because this this is really
Speaker 1: going to come here inevitably. Do you want to blunt
Speaker 1: the impact of it? And if you spend a lot
Speaker 1: of time focusing on travelers and quarantines and travel bands,
Speaker 1: you're really diverting precious resources. And in the end it
Speaker 1: may not it's not going to make much of a
Speaker 1: difference because this is a respiratory virus that has some
Speaker 1: spread during a day symptomatic period, so it becomes very
Speaker 1: hard to contain. And travel bands did not work during
Speaker 1: H one and one, they did not work during Ebola,
Speaker 1: they did not work during HIV. They do not work,
Speaker 1: and they actually make things much harder. Even though politicians
Speaker 1: love to run for them when when any time of
Speaker 1: outbreak occurs, don't to appreciate your point of view this morning,
Speaker 1: that's start to amish down yet, John, I guess from
Speaker 1: the Johns Hopkins Bloomberg School of Public Health, they senior
Speaker 1: Schollar there. We should of course point out that Michael
Speaker 1: and Bloomberg is the founder a majority owner of Bloomberg Alp,
Speaker 1: the parent company of Bloomberg News. John, you know, Miranda
Speaker 1: Carr is like a few of the people we have.
Speaker 1: It's like authentic knowledge in China, not the distance thing.
Speaker 1: I feel like incredible live and breathes it. Yeah, I
Speaker 1: mean I feel so distant. I got I been to China.
Speaker 1: I've been literally like in Hong Kong. I mean like
Speaker 1: three quarters of a mile. You go to China and
Speaker 1: then you stay in the hotel. Yeah. I mean it's
Speaker 1: a complete boggest statement to say been to China. We
Speaker 1: can bring it, Miranda car right now, High Time Security
Speaker 1: Senior analyst, Miranda talk to us about the damage being
Speaker 1: done to the economy at the moment. Well, you've got bitter.
Speaker 1: We got two elements to it. I mean the first
Speaker 1: is the consumption hit. So Spring festival the consumption. No
Speaker 1: one was going out, no one was spending going out
Speaker 1: and seeing people. So you've had that sort of short
Speaker 1: term economic hit. But the longer term economic hit could
Speaker 1: be the one where we're seeing now where instead of
Speaker 1: going back to work and production starting to kick off,
Speaker 1: where you want the Spring festival sort of post spring
Speaker 1: festival ranks where everyone's like, you know, having a key
Speaker 1: I on new export orders and production levels that's not
Speaker 1: starting now UM. And so this is where sort of
Speaker 1: a lot of the sort of industrials UM and you know,
Speaker 1: the private sector manufacturing may see a bigger hit than
Speaker 1: what we saw as a consumption hit over the spring
Speaker 1: festival shutdown RAND And we had a guest on the
Speaker 1: program in the last hour that said he's much more
Speaker 1: worried about the supply chain hit than the demand side hit.
Speaker 1: Does that resonate with you, Well, yeah, I mean good,
Speaker 1: because with the demand side you can get I mean
Speaker 1: not you know, if people can spend money over Spring festival,
Speaker 1: they can basically they've still got it in their pockets.
Speaker 1: They can go out and when when the virus passes,
Speaker 1: that consumption rebound can happen. But the trouble is going
Speaker 1: to be in areas where you know, they were already
Speaker 1: under pressure for the trade war and the supply chain
Speaker 1: sort of you know, shifting around into other areas, other countries,
Speaker 1: UM and other areas of the world. Now if they're
Speaker 1: not getting the sort of export rebound, they're already suffering
Speaker 1: cash flow problems. And then you have a production shutdown, UM,
Speaker 1: then that means you're going to have a lot of
Speaker 1: the sort of same sector are going to be struggling
Speaker 1: with both cash flows and orders as we come into
Speaker 1: Q two UM and that will then depend, you know,
Speaker 1: depends how long the virus and hits um If it
Speaker 1: continues on to Q two, then then then that could
Speaker 1: be a real struggle. MINDA. There's been some speculation that
Speaker 1: the PBOC that that the Beijing or will inject a
Speaker 1: significant amount of additional stimulus to offset any potential economic
Speaker 1: shock here. How much ammunition do they have to completely
Speaker 1: cushion the blow here? Well, interestingly, so they've actually got
Speaker 1: because they didn't go sort of full help in the
Speaker 1: stimulus for on the trade war, they still have a
Speaker 1: little bit of ammunition left. I mean, if you think
Speaker 1: of infrastructure last year, it was only four UM your
Speaker 1: and your growth, So they've still got they can still
Speaker 1: bring forward a lot of the local government spending, local
Speaker 1: government bond issuance UM and get that spending. But again
Speaker 1: it does come down to when the virus starts peaking
Speaker 1: and construction CONSTRUCTUSUS. You know, you can't put infrastructure in place,
Speaker 1: um is people aren't be able to move around. So
Speaker 1: it really needs you need, really need the virus to
Speaker 1: start sort of peeking and then movement to start going again.
Speaker 1: And then once you get into q Q, then you're
Speaker 1: likely to see a bit much much bigger stimulus package
Speaker 1: than you saw, particularly monetary policy easing, but also more
Speaker 1: infrastructure investment plans arounder. The constructive view on all of
Speaker 1: this is that we get some kind of V shape recovery.
Speaker 1: It's an inflection point that you have in mind that
Speaker 1: we go beyond that. The longer this goes on for,
Speaker 1: the more you doubt that we will get that sharp
Speaker 1: V shape recovery out of the Chinese economy. Well, the
Speaker 1: official projections at the moment are for for the peak
Speaker 1: in seventeenth of February, and it's an incredibly precise date. Um.
Speaker 1: If it peaks then and then starts declining, then then
Speaker 1: we're basically we're going to see sort of Q two
Speaker 1: Q two rebound. The risk is obviously, you know, you know,
Speaker 1: even this time last week, singing was going to be
Speaker 1: over seventeen um in in infected cases. No one was
Speaker 1: imagining that. So therefore there's it's the uncertainty about when
Speaker 1: that peak is going to happen, which is which is
Speaker 1: a big problem, and all the associated shutdowns with trying
Speaker 1: to prevent that, rather than necessarily the scale of the
Speaker 1: effect itself, Miranda, will this affect agricultural transfer from the
Speaker 1: United States to China, like to be direct soybeans from
Speaker 1: the United States of China. Does any of that get
Speaker 1: gummed up so far? Well? I think no. I think
Speaker 1: that that that may have issues, but I think it
Speaker 1: appoints to an even more interesting one because one is
Speaker 1: one of the one of the things which is a
Speaker 1: big factor. I mean, one of the issues this year
Speaker 1: was going to be the you know, the pick price
Speaker 1: increases because of the swine fever. That's basically a food
Speaker 1: safety issue. And then now you've got this which is
Speaker 1: obviously coming from from from wild you know, supposedly coming
Speaker 1: from wild animals, and you've got this whole supply chain,
Speaker 1: food distribution, food safety, all of that different aspects, and
Speaker 1: suddenly China's going to take quite dramatic action in order
Speaker 1: to do that and make that investment. And to be honest,
Speaker 1: that's where some of the most interesting you know, if
Speaker 1: you're if you're thinking about where the upside from this
Speaker 1: can come then it's in that kind of you know,
Speaker 1: the could chain distribution in the seat safety and all
Speaker 1: the sort of defeat manufacturers. He should actually be benefiting
Speaker 1: from this because that's where they're going to have to
Speaker 1: address a lot of the issues that have got us
Speaker 1: into this place in the first place. Miranda, thank you
Speaker 1: so much. Brian to car with Hi Tong International this morning.
Speaker 1: This is a joy. We haven't talked to Mickey Levy
Speaker 1: at some length here in a while, and it's important
Speaker 1: to do that now. He's with Barrenburg Bank, but that
Speaker 1: barely describes his contribution to thinking about what central banks do.
Speaker 1: He's associated with the Shadow Open Market Committee. I'm not
Speaker 1: going to go into it all because of time, but
Speaker 1: the answer is back thirty fifty years as a group
Speaker 1: concerned about flow dynamics and stock dynamics within the Central
Speaker 1: Bank and worried about rising prices. Dr Levy, thank you
Speaker 1: so much for being with us today. There's this perennial
Speaker 1: call for inflation. Vice Chairman Clarica said to Bloomberg a
Speaker 1: few days ago he sees us nearing a tourist inflation.
Speaker 1: Have we given up on the inflation watch? Is there
Speaker 1: inflation out there to worry about a little bit, Tom,
Speaker 1: but not really. I mean nominal GDP growth, that is current,
Speaker 1: all are spending in the economy is growing only modestly,
Speaker 1: so businesses really don't have much pricing power. Um, it's
Speaker 1: really interesting and perplexing that the FED is, you know,
Speaker 1: still insistent that inflation goes up to two percent. The
Speaker 1: economy is really benefiting with the lower inflation. In fact,
Speaker 1: if you consider what's happening emmy out of China and
Speaker 1: with the sharply lower fil prices, that's going to flow
Speaker 1: through to UH lower energy prices, which benefits us consumers.
Speaker 1: So what's wrong with that? I mean, what's so important here? Mickey?
Speaker 1: And and and this goes to Javier blast I thought
Speaker 1: that a phenomenal job with Bloomberg Energy this morning of
Speaker 1: explaining this all of a sudden, it's really become global
Speaker 1: even if it's just a virus. I don't mean to
Speaker 1: make light of the horrific damage this virus is doing.
Speaker 1: But what's the deflationary impulse you can gauge at Barrenberg
Speaker 1: right now, Um, not much of a deflationary impact. But
Speaker 1: to the way I view what's going on in China,
Speaker 1: is it's the negative supply shock, So it's in China.
Speaker 1: UM aggregate demand is going to decline. That is, people
Speaker 1: are going to save more, they're going to spend less.
Speaker 1: They're gonna spend more on things, the things they things
Speaker 1: they think are necessary, but they're going to spend much
Speaker 1: less on discretionary spending like autos and consumer electronics and
Speaker 1: the like. And and this emanates around the world. Then
Speaker 1: on the on the production side of things, just the
Speaker 1: bottlenecks and supply chains and the disruptions. We we really
Speaker 1: don't know the impact of this, but I would firstly, yeah,
Speaker 1: the economy in China was weak to start with, and
Speaker 1: you know, the official numbers they'll knock off a few
Speaker 1: tents from GDP, but in reality they're probably facing a
Speaker 1: near term decline in GDP. And this is going to
Speaker 1: affect the world, particularly manufacturing. And yes, in the next
Speaker 1: couple of months, we'll see it in the p m
Speaker 1: I s in Europe and Japan and the US. Maybeah,
Speaker 1: I want to pick up on the oil point, the
Speaker 1: idea that lower oil prices on the margins will actually
Speaker 1: give a boost to US consumers. I've heard both arguments,
Speaker 1: and today we did see oil prices a little bit
Speaker 1: higher in the in the market. Now they're actually basically
Speaker 1: flat eight cents traded on the IMAX. And I'm wondering
Speaker 1: how much the positive boost to consumers is offset by
Speaker 1: the negative income impact in the shale patch as we
Speaker 1: see an increasing amount of pressure on what had been
Speaker 1: the fastest growing or one of the fastest growing industries
Speaker 1: in the United States. I mean, how much it is
Speaker 1: a negative for the U S economy and a it
Speaker 1: hadn't been in the past. Okay, you're bringing out a
Speaker 1: great point. Now that the US is net energy independent, um,
Speaker 1: the boost to consumers and there is going to be
Speaker 1: a significant boost as as the lower oil prices feed
Speaker 1: through to retail gasoline and home heating oil prices. UM.
Speaker 1: That will be partially offset by a decline in capital
Speaker 1: spending in the in the oil patch. And so this
Speaker 1: is going to take a chunk out of capital spending
Speaker 1: in the GDP accounts, but the consumers ADP and it's
Speaker 1: and it's significantly Well, you know, with your decades of
Speaker 1: perspective on inflation and standing ready to fight inflation, what
Speaker 1: does the next marginal rate cut do? I mean, we've
Speaker 1: had some experience with this recently. Are you proposing a
Speaker 1: rate cut is efficacious here? Mickey, No, absolutely not. Um.
Speaker 1: If we think about what's been hitting the economy even
Speaker 1: before this virus, we decline in global trade volumes, uncertainties
Speaker 1: in Europe, um, etcetera, etcetera. All of these have nothing
Speaker 1: to do with monetary policy. And so to ease further
Speaker 1: like the e c B and and the Fed did
Speaker 1: last year, while the b o J continues with its QUEWI,
Speaker 1: it has no impact other other than to boost asset prices,
Speaker 1: stock prices, UM, increased income and wealth inequality. Really, if
Speaker 1: you think of the channels through which monetary policy is
Speaker 1: supposed to affect the economy, it is going to have
Speaker 1: no impact um. And so so central banks, the FED
Speaker 1: of course, is all over this. They'll they'll sit pat
Speaker 1: here and they'll talk about the reduction and inflation that's coming.
Speaker 1: It'll be temporary, and that will be the right move,
Speaker 1: just just to hold still, all right. So there's the
Speaker 1: reaction function of the federals are But there's also a
Speaker 1: question of just how significant this economic shock is going
Speaker 1: to be. Just based on what you've seen, the idea
Speaker 1: that entire cities of people have been completely shut down
Speaker 1: in China? Do you think that markets are accurately pricing
Speaker 1: in the economic shock that has already happened, let alone,
Speaker 1: What potentially could happen if this virus continues to cause
Speaker 1: shutdowns and travel impairments. Once again, a great question. We
Speaker 1: don't fully know the answer to it. You saw China
Speaker 1: over nack down eight. I think this is a major
Speaker 1: body blow to China that is going to have a
Speaker 1: lingering impact on their economy, and of course their official
Speaker 1: economic data really don't add up to what's happening in reality.
Speaker 1: In the US, we've had a decline in the stock market.
Speaker 1: I think what this will do is this is definitely
Speaker 1: gonna accentuate the decline in global trade. It's going to
Speaker 1: really cause bottlenecks in in global production. The p M
Speaker 1: I s it's going to delay any any pick up.
Speaker 1: Eventually things will bounce back, but we should not take
Speaker 1: so lightly the economics of it is it's really going
Speaker 1: to happen in I mean, what do your European compatriots
Speaker 1: say about the ECB? Then John Farrell mentioned this, you know,
Speaker 1: twenty minutes ago or so, maybe you say the FED
Speaker 1: will wait and finesse it they won't cut rates. What
Speaker 1: does the CB do? UM? We should hope they're realistic
Speaker 1: about this, Tom. The ECB already has their policy rate
Speaker 1: at minus fifty basis points and they're flooding their economy
Speaker 1: with liquidity. Do you think further negative rates are going
Speaker 1: to help everybody through? Well, let's cut to the chaser, Mickey,
Speaker 1: you're helping with an important panel March six in honor
Speaker 1: of Marvin good Friend, who just tragically died at Carnegie Mellon.
Speaker 1: His great statement was the amplitude of negative rates. Do
Speaker 1: we do we need to get braver. I'm a good
Speaker 1: friend to Jackson Hole and imply a greater negative rate
Speaker 1: to clear the markets. I don't think so, Tom. I
Speaker 1: don't think the problem here is markets. The US is
Speaker 1: actually very well positioned here the the the US consumer
Speaker 1: and housing are doing well, there's no question, but that, UM,
Speaker 1: the production side of the economy, industrial productions declining a bit,
Speaker 1: and that's going to and that's going to show up
Speaker 1: in the I s M. That's that's heavily weighted towards
Speaker 1: export orders. UM. But all in all, the US economy
Speaker 1: is actually moving along the path that the FED had
Speaker 1: predicted and moving along potentially, So the Feds should just
Speaker 1: be sitting here. And keep in mind the federal funds
Speaker 1: rate is zero in inflation adjusted terms, and there's more
Speaker 1: than the left liquidity in the market. So so through
Speaker 1: all this angst, we have to hope that the Fed
Speaker 1: you know it, takes an even key and says these
Speaker 1: are temporary impacts even if they last. Very cool, make
Speaker 1: you leave you thank you so much. With Baron Burbanks,
Speaker 1: that's great to have John writing in the previous art
Speaker 1: and Dr Leavy here some really different perspectives. We now
Speaker 1: begin with our question or an interview of the day,
Speaker 1: even of the week on oil. He is Edward Morris.
Speaker 1: He's a City Group. A careful read of his accomplishments
Speaker 1: is most interesting, including his work in politics at Princeton
Speaker 1: University and of course running all of commodity research for
Speaker 1: various houses in our Wisconsin again at city Group, Edward Moore,
Speaker 1: it's wonderful to have you on today. Can you calibrate
Speaker 1: the decline in demand for oil in China? Well, I
Speaker 1: think we can calibrate it to date. The issue is
Speaker 1: calibrating going forward. We we actually think that China's right now,
Speaker 1: a loss of about four million dollars a day of
Speaker 1: oil demand. A lot of this is in the transportation sector. Uh.
Speaker 1: You know, they basically shut down at least half of
Speaker 1: their civil aviation. Uh. Very international repercussions of that. Freight
Speaker 1: and passenger use has has shut down. And yeah, it's
Speaker 1: a very large number. As I said, around four million
Speaker 1: dollars a day of an eleven million dollar a day system,
Speaker 1: and their ripple effects have been going on. And I'd
Speaker 1: say that the the uh, it looks like the downside
Speaker 1: risk to this is much greater than the upside. We
Speaker 1: don't really see a shape recovery anytime in the future.
Speaker 1: As we do we measure our global strategic strategists in
Speaker 1: oil by what they do day to day. It's a joke,
Speaker 1: but Ed Morris you absolutely nailed in the fear over
Speaker 1: Tehran and Baghdad the idea of a market structure for
Speaker 1: a weaker oil price. Can you amend the Morrise call
Speaker 1: they're even lower? Can you put a greater weight to
Speaker 1: the downside on oil with what we've seen in the
Speaker 1: last two weeks. Sure we can. We can put a
Speaker 1: weight on it. The question is how long level as
Speaker 1: so Uh, you know, we we have downgraded our outlook
Speaker 1: for Q two significantly. Q one and Q two we
Speaker 1: don't see oil getting much out of a fifty dollar range.
Speaker 1: But the fact that we have a fifty dollar price
Speaker 1: on Q two for Brent tells you that we think
Speaker 1: it's going to be in a forty dollar range a
Speaker 1: good deal of that period of time. And yes, there
Speaker 1: is downside to that. The downside comes from i'd say
Speaker 1: three major factors. One is the amount of inventory that
Speaker 1: we think is possibly going to be built that good
Speaker 1: way heavily on markets. A second is what the real
Speaker 1: response of Opeque plus countries will be there meeting in
Speaker 1: Vienna at a technical level tomorrow and the next day,
Speaker 1: they are considering a range of options from doing nothing
Speaker 1: to taking a million dollars a day out of the market. Again,
Speaker 1: they're thinking of doing it for three months or for
Speaker 1: a year, and there's no agreement yet that has come out,
Speaker 1: and uh, it's not clear which way things will go.
Speaker 1: We don't know whether this is going to be something
Speaker 1: that they're going to recommend ministers to get together for
Speaker 1: to accomplish by March one. Are they going to wait
Speaker 1: for the March meeting and that brings up the third factor,
Speaker 1: namely to the degree that they postponed decision until their
Speaker 1: March regularly scheduled OPEC meeting or already scheduled meeting, then
Speaker 1: speculators will get at work. In this the speculative community
Speaker 1: has moved from a neutral to the shortest position, but
Speaker 1: they have a further way to go. I mean I
Speaker 1: I think combined, and we know that combined manage money
Speaker 1: in Brent and w t I is currently long by
Speaker 1: a factor of two to one. That, by the way,
Speaker 1: may sound long, but it's not. If it were eighteen
Speaker 1: to one, as it was a year and a half ago,
Speaker 1: that would be long. But we we have had an
Speaker 1: experience and they're not so distant past past in which
Speaker 1: a market forces manage money. In particular, we're actually short
Speaker 1: BRNT and that's where we had Brent prices going to
Speaker 1: thirty and w t I prices going to the mid twenties.
Speaker 1: So you know, there's there's some way to go, and
Speaker 1: what the actors of the market do will really dramatically
Speaker 1: impact how speculative flows work. So that kind of goes
Speaker 1: to where I wanted to go, which is you know, OPEC,
Speaker 1: OPEC plus, do you think they will wait to march.
Speaker 1: It seems like we're in a scenario here or as
Speaker 1: you're painting, and we've heard from some others that the
Speaker 1: downside is pretty substantial here. Do you think they would
Speaker 1: choose to act sooner? I think now that we see
Speaker 1: prices continuing to fall every day, that that pushes them
Speaker 1: toward a sooner meeting rather than a latter meeting. We
Speaker 1: know from official statements that have been made that the
Speaker 1: fatties would like to cut down and they'd like to
Speaker 1: cut a million dollars a day out of the market
Speaker 1: if that's possible. That's a level that strikes me as
Speaker 1: not doable yet. Um So the likelihood is that they're
Speaker 1: going to focus on a half a million validay cut
Speaker 1: and to do it sooner rather than later. And if
Speaker 1: they don't, I think they'll be fall at. I think
Speaker 1: the major obstacles at work are really on the western side.
Speaker 1: I don't think they're at work on the g c
Speaker 1: C side. I think that even without a full fledged
Speaker 1: government UH in Iraq, they could UH actually pull off
Speaker 1: in agreement UH from the countries and effects that have
Speaker 1: the capacity not to not to deplete production because of
Speaker 1: natural forces, but to make a decision to reduce UH
Speaker 1: production from a targeted level. UM. I think the Russian
Speaker 1: situation has always been complicated. UH, it's made more complicated
Speaker 1: by a look at where they might fear that they
Speaker 1: may lose market share. I wouldn't be surprised if the
Speaker 1: Kremlin now is looking at UH where Russian oil goes
Speaker 1: to in China, how much of it is by pipeline,
Speaker 1: how much of it would be a real market share
Speaker 1: loss if they UH drop production? So UH, the decision
Speaker 1: in Moscow is clearly going to be a political one.
Speaker 1: The supreme leader there, the president of the country, is
Speaker 1: going to lay in on it. He's gonna, you know,
Speaker 1: make the ultimate decision. But there are obstacles at work
Speaker 1: in that decision. And how about the American producers? The
Speaker 1: shale UH phenomena over the last couple of decades has
Speaker 1: really changed global market dynamics. Where are the American shale
Speaker 1: producers right now in terms of supply given your UH,
Speaker 1: you know, kind of very cautious demand outlook. Sure, well, well,
Speaker 1: you know, this is an interesting period of time because
Speaker 1: we're seeing the final results from last year UH, and
Speaker 1: we're going to have guidance reporting from the company's UM.
Speaker 1: We know that from the perspective of some OPEC countries.
Speaker 1: The whether it's wishful thinking or analytical is not clear,
Speaker 1: but they think that there is going to be a
Speaker 1: significant slide in US production. They're very optimistic about that
Speaker 1: because of all of the concerns that they've heard raised
Speaker 1: about UH, about cash flow problems that have been encountered
Speaker 1: by US companies. But our judgment is a little bit different.
Speaker 1: We have penciled in one point one million bell a
Speaker 1: day increase for US liquids production. That includes around a
Speaker 1: hundred and seventy five bells a day of increased production
Speaker 1: deep water. It could be a higher number than that.
Speaker 1: We have almost three hundred thousand dollars a day of
Speaker 1: natural gas liquids UH, and that comes out of the
Speaker 1: gas pool, not out of the oil pool UH per se.
Speaker 1: And then we look at the US help market participants
Speaker 1: and they've changed. We now have of drilling taking place
Speaker 1: by major companies like the four big major's, exciting, Chevron, Shell,
Speaker 1: m v p UH. They are almost certainly going to
Speaker 1: be growing their drilling activity over the course of a year.
Speaker 1: They're impervious to whatever the current prices that they've got
Speaker 1: guidance that based is based on integrated projects of oil, gas,
Speaker 1: petro chemicals, and they've got to grow. They're not gonna
Speaker 1: shut down. A whole bunch of the UM. Independent large
Speaker 1: cap companies that are publicly traded are in very good shape.
Speaker 1: They're going to be increasing in all their drilling activity. UM.
Speaker 1: The private equity companies UH and the private companies that
Speaker 1: are family owned billion in the United States, that's a
Speaker 1: very big number. We think they're pretty well hedged out. UH.
Speaker 1: And you know, if we look at UH at the
Speaker 1: weekly rig count for the last ten weeks, the average
Speaker 1: number is up for UH, you know, almost a half
Speaker 1: a ring a week. It means that the drop in
Speaker 1: growing has really stabilized. Is stabilized really the beginning of December,
Speaker 1: if not the middle of November. UM and at that level,
Speaker 1: production grows in the US and we think those who
Speaker 1: think it's going to be at the three or four
Speaker 1: hundred thousand Holliday level are going to be proven wrong.
Speaker 1: On the other hand, if we get lower prices, and
Speaker 1: significantly lower prices we think are one point one million
Speaker 1: dollar day number could be shaved off by a couple
Speaker 1: of hundred thousand dollars a day, but not by more
Speaker 1: than that, and that means that demand and supply will
Speaker 1: still be We're srilled to bring you this morning. It
Speaker 1: will be out on our podcast and Remorse of City Group.
Speaker 1: Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio