Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. I want to get
Speaker 1: to our next guest, Tim Line. He's the CEO of
Speaker 1: on Terrius Capital. On Terris the folks that are a
Speaker 1: lender to middle market pe owned company. So it's always
Speaker 1: a good chat with Tim to get a sense of
Speaker 1: what's going on with some of these small and mid
Speaker 1: cap companies out there as they deal with higher inflation, uh,
Speaker 1: the backside of a pandemic, potential recession. Uh. Tim gives
Speaker 1: us some good thoughts there. Tim, thanks so much for
Speaker 1: joining us here. And I'd love just to get kind
Speaker 1: of word of time of flux here. We've got rising inflation,
Speaker 1: we've got rising interest rates, we've got potential for a recession.
Speaker 1: As you talk to some of these smaller and mid
Speaker 1: sized companies, what are they generally seeing, how are they adapting? Sure?
Speaker 1: Good morning, pauling creedy and pleasure to be here. So
Speaker 1: we have almost five hundred middle market portfolio companies, and
Speaker 1: what I'm hearing from them is that demand drivers remain favorable,
Speaker 1: Revenue growth is still quite strong, and while there's certainly
Speaker 1: some inflation concern, our borrowers have managed cost inflation with
Speaker 1: price increases. The most significant challenge for these portfolio companies
Speaker 1: is navigating this tight, tight labor market. So it's kind
Speaker 1: of how do I retain my best people? Where do
Speaker 1: I find new talent? And this hiring issues impacting almost
Speaker 1: all industries and it's across all personnel levels. You made
Speaker 1: a key point. They're offsetting costs with price increases, and
Speaker 1: to your point, it has worked quite well, not just
Speaker 1: for middle market companies as you're focusing on, but I
Speaker 1: would like to say broader sp companies as well. But
Speaker 1: I'm curious how long that can actually last. At what
Speaker 1: point do price increases become so dicky that it ends
Speaker 1: up leading to demand destruction. Sure, it's a very good question,
Speaker 1: and I would say it's not sustainable. I mean, we've
Speaker 1: we've seen companies in our portfolio implement a ten percent
Speaker 1: price increase followed by a twelve percent price increase, and
Speaker 1: at some point there's going to be the customers are
Speaker 1: going to resist and just say I'm not willing to
Speaker 1: do that. But what's so interesting right now is the
Speaker 1: customers need the product, so because of all the supply
Speaker 1: chain disruption, they're willing to pay the extra price to
Speaker 1: get the product to then be able to meet the
Speaker 1: demand from their customers. So what I love to just
Speaker 1: get your sense of a small mid market, MidCap kind
Speaker 1: of M and A activity the last few years. Much
Speaker 1: to my surprise, we're generally very strong despite the pandemic
Speaker 1: and challenges there. Um, what's the M and A activity
Speaker 1: this year? Sure, so we did experience a frenzy of activity,
Speaker 1: one with record deal volume. LBO volume is certainly down
Speaker 1: this year. But notwithstanding this, what we've seen it's very
Speaker 1: strong add on acquisition activity in so our private equity
Speaker 1: sponsors are always looking for opportunities to grow their portfolio
Speaker 1: companies through new services or new product lines. And we
Speaker 1: really expect this strong add on acquisition activity to continue
Speaker 1: for the remainder of this year and and maybe into
Speaker 1: as well. But how is that financed? Exactly? How are
Speaker 1: they financed? Is we? So we and other lenders provide
Speaker 1: that financing. So sponsor buys a company, Uh, the deal
Speaker 1: is capitalized with equity and debt, and when they have
Speaker 1: add on acquisitions, assuming the capital structure is right sized,
Speaker 1: will be able to provide a financing for those acquisition
Speaker 1: Sans if it's a really large acquisition, the sponsor may
Speaker 1: need to step up with additional equity as well. So
Speaker 1: talk to us about the private debt marketplace. It's been
Speaker 1: a area of good growth. That's where you guys play.
Speaker 1: Talk to us about that market in terms of, uh,
Speaker 1: you know, the capital that's available, the rates that you'll lend,
Speaker 1: the liquidity in that marketplace. Gives a sense of overall
Speaker 1: health of that private debt market. Sure, Uh, there's good
Speaker 1: reason for private debt rapid growth. So the industry has
Speaker 1: demonstrated resiliency through numerous second economic cycles over the last
Speaker 1: twenty years. If you think about it, for the investor,
Speaker 1: private debt really offers more favorable risk adjusted returns than
Speaker 1: many other asset classes. Importantly, right now, with the increasing
Speaker 1: interest grates, it offers an inflation hedge because our loans
Speaker 1: are floating rate instruments. So you ask, like, what would
Speaker 1: be a rate we've moved from library to sofa, so
Speaker 1: might be sofur plus five fifty so for plus six
Speaker 1: fifty um. And we don't really see the current economic
Speaker 1: environment changing. Private debts appealed for investors. As a matter
Speaker 1: of fact, private debt assets under management are projected to
Speaker 1: grow at double digit rates over the next five years.
Speaker 1: Over the next five years double digit rates, well um,
Speaker 1: double digit rates per year. Yes, And so where where
Speaker 1: where does that capital come from? Is that coming from
Speaker 1: pension funds, endowments, that types of thing exactly so? Uh,
Speaker 1: And it's from all around the world, right, So it's
Speaker 1: a lot of pensions, sovereign wealth funds and others looking
Speaker 1: for they need yield. So they need yield to be
Speaker 1: able to pay to their pensioneers on a current basis.
Speaker 1: And private debt offers that. Uh. It's an attractive product
Speaker 1: because you're investing in an instrument that provides a current
Speaker 1: yield and an attractive yield. So it's investors all around
Speaker 1: the world, pension sovereign wealth funds, and dowments, etcetera. All right, Tim,
Speaker 1: great stuff, Always a fascinating discussion. Tim Line, CEO of
Speaker 1: in Terris Capital, get a good sense when we talked
Speaker 1: to Tim about the state of small you know, midsize,
Speaker 1: M and A out there, not just the big blockbuster
Speaker 1: deals that are on the Bloomberg terminal every day. We
Speaker 1: also get a good sense of the private debt market,
Speaker 1: which again is a a growing source of capital for UM.
Speaker 1: You know, companies that are looking for growth capital, private
Speaker 1: equity firms that are looking for growth capital. You don't
Speaker 1: just need to go to your local bank. The S
Speaker 1: and P five hundreds still down almost fourteen percent on
Speaker 1: a year to day basis. And then I looked at
Speaker 1: the foot see one, d are good friends over in
Speaker 1: the UK It's up one point three pc. I did
Speaker 1: not know that, so I said, we need to check
Speaker 1: in with Tim craig. Hetty's a director of research, senior
Speaker 1: European strategist for Bloomberg Intelligence and the Pride of Southwest Virginia. Tim,
Speaker 1: thanks for joining us. What do you guys get right
Speaker 1: over there that we're not doing. We're here's a pretty
Speaker 1: good relative performance for the foot see Paul, thanks for
Speaker 1: having me on. Look, I think there are a couple
Speaker 1: of things to consider. UM. One is the makeup of
Speaker 1: the foot see. Remember it doesn't have any tech which
Speaker 1: has gotten tumbled in the US, you know, notwithstanding the
Speaker 1: bounce that we've had back over the last six weeks. Um,
Speaker 1: it's got a big chunk of it is is consumer
Speaker 1: global brands that are also benefiting from a week pound
Speaker 1: because they get to translate back strong dollars into the UK.
Speaker 1: And it's got a big chunk of energy with high
Speaker 1: energy prices, and a big chunk of financials with rising
Speaker 1: interest rates, and all this coalesces to a foot. See
Speaker 1: that's doing really well by trading water. Now. The caveat
Speaker 1: in the off set is it all depends on your
Speaker 1: currency reference point. If you look at uh, the S
Speaker 1: and P five hundred in pounds where I'm sitting, Um,
Speaker 1: it's down a half a percentum. So you've got to
Speaker 1: keep that one in mind. Two, give us a sense
Speaker 1: to him just kind of I'd love to just get
Speaker 1: your thoughts of kind of what you're seeing and hearing
Speaker 1: from companies over in Europe. How tough is it and
Speaker 1: from an economic perspective, and boy, how tough could it
Speaker 1: be when if you guys really are going to have
Speaker 1: this really challenging winter from an energy perspective, Yeah, well,
Speaker 1: fingers calls for a mild winter, that's for sure. And
Speaker 1: you know it's it's interesting because you know, inflation being
Speaker 1: the bug bear that it is for all markets right now,
Speaker 1: it's different in different places in Europe. Um, the key
Speaker 1: issue is is energy um in terms of driving inflation,
Speaker 1: and it's also a key risk factor from the standpoint
Speaker 1: of economic growth. Um. You know our calculations are for
Speaker 1: rush it does cut off the gas and industry is
Speaker 1: what's going to be affected from the standpoint of potential
Speaker 1: shutdowns in terms of energy consumption. You've got to keep
Speaker 1: people's houses warm. Um. You could see for example, the
Speaker 1: docks the main your the main German index with with
Speaker 1: consensus expectations cut by something on the order of from
Speaker 1: where we are right now for two thousand twenty three,
Speaker 1: so the profit impact could be quite significant relative to
Speaker 1: what baked in at this point. In Germany is definitely
Speaker 1: the poster child from the standpoint of where the most
Speaker 1: impact is. And to your point, Tim, as we look
Speaker 1: at what the docks is doing in particular, the negative
Speaker 1: correlation between the docks and natural gas prices is just
Speaker 1: building is getting stronger and stronger. It really shows you
Speaker 1: that even on an inter day basis, you do start
Speaker 1: to see that reaction to the energy prices you're speaking about.
Speaker 1: I'm curious though about what changes it is the idea
Speaker 1: of a recession kind of this in ability that investors
Speaker 1: have to kind of get past to really be foolish
Speaker 1: on Europe again. Um. Yeah, I think that's probably accurate,
Speaker 1: and frankly in ways I think it's true globally. Um,
Speaker 1: you know, evaluations are mawed down into the low teens.
Speaker 1: You're looking at the eurostocks fifty, which is kind of
Speaker 1: our equivalent of the dal Jones index, right, and it's
Speaker 1: now at eleven times forward earnings. You know, the SMP
Speaker 1: sitting it eighteen and change. So evaluation is such where
Speaker 1: a lot is already baked in from the standpoint of
Speaker 1: the expectations of risk. Um. I think the biggest issue
Speaker 1: is when do we see peak inflation and you know,
Speaker 1: the peak in monetary policy tightening and the bad news
Speaker 1: is going to continue in terms of economic growth for
Speaker 1: a while. But when we when we sense that we're
Speaker 1: at that inflection that we don't see it yet, Um,
Speaker 1: that's when you can start to think ahead from the
Speaker 1: standpoint of when valuation will be more important. Right now,
Speaker 1: we think earnings for the rest of the year are
Speaker 1: going to be the big thing, and we see earnings
Speaker 1: risk right now. So as sloppy market outlook. Tim Marcus
Speaker 1: Ashworth from Bloomberg Opinion based in London, we have him
Speaker 1: on pretty often. He is not afraid to show his
Speaker 1: disdain for the e c B UM and its approach. Here,
Speaker 1: what's the market feel like in terms of or what's
Speaker 1: the market discounting in terms of the ECB and its
Speaker 1: ability to flight to fight inflation going forward? Yeah, it's
Speaker 1: it's it's a good question, Paul. And you know Marcus
Speaker 1: has some degree views central banks regardless of where they
Speaker 1: are there between a rock and hart rock and a
Speaker 1: hard place. They can't ease the energy crisis by um
Speaker 1: by supplying more oil um. The only thing they can
Speaker 1: do is accelerate or decelerate economic growth. And so it's
Speaker 1: the best an indirect um sworks tool. And you know,
Speaker 1: maybe they are late to the game. We can talk
Speaker 1: about that all day long. But if they want to
Speaker 1: have an impact on what's going on with inflation, they're
Speaker 1: only option is to slow economic growth by raising interest rates.
Speaker 1: And lord knows whether they're late to it or not.
Speaker 1: That's where they're headed now, and they seem the beginning
Speaker 1: all that bus um, and certainly the b o E
Speaker 1: is and it's here in England, and obviously the FED
Speaker 1: is more here and more on this. As you guys
Speaker 1: said at Jackson Home, Tim, give us a sense. So
Speaker 1: you've been in London now a long time. I mean
Speaker 1: you're born and raised in southwestern Virginia. But you in
Speaker 1: your career on Wall Street and at Bloomberg, you've been
Speaker 1: all over the world. You run business businesses for Bloomberg
Speaker 1: in Hong Kong and New York and now London. What's
Speaker 1: it like in in England these days? In the UK?
Speaker 1: How are consumers feeling? Um? You know? And I guess
Speaker 1: there's this I'm sure there's this tremendous concern about energy security,
Speaker 1: come come this win. But how's the consumer over there
Speaker 1: in the UK and Europe? Um? You know, it's an
Speaker 1: interesting sort of juxtaposition. Um. If I go to the
Speaker 1: local restaurants, there's plenty of people there. There's still crowds
Speaker 1: in the pubs, you know, Lord knows. On the nice
Speaker 1: sunny afternoon, especially a Wednesday or Thursday, Thursday now being
Speaker 1: the new Friday, you know, the pubs are packed outside
Speaker 1: as you know we do here. Um. And if you
Speaker 1: go to the Regent Street, Um, there's plenty of activity. Um.
Speaker 1: That said, UM, you know, that's only one element. And
Speaker 1: clearly there's an awful lot of press reports about especially
Speaker 1: those on lower income. They are really struggling. And so
Speaker 1: I think that there's a real dichotomy right now. But
Speaker 1: boots on the ground, actually things feel pretty normal. Retail
Speaker 1: sales look pretty good. Yep, yep, good stuff, all right.
Speaker 1: Tim craig Head always appreciate the euro perspective from Tim. Uh.
Speaker 1: Tim's based in London for Bloomberg Intelligence. He's a director
Speaker 1: of Research, senior strategist over there. He's been on the
Speaker 1: Wall Street for well over thirty years. Goldman Sachs, Bloomberg
Speaker 1: Wealth of Experience. We appreciate getting some of his time
Speaker 1: from London later this week. Uh, some economic nerds are
Speaker 1: gonna get together Jackson Hall, Wyoming. I've been there. It's beautiful,
Speaker 1: you can do fly fishing, you can see all these
Speaker 1: crazy animals that you'd never see. Bison elk I mean,
Speaker 1: I mean bison are huge. Um. Any who they're gonna
Speaker 1: get together, I'm not really sure what they're gonna do.
Speaker 1: But our next guest can help us figure that out.
Speaker 1: Janelle Marte, economics and Federal Reserve reporter for Bloomberg News.
Speaker 1: All right, Joannelle, we're sending out Michael McKee, Bloomberg's Economic School.
Speaker 1: We're gonna send out the surveillance team, Uh, Tom, John
Speaker 1: and Lisa out to Jackson Hole. Can you tell us
Speaker 1: and tell me and our listeners what is this Jackson
Speaker 1: Hole get together? Who goes and what do they do
Speaker 1: and what's the purpose? So, as you said, it's a
Speaker 1: big deal, especially for economic nerds. Um. They go out
Speaker 1: to enjoy nature, but also to talk about what's happening
Speaker 1: in the economy, and not just here but globally. And
Speaker 1: it's often a chance or a good place for fat
Speaker 1: officials or fat presidents too. You know, they'll they usually
Speaker 1: use it like as a chance to unveil some big
Speaker 1: policy change. Um. But this year, I think what people
Speaker 1: are looking for is any guidance from the Fed as
Speaker 1: to when they might slow rate increases or if they're
Speaker 1: planning to do so on any your term, you know, Janelle,
Speaker 1: I think it's so funny that Paul Sweeney creeps calling
Speaker 1: them nerds and clearly in school. But I mean they're
Speaker 1: the smart folks. That's put it that way. They are
Speaker 1: the smart folks, Janelle, I'm curious about how much of
Speaker 1: this could be anticlimatic. To some extent, it almost seems like,
Speaker 1: at least this week for the markets, a lot of
Speaker 1: this is going to be in wait and see mode
Speaker 1: to see if indeed Chairman Powell and by ascension, the
Speaker 1: Federal Reserve is as hawkish as the market is expecting
Speaker 1: what happens if this becomes a huge nothing burger. I mean,
Speaker 1: listen anytime that power speaks, especially when he speaks at
Speaker 1: Jackson Hall, everyone is, everyone listens, right. Last year he
Speaker 1: made a big speech trying to defend the idea that
Speaker 1: inflation was going to be transitory. Of course, he's since
Speaker 1: canceled that word and said, um, inflation is here, we
Speaker 1: need to get it, get it under control. So when
Speaker 1: he speaks on on Friday morning, everyone everyone's going to
Speaker 1: be listening to just to hear what he has to say,
Speaker 1: you know, especially given what he said last year. Um,
Speaker 1: and yeah, maybe we won't get a big signal. I mean,
Speaker 1: he's not very likely to give us a hand as
Speaker 1: to what they're going to do exactly in September, for example,
Speaker 1: because he's already said they're moving away from that specific
Speaker 1: for guidance. They're not going to tell us they're going
Speaker 1: to do it meeting by meeting. Um, However, you know
Speaker 1: if he if he's end the message that you know
Speaker 1: apparently you know from the from the July meeting, the
Speaker 1: takeaway that a lot of investors um grabbed was that
Speaker 1: the Fed what might soon slow down the pace of
Speaker 1: rat increases, and officials have really pushed back against that. So, UM,
Speaker 1: we'll see if he sends like a really clear message now,
Speaker 1: and you're right, he might not, but certainly that is
Speaker 1: what people are looking for. You know, based on your reporting,
Speaker 1: what's the consensus here about recession? Are we in one?
Speaker 1: Are we going to get into one? If so this year,
Speaker 1: next year? How deep? What are you? What are you
Speaker 1: hearing and seeing? So I would say that there is
Speaker 1: no consensus. We're in a really unique and challenging time
Speaker 1: in that, you know, some economic data is pointing to
Speaker 1: a slow down, as we've seen the GDP numbers, but
Speaker 1: then we have some really strong indicators like what happened
Speaker 1: with jobs, for example, where we saw twice as many
Speaker 1: jobs I did last month as anticipated. So you know,
Speaker 1: I think FED officials are looking at this trying to
Speaker 1: figure it out. There are some people saying that we
Speaker 1: might actually see GDP revised upward later and that that
Speaker 1: might help to close the gap. But really people are
Speaker 1: just waiting to see and figure it and figure it out.
Speaker 1: And I think that as we learn more that that's
Speaker 1: what's going to inform policymakers as to what the what
Speaker 1: the eventually end up doing with rates, Because you know,
Speaker 1: economic data is not perfect. It is often revised. Some
Speaker 1: people have some officials have already blamed that as to
Speaker 1: why they were a little bit slow to respond into
Speaker 1: or twenty one rather as inflation continued to soar and
Speaker 1: so um. I think we'll just have to continue to
Speaker 1: look at the data and see how all the pieces
Speaker 1: fall into place, do you know, on the market scale.
Speaker 1: And one of the big conversations and markets has been
Speaker 1: that the FED is constantly behind the curve and has
Speaker 1: been for years. I'm curious though, if they have actually
Speaker 1: caught up around the cusp of doing so, given that
Speaker 1: we've now had to seventy five bases point hikes and
Speaker 1: fifty and before that as well, So how much further
Speaker 1: do they have to go before they can say, well,
Speaker 1: the Fed is now on top of things. Really good
Speaker 1: point there. The Fed was behind the curve earlier. They've
Speaker 1: said so themselves. But at this point, I mean, they've
Speaker 1: really aggressively raised interest rates and they're at a point
Speaker 1: now where the rates might be considered neutral, which is
Speaker 1: an area that people are not really sure where that is.
Speaker 1: But the point being that they've said they're not going
Speaker 1: to move into restrictive so continuing to increase rates to
Speaker 1: the point where that is intentionally meant to slow economic
Speaker 1: growth and cool demand and bring prices, bring price gains down,
Speaker 1: bring inflation down. So they've said where they're going, you
Speaker 1: know where that endpoint is. It's hard to you know,
Speaker 1: they don't know themselves. They're trying to engauge clues or
Speaker 1: get clues from what happens with inflation and what happens
Speaker 1: with the economy. But we the level of tightening that
Speaker 1: we've seen in the past few months is really the
Speaker 1: highest that we've seen in decades from the FAD. So
Speaker 1: um they're they're they're taking strong action. Uh they are,
Speaker 1: and will certainly pay attention to the news coming out
Speaker 1: of Jackson Hole later this week. Friday is kind of
Speaker 1: the big day. Uh. And again the surveillance team will
Speaker 1: have full coverage from Jackson Hole. Why. I'm sure they're
Speaker 1: gonna have a really cool set up out there, uh,
Speaker 1: in the middle of nowhere, but it is beautiful out there.
Speaker 1: Janelle Marte, Economics and Federal Reserve reporter from Blueberg News
Speaker 1: joints us with some calls there. On the economy. You know,
Speaker 1: we've had oil really pulling back, you know, over the
Speaker 1: last several months. We hit one twenty on w T
Speaker 1: I crued several months back, and then we got down
Speaker 1: here below ninety. A little bit of a spike here today,
Speaker 1: a three percent. I want just to get a sense
Speaker 1: of kind of where the short term trends are. I'm
Speaker 1: really digging this. Blow four dollars or barrel or four
Speaker 1: dollars a gallant gasoline. Um, We'll get a sense where
Speaker 1: the short term trends are and the longer term trends.
Speaker 1: To do that, we check the with the Fernando Valley,
Speaker 1: senior analyst for Bloomberg Intelligence. Fernando, I guess the news
Speaker 1: today is maybe OPEC will be cutting production what do
Speaker 1: you what do you make of the news seeing today
Speaker 1: and Paul, I think it's a very interesting indication of
Speaker 1: where they see the band over the next couple of months.
Speaker 1: And uh, you know, our concern has always been that
Speaker 1: the FED tightening would lead to pain in the emerging markets,
Speaker 1: and I think that's something that we're starting to see
Speaker 1: a lot of emerging markets struggling with a strong dollar,
Speaker 1: with rising food and energy inflation and and low and behold. Uh,
Speaker 1: they're seeing some over supply, especially with China being slower
Speaker 1: to buy some buy crude. And we talked about previously
Speaker 1: about how China I was having issues with lockdowns and
Speaker 1: how that could impact their purchasing and we're starting to
Speaker 1: see that. And you know, the physical market can be
Speaker 1: very different from the financial market, and they're starting to
Speaker 1: see some lag on the Asian side, even though on
Speaker 1: the on the U S side still zee, excuse me,
Speaker 1: a very tight market, Fernando. One of the arguments that
Speaker 1: I believe is how the energy MR had made was
Speaker 1: that liquidity is an issue that there's so many people
Speaker 1: who had hopped into the commodities market. I mean, we
Speaker 1: talked about all the time oil as this big macro
Speaker 1: heade from investors who usually don't actually trade oil or
Speaker 1: trade commodities. I'm curious how much of that is skewing
Speaker 1: the numbers and skewing the price action. Absolutely, and that's
Speaker 1: why we saw in biatigoing negative. It's a lot of
Speaker 1: financial UH speculators and the true definition of the word
Speaker 1: that they don't actually want to take the physical barrels,
Speaker 1: and they can skew that market. UH. The way that
Speaker 1: we tend to look at it is the difference between
Speaker 1: the crude grades themselves and Brent, Brent being the global benchmark,
Speaker 1: and when we see those differentials getting very narrow, it
Speaker 1: typically means that they are competing and there's less of
Speaker 1: a UH. There's a lot less competition between the crude
Speaker 1: sellers and not so much between the crude buyers and
Speaker 1: the opposing is true. So while in the beginning of
Speaker 1: the summer you're seeing the differentials widely significantly, now there's
Speaker 1: they're starting to narrow, especially in Asia, again a sign
Speaker 1: that the activity there is is slower than expected. Fernando Gasoline,
Speaker 1: we're down below three dollars and ninety cents a gallon.
Speaker 1: Good news for the average consumer. It's like getting a
Speaker 1: kind of a tax break, if you will. What's driving
Speaker 1: that is, is more refining capacity coming online, or is
Speaker 1: demand just kind of fading a little bit in the
Speaker 1: face of that some of that higher prices we saw earlier,
Speaker 1: what's the latter. For sure, we are both passed the
Speaker 1: peak demand for the northern hemisphere, so that helps. But
Speaker 1: we also saw weaker demand UH in two then we
Speaker 1: did in twenty one, and and even UH compared to
Speaker 1: were still below five to six percent below those levels.
Speaker 1: But the other part that helps UH is that we're
Speaker 1: actually seeing a bifurcation between gasoline and diesel. Diesel margins
Speaker 1: are fifty seven dollars a barrel, while gasling is a
Speaker 1: thirty two, And because the refiners are chasing diesel, they're
Speaker 1: over supplying gasoline. So that's helping bring the gasoline margin
Speaker 1: down significantly, while diesel remains very high and we expect
Speaker 1: will continue to go higher, especially as we head towards winter.
Speaker 1: We'll stick to the subject of spreads in particular. Point
Speaker 1: of this out earlier in the show. We're looking at
Speaker 1: front crewed with handle w t I with a nine
Speaker 1: three handle. That's a spread of about six dollars and change.
Speaker 1: What does that tell you six dollars if I'm not wrong,
Speaker 1: correct me if I am Fernando, it's historically high when
Speaker 1: it comes to that spread, right, absolutely. Uh. It tells
Speaker 1: me that the spr releases are having that impact because
Speaker 1: you know, w T I is priced in Cushing and
Speaker 1: we're trying to we are continuing to sell more and
Speaker 1: more crude out of Cushing as opposed to Brent that
Speaker 1: is slightly more UM, so we're basically discounting it for
Speaker 1: the transportation costs to take it to foreign markets. So
Speaker 1: it's basically showing us that we are exporting significant portions
Speaker 1: of that Cushing Uh, that Cushing release to oversee markets.
Speaker 1: How are things down into Permian? Those boys down they're
Speaker 1: still making money, they are. It's certainly and you know
Speaker 1: it's not just scrude. Natural gas liquids propane utane are
Speaker 1: are rising very significantly. Natural gas prices as well, very high,
Speaker 1: so they are starting to make money. It's actually been
Speaker 1: allowed for what we call refracts, when you go back
Speaker 1: into an old well and you redo the fracking process
Speaker 1: so that you can get more production out of it.
Speaker 1: So we're starting to see are you rising in those
Speaker 1: refracts um to help produce producing, and that helps bypass
Speaker 1: one of the biggest issues, which is continuing to drill
Speaker 1: wells and continue to have to have the the the
Speaker 1: the the drilling rigs and the other portions that are
Speaker 1: more supplied constraint. I think I'm going to go down
Speaker 1: in Texas, drill a couple of holes in the ground,
Speaker 1: put some wells in there, and see what I can do.
Speaker 1: I mean, they gotta oil just ripping here back above ninety.
Speaker 1: I think I could do that for now. Of Vale
Speaker 1: Senior Analyst or Bloomberg Intelligence, he does it for a living.
Speaker 1: He covers all things energy. He's been doing it for
Speaker 1: a couple of decades, and he is one of our
Speaker 1: go to voices when we get a sense of global oil,
Speaker 1: global energy. All right, let's switch to I'm gonna talk
Speaker 1: electric vehicles because I actually drove an electric vehicle. I
Speaker 1: had a first couple of first month or so ago.
Speaker 1: I drove my first pickup truck ever and drove my
Speaker 1: first electric vehicle ever, the Ford F one fifty Lightning. Uh.
Speaker 1: They were kind enough to loan me for a few
Speaker 1: days and it was awesome. So I was really skeptical
Speaker 1: about that. Totally, totally, I mean everything. It was just
Speaker 1: an awesome vehicle and the electric uh, the EV technology
Speaker 1: was pretty cool. Same of course, he's associate associate portfolio
Speaker 1: management Analysts at ARC Investment Management. That good folks ark
Speaker 1: they have some passing interest in the EV market here, Sam,
Speaker 1: I love to get your thoughts here on the EV
Speaker 1: market as it relates to the competitive landscape because our
Speaker 1: good friends at Tesla had had essentially had the market
Speaker 1: to themselves for a long time, and and wow, what
Speaker 1: an amazing job Elon Musk and the Tesla folks have
Speaker 1: done and effectively creating and commercializing this market. But now
Speaker 1: you got the Ford f one fifty, you got Volkswagen
Speaker 1: go on all Electric, got porschego on Electric. Talk to
Speaker 1: us about how you guys think about this can petitive
Speaker 1: landscape for electric vehicles? Absolutely, And you know, I think,
Speaker 1: as you're saying f one fifty electric, I'm sure once
Speaker 1: you drive that you're not going back to the internal
Speaker 1: combustion engine. So I think really the first place to
Speaker 1: start is what are the competitive dynamics. The competitive dynamics
Speaker 1: are that the internal combustion engine is losing out big time.
Speaker 1: So if you're just looking in the first half of two,
Speaker 1: internal combustion engine vehicles sales down eighteen point four, battery
Speaker 1: electric vehicles up. So the share games are tremendous for
Speaker 1: electric UH. And then when you look into the actual
Speaker 1: UH players, who are who are investing in this, you know,
Speaker 1: that's where things we think start to get interesting. It's
Speaker 1: a growing pie, so they're not necessarily competing with one another, UM.
Speaker 1: But what we what we're looking at for the future
Speaker 1: is who's investing in battery capacity. That's very important UM
Speaker 1: and really looking to see who's putting the money where
Speaker 1: their mouth is. I think one of the the classic
Speaker 1: arguments we've heard over time were these large traditional automakers,
Speaker 1: when they decide to go electric, they're going to crush
Speaker 1: any of the startups. But then when we when we
Speaker 1: look at you know, the actual cafex and what these
Speaker 1: companies are planning. You have forward planning seven to eight
Speaker 1: billion dollars a year in cafex UH, and that's combined
Speaker 1: for internal combustion and electric. You have GM in the
Speaker 1: nine billion range. Again that's a combination of traditional gas
Speaker 1: powered vehicles and electric. And then you have Tesla in
Speaker 1: there with seven to ten billion dollars and Cafex over
Speaker 1: the next few years. So you have Tesla who's now
Speaker 1: competing with UH the incumbents, and we actually forecast that
Speaker 1: they're gonna outspend them by sgnificant degree and that's really
Speaker 1: going to allow them to keep market share going forward.
Speaker 1: What does that mean for the challenges when it comes
Speaker 1: to scaling and producing in bulk? How does the likes
Speaker 1: of Tesla Rivian deal with that? Yeah, scaling is it's
Speaker 1: a very difficult problem. And I think the electric vehicle
Speaker 1: industry is in a great position as a whole where
Speaker 1: they do seem to be supply constrained. So it's good
Speaker 1: that they actually have the demand there and so looking
Speaker 1: to scale, um, you have the production side, which is
Speaker 1: quite difficult UH. And this is actually where we think,
Speaker 1: you know, China has UH an advantage here when we
Speaker 1: look at the speed at which these Chinese companies are
Speaker 1: able to scale production and even Tesla in China right
Speaker 1: going from start of construction to a million vehicles produced
Speaker 1: in three and a half years is is pretty heard
Speaker 1: of in the auto industry. And then when we look
Speaker 1: further down the line beyond just you know, the scale
Speaker 1: zero to one, you know, no cars produced to one
Speaker 1: car produced, uh, than getting up to the hundreds of thousands.
Speaker 1: We start to look into the raw materials UH. And
Speaker 1: this is I think where we've seen a lot of
Speaker 1: concern is saying, Okay, now that people are more convinced
Speaker 1: we're going to have an electric vehicle future, where do
Speaker 1: we get all of the raw materials for this? And
Speaker 1: the good news is is that, ah, the raw materials
Speaker 1: exist right there, They're out there in the earth. UM.
Speaker 1: The challenging part is going to be the processing of
Speaker 1: these raw materials UH into what can be used in
Speaker 1: battery packs for electric vehicles. And we're seeing incredible investment
Speaker 1: on this front as well, and we're even seeing a
Speaker 1: shift in the bad mattery chemistry is being used to
Speaker 1: help offset some of these bottlenecks. So a great example
Speaker 1: is if we went back, you know, three to four years,
Speaker 1: everyone was extremely concerned about cobalts and saying, you know,
Speaker 1: cobalt is incredibly difficult and there's you know, big human
Speaker 1: rights implications in cobalt mine. And the battery industry is
Speaker 1: shifted from using battery chemistry that was equal parts nickel
Speaker 1: magnese and cobalt to a new chemistry that had almost
Speaker 1: no cobalts in it. And then there was another constraint
Speaker 1: on nickel. And you know you heard Elon Musk on
Speaker 1: the earnings call saying if you can, if you can mind,
Speaker 1: nickel will buy it. And now we're seeing a shift
Speaker 1: from batteries that are extremely nickel dense two batteries that
Speaker 1: have no nickel at all. So it's a combination of
Speaker 1: supply ramping up and the actual battery manufacturers and vehicle
Speaker 1: manufacturers shifting to different chemistries to avoid those bottlenecks. All right, Sam,
Speaker 1: good stuff, good overview of the e V space there. Sam, course,
Speaker 1: he's associate portfolio manager and analyst at ARC Investment Management
Speaker 1: and ARC. Thanks for listening to the Bloomberg Markets podcast.
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Speaker 1: on Twitter at Matt Miller three and on Ball Sweeney
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