WEBVTT - Surveillance: Market Pause with Sheets (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.120 and of course on the Bloomberg terminal. Andrew Sheets is 0:00:31.200 --> 0:00:36.400 chief cross strategist at Morgan Stanley. He has to synthesize together, 0:00:36.520 --> 0:00:40.240 piece together all of what Morgan Stanley is doing. Andrew, 0:00:40.280 --> 0:00:43.519 I'm going to suggest in August, your head is spinning. 0:00:44.080 --> 0:00:47.720 We've got to get from August to September. What are 0:00:47.720 --> 0:00:52.120 we gonna look like in September? Well, thanks Tom so 0:00:52.120 --> 0:00:56.200 so much. I do think markets are in this interesting pause, 0:00:56.320 --> 0:01:01.480 this interesting quiet before you. A lot of incredibly important 0:01:01.520 --> 0:01:04.480 events that are all arriving in September October. Right, we 0:01:04.560 --> 0:01:07.800 have an important FED meeting in September where we think 0:01:07.800 --> 0:01:10.400 the Fed's gonna hike another fifty basis points. We have 0:01:10.520 --> 0:01:12.920 inflation that's going to be coming down, but we think 0:01:12.959 --> 0:01:16.200 it's gonna be coming down slower than probably the FED 0:01:16.280 --> 0:01:19.160 would like. And then you also have a very important 0:01:19.240 --> 0:01:22.360 earning season where we think the numbers are going to 0:01:22.480 --> 0:01:26.920 get reduced further into third quarter earnings. So I think 0:01:26.959 --> 0:01:29.360 at the moment, you know, the market has been getting 0:01:29.440 --> 0:01:31.120 some relief from the fact that inflation has been a 0:01:31.160 --> 0:01:34.120 little bit better. Sentiment was was very barish. You've had 0:01:34.160 --> 0:01:37.399 some better than expected economic data. But I don't think 0:01:37.520 --> 0:01:40.480 these issues have been resolved. And we still think that 0:01:40.560 --> 0:01:43.480 the Fed has more to go and then also will 0:01:43.640 --> 0:01:46.840 ease policy less next year as they want to stay 0:01:46.880 --> 0:01:49.240 serious about inflation and two at times, and I'll say 0:01:49.320 --> 0:01:51.440 this for you, I think even the team of unfatty 0:01:51.520 --> 0:01:56.920 being characterized described as perma bess, you won't spring. In fact, 0:01:56.960 --> 0:01:59.360 you were out front saying, let's buy this market, let's go, 0:01:59.480 --> 0:02:01.680 let's go, let's go. Can you tell me the difference 0:02:01.720 --> 0:02:03.360 between now and them? Because if there were a lot 0:02:03.400 --> 0:02:05.920 of people that conditioned by that experience andry, they just 0:02:06.000 --> 0:02:08.320 remember people tanning them, don't buy this, don't buy this. 0:02:08.480 --> 0:02:10.640 And then we got down the road off the lows 0:02:10.720 --> 0:02:13.400 and they realized that ms the rally andrew what's the 0:02:13.440 --> 0:02:15.239 difference between now and them? What are the signals that 0:02:15.240 --> 0:02:18.200 would triggered then that you said by that aren't being 0:02:18.240 --> 0:02:21.720 triggered now, yeah, thanks, thanks Jonathans. So I think there 0:02:21.880 --> 0:02:23.959 are a number of early big differences. I think in 0:02:24.160 --> 0:02:28.280 early after after that market decline, you had a lot 0:02:28.320 --> 0:02:31.920 of very early cycle signals. You had very depressed economic data, 0:02:32.080 --> 0:02:37.519 very depressed sentiment. Importantly, very easy monetary policy with very 0:02:37.800 --> 0:02:41.519 low inflation. Remember we had that kind of infamous negative 0:02:41.639 --> 0:02:44.840 number of traded for a barrel of oil, and you 0:02:44.960 --> 0:02:48.000 had very low valuations are much much lower valuations, all 0:02:48.040 --> 0:02:49.799 those things coming together, a lot of things that you 0:02:50.040 --> 0:02:53.600 usually get kind of around around a recession. Now, I 0:02:53.680 --> 0:02:55.960 think as we kind of fast forward to today, I mean, 0:02:56.120 --> 0:03:00.399 valuations aren't necessarily expensive on all asset classes, but they're 0:03:00.400 --> 0:03:02.359 they're nowhere near as cheap as they were in early 0:03:03.600 --> 0:03:06.799 But I think more importantly that the Monterey policy backdrop 0:03:06.919 --> 0:03:09.840 is night and day. It's it's gone from kind of 0:03:09.960 --> 0:03:14.880 whatever whatever it takes response to an unprecedented pandemic to 0:03:15.400 --> 0:03:18.000 you know, one of the fastest paces of rate hikes 0:03:18.080 --> 0:03:20.959 that we've seen in the last thirty years in attempting 0:03:21.000 --> 0:03:22.880 to get in front of some of the highest rates 0:03:22.919 --> 0:03:25.000 of inflation we've seen in the last forty years. So 0:03:25.320 --> 0:03:28.800 I think it's that that resolve from central banks, especially 0:03:28.840 --> 0:03:30.880 the FED, that we think continues. That's one of the 0:03:30.919 --> 0:03:34.480 big differences. So, Andrew, all of that makes logical sense. 0:03:34.560 --> 0:03:36.560 And yet we've seen the return of the meme stocks 0:03:36.720 --> 0:03:39.360 in recent weeks, speculative behavior that we all thought was 0:03:39.400 --> 0:03:41.640 going to be long gone in an era in which 0:03:42.120 --> 0:03:45.040 central banks are tightening policy. What kind of signal does 0:03:45.120 --> 0:03:46.600 that send to you? And how hard do you think 0:03:46.600 --> 0:03:48.240 the Federal Reserve is going to have to push back 0:03:48.280 --> 0:03:51.360 against that kind of behavior. Yeah, thanks, Kelly, And so 0:03:51.440 --> 0:03:53.200 this is a great question. I mean, anytime you're on 0:03:53.280 --> 0:03:56.720 the more cautious end of the spectrum and you're incorrect 0:03:56.760 --> 0:03:58.600 about that, I think, as as we've been over the 0:03:58.680 --> 0:04:01.760 last couple of weeks, you do need to think hard 0:04:01.800 --> 0:04:05.040 about that thesis and if you're missing something, And I 0:04:05.320 --> 0:04:08.200 think if it was a rally that was being led 0:04:08.360 --> 0:04:11.960 by by new leadership, cyclical leadership, a sign that you know, 0:04:12.040 --> 0:04:14.240 we've had the worst of the slowdown behind us and 0:04:14.320 --> 0:04:16.600 things are going to ret re accelerate, I think I 0:04:16.600 --> 0:04:18.640 think that would actually be a very encouraging sign. I mean, 0:04:18.640 --> 0:04:20.320 I think that would be the sign that this really 0:04:20.440 --> 0:04:23.120 is a mid cycle slowdown or or we've already had 0:04:23.200 --> 0:04:25.600 the sell off off of recession. But I think the 0:04:25.760 --> 0:04:29.520 the re emergence of some of the biggest beneficiaries of 0:04:29.760 --> 0:04:36.000 of low rates, zero rates, quantitative easing in one that 0:04:36.120 --> 0:04:38.920 that doesn't feel like kind of a new cycle starting. 0:04:38.960 --> 0:04:42.000 That feels a little bit more like shorts being squeezed, 0:04:42.360 --> 0:04:45.320 investors being fearful of missing out, a sentiment maybe not 0:04:45.440 --> 0:04:48.320 being as depressed as we otherwise might like to think. So, 0:04:49.080 --> 0:04:51.240 you know, I also think from a FED perspective, the 0:04:51.320 --> 0:04:54.359 FED has to think about financial conditions, and it's goal 0:04:54.600 --> 0:04:57.200 is to tighten financial conditions. And so again, you know, 0:04:57.279 --> 0:04:59.760 as we've seen stocks bounce back, and as we've seen 0:04:59.839 --> 0:05:02.240 some the most speculative areas of the market bounce back, 0:05:02.360 --> 0:05:04.760 that's that's going against one of the things that FED 0:05:04.839 --> 0:05:06.640 is trying to accomplish. So, Andrew, when do we get 0:05:06.680 --> 0:05:08.880 the wake up cold? What's the wake up co look like? 0:05:09.080 --> 0:05:11.560 What do you anticipating? Is it one speech from Chairman 0:05:11.560 --> 0:05:14.520 Pound next week at Jackson Home, Wyoming? Is the data? 0:05:14.720 --> 0:05:18.040 What is it? Yeah? So I think it's a it's 0:05:18.040 --> 0:05:19.720 a number of things I think we need to look 0:05:19.760 --> 0:05:22.360 out for. And again, I do think this upcoming window 0:05:22.640 --> 0:05:24.760 for markets is pretty important. I think if you know 0:05:24.800 --> 0:05:26.760 if worse things are going to happen, or if trouble 0:05:26.880 --> 0:05:28.840 is going to emerge, it's it's going to happen in 0:05:28.839 --> 0:05:30.760 the next the next two months, or it's not going 0:05:30.839 --> 0:05:32.760 to happen. So I think that trouble would come from 0:05:33.240 --> 0:05:36.560 inflation not coming down as fast as expected. So the 0:05:36.640 --> 0:05:42.840 upcoming CPI, especially core CPI, core PCE not declining UM 0:05:43.480 --> 0:05:45.160 as much as the Fed would like. I think that 0:05:45.279 --> 0:05:48.360 would push the Fed and push the market to to 0:05:48.480 --> 0:05:51.960 remove their rate cut expectations from next year. And we 0:05:52.200 --> 0:05:56.160 like pushing against those rate cut expectations next year. We 0:05:56.240 --> 0:05:59.080 also like being along the dollar for those reasons. And 0:05:59.160 --> 0:06:00.760 then it's the earnings out. I mean this has been 0:06:00.839 --> 0:06:02.760 something that might calla Mike Wilson in the US or 0:06:02.800 --> 0:06:05.040 my Colleaguraham sector in Europe have been very focused on. 0:06:05.240 --> 0:06:07.720 Is is a view that the earnings expectations they think 0:06:07.760 --> 0:06:10.680 are too high. Now the third quarter is often a 0:06:10.760 --> 0:06:14.400 relatively weak quarter seasonally for earnings. That's often when companies 0:06:14.440 --> 0:06:17.160 come out and take guidance down. We'll see if that 0:06:17.240 --> 0:06:19.880 happens again. But our expectation or are concern is that 0:06:20.040 --> 0:06:22.920 the risk of that is is still elevated, and we'd 0:06:22.960 --> 0:06:24.880 like to get through that third quarter earning season. First, 0:06:25.000 --> 0:06:26.600 What do you owned the front half of this year? 0:06:26.640 --> 0:06:29.080 That's for sure. The second half is up for Graps 0:06:29.120 --> 0:06:31.679 Andrew shake Samo can stand the andre also as a waite. 0:06:36.200 --> 0:06:39.960 What's important is to watch flows and when it's August 0:06:40.120 --> 0:06:45.400 and it's slow, flows really matter. Uh uh. Emily Garfao 0:06:45.600 --> 0:06:49.479 over at our asset division, reporting today on a massive 0:06:49.560 --> 0:06:53.040 switch and flows that we've seen in the equity income 0:06:53.120 --> 0:06:55.520 and this is all wrapped around quality. The search for 0:06:55.640 --> 0:06:58.920 quality is seen and flows. Kelsey Barrow on the bond side, 0:06:58.920 --> 0:07:03.400 fixed income portfolio manager, JP Morgan Management, Emily Grafo was 0:07:03.440 --> 0:07:05.280 looking at the equity market, what do you see in 0:07:05.400 --> 0:07:07.359 flows in bounds? And you and Bob Michael look at 0:07:07.400 --> 0:07:09.800 the screen, what do flows look like? Yeah, so we've 0:07:09.880 --> 0:07:13.240 seen some pretty large moves within the fixed income market 0:07:13.480 --> 0:07:16.240 over the last few months. So if you think about 0:07:16.360 --> 0:07:19.480 what the market was pricing in terms of recession probabilities 0:07:19.520 --> 0:07:22.760 implied within triple B spreads or the equity market, it 0:07:22.880 --> 0:07:25.160 was as high as around eighty percent in mid June. 0:07:25.640 --> 0:07:28.840 Now that's down to about so we've seen a very 0:07:29.040 --> 0:07:33.280 large retracement in in high yield spreads down to the 0:07:33.720 --> 0:07:36.680 mid to low four hundreds. And what we feel in 0:07:36.880 --> 0:07:40.280 terms of that movement is we understand why there's been 0:07:40.320 --> 0:07:43.200 a repricing. There is an increased probability of a soft 0:07:43.320 --> 0:07:46.320 landing that at this point, this level of spread is 0:07:46.400 --> 0:07:49.520 really no longer protecting you from the still material risk 0:07:49.800 --> 0:07:53.360 of hard landing, UM if inflation remains stickier, which is 0:07:53.400 --> 0:07:55.840 our base case. Okay, Cassie, So what is that lefth 0:07:55.880 --> 0:07:58.200 the treasury market and how that's priced right now? You 0:07:58.320 --> 0:08:01.240 more comfortable with that? Chris haf You Wells Fargo wrote 0:08:01.320 --> 0:08:03.559 this in the last twenty four hours, the eight pril's 0:08:03.640 --> 0:08:05.720 five basis point in version seems to have got more 0:08:05.720 --> 0:08:08.400 attention than the almost fifty basis point in version we 0:08:08.480 --> 0:08:11.000 had last week. Why do you think that is? Well, 0:08:11.280 --> 0:08:15.680 we've been positioned for curve flatteners. Uh. I know, I 0:08:15.840 --> 0:08:18.560 was last here on July six. We were calling for 0:08:18.760 --> 0:08:21.320 higher front end yields on a flatter curve. The twos 0:08:21.400 --> 0:08:24.920 tends curve is now thirty basis points flatter um, and 0:08:25.360 --> 0:08:27.960 we think that that makes sense. The Fed has done 0:08:28.080 --> 0:08:33.199 two supersized rate hikes now what we're looking at. So 0:08:33.440 --> 0:08:36.160 the market is pricing in uh, the FED funds rate 0:08:36.200 --> 0:08:38.679 getting to around three and a half percent by the 0:08:38.800 --> 0:08:40.600 end of the year. That's basically in line with the FED. 0:08:40.880 --> 0:08:45.520 The real divergence comes in where the market is pricing 0:08:45.640 --> 0:08:48.680 rate cuts and the Fed is expecting to continue to hike, 0:08:49.240 --> 0:08:51.480 And I think the minutes gave us some insight into that. 0:08:52.000 --> 0:08:54.640 I noticed one of the things that that stood out 0:08:54.679 --> 0:08:56.400 to me was the fact that there are a number 0:08:56.440 --> 0:08:58.600 of people on the committee that expect that once they 0:08:58.679 --> 0:09:01.040 get the policy rate to rest directive, they're actually gonna 0:09:01.080 --> 0:09:03.440 need to keep it there for a period of time. 0:09:03.840 --> 0:09:07.199 And we are lean on that side expecting that the 0:09:07.240 --> 0:09:10.120 Fed is going to need to keep policy rates higher 0:09:10.480 --> 0:09:14.760 because although we got one decent inflation report, we're still 0:09:14.840 --> 0:09:17.120 seeing a lot of wage pressure. And one of the 0:09:17.200 --> 0:09:20.480 data points that that we thought really was under underappreciated 0:09:20.600 --> 0:09:24.240 last week was unit labor costs productivity adjusted wages, which 0:09:24.320 --> 0:09:28.320 is also still very strong relative to previous cycles. Then 0:09:28.440 --> 0:09:31.800 cassy previous hiking cycles. How much longer do you think 0:09:31.840 --> 0:09:34.320 they're going to keep it at that terminal? Right? That peak? Right? 0:09:34.880 --> 0:09:38.559 The Fed in this hiking cycle relative to psychos gone by. Yeah, 0:09:38.640 --> 0:09:41.520 So we looked back at the last four or five 0:09:41.679 --> 0:09:45.319 six hiking cycles, all kind of the modern hiking cycles 0:09:45.320 --> 0:09:47.360 that you'd think of, and a couple of things stood 0:09:47.360 --> 0:09:50.760 out to us. One, the Fed never stops hiking rates 0:09:51.040 --> 0:09:54.000 when the real Fed funds rate is still negative. So, 0:09:54.360 --> 0:09:56.360 just to put it out there, the real Fed funds 0:09:56.440 --> 0:09:59.560 rate is still minus six percent if you deflated by 0:09:59.600 --> 0:10:01.959 headline CPI. So they still have a lot more to go. 0:10:02.480 --> 0:10:04.679 But in terms of how long they're going to keep 0:10:04.760 --> 0:10:08.600 policy and restrictive, on average, we see that the Fed 0:10:08.800 --> 0:10:13.559 keeps rates uh at that terminal rate for about seven 0:10:13.640 --> 0:10:16.439 to twelve months, so about a year. Uh. And we 0:10:16.640 --> 0:10:20.640 think given the magnitude of the inflation problem, given the 0:10:20.720 --> 0:10:23.720 fact that the unemployment rate actually continues to take down 0:10:23.960 --> 0:10:28.120 despite you know, we'll watch initial claims later this morning, uh, 0:10:28.320 --> 0:10:30.920 and so we expect them to to be more in 0:10:31.080 --> 0:10:34.839 line with the historical average of the last four tightening cycles. Well, 0:10:34.840 --> 0:10:36.880 while we're looking back at history, let's talk about the 0:10:36.960 --> 0:10:39.079 seventies as well, because I noticed some research out of 0:10:39.120 --> 0:10:41.880 Berkeley's on credit earlier this week, essentially saying, when you 0:10:41.920 --> 0:10:44.280 look at this inflation and growth environment and it's most 0:10:44.360 --> 0:10:49.200 akin to nineteen seventy to ninety to nine eighty, both 0:10:49.280 --> 0:10:51.720 periods which were not good for credit, and they say 0:10:51.800 --> 0:10:55.400 this time isn't going to be different, will it. We 0:10:55.559 --> 0:10:59.600 are a little bit more cautious on specifically high yield 0:10:59.720 --> 0:11:03.079 give the retracement we've seen there, there are probably some 0:11:03.280 --> 0:11:06.319 things that are are going to uh, you know, put 0:11:06.440 --> 0:11:10.640 some resistance below four hundred on high yield spreads. One, 0:11:10.800 --> 0:11:14.280 we do expect that issuance is going to start picking up. Also, 0:11:14.360 --> 0:11:17.720 if you you know, break it down between the categories, uh, 0:11:17.920 --> 0:11:21.040 within the high yield, one of the areas where you're 0:11:21.080 --> 0:11:23.200 going to really need to see a lot of retracement 0:11:23.280 --> 0:11:26.480 to get spreads materially tighter would be triple c's And 0:11:26.559 --> 0:11:29.680 these lower quality companies are starting to feel the pinch 0:11:29.760 --> 0:11:33.640 of higher prices, higher interest rates UM. And so you 0:11:33.679 --> 0:11:37.400 know where we're more focused is in short dated investment 0:11:37.480 --> 0:11:40.400 grade credits or higher quality as well as short dated 0:11:40.480 --> 0:11:44.040 securitized credit. These have better break evens, they have better 0:11:44.160 --> 0:11:47.599 all in yields UM. We can feel more comfortable with 0:11:47.720 --> 0:11:49.880 the credit quality. And if you look at how they 0:11:50.000 --> 0:11:52.920 performed in this rally. They've they've kind of lagged relative 0:11:53.400 --> 0:11:55.800 to the US high yield market where what high yield 0:11:55.800 --> 0:11:57.839 spreads need to get to in order for it to 0:11:57.880 --> 0:12:03.640 look attractive. Well, back in June we got around six hundred, 0:12:03.800 --> 0:12:06.559 and at that point we thought that we were at 0:12:06.640 --> 0:12:10.079 least starting to price in UH and get compensated for 0:12:10.320 --> 0:12:15.400 those risks of harder landing for an increase in defaults. Now, 0:12:15.960 --> 0:12:18.199 I don't want to ignore the fact that on a 0:12:18.360 --> 0:12:23.200 high level, credit fundamentals are still extremely strong. UH. We're 0:12:23.240 --> 0:12:26.640 starting from a very good point for both investment grade 0:12:26.800 --> 0:12:30.520 and high old companies, high cash balances. They've termed out 0:12:30.559 --> 0:12:34.600 their debt, their leverages is on track and looks good 0:12:34.920 --> 0:12:38.360 um relative to pre COVID, But we do have to 0:12:38.440 --> 0:12:40.880 realize that where we are in the cycle, things are 0:12:40.960 --> 0:12:44.000 going to deteriorate from here. Margins seem to hold up 0:12:44.000 --> 0:12:47.640 actually better in this last earnings report, but we do 0:12:47.840 --> 0:12:49.679 see that that that's not something that's going to be 0:12:49.760 --> 0:12:53.160 sustainable as inflation pressures remain. You can see just awesome 0:12:53.320 --> 0:12:55.600 as always and wonderful to cashop again here in New York, 0:12:55.640 --> 0:13:04.079 Cassey better with that of JP morgan Esset Management. My recollection. 0:13:04.160 --> 0:13:07.000 John Is Francisco Blanche has loved to charge on over 0:13:07.040 --> 0:13:10.120 a hundred dollars of barrel on Brent. When he said it, 0:13:10.280 --> 0:13:12.360 it was a shock. He's had a global Commodities and 0:13:12.440 --> 0:13:16.400 derivative research at Bank of American joins us today. Francisco, 0:13:16.440 --> 0:13:18.440 I want to touch on one paragraph in your new 0:13:18.520 --> 0:13:21.679 report which was shocking, and Kayley wants to pick up 0:13:22.000 --> 0:13:24.960 on the news of the day. You tore about tore 0:13:25.000 --> 0:13:28.439 apart our key distal it which is a forty seven 0:13:28.520 --> 0:13:31.920 thousand gallons on a Boeing seven seventies seven that all 0:13:31.960 --> 0:13:34.360 of us need, that we all take for granted when 0:13:34.440 --> 0:13:39.680 we fly around domestically and internationally. You say, watch jet fuel. 0:13:39.960 --> 0:13:43.439 Why well, look Tom, and I think we have We 0:13:43.520 --> 0:13:45.800 still have China, and lookdown we have large sports of 0:13:45.880 --> 0:13:49.960 Asia also in partial lookdown when it comes to international 0:13:50.040 --> 0:13:53.240 travel and um, and I think that's gonna open up 0:13:53.280 --> 0:13:58.199 in the next sixth both months we are down on 0:13:58.400 --> 0:14:01.280 Jeff field Man globally from pre of the levels, um, 0:14:01.520 --> 0:14:04.560 we could see a pickup of half a million barrels day, 0:14:04.600 --> 0:14:07.599 maybe more just on that front alone. And again this 0:14:07.679 --> 0:14:10.720 has been the leading fuel in the last twelve months. 0:14:11.520 --> 0:14:13.600 I expected to be the leading fuel the next twelve months. 0:14:13.760 --> 0:14:15.840 How will they come over to Brent Cruz price. Can 0:14:15.840 --> 0:14:19.600 you extrapolate over from the new Pacific RIM demand over 0:14:19.680 --> 0:14:22.960 to over a hundred dollars of barrel brand? I'm definitely 0:14:23.000 --> 0:14:26.640 constructive on brand right here. We've we've pulled back after 0:14:26.800 --> 0:14:30.800 the seasonal driving peak in America. But I think coming 0:14:30.800 --> 0:14:33.760 into the winter, you're gonna have jet fuel demand. You're 0:14:33.800 --> 0:14:36.080 going to have demand from Europe because of the record 0:14:36.200 --> 0:14:39.600 high natural press you have there um and and also 0:14:39.720 --> 0:14:43.840 remember um we still have a very tight global refining 0:14:43.920 --> 0:14:46.600 system for for variety of reasons. So all of that 0:14:46.680 --> 0:14:49.000 I think is gonna drag us back higher. I've got 0:14:49.080 --> 0:14:52.640 fourteen themes. I have to go to the social reality 0:14:52.760 --> 0:14:55.600 that Europe faces. This is not about math, It's not 0:14:55.720 --> 0:14:58.480 about spreads, crack spreads and the rest of it. It's 0:14:58.480 --> 0:15:05.200 about multiple multip post standard deviation moves that become social policy. 0:15:06.120 --> 0:15:09.720 Tell us how your world can help Europe and this 0:15:10.000 --> 0:15:13.720 crushing social policy of where prices are electricity in France 0:15:13.760 --> 0:15:17.800 as an example, Well, Europe faces an obviously a very 0:15:17.840 --> 0:15:21.600 complicated situation. If you look at European natural gas um right, 0:15:21.640 --> 0:15:24.520 I mean comes from Russia used to come from Russia, 0:15:24.880 --> 0:15:28.280 and you've lost right around um, you've lost right around 0:15:28.320 --> 0:15:31.840 ten percent of the entire energy supply of Europe with 0:15:31.960 --> 0:15:35.280 Russia curtailing that gas um other things man equal, that 0:15:35.320 --> 0:15:38.560 would that would mean a ten percent GDP contraction. And 0:15:38.640 --> 0:15:41.920 what's happening right now Essentially Europe is trying to price 0:15:42.000 --> 0:15:44.960 itself back into the global economy, so to speak, by 0:15:45.000 --> 0:15:48.640 attracting liquid gas from Japan from China bringing it to 0:15:48.640 --> 0:15:52.080 the European continent. But also importantly we're seeing the shutdown 0:15:52.120 --> 0:15:59.280 of zinc smelters, aluminum smelters, um steel plants, and fertilizer capacity, 0:15:59.640 --> 0:16:03.120 so that that's all important. Again. So essentially all European 0:16:03.280 --> 0:16:07.400 energy prices are rising above global prices, but importantly a 0:16:07.480 --> 0:16:13.360 lot of the domestic produced energy intensive commodities like steel 0:16:13.440 --> 0:16:16.840 and what have you are also being displaced out um. 0:16:17.040 --> 0:16:18.960 And and that's the way Europe is going to avoid 0:16:19.680 --> 0:16:21.640 a very very steep recession and probably end up with 0:16:21.760 --> 0:16:25.960 just the mile That's that's essentially approach we're going through. Well, Francisco. 0:16:26.040 --> 0:16:28.720 What I find so ironic about frances Nuclear was supposed 0:16:28.720 --> 0:16:30.520 to help them out and yet because of the climate 0:16:30.560 --> 0:16:33.440 issues in the river temperatures, it also is inhibiting their 0:16:33.480 --> 0:16:36.000 ability to use that power, which brings me to clean energy. 0:16:36.120 --> 0:16:38.800 There is now moves in the US after the signing 0:16:39.040 --> 0:16:42.480 of the Inflation Reduction Act. In that effort, there's also 0:16:42.680 --> 0:16:45.360 metrics within that, like a methane tax for example, for 0:16:45.600 --> 0:16:48.800 US producers. How is that ultimately going to affect supply 0:16:48.880 --> 0:16:53.080 of fossil fuels? Well? Um one of the hardest parts, 0:16:53.200 --> 0:16:58.360 right that we often forget is that the COVID collapse 0:16:58.480 --> 0:17:02.240 in demand also brought about a collapse in investment. Um so, 0:17:03.160 --> 0:17:05.440 was not just the demand shock, was also a supply shock. 0:17:05.480 --> 0:17:08.960 We had negative oil prices. We had um we had 0:17:09.320 --> 0:17:12.480 natural gas in Europe TTF at one dollar per m 0:17:12.600 --> 0:17:14.639 b tu, which is the same gas US trading at 0:17:14.680 --> 0:17:17.399 eighty bucks and m btu right, almost like like a 0:17:17.440 --> 0:17:20.480 cryptocurrency if you like, and not precisely Bitcoin, one of 0:17:20.560 --> 0:17:23.520 the more extreme ones. And this is a real commodity 0:17:23.560 --> 0:17:26.679 that actually people use every day. So um so, I think, 0:17:26.720 --> 0:17:28.840 I think false health fuels have have a tough future 0:17:28.840 --> 0:17:32.399 ahead of them because nobody wants to sign long term 0:17:32.440 --> 0:17:36.359 call leases, right um and and and no financial institution 0:17:36.920 --> 0:17:39.879 or no major France institution wants to be financing thermal 0:17:39.960 --> 0:17:44.440 coal either. Uh, it's hard to get financing for conventional 0:17:44.560 --> 0:17:47.879 oil and gas or or or just shell gas. So 0:17:48.119 --> 0:17:49.800 I think I think the issue is is going to 0:17:49.920 --> 0:17:52.800 be in the medium term. We are trying to move 0:17:52.880 --> 0:17:55.760 very fast into into a greener economy because we have 0:17:55.840 --> 0:17:58.040 this pressure is coming from climate and we've seen them. Right. 0:17:58.119 --> 0:18:00.920 Part of the problem you talked for nukes. Part of 0:18:00.920 --> 0:18:02.879 the issue in the with the French nukes is that 0:18:02.960 --> 0:18:05.800 we don't have enough water on European rivers, which is 0:18:05.840 --> 0:18:09.720 a function of glaciers melting fast. Right, So we're starting 0:18:09.760 --> 0:18:12.520 to get all the compounded effects of climate change across 0:18:12.560 --> 0:18:16.320 the energy supply system. UM and and and I think, um, 0:18:16.359 --> 0:18:18.359 I think it's obviously very important to move quick to 0:18:18.440 --> 0:18:20.960 green fuels, but at the same time we have this gap. 0:18:21.440 --> 0:18:25.560 And unfortunately, remember prices are just the balancing item for 0:18:25.720 --> 0:18:29.280 supply and demanding commodity markets, and we continue to expect 0:18:29.800 --> 0:18:33.560 very high volatility um continued inflation and of course a 0:18:33.640 --> 0:18:36.920 lot of basis risks in terms of differentials, time spreads, 0:18:37.160 --> 0:18:40.320 and cross commodities across the complex. So I I just 0:18:40.440 --> 0:18:42.479 don't think. I think commodity markets are going to give 0:18:42.520 --> 0:18:44.800 us a solution, but it's all gonna be extreme pricing 0:18:44.840 --> 0:18:48.040 for a while and we remain constructive on the complex. Francisco, 0:18:48.080 --> 0:18:50.040 I've got thirty seconds left. Can you tell me what 0:18:50.119 --> 0:18:52.560 you think Eupe looks like this winter? We're going do 0:18:52.680 --> 0:18:55.240 a four day work week. What's going to happen with 0:18:55.640 --> 0:18:59.320 the effort to curve consumption? Um? Well, Europe is going 0:18:59.359 --> 0:19:01.680 to is going to to curve consumption by by definition, 0:19:01.760 --> 0:19:04.480 it's as I mentioned at the very beginning, it's happening already, 0:19:05.080 --> 0:19:09.240 um with with curt elements to to uh of energy 0:19:09.240 --> 0:19:12.679 supplight to industry, but also curt elements of uh um 0:19:13.520 --> 0:19:16.760 temperatures at home during the summer and during the winter 0:19:17.840 --> 0:19:21.240 as well. Right, so we're going to see UM forced 0:19:21.280 --> 0:19:25.000 reductions potentially potentially rolling brownouts in some parts of Europe. Right, 0:19:25.040 --> 0:19:27.159 I mean, this is what what what it looks like. 0:19:27.359 --> 0:19:29.920 And it's almost, you know, it's almost like like the 0:19:29.960 --> 0:19:33.320 developed markets are becoming emerging markets and and in in 0:19:33.400 --> 0:19:35.400 a in a in a weird kind of way. So Francisco, 0:19:35.440 --> 0:19:44.520 Bank America Global Research, Francisco, awesome. As always, I'm gonna 0:19:44.560 --> 0:19:46.560 go right to it. You know what I care about, 0:19:46.680 --> 0:19:48.920 Dan ives, which is the chips that are in all 0:19:49.000 --> 0:19:53.120 these miracle toys we use. The the new Apple phone 0:19:53.200 --> 0:19:56.760 in September, we'll have the A sixteen chip, which is 0:19:56.960 --> 0:20:01.200 five nanometer technology. Blah blah blah. Is that enough to 0:20:01.240 --> 0:20:04.600 get Kaylee Lines to buy a new phone? I think 0:20:04.640 --> 0:20:10.360 it's Kellie and about forty million others because I think, 0:20:10.480 --> 0:20:13.080 what were you're really gonna see here? This is a 0:20:13.280 --> 0:20:16.399 catalyst that speaks of the pen up demand that we 0:20:16.480 --> 0:20:20.320 see across the installing She woundered forty million of a 0:20:20.440 --> 0:20:24.560 billion iPhones worldwide have not upgrading three and a half years. 0:20:24.920 --> 0:20:29.000 And I think this is still significantly underestimated by the street. Dan. 0:20:29.119 --> 0:20:31.359 I take huge issues, as I know you do, with 0:20:31.480 --> 0:20:34.359 the way the media tosses out O MG, why would 0:20:34.359 --> 0:20:37.960 anybody buy a nine hundred dollar toy? What percentage of 0:20:38.080 --> 0:20:41.239 us are buying this on a monthly plan? And has 0:20:41.320 --> 0:20:44.160 that worked out for Apple and frankly for the cell 0:20:44.200 --> 0:20:48.760 phone providers? Well, it has that's about from from a 0:20:48.840 --> 0:20:53.840 monthly perspective, and you put that together, it's ultimately, especially 0:20:53.840 --> 0:20:56.680 when we were going to be a hundred increase on 0:20:56.800 --> 0:21:00.560 the iPhone pro pro mact. It's become more than jestable. 0:21:00.600 --> 0:21:03.879 Remember you haven't had a price increase and call it 0:21:04.280 --> 0:21:06.800 four or five years. I think you're starting to keep 0:21:06.880 --> 0:21:10.920 consumers now more and more look at a thousand hour 0:21:11.040 --> 0:21:14.320 iPhones has really pay the price of what they expect 0:21:14.400 --> 0:21:17.359 to be. When it comes to Apple, what about in China. 0:21:17.560 --> 0:21:19.359 I understand that the U S consumer is in a 0:21:19.400 --> 0:21:22.760 pretty healthy position, but we've actually seen Apple doing discounting 0:21:22.800 --> 0:21:25.960 in China on higher end models. That's a pretty important 0:21:26.000 --> 0:21:30.760 market for them. What is your read on how that's going. Yeah, 0:21:30.840 --> 0:21:34.119 it's a great question. I think in China, re estimate 0:21:34.160 --> 0:21:38.040 about of the Chinese consumers in terms of iPhones are 0:21:38.119 --> 0:21:40.600 in the window of an upgrade opportunity and actually more 0:21:40.640 --> 0:21:44.640 and more pushing towards the higher a sp throw pro mac. 0:21:45.160 --> 0:21:47.680 That's very important is this all plays out, because that's 0:21:48.000 --> 0:21:50.480 the hearts and lungs of the Apple bull story. And 0:21:50.480 --> 0:21:53.159 I can tell you this week our checks in Asia 0:21:53.320 --> 0:21:55.720 basically showing firm demand in terms of coming out of 0:21:55.760 --> 0:21:58.280 the gates drive on four teams, which looks like the 0:21:58.359 --> 0:22:02.320