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Speaker 1: Welcome to the Bloomberg surveillance podcast. I'm tom keen along

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Speaker 1: with Jonathan Ferrell and lisa Abramowitz daily, we bring you

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Speaker 1: insight from the best and economics, finance, investment and international

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Speaker 1: relations find Bloomberg surveillance on apple podcast, SoundCloud Bloomberg dot com.

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Speaker 1: And of course on the Bloomberg terminal,

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Speaker 1: we come to you today with a lot of humility,

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Speaker 1: john Farrell lease Abramowitz and I know that oil is

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Speaker 1: the toughest commodity to call. There's all sorts of academic

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Speaker 1: research that shows that yesterday we had an Edward morse

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Speaker 1: of Citi group with a huge political economic standpoint on

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Speaker 1: hydrocarbons and today as acute Francisco blanch joins us, head

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Speaker 1: of global commodities and derivatives research at Bank of America Francisco,

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Speaker 1: you were the,

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Speaker 1: The first one out that I knew model $100 a barrel.

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Speaker 1: You made global headlines with it, you were right up

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Speaker 1: we went and then down we can came on, I'm

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Speaker 1: going to say a dearth of demand Christopher Owen was

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Speaker 1: just on the technical analyst and says the spot market

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Speaker 1: for oil is behaving differently than the futures market for

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Speaker 1: oil explain in Greek what that means.

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Speaker 1: Well, uh, you want me to use uh Vegas and uh,

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Speaker 1: and uh, deltas in, in, in the process to maybe

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Speaker 1: not let me just say it in plain english. Uh,

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Speaker 1: we have um, essentially very low speculative interest, essentially all the,

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Speaker 1: all the macro players have been selling oil on the

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Speaker 1: back of uh, on the back of recession fears some

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Speaker 1: of the comments that you were just making before we

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Speaker 1: went on the oil segment.

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Speaker 1: Also, we've seen a dearth of liquidity liquidity is falling

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Speaker 1: very quickly in the forward markets. And, and then I think,

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Speaker 1: I think beyond that, the physical market has been actually

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Speaker 1: relatively uh, more supported, although that's changing a bit too

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Speaker 1: because it turns out that the Russian supply disruption we

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Speaker 1: were expecting on the back of the EU sanctions hasn't

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Speaker 1: really come through as expected. And, and, and maybe we

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Speaker 1: won't be losing as much raw

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Speaker 1: after all long ago and far away, lisa Abramowitz put

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Speaker 1: two kids through school speculating on oil when it went

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Speaker 1: down under zero. There was that huge shock of 18

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Speaker 1: months ago, two years ago we kid her that she

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Speaker 1: had two barrels of oil in her living room on delivery.

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Speaker 1: Are we going to get the same spring here, did

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Speaker 1: we have a possibility of seeing 70 west texas intermediate

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Speaker 1: become 95 or 100 west texas intermediate and a cup

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Speaker 1: of coffee?

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Speaker 1: I'm afraid so. I think we have a very springy,

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Speaker 1: I think you use the Great War, their spring oil market. Um,

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Speaker 1: because inventories remain quite low, uh, spare capacity is tight.

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Speaker 1: And if if you look at at the three key

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Speaker 1: drivers of oil prices heading into 2023 there are clearly, uh,

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Speaker 1: in my view, whatever happens to opec plus Russia, uh,

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Speaker 1: whatever happens to china reopening and the third one being

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Speaker 1: the Fed pivot. Um,

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Speaker 1: And, and the way I think about each one of

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Speaker 1: those is, uh, if you look at our 2023 numbers

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Speaker 1: all the demand growth that we forecast for next year

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Speaker 1: is coming from emerging markets with China being 50% of

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Speaker 1: that and India being about 20%. So we need emerging

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Speaker 1: markets to come back strong and it's still early. It's

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Speaker 1: still unclear how China is gonna make a comeback. Um

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Speaker 1: And and it may be a different comeback than the

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Speaker 1: one that we saw in the U. S. And in

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Speaker 1: europe particularly if if the reopening is one of fits

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Speaker 1: and starts. Um partly because I think the chinese population

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Speaker 1: has not really been much exposed to Covid. We talked

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Speaker 1: about the post covid world in in in europe and

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Speaker 1: the U. S. But really

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Speaker 1: china hasn't had Covid broadly disseminated yet. To the extent

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Speaker 1: that we've seen it in in most other countries in

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Speaker 1: the world. And that's number one. Number two is really Russia.

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Speaker 1: Opec how does that play out, how much oil do

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Speaker 1: we lose from Russia? And how much oil does Opec

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Speaker 1: plus actually take out of the market.

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Speaker 1: And then the third one really being the opec the

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Speaker 1: Fed tightening policy and which at the moment we have O. E. C. D.

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Speaker 1: Economies essentially growing zero next year. But of course if

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Speaker 1: the Fed uh if us Fed fund rates go to 6% 7%

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Speaker 1: that could become negative pretty quickly here. And that's another

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Speaker 1: big uncertainty and probably

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Speaker 1: oil prices have been falling in recent days. So how

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Speaker 1: much

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Speaker 2: do you think that they could rise? I know that

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Speaker 2: you have a target of perhaps $100 for W. T. I.

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Speaker 2: And $94 for Brent. How do we get there given

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Speaker 2: all of what you talk about given that we already

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Speaker 2: are seeing some fits and starts with respect to a

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Speaker 2: china reopening and it hasn't really caused the price to

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Speaker 2: go up that much.

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Speaker 1: Um Well so so um again I think I think

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Speaker 1: the micro pictures is pretty gloomy here. Um And and

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Speaker 1: that's part of the recent prices have come down but

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Speaker 1: but I think it's a bit of a different environment

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Speaker 1: to to prior Pullbacks in oil prices first. We think

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Speaker 1: there's there's a put uh that will be triggered. I

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Speaker 1: mean Opec

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Speaker 1: just had their meeting on sunday decided to roll over

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Speaker 1: the cuts. Um But remember the cuts, announced cuts were

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Speaker 1: two million barrels a day. Nobody expected Opec to implement

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Speaker 1: the two million barrels a cut. They could actually go

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Speaker 1: and do that. They will actually implement a deeper cut.

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Speaker 1: Um And also we're going to see W. T. I.

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Speaker 1: Uh

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Speaker 1: price is entering the range at which the U. S.

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Speaker 1: Government will start filling or refilling rather in the strategic

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Speaker 1: Petroleum Reserve. Remember the number that was put out by

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Speaker 1: the White House was $72 a barrel on W. T. I.

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Speaker 1: So we're getting close to the point where we might

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Speaker 1: see those triggers providing support to prices here. So it's

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Speaker 1: a bit of a different to the environment, to the

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Speaker 1: to the 2020 world where where prices just created.

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Speaker 1: Can

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Speaker 2: you elaborate on that? Because this has been one of

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Speaker 2: the big question marks if the U. S. Has said

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Speaker 2: $72 a barrel was the time they start buying and

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Speaker 2: one of the big drivers of the decline in oil

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Speaker 2: prices has been the release of the Strategic Petroleum Reserve.

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Speaker 2: How much is that going to cause prices to rise?

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Speaker 2: Are we almost there yet? Where this administration ought to

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Speaker 2: start buying based on what they've said and that will

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Speaker 2: actually drive prices much higher perhaps in the short

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Speaker 1: term?

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Speaker 1: Well um again I'm just going by what the White

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Speaker 1: House communique was a couple months ago. They are um

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Speaker 1: they're saying they're gonna be buying oil as as soon

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Speaker 1: as we get below the 72 hour threshold and the

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Speaker 1: balance could change pretty dramatically here. We could see an

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Speaker 1: extra half a million barrels a day of demand from

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Speaker 1: uh from the U. S. Strategic Petroleum Reserve. Remember that

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Speaker 1: you need to probably put in 100 and 5200 million

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Speaker 1: back

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Speaker 1: back in store. That's again that that takes a whole

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Speaker 1: year of buying half a million barrels a day. Right?

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Speaker 1: I mean a simple math there. Right. So um so

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Speaker 1: you could see a pretty meaningful swinging imbalances in that regard.

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Speaker 1: You can also see heading into 2023 china, reopening picking

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Speaker 1: up momentum. Um even even if the 1st 234 months

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Speaker 1: could be a little patchy

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Speaker 1: And and then of course I think the sanctions on

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Speaker 1: on Russian petroleum products which kick in on February five

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Speaker 1: are certainly a much bigger deal than the sanctions on

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Speaker 1: Russian crude, which have turned out to be a lot

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Speaker 1: to do about nothing really.

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Speaker 2: What do you make, you mentioned the Jinping meeting in

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Speaker 2: Saudi Arabia? Well, how does that affect the dynamic of

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Speaker 2: the oil picture? Just given the sense that there seems

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Speaker 2: to be an ongoing and public display of increased closeness

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Speaker 1: there?

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Speaker 1: Well, I I think that's only a natural development of

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Speaker 1: uh the bilateral trade relationship between Saudi Arabia and china,

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Speaker 1: which has changed dramatically since the advent of us shale.

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Speaker 1: Remember the U. S. Is now a net exporter of energy.

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Speaker 1: We've argued the U. S. Is going to be energy

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Speaker 1: independent for the last 10 years. But now we're arguing

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Speaker 1: the U. S. Is going to be energy dominant. So

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Speaker 1: in some ways the U. S. Is a competitor to

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Speaker 1: Saudi Arabia and the energy space. Um, and I think

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Speaker 1: I think in that rig

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Speaker 1: The trade with between Rigid and Beijing has really picked

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Speaker 1: up pretty dramatically. So so that that I think it's

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Speaker 1: just a natural change of commercial relationships Maria from Brussels

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Speaker 1: emails in and Francisco make the kick from 12 yards out.

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Speaker 1: He's in Madrid. He probably had a tough day yesterday.

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Speaker 1: That was just brutal yesterday. Some of the worst penalty

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Speaker 1: Francisco's in Madrid and I'm sure the city must be

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Speaker 1: blooming Francisco. Do you want to weigh in on that?

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Speaker 1: Yeah, it's not, it wasn't happy, I wasn't happy day yesterday,

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Speaker 1: I have to say. Um, you know, the team just

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Speaker 1: kept passing the ball without really the spanish team without

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Speaker 1: really scoring. So it was all disappointing. Um, and yeah,

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Speaker 1: it moves a little gloomy here. You can see the background.

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Speaker 1: The sun hasn't come out yet

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Speaker 1: a couple more days. Does Moynahan know you're in Madrid.

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Speaker 1: I mean he's talking about expense control, Francisco. How did

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Speaker 1: this happen? You causing trouble? I'm causing trouble. This is great.

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Speaker 1: It's like pharaoh and Qatar just run Francis, you

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Speaker 2: don't have to try.

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Speaker 1: I think, look, I mean we have an office. Here

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Speaker 1: we have. There we go. We have an office. It

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Speaker 1: was an empty office when I got here. The one

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Speaker 1: I got So I don't think it's, I'm actually beefing

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Speaker 1: up expenses here. Right, right there was going, thank you Francisco. Wonderful,

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Speaker 1: thank you very much Francisco blanch their bank for America.

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Speaker 1: It is a jumbo, some would say almost in kuwait

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Speaker 1: here what we're talking about here. All the backs and forth.

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Speaker 1: Someone that needs to distill, this is with Northwestern mutual

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Speaker 1: wealth management Brent shooter joins us now. The chief investment

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Speaker 1: officer Brent, did you take your outlook for 2023 from

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Speaker 1: 55 pages down to 12 I mean are you, are

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Speaker 1: you going short and sweet here or your right in

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Speaker 1: war in peace here on what we're gonna see next year?

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Speaker 1: Right? I think we're more in the short and sweet

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Speaker 1: type and trying to be understandable and makes sense And

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Speaker 1: and to me, I think you know, we're switching from

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Speaker 1: right now inflation fears to recession fears. I hear the

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Speaker 1: word recession quite a bit and this is what we

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Speaker 1: thought would happen. So if you think about it, inflation

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Speaker 1: fears drove us lower till october 12th, That was the

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Speaker 1: day before core CPI I topped

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Speaker 1: and so I think what you're seeing now is the

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Speaker 1: commentary that the Fed has done too much. You're seeing

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Speaker 1: it in the bond market. The bond market is telling

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Speaker 1: you that inflation is a thing of the past and

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Speaker 1: that the Fed has done too much and that's what

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Speaker 1: I think likely drives trading for the next few months

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Speaker 1: where you see the recession fears come out once we

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Speaker 1: see that inflation does not survive a recession and that

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Speaker 1: the Fed will pause when they actually see jobs being lost,

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Speaker 1: that you can move higher in in a more sustained pace.

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Speaker 1: We agree that inflation coming down is what's called a

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Speaker 1: highly stochastic. It's pointy folks, it goes up up doom

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Speaker 1: and gloom and then it comes down rapidly as it

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Speaker 1: did twice after 1947 and other times as well. How

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Speaker 1: does the allocation or outlook of your investment recommendations change

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Speaker 1: if inflation only comes down to 4% and not to

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Speaker 1: the proverbial 2%.

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Speaker 1: Yeah. I mean I think that's what most people are

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Speaker 1: saying right now, largely because the new york fed U. I. G.

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Speaker 1: Underlying inflation gauge shows 4% inflation as being kind of

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Speaker 1: a more persistent part of it. And so you know,

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Speaker 1: I I just don't think that we stay at 4%.

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Speaker 1: I think it does pull back. I don't think we're

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Speaker 1: going below two. I don't think we're going back to

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Speaker 1: the last decade that we had, where we persistently worried

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Speaker 1: about deflation. Um That to me was not, you know,

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Speaker 1: inflation wasn't a relic of the past, that was how

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Speaker 1: we were positioned then, but we are certainly positioned more

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Speaker 1: for it coming down in the next few quarters. For example,

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Speaker 1: we we actually upped our allocate

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Speaker 1: or increase our duration towards fixed income in the middle

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Speaker 1: of october because the barclays aggregate was yielding 5% versus

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Speaker 1: 1 75 at the start of the year bonds now

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Speaker 1: provide real value. They provide a hedge against downturns and

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Speaker 1: equities caused by recession and that's where we've kind of

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Speaker 1: focused on the bond side, on the equity side? We're

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Speaker 1: still in things that are cheaper. That has been what

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Speaker 1: has worked this year. That has been what I think

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Speaker 1: will continue to work next year. And so we own

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Speaker 1: the S. And P. 600 it trades at 13 times

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Speaker 1: next year's earnings that have already been marked down

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Speaker 1: by 14 15% mark them down 10 more percent or

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Speaker 1: 10 more. We still are at 15 times and so on.

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Speaker 1: Things like that. And I dare say international developed is

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Speaker 1: becoming more attractive because I think the dollar will fall

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Speaker 1: next year. So do I hear 60 40 going into

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Speaker 1: 2023 60 40 was never dead. It's not that it

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Speaker 1: needed commodities that we had those. Uh and now I

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Speaker 1: think it's actually going to be a much better place

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Speaker 1: going forward. I mean equities have done the heavy lifting

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Speaker 1: lifting for the last 10 years. Now bonds offer

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Speaker 1: some value. And so certainly they will be a way

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Speaker 1: that holds up to 60 40 as we push forward

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Speaker 1: into 2023. So that's a big change, isn't it, coming

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Speaker 1: into 22 Remember that 60 40 is dead, It's over

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Speaker 1: and 60 40 let's be clear this year, brutal.

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Speaker 2: It was devastated, brutal. And how much do people buy

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Speaker 2: that 6040 is back, especially after the brutality that we

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Speaker 2: just saw.

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Speaker 1: Well that's the question, how perceptive or other people about

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Speaker 1: the thing that you see, how receptive are they towards

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Speaker 1: what you're saying? I

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Speaker 1: I always like to hope to be a little bit

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Speaker 1: contrarian in nature because I found that usually the right

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Speaker 1: place to be. And so you know, I do think

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Speaker 1: people are worried just because the 60 40 hasn't worked

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Speaker 1: and that narrative has been that it's dead. I think

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Speaker 1: most people think of the 60 40 unfortunately just large

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Speaker 1: cap growth and investment grade bonds. I think you need

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Speaker 1: to have things like commodities and there's something that we've

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Speaker 1: owned because we didn't think inflation was dead, um something

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Speaker 1: like small cap, something like international stocks, which is no

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Speaker 1: one wants to own those just because they haven't done well.

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Speaker 1: But if I look back at economic cycles post 1980

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Speaker 1: every single economic cycle had different leadership.

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Speaker 1: The S and P and F. Alternated. I'm not suggesting

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Speaker 1: that it has to be. But I think as you

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Speaker 1: push forward, you're in a different type of environment where

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Speaker 1: inflation will be above 2% where there will be different

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Speaker 1: worries where there'll be shortages on different sides of the economy.

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Speaker 1: And I think that's going to drive us forward. And

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Speaker 1: I think 60 42 look historically going back to 1926

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Speaker 1: we've only had four years where the bond market was

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Speaker 1: negative when the stock market was

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Speaker 2: negative, we're

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Speaker 1: all addicted

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Speaker 1: by high inflation, which I don't think we're gonna have

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Speaker 1: next year,

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Speaker 2: Right? You mentioned commodities and let's end there because we've

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Speaker 2: been talking about the divergence between energy stocks and other

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Speaker 2: commodity equities that are doing very well and then you're

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Speaker 2: looking at a crude price. That's the lowest, going back

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Speaker 2: to December of 2021. What gives there, can you have

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Speaker 2: conviction to continue buying energy equities in the face of

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Speaker 2: prices that are dropping in the crude space,

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Speaker 1: There will still be companies that make money within the

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Speaker 1: crewed space. I think you just need to focus on

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Speaker 1: picking the right ones. Certainly the easier money has been

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Speaker 1: made in energy. Um that's been the sector that has

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Speaker 1: done well over the past few years because no one

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Speaker 1: wanted to own it now. You have more people wanting

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Speaker 1: to own it.

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Speaker 1: And so I don't think that it's all negative, but

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Speaker 1: I certainly think the easy money has been made as

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Speaker 1: you look forward and certainly the price of oil is

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Speaker 1: still something that is going to be highly variable based

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Speaker 1: upon what is happening the economy. I think right now

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Speaker 1: it reflects the reality that we are moving more towards

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Speaker 1: a recession. Um Certainly I think the good news is

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Speaker 1: we've had rolling recessions over the past year, just like

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Speaker 1: we had a rolling recovery and I think that helps

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Speaker 1: take the starch out of any recession as we push forward,

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Speaker 1: as does the state of the U. S. Consumer, which

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Speaker 1: is still in good shape

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Speaker 1: money after the fact, isn't it? Tom they never tell

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Speaker 1: me ahead of time. It's going to be easy money

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Speaker 1: looking ahead a year ahead. I think the best you

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Speaker 1: can do, john it's a really important insight and the

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Speaker 1: best you can do is try to gauge consensus and

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Speaker 1: it's not going against consensus when consensus is sort of

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Speaker 1: kind of like it's when there's a massive consensus bet

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Speaker 1: and the question is, are we there now of Northwestern

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Speaker 1: mutual wealth management at the end? It's great to catch up.

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Speaker 1: Lorena or itchy joins us now us economist at T.

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Speaker 1: Rowe Price. We're gonna thank you. Thank you so much

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Speaker 1: for being with us. My head is spinning over what

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Speaker 1: the actual view of the american economy is not the

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Speaker 1: guesstimate out six months. Where are we right now? What's

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Speaker 1: your working figure for some form of inflation adjusted GDP

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Speaker 1: Q four?

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Speaker 2: That's a great question. Everybody's confused because we're getting such

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Speaker 2: mixed messages from the data. Is the labor market accelerating

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Speaker 2: even though the Fed has been hiking at such a

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Speaker 2: fast pace. What's going on with growth and consumer spending?

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Speaker 2: I would say in Q. Four of this year, the U. S.

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Speaker 2: Economy is shaping up to expand at a healthy pace

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Speaker 2: probably 2 to 3% after being a

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Speaker 2: adjusted from inflation. And once again, what's pulling through the U. S.

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Speaker 2: Economy is the consumer consumer spending data, both on services

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Speaker 2: and goods for the beginning of Q four were pretty

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Speaker 2: solid for services as well as good. So yeah, we're

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Speaker 2: in a good spot right now but I think more

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Speaker 2: deceleration is to come next year. Unfortunately

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Speaker 1: the outlooks of the sell side are

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Speaker 1: this year. I've truly never seen the chaos a cacophony

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Speaker 1: is out there. What are you advising portfolio managers at

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Speaker 1: T Rowe price you guys invented on the buy side

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Speaker 1: of fractious debate. This is folks, I'm gonna say 40

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Speaker 1: if not 50 years ago. Are they listening to you?

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Speaker 1: And if they are, what's the line for them of

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Speaker 1: how to be invested given this chaos?

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Speaker 2: So how do we navigate these crosscurrents that we're facing

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Speaker 2: in 2023? I would say that the main thing is

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Speaker 2: we expect interest rates to continue increasing. That means there's

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Speaker 2: gonna be yield in those fixed and fixed-income portfolios that

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Speaker 2: we manage. However, as we look at the question of

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Speaker 2: whether do we add risk or do we not at

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Speaker 2: risk next year? The outlook for employment growth and consumption

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Speaker 2: growth slowing into

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Speaker 2: 2023 means that we're tentatively more conservative when we're positioning

359
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Speaker 2: ourselves with respect to risk. We were talking with Jim

360
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Speaker 2: Bianco of Bianco research a bit ago and he was

361
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Speaker 2: saying there still is this feeling of transitory baked into

362
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Speaker 2: people's expectations. It's just been pushed out that basically there

363
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Speaker 2: will be an immaculate disinflationary force that will come into

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Speaker 2: play at the end of next year and allow the

365
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Speaker 2: downturn to not be as severe as some people feared.

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Speaker 2: Do you adhere to that kind of idea.

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Speaker 2: Well, I think lots of questions for the second half

368
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Speaker 2: of next year. First of all I do think the

369
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Speaker 2: Fed will get some help from the transitory question when

370
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Speaker 2: it comes to inflation and we're gonna start seeing that

371
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Speaker 2: concretely in core goods inflation in the first half of

372
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Speaker 2: next year. So I think that will be a factor

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Speaker 2: helping the outlook for next year. However, when it comes

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Speaker 2: to the question of a recession, I do notice as

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Speaker 2: well that lots of commentators are saying just because we

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Speaker 2: don't

377
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Speaker 2: the imbalances right now that this is if we do

378
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Speaker 2: have a recession is going to be a shallow one,

379
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Speaker 2: I don't think I necessarily agree with that. I think

380
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Speaker 2: once recessionary processes take place and and start to get

381
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Speaker 2: into motion things breaking the economy that we don't necessarily

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Speaker 2: anticipate this is what happens in every recession. The other

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Speaker 2: factor that I think ways against the U. S. Economy

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Speaker 2: next year is that monetary policy has

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Speaker 2: been tightening at a very very fast pace compared to

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Speaker 2: the last 2030 years. And the other one is that

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Speaker 2: is facing a very adverse global environment of growth in

388
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Speaker 2: china slowing growth in europe slowing contraction expected actually in

389
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Speaker 2: europe for the first half of this year. So the

390
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Speaker 2: external environment is not that favorable. And then domestically we

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Speaker 2: have very tight monetary policy as well given the headwinds,

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Speaker 2: why do you think the Fed is still going to

393
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Speaker 2: get to 5%.

394
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Speaker 2: Well I think the headwinds are more based for the

395
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Speaker 2: second half of the year. And I think the Fed

396
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Speaker 2: is so focused on realized inflation and the trend of

397
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Speaker 2: three month moving annualized average of core inflation that I

398
00:20:05,040 --> 00:20:09,130
Speaker 2: think it will need to continue hiking and delivering on

399
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Speaker 2: those hikes that have been already priced in the market,

400
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Speaker 1: bolena. Sebastian page emails in. I'm kidding. But for Sebastian

401
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Speaker 1: page who's expert diversification is wonderful book out on allocation

402
00:20:21,180 --> 00:20:25,840
Speaker 1: in realities folks. A colleague of Lorena's at T Rowe price, Lorena,

403
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Speaker 1: one of the great things lisa and I see is

404
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Speaker 1: O E C D views grim. I. M F views

405
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Speaker 1: grim is now this is a loaded question is now

406
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Speaker 1: the time to buy international Andy em equities. That's simple.

407
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Speaker 2: So this is the most anticipated recession in history. Is

408
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Speaker 2: that what you're saying? So has all the bad news

409
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Speaker 2: been priced in and is it time to dip into

410
00:20:54,270 --> 00:20:57,110
Speaker 2: those more risky assets? I think we're still on the

411
00:20:57,109 --> 00:20:59,679
Speaker 2: fence about them because of the question that we just

412
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Speaker 2: discussed that once we get into a recession, things can

413
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Speaker 2: break unexpectedly. So I think we're still being a little

414
00:21:07,150 --> 00:21:09,209
Speaker 2: bit more cautious in our portfolio.

415
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Speaker 2: Will be able to tell you more. I

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Speaker 1: think this is a very fair answer. You know, we

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Speaker 1: make jokes about people on the fence but I think

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Speaker 1: there's a huge body of people right now on the

419
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Speaker 1: fence about go long am go along international burnt once

420
00:21:23,980 --> 00:21:27,340
Speaker 1: burned twice, three times four times on and on and on.

421
00:21:27,359 --> 00:21:28,760
Speaker 1: There's a lot of people on the fence

422
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Speaker 2: especially we hear about the debt GDP that Damien Sasser

423
00:21:32,260 --> 00:21:34,830
Speaker 2: record highs, which is going to be a pervasive concern

424
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Speaker 2: for a longer period of time.

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Speaker 2: Lorena, when you look at what's going to happen next year,

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Speaker 2: how much confidence do you have that the that the

427
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Speaker 2: inflation is going to come down enough to support this

428
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Speaker 2: expectation that we see over at HSBC for example that

429
00:21:49,520 --> 00:21:51,850
Speaker 2: the 10 year is going to get down to 2.5%

430
00:21:51,859 --> 00:21:54,830
Speaker 2: because of that long term reversion back to what we

431
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Speaker 2: used to know.

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Speaker 2: I think there are some tailwinds for inflation next year.

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Speaker 2: So Chair Powell very helpfully split this into three pillars

434
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Speaker 2: in his speech at brookings last week. I think the

435
00:22:06,340 --> 00:22:10,180
Speaker 2: first pillar of Kohler goods is coming down significantly next year.

436
00:22:10,190 --> 00:22:13,500
Speaker 2: We still have the effect of the dollar appreciation, feeding

437
00:22:13,500 --> 00:22:16,180
Speaker 2: into core goods with a lag. I think we have

438
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Speaker 2: those rising inventory levels and slowing consumer demand for consumer

439
00:22:20,480 --> 00:22:23,980
Speaker 2: spending on goods and the improvement in supply chains as

440
00:22:23,980 --> 00:22:25,160
Speaker 2: well as transportation.

441
00:22:25,609 --> 00:22:29,790
Speaker 2: I also look at private sector rental prices. They do

442
00:22:29,790 --> 00:22:32,930
Speaker 2: feed into the rent components of C. P. I with

443
00:22:32,930 --> 00:22:35,330
Speaker 2: a lag and I think they're telling me that around

444
00:22:35,330 --> 00:22:38,510
Speaker 2: the second quarter of next year we look at significant

445
00:22:38,510 --> 00:22:42,700
Speaker 2: progress there as well. But I think on average, even

446
00:22:42,700 --> 00:22:46,520
Speaker 2: if inflation remains sticky in the other services components, on

447
00:22:46,530 --> 00:22:50,399
Speaker 2: average is going to be trending down in a sustained basis.

448
00:22:50,410 --> 00:22:53,330
Speaker 2: But we shouldn't extrapolate this into the

449
00:22:53,340 --> 00:22:58,210
Speaker 2: the Fed is going to cultivate significantly immediately as we

450
00:22:58,210 --> 00:23:01,280
Speaker 2: hit a rough patch in the U. S. Economy just

451
00:23:01,280 --> 00:23:02,780
Speaker 2: real quick before we let you go, where have all

452
00:23:02,780 --> 00:23:04,930
Speaker 2: the missing workers gone? This is something that jay Powell

453
00:23:04,930 --> 00:23:05,560
Speaker 2: has been talking

454
00:23:05,560 --> 00:23:06,480
Speaker 1: about.

455
00:23:06,490 --> 00:23:10,420
Speaker 2: We this is a great question and we did a

456
00:23:10,430 --> 00:23:13,710
Speaker 2: deep dive across our fixed income division here to look

457
00:23:13,710 --> 00:23:16,820
Speaker 2: into some of the factors that are keeping labor supply

458
00:23:16,820 --> 00:23:20,200
Speaker 2: so depressed the ones that really stood out to us

459
00:23:20,200 --> 00:23:21,510
Speaker 2: is the interaction. First of

460
00:23:21,730 --> 00:23:26,229
Speaker 2: of demographics and Covid, we knew that we had a

461
00:23:26,240 --> 00:23:31,180
Speaker 2: demographic had went to uh, labor supply. And then Covid

462
00:23:31,180 --> 00:23:34,790
Speaker 2: made people retire even sooner than they would have otherwise.

463
00:23:34,800 --> 00:23:38,010
Speaker 2: We also have a big big hole in our labor

464
00:23:38,010 --> 00:23:42,859
Speaker 2: supply from the lack of migrant workers, uh immigration Visa

465
00:23:42,859 --> 00:23:47,830
Speaker 2: processing collapsed in 2020 and 2021. We estimate about 1.5

466
00:23:47,830 --> 00:23:49,680
Speaker 2: to 2 million workers are missing

467
00:23:49,690 --> 00:23:52,990
Speaker 2: from this. And then we have other, more structural long

468
00:23:52,990 --> 00:23:58,750
Speaker 2: term factors that are keeping depressed prime age workers, especially

469
00:23:58,750 --> 00:24:03,720
Speaker 2: male workers. So, lots of demographic, lots of structural factors.

470
00:24:03,730 --> 00:24:08,250
Speaker 2: Keeping labor supply low. Can monetary policy do anything about this?

471
00:24:08,270 --> 00:24:11,180
Speaker 2: We don't think so. So they just have to bring

472
00:24:11,180 --> 00:24:12,750
Speaker 2: down demand for labor.

473
00:24:12,760 --> 00:24:16,830
Speaker 1: Very good. Thank you so much Ballerina with this with

474
00:24:16,830 --> 00:24:17,860
Speaker 1: T Rowe price.

475
00:24:28,800 --> 00:24:31,230
Speaker 1: Let's go to Washington now and figure out what happens

476
00:24:31,230 --> 00:24:34,060
Speaker 1: not in Atlanta after George about what happens in the

477
00:24:34,060 --> 00:24:37,209
Speaker 1: white marble of Capitol Hill. Henrietta trays joins Economic Policy

478
00:24:37,210 --> 00:24:42,850
Speaker 1: director with veda partners in serious capital Hill cred, how

479
00:24:42,850 --> 00:24:45,730
Speaker 1: does your world change now? What does the gridlock look

480
00:24:45,730 --> 00:24:48,080
Speaker 1: like in 2023?

481
00:24:48,650 --> 00:24:51,619
Speaker 2: Well, helpfully for the democrats, they are locked and loaded

482
00:24:51,619 --> 00:24:54,610
Speaker 2: in the Senate. They've got their 51 seats. They can

483
00:24:54,619 --> 00:24:58,100
Speaker 2: hold committee hearings, they can confirm whoever they need to.

484
00:24:58,109 --> 00:25:01,639
Speaker 2: Um it's going to smooth passage and honestly lift the

485
00:25:01,640 --> 00:25:04,840
Speaker 2: fog of the last couple of weeks that has sort

486
00:25:04,840 --> 00:25:07,280
Speaker 2: of settled over D. C. As everybody on the Democratic

487
00:25:07,280 --> 00:25:09,310
Speaker 2: side and the republican side wait for the outcome of

488
00:25:09,310 --> 00:25:10,379
Speaker 2: last night's election.

489
00:25:10,560 --> 00:25:13,340
Speaker 2: So that decisive win should clear us up on a

490
00:25:13,340 --> 00:25:17,840
Speaker 2: lot of really niche issues. Things like whether the Boeing

491
00:25:17,840 --> 00:25:20,830
Speaker 2: jets will be certified whether the Durbin amendment on Visa

492
00:25:20,830 --> 00:25:23,260
Speaker 2: and Mastercard will be approved. Whether we can't get a

493
00:25:23,260 --> 00:25:27,639
Speaker 2: pipeline permitting bill through the government funding package, there's hopefully

494
00:25:27,640 --> 00:25:28,419
Speaker 2: going to be a lot of movement.

495
00:25:28,430 --> 00:25:31,810
Speaker 1: So maybe the power changes for joe Manchin cinema of Arizona.

496
00:25:31,810 --> 00:25:32,460
Speaker 1: And that

497
00:25:32,680 --> 00:25:35,639
Speaker 1: on the republican side where McCarthy is not even sure

498
00:25:35,640 --> 00:25:38,960
Speaker 1: he's going to be speaker. Are there joe Manchin like

499
00:25:38,970 --> 00:25:43,490
Speaker 1: people or a cadre within the house republicans that can

500
00:25:43,490 --> 00:25:47,380
Speaker 1: block what McCarthy and the Republican leadership want to do.

501
00:25:48,170 --> 00:25:51,110
Speaker 2: Yes, absolutely. I mean there's a four vote margin and

502
00:25:51,109 --> 00:25:53,580
Speaker 2: I would say that in order to be functional for

503
00:25:53,580 --> 00:25:55,629
Speaker 2: the big tent, that is the Republican party. Over on

504
00:25:55,630 --> 00:25:58,490
Speaker 2: the House side, kevin McCarthy or whomever the next speaker

505
00:25:58,490 --> 00:26:02,540
Speaker 2: is really needed 20 or even 25 30 extra votes

506
00:26:02,550 --> 00:26:05,520
Speaker 2: in the sort of middle of the road camp. Now

507
00:26:05,520 --> 00:26:08,830
Speaker 2: you have a very fractured Republican conference in the House.

508
00:26:08,840 --> 00:26:11,240
Speaker 2: I think it'll be really difficult and fascinating to watch

509
00:26:11,240 --> 00:26:14,630
Speaker 2: the january 3rd election for speaker. And then again, as

510
00:26:14,630 --> 00:26:15,679
Speaker 2: we get into college

511
00:26:15,690 --> 00:26:18,790
Speaker 2: july or even september at the latest, the debt ceiling fight.

512
00:26:18,800 --> 00:26:21,230
Speaker 2: It could very well be that whoever the speaker is

513
00:26:21,240 --> 00:26:22,820
Speaker 2: in the beginning half of the year is not the

514
00:26:22,820 --> 00:26:25,020
Speaker 2: speaker in the back half of the year based on

515
00:26:25,020 --> 00:26:27,370
Speaker 2: what they've got coming. We started this conversation talking about

516
00:26:27,369 --> 00:26:31,600
Speaker 2: the iphone and the TSMC production outfit they're building over

517
00:26:31,600 --> 00:26:34,890
Speaker 2: in phoenix. We haven't talked about who's going to staff

518
00:26:34,900 --> 00:26:38,000
Speaker 2: up some of the production that were on shoring or

519
00:26:38,000 --> 00:26:41,070
Speaker 2: near shoring. How much are you seeing that continue to

520
00:26:41,070 --> 00:26:43,170
Speaker 2: percolate in discussions in Washington

521
00:26:43,359 --> 00:26:46,129
Speaker 2: with some real policy of how to bring more people

522
00:26:46,130 --> 00:26:48,920
Speaker 2: back to the labor force and train them for some

523
00:26:48,920 --> 00:26:52,960
Speaker 2: very highly specified roles. It's funny you mentioned that I

524
00:26:52,960 --> 00:26:55,050
Speaker 2: was just at a lunch with a guy that you

525
00:26:55,050 --> 00:26:56,800
Speaker 2: guys speak with all the time, tourists and slack and

526
00:26:56,800 --> 00:26:59,070
Speaker 2: Apollo and we were talking about exactly that. How are

527
00:26:59,070 --> 00:27:01,240
Speaker 2: we getting get immigration to tick up so we can

528
00:27:01,240 --> 00:27:03,399
Speaker 2: get everything from those high tech jobs down to the

529
00:27:03,400 --> 00:27:06,170
Speaker 2: farm workers in. Um, and there is a couple of

530
00:27:06,170 --> 00:27:08,650
Speaker 2: separate bills that are pending right now. I do not

531
00:27:08,650 --> 00:27:10,740
Speaker 2: have any kind of high odds that they'll be approved

532
00:27:10,740 --> 00:27:12,060
Speaker 2: before the end of this year. I think the

533
00:27:12,070 --> 00:27:14,590
Speaker 2: split in the House and Senate is just too severe

534
00:27:14,590 --> 00:27:17,669
Speaker 2: and to get anything on immigration done even helpful stuff.

535
00:27:17,680 --> 00:27:19,750
Speaker 2: So to that end, I sort of look to Mexico,

536
00:27:19,750 --> 00:27:22,240
Speaker 2: there's been a lot of talk from, for instance, the

537
00:27:22,240 --> 00:27:26,970
Speaker 2: Commerce Secretary about how you can get a really helpful

538
00:27:26,970 --> 00:27:29,970
Speaker 2: supply chain build out on, you know, testing these products

539
00:27:29,970 --> 00:27:32,290
Speaker 2: or packaging, these products from Mexico, which

540
00:27:32,310 --> 00:27:34,250
Speaker 2: to be near shoring or friend shoring. So I think

541
00:27:34,250 --> 00:27:36,460
Speaker 2: to look look for a lot of that, a lot

542
00:27:36,460 --> 00:27:38,020
Speaker 2: of optimism on that front, I don't know that there

543
00:27:38,020 --> 00:27:39,760
Speaker 2: will be an immigration deal that brings in a whole

544
00:27:39,760 --> 00:27:41,860
Speaker 2: host of workers that were obviously gonna need for those

545
00:27:41,859 --> 00:27:44,710
Speaker 2: new production facilities in Arizona and elsewhere. Well, and these

546
00:27:44,710 --> 00:27:46,050
Speaker 2: are the two issues that I've been looking at the

547
00:27:46,050 --> 00:27:48,270
Speaker 2: labor market. Everyone's saying it's so tight in the United

548
00:27:48,270 --> 00:27:50,879
Speaker 2: States and then we're building out these factories and wondering, okay,

549
00:27:50,880 --> 00:27:52,510
Speaker 2: well who's going to come in and work for them.

550
00:27:52,710 --> 00:27:54,850
Speaker 2: And the second point has been gasoline prices that have

551
00:27:54,850 --> 00:27:56,700
Speaker 2: been coming down dramatically. And this has been one of

552
00:27:56,700 --> 00:27:59,570
Speaker 2: the key mark hallmarks of president biden's past couple of

553
00:27:59,570 --> 00:28:01,970
Speaker 2: months in terms of the spr releases and we're seeing

554
00:28:01,970 --> 00:28:05,580
Speaker 2: now crude prices almost down to that threshold where they

555
00:28:05,580 --> 00:28:09,250
Speaker 2: said they would start buying and rebuilding their inventories. When

556
00:28:09,250 --> 00:28:10,940
Speaker 2: did they pull the trigger? How much are you hearing

557
00:28:10,940 --> 00:28:12,680
Speaker 2: conversations about that in D. C.

558
00:28:13,410 --> 00:28:15,810
Speaker 2: Um I think there's a lot of mixed bag on

559
00:28:15,810 --> 00:28:17,990
Speaker 2: the oil and gas front. Um one of the areas

560
00:28:17,990 --> 00:28:19,750
Speaker 2: that I've spent a bunch of time recently is the

561
00:28:19,750 --> 00:28:22,510
Speaker 2: idea of that windfall profits tax out in California that

562
00:28:22,510 --> 00:28:24,750
Speaker 2: we're monitoring very closely. I do think that there will

563
00:28:24,750 --> 00:28:27,960
Speaker 2: be efforts to replenish the spr, especially after after we've

564
00:28:27,960 --> 00:28:31,190
Speaker 2: depleted it for the last however many months now. Um,

565
00:28:31,190 --> 00:28:33,070
Speaker 2: so I do think that there is a lot of

566
00:28:33,080 --> 00:28:35,310
Speaker 2: encouragement for that and that would be done at the

567
00:28:35,310 --> 00:28:37,699
Speaker 2: administration level. So hopefully you don't need Congress to win

568
00:28:37,710 --> 00:28:40,830
Speaker 2: In on that. But certainly you see a more proactive

569
00:28:40,840 --> 00:28:44,510
Speaker 2: house and Senate members writing a lot more letters trying

570
00:28:44,510 --> 00:28:47,040
Speaker 2: to advise the president trying to advise the Fed on

571
00:28:47,040 --> 00:28:49,110
Speaker 2: what they should do from here on out. And it's

572
00:28:49,110 --> 00:28:51,620
Speaker 2: really gonna be up to the agencies up to the

573
00:28:51,620 --> 00:28:53,810
Speaker 2: executive branch because Congress is not going to get anything

574
00:28:53,810 --> 00:28:57,330
Speaker 2: done after call it December 23 to be generous

575
00:28:57,330 --> 00:29:01,900
Speaker 1: Henrietta are incumbents more entrenched as we move forward.

576
00:29:03,380 --> 00:29:08,239
Speaker 2: I think incumbents are definitely entrenched and what we have

577
00:29:08,240 --> 00:29:11,220
Speaker 2: here is a unique situation where so many of the

578
00:29:11,220 --> 00:29:15,000
Speaker 2: House republicans are relative freshmen. They all come in since

579
00:29:15,000 --> 00:29:18,160
Speaker 2: 2016 when president trump first one. Last time I checked,

580
00:29:18,160 --> 00:29:20,400
Speaker 2: I think it was like 75% of the House Republican

581
00:29:20,400 --> 00:29:24,440
Speaker 2: conference is all new since 2016. So technically they're incumbents,

582
00:29:24,440 --> 00:29:26,710
Speaker 2: but that's a pretty um Kuki said

583
00:29:26,720 --> 00:29:31,780
Speaker 2: of incumbency environments or experiences that they've had. So I

584
00:29:31,780 --> 00:29:34,490
Speaker 2: would expect for incumbents to sort of stick with what

585
00:29:34,490 --> 00:29:37,650
Speaker 2: they know caucus pretty hard, especially on the Democratic side

586
00:29:37,650 --> 00:29:40,960
Speaker 2: where kim jeffries is gonna try to, you know, figure

587
00:29:40,960 --> 00:29:43,820
Speaker 2: out how his caucus works. But the Republican conference is

588
00:29:43,820 --> 00:29:47,300
Speaker 2: so fractured. Incumbency means sort of a different thing on that.

589
00:29:47,310 --> 00:29:50,030
Speaker 2: On that level. You're gonna get uh that that freshman

590
00:29:50,290 --> 00:29:53,100
Speaker 2: That since 2016 class, that acts a lot differently than

591
00:29:53,100 --> 00:29:53,820
Speaker 2: the old guys

592
00:29:53,950 --> 00:29:58,890
Speaker 1: never born in Washington. She says best value in the

593
00:29:58,890 --> 00:30:02,840
Speaker 1: shortest time. You know, I think maybe value, but it's

594
00:30:02,840 --> 00:30:07,620
Speaker 1: just I learned so much there. This is the Bloomberg

595
00:30:07,620 --> 00:30:12,000
Speaker 1: surveillance podcast. Thanks for listening, join us live weekdays from

596
00:30:12,000 --> 00:30:13,380
Speaker 1: 7 to 10 a.m. East

597
00:30:13,710 --> 00:30:17,890
Speaker 1: on Bloomberg radio and on Bloomberg television each day from

598
00:30:17,890 --> 00:30:22,680
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599
00:30:22,680 --> 00:30:28,230
Speaker 1: investment and international relations and subscribe to the surveillance podcast

600
00:30:28,240 --> 00:30:32,140
Speaker 1: on apple podcast soundCloud Bloomberg dot com. And of course

601
00:30:32,150 --> 00:30:36,650
Speaker 1: on the terminal. I'm tom keen and this is Bloomberg