Speaker 1: Welcome to the Bloomberg surveillance podcast. I'm tom keen along
Speaker 1: with Jonathan Ferrell and lisa Abramowitz daily, we bring you
Speaker 1: insight from the best and economics, finance, investment and international
Speaker 1: relations find Bloomberg surveillance on apple podcast, SoundCloud Bloomberg dot com.
Speaker 1: And of course on the Bloomberg terminal,
Speaker 1: we come to you today with a lot of humility,
Speaker 1: john Farrell lease Abramowitz and I know that oil is
Speaker 1: the toughest commodity to call. There's all sorts of academic
Speaker 1: research that shows that yesterday we had an Edward morse
Speaker 1: of Citi group with a huge political economic standpoint on
Speaker 1: hydrocarbons and today as acute Francisco blanch joins us, head
Speaker 1: of global commodities and derivatives research at Bank of America Francisco,
Speaker 1: you were the,
Speaker 1: The first one out that I knew model $100 a barrel.
Speaker 1: You made global headlines with it, you were right up
Speaker 1: we went and then down we can came on, I'm
Speaker 1: going to say a dearth of demand Christopher Owen was
Speaker 1: just on the technical analyst and says the spot market
Speaker 1: for oil is behaving differently than the futures market for
Speaker 1: oil explain in Greek what that means.
Speaker 1: Well, uh, you want me to use uh Vegas and uh,
Speaker 1: and uh, deltas in, in, in the process to maybe
Speaker 1: not let me just say it in plain english. Uh,
Speaker 1: we have um, essentially very low speculative interest, essentially all the,
Speaker 1: all the macro players have been selling oil on the
Speaker 1: back of uh, on the back of recession fears some
Speaker 1: of the comments that you were just making before we
Speaker 1: went on the oil segment.
Speaker 1: Also, we've seen a dearth of liquidity liquidity is falling
Speaker 1: very quickly in the forward markets. And, and then I think,
Speaker 1: I think beyond that, the physical market has been actually
Speaker 1: relatively uh, more supported, although that's changing a bit too
Speaker 1: because it turns out that the Russian supply disruption we
Speaker 1: were expecting on the back of the EU sanctions hasn't
Speaker 1: really come through as expected. And, and, and maybe we
Speaker 1: won't be losing as much raw
Speaker 1: after all long ago and far away, lisa Abramowitz put
Speaker 1: two kids through school speculating on oil when it went
Speaker 1: down under zero. There was that huge shock of 18
Speaker 1: months ago, two years ago we kid her that she
Speaker 1: had two barrels of oil in her living room on delivery.
Speaker 1: Are we going to get the same spring here, did
Speaker 1: we have a possibility of seeing 70 west texas intermediate
Speaker 1: become 95 or 100 west texas intermediate and a cup
Speaker 1: of coffee?
Speaker 1: I'm afraid so. I think we have a very springy,
Speaker 1: I think you use the Great War, their spring oil market. Um,
Speaker 1: because inventories remain quite low, uh, spare capacity is tight.
Speaker 1: And if if you look at at the three key
Speaker 1: drivers of oil prices heading into 2023 there are clearly, uh,
Speaker 1: in my view, whatever happens to opec plus Russia, uh,
Speaker 1: whatever happens to china reopening and the third one being
Speaker 1: the Fed pivot. Um,
Speaker 1: And, and the way I think about each one of
Speaker 1: those is, uh, if you look at our 2023 numbers
Speaker 1: all the demand growth that we forecast for next year
Speaker 1: is coming from emerging markets with China being 50% of
Speaker 1: that and India being about 20%. So we need emerging
Speaker 1: markets to come back strong and it's still early. It's
Speaker 1: still unclear how China is gonna make a comeback. Um
Speaker 1: And and it may be a different comeback than the
Speaker 1: one that we saw in the U. S. And in
Speaker 1: europe particularly if if the reopening is one of fits
Speaker 1: and starts. Um partly because I think the chinese population
Speaker 1: has not really been much exposed to Covid. We talked
Speaker 1: about the post covid world in in in europe and
Speaker 1: the U. S. But really
Speaker 1: china hasn't had Covid broadly disseminated yet. To the extent
Speaker 1: that we've seen it in in most other countries in
Speaker 1: the world. And that's number one. Number two is really Russia.
Speaker 1: Opec how does that play out, how much oil do
Speaker 1: we lose from Russia? And how much oil does Opec
Speaker 1: plus actually take out of the market.
Speaker 1: And then the third one really being the opec the
Speaker 1: Fed tightening policy and which at the moment we have O. E. C. D.
Speaker 1: Economies essentially growing zero next year. But of course if
Speaker 1: the Fed uh if us Fed fund rates go to 6% 7%
Speaker 1: that could become negative pretty quickly here. And that's another
Speaker 1: big uncertainty and probably
Speaker 1: oil prices have been falling in recent days. So how
Speaker 1: much
Speaker 2: do you think that they could rise? I know that
Speaker 2: you have a target of perhaps $100 for W. T. I.
Speaker 2: And $94 for Brent. How do we get there given
Speaker 2: all of what you talk about given that we already
Speaker 2: are seeing some fits and starts with respect to a
Speaker 2: china reopening and it hasn't really caused the price to
Speaker 2: go up that much.
Speaker 1: Um Well so so um again I think I think
Speaker 1: the micro pictures is pretty gloomy here. Um And and
Speaker 1: that's part of the recent prices have come down but
Speaker 1: but I think it's a bit of a different environment
Speaker 1: to to prior Pullbacks in oil prices first. We think
Speaker 1: there's there's a put uh that will be triggered. I
Speaker 1: mean Opec
Speaker 1: just had their meeting on sunday decided to roll over
Speaker 1: the cuts. Um But remember the cuts, announced cuts were
Speaker 1: two million barrels a day. Nobody expected Opec to implement
Speaker 1: the two million barrels a cut. They could actually go
Speaker 1: and do that. They will actually implement a deeper cut.
Speaker 1: Um And also we're going to see W. T. I.
Speaker 1: Uh
Speaker 1: price is entering the range at which the U. S.
Speaker 1: Government will start filling or refilling rather in the strategic
Speaker 1: Petroleum Reserve. Remember the number that was put out by
Speaker 1: the White House was $72 a barrel on W. T. I.
Speaker 1: So we're getting close to the point where we might
Speaker 1: see those triggers providing support to prices here. So it's
Speaker 1: a bit of a different to the environment, to the
Speaker 1: to the 2020 world where where prices just created.
Speaker 1: Can
Speaker 2: you elaborate on that? Because this has been one of
Speaker 2: the big question marks if the U. S. Has said
Speaker 2: $72 a barrel was the time they start buying and
Speaker 2: one of the big drivers of the decline in oil
Speaker 2: prices has been the release of the Strategic Petroleum Reserve.
Speaker 2: How much is that going to cause prices to rise?
Speaker 2: Are we almost there yet? Where this administration ought to
Speaker 2: start buying based on what they've said and that will
Speaker 2: actually drive prices much higher perhaps in the short
Speaker 1: term?
Speaker 1: Well um again I'm just going by what the White
Speaker 1: House communique was a couple months ago. They are um
Speaker 1: they're saying they're gonna be buying oil as as soon
Speaker 1: as we get below the 72 hour threshold and the
Speaker 1: balance could change pretty dramatically here. We could see an
Speaker 1: extra half a million barrels a day of demand from
Speaker 1: uh from the U. S. Strategic Petroleum Reserve. Remember that
Speaker 1: you need to probably put in 100 and 5200 million
Speaker 1: back
Speaker 1: back in store. That's again that that takes a whole
Speaker 1: year of buying half a million barrels a day. Right?
Speaker 1: I mean a simple math there. Right. So um so
Speaker 1: you could see a pretty meaningful swinging imbalances in that regard.
Speaker 1: You can also see heading into 2023 china, reopening picking
Speaker 1: up momentum. Um even even if the 1st 234 months
Speaker 1: could be a little patchy
Speaker 1: And and then of course I think the sanctions on
Speaker 1: on Russian petroleum products which kick in on February five
Speaker 1: are certainly a much bigger deal than the sanctions on
Speaker 1: Russian crude, which have turned out to be a lot
Speaker 1: to do about nothing really.
Speaker 2: What do you make, you mentioned the Jinping meeting in
Speaker 2: Saudi Arabia? Well, how does that affect the dynamic of
Speaker 2: the oil picture? Just given the sense that there seems
Speaker 2: to be an ongoing and public display of increased closeness
Speaker 1: there?
Speaker 1: Well, I I think that's only a natural development of
Speaker 1: uh the bilateral trade relationship between Saudi Arabia and china,
Speaker 1: which has changed dramatically since the advent of us shale.
Speaker 1: Remember the U. S. Is now a net exporter of energy.
Speaker 1: We've argued the U. S. Is going to be energy
Speaker 1: independent for the last 10 years. But now we're arguing
Speaker 1: the U. S. Is going to be energy dominant. So
Speaker 1: in some ways the U. S. Is a competitor to
Speaker 1: Saudi Arabia and the energy space. Um, and I think
Speaker 1: I think in that rig
Speaker 1: The trade with between Rigid and Beijing has really picked
Speaker 1: up pretty dramatically. So so that that I think it's
Speaker 1: just a natural change of commercial relationships Maria from Brussels
Speaker 1: emails in and Francisco make the kick from 12 yards out.
Speaker 1: He's in Madrid. He probably had a tough day yesterday.
Speaker 1: That was just brutal yesterday. Some of the worst penalty
Speaker 1: Francisco's in Madrid and I'm sure the city must be
Speaker 1: blooming Francisco. Do you want to weigh in on that?
Speaker 1: Yeah, it's not, it wasn't happy, I wasn't happy day yesterday,
Speaker 1: I have to say. Um, you know, the team just
Speaker 1: kept passing the ball without really the spanish team without
Speaker 1: really scoring. So it was all disappointing. Um, and yeah,
Speaker 1: it moves a little gloomy here. You can see the background.
Speaker 1: The sun hasn't come out yet
Speaker 1: a couple more days. Does Moynahan know you're in Madrid.
Speaker 1: I mean he's talking about expense control, Francisco. How did
Speaker 1: this happen? You causing trouble? I'm causing trouble. This is great.
Speaker 1: It's like pharaoh and Qatar just run Francis, you
Speaker 2: don't have to try.
Speaker 1: I think, look, I mean we have an office. Here
Speaker 1: we have. There we go. We have an office. It
Speaker 1: was an empty office when I got here. The one
Speaker 1: I got So I don't think it's, I'm actually beefing
Speaker 1: up expenses here. Right, right there was going, thank you Francisco. Wonderful,
Speaker 1: thank you very much Francisco blanch their bank for America.
Speaker 1: It is a jumbo, some would say almost in kuwait
Speaker 1: here what we're talking about here. All the backs and forth.
Speaker 1: Someone that needs to distill, this is with Northwestern mutual
Speaker 1: wealth management Brent shooter joins us now. The chief investment
Speaker 1: officer Brent, did you take your outlook for 2023 from
Speaker 1: 55 pages down to 12 I mean are you, are
Speaker 1: you going short and sweet here or your right in
Speaker 1: war in peace here on what we're gonna see next year?
Speaker 1: Right? I think we're more in the short and sweet
Speaker 1: type and trying to be understandable and makes sense And
Speaker 1: and to me, I think you know, we're switching from
Speaker 1: right now inflation fears to recession fears. I hear the
Speaker 1: word recession quite a bit and this is what we
Speaker 1: thought would happen. So if you think about it, inflation
Speaker 1: fears drove us lower till october 12th, That was the
Speaker 1: day before core CPI I topped
Speaker 1: and so I think what you're seeing now is the
Speaker 1: commentary that the Fed has done too much. You're seeing
Speaker 1: it in the bond market. The bond market is telling
Speaker 1: you that inflation is a thing of the past and
Speaker 1: that the Fed has done too much and that's what
Speaker 1: I think likely drives trading for the next few months
Speaker 1: where you see the recession fears come out once we
Speaker 1: see that inflation does not survive a recession and that
Speaker 1: the Fed will pause when they actually see jobs being lost,
Speaker 1: that you can move higher in in a more sustained pace.
Speaker 1: We agree that inflation coming down is what's called a
Speaker 1: highly stochastic. It's pointy folks, it goes up up doom
Speaker 1: and gloom and then it comes down rapidly as it
Speaker 1: did twice after 1947 and other times as well. How
Speaker 1: does the allocation or outlook of your investment recommendations change
Speaker 1: if inflation only comes down to 4% and not to
Speaker 1: the proverbial 2%.
Speaker 1: Yeah. I mean I think that's what most people are
Speaker 1: saying right now, largely because the new york fed U. I. G.
Speaker 1: Underlying inflation gauge shows 4% inflation as being kind of
Speaker 1: a more persistent part of it. And so you know,
Speaker 1: I I just don't think that we stay at 4%.
Speaker 1: I think it does pull back. I don't think we're
Speaker 1: going below two. I don't think we're going back to
Speaker 1: the last decade that we had, where we persistently worried
Speaker 1: about deflation. Um That to me was not, you know,
Speaker 1: inflation wasn't a relic of the past, that was how
Speaker 1: we were positioned then, but we are certainly positioned more
Speaker 1: for it coming down in the next few quarters. For example,
Speaker 1: we we actually upped our allocate
Speaker 1: or increase our duration towards fixed income in the middle
Speaker 1: of october because the barclays aggregate was yielding 5% versus
Speaker 1: 1 75 at the start of the year bonds now
Speaker 1: provide real value. They provide a hedge against downturns and
Speaker 1: equities caused by recession and that's where we've kind of
Speaker 1: focused on the bond side, on the equity side? We're
Speaker 1: still in things that are cheaper. That has been what
Speaker 1: has worked this year. That has been what I think
Speaker 1: will continue to work next year. And so we own
Speaker 1: the S. And P. 600 it trades at 13 times
Speaker 1: next year's earnings that have already been marked down
Speaker 1: by 14 15% mark them down 10 more percent or
Speaker 1: 10 more. We still are at 15 times and so on.
Speaker 1: Things like that. And I dare say international developed is
Speaker 1: becoming more attractive because I think the dollar will fall
Speaker 1: next year. So do I hear 60 40 going into
Speaker 1: 2023 60 40 was never dead. It's not that it
Speaker 1: needed commodities that we had those. Uh and now I
Speaker 1: think it's actually going to be a much better place
Speaker 1: going forward. I mean equities have done the heavy lifting
Speaker 1: lifting for the last 10 years. Now bonds offer
Speaker 1: some value. And so certainly they will be a way
Speaker 1: that holds up to 60 40 as we push forward
Speaker 1: into 2023. So that's a big change, isn't it, coming
Speaker 1: into 22 Remember that 60 40 is dead, It's over
Speaker 1: and 60 40 let's be clear this year, brutal.
Speaker 2: It was devastated, brutal. And how much do people buy
Speaker 2: that 6040 is back, especially after the brutality that we
Speaker 2: just saw.
Speaker 1: Well that's the question, how perceptive or other people about
Speaker 1: the thing that you see, how receptive are they towards
Speaker 1: what you're saying? I
Speaker 1: I always like to hope to be a little bit
Speaker 1: contrarian in nature because I found that usually the right
Speaker 1: place to be. And so you know, I do think
Speaker 1: people are worried just because the 60 40 hasn't worked
Speaker 1: and that narrative has been that it's dead. I think
Speaker 1: most people think of the 60 40 unfortunately just large
Speaker 1: cap growth and investment grade bonds. I think you need
Speaker 1: to have things like commodities and there's something that we've
Speaker 1: owned because we didn't think inflation was dead, um something
Speaker 1: like small cap, something like international stocks, which is no
Speaker 1: one wants to own those just because they haven't done well.
Speaker 1: But if I look back at economic cycles post 1980
Speaker 1: every single economic cycle had different leadership.
Speaker 1: The S and P and F. Alternated. I'm not suggesting
Speaker 1: that it has to be. But I think as you
Speaker 1: push forward, you're in a different type of environment where
Speaker 1: inflation will be above 2% where there will be different
Speaker 1: worries where there'll be shortages on different sides of the economy.
Speaker 1: And I think that's going to drive us forward. And
Speaker 1: I think 60 42 look historically going back to 1926
Speaker 1: we've only had four years where the bond market was
Speaker 1: negative when the stock market was
Speaker 2: negative, we're
Speaker 1: all addicted
Speaker 1: by high inflation, which I don't think we're gonna have
Speaker 1: next year,
Speaker 2: Right? You mentioned commodities and let's end there because we've
Speaker 2: been talking about the divergence between energy stocks and other
Speaker 2: commodity equities that are doing very well and then you're
Speaker 2: looking at a crude price. That's the lowest, going back
Speaker 2: to December of 2021. What gives there, can you have
Speaker 2: conviction to continue buying energy equities in the face of
Speaker 2: prices that are dropping in the crude space,
Speaker 1: There will still be companies that make money within the
Speaker 1: crewed space. I think you just need to focus on
Speaker 1: picking the right ones. Certainly the easier money has been
Speaker 1: made in energy. Um that's been the sector that has
Speaker 1: done well over the past few years because no one
Speaker 1: wanted to own it now. You have more people wanting
Speaker 1: to own it.
Speaker 1: And so I don't think that it's all negative, but
Speaker 1: I certainly think the easy money has been made as
Speaker 1: you look forward and certainly the price of oil is
Speaker 1: still something that is going to be highly variable based
Speaker 1: upon what is happening the economy. I think right now
Speaker 1: it reflects the reality that we are moving more towards
Speaker 1: a recession. Um Certainly I think the good news is
Speaker 1: we've had rolling recessions over the past year, just like
Speaker 1: we had a rolling recovery and I think that helps
Speaker 1: take the starch out of any recession as we push forward,
Speaker 1: as does the state of the U. S. Consumer, which
Speaker 1: is still in good shape
Speaker 1: money after the fact, isn't it? Tom they never tell
Speaker 1: me ahead of time. It's going to be easy money
Speaker 1: looking ahead a year ahead. I think the best you
Speaker 1: can do, john it's a really important insight and the
Speaker 1: best you can do is try to gauge consensus and
Speaker 1: it's not going against consensus when consensus is sort of
Speaker 1: kind of like it's when there's a massive consensus bet
Speaker 1: and the question is, are we there now of Northwestern
Speaker 1: mutual wealth management at the end? It's great to catch up.
Speaker 1: Lorena or itchy joins us now us economist at T.
Speaker 1: Rowe Price. We're gonna thank you. Thank you so much
Speaker 1: for being with us. My head is spinning over what
Speaker 1: the actual view of the american economy is not the
Speaker 1: guesstimate out six months. Where are we right now? What's
Speaker 1: your working figure for some form of inflation adjusted GDP
Speaker 1: Q four?
Speaker 2: That's a great question. Everybody's confused because we're getting such
Speaker 2: mixed messages from the data. Is the labor market accelerating
Speaker 2: even though the Fed has been hiking at such a
Speaker 2: fast pace. What's going on with growth and consumer spending?
Speaker 2: I would say in Q. Four of this year, the U. S.
Speaker 2: Economy is shaping up to expand at a healthy pace
Speaker 2: probably 2 to 3% after being a
Speaker 2: adjusted from inflation. And once again, what's pulling through the U. S.
Speaker 2: Economy is the consumer consumer spending data, both on services
Speaker 2: and goods for the beginning of Q four were pretty
Speaker 2: solid for services as well as good. So yeah, we're
Speaker 2: in a good spot right now but I think more
Speaker 2: deceleration is to come next year. Unfortunately
Speaker 1: the outlooks of the sell side are
Speaker 1: this year. I've truly never seen the chaos a cacophony
Speaker 1: is out there. What are you advising portfolio managers at
Speaker 1: T Rowe price you guys invented on the buy side
Speaker 1: of fractious debate. This is folks, I'm gonna say 40
Speaker 1: if not 50 years ago. Are they listening to you?
Speaker 1: And if they are, what's the line for them of
Speaker 1: how to be invested given this chaos?
Speaker 2: So how do we navigate these crosscurrents that we're facing
Speaker 2: in 2023? I would say that the main thing is
Speaker 2: we expect interest rates to continue increasing. That means there's
Speaker 2: gonna be yield in those fixed and fixed-income portfolios that
Speaker 2: we manage. However, as we look at the question of
Speaker 2: whether do we add risk or do we not at
Speaker 2: risk next year? The outlook for employment growth and consumption
Speaker 2: growth slowing into
Speaker 2: 2023 means that we're tentatively more conservative when we're positioning
Speaker 2: ourselves with respect to risk. We were talking with Jim
Speaker 2: Bianco of Bianco research a bit ago and he was
Speaker 2: saying there still is this feeling of transitory baked into
Speaker 2: people's expectations. It's just been pushed out that basically there
Speaker 2: will be an immaculate disinflationary force that will come into
Speaker 2: play at the end of next year and allow the
Speaker 2: downturn to not be as severe as some people feared.
Speaker 2: Do you adhere to that kind of idea.
Speaker 2: Well, I think lots of questions for the second half
Speaker 2: of next year. First of all I do think the
Speaker 2: Fed will get some help from the transitory question when
Speaker 2: it comes to inflation and we're gonna start seeing that
Speaker 2: concretely in core goods inflation in the first half of
Speaker 2: next year. So I think that will be a factor
Speaker 2: helping the outlook for next year. However, when it comes
Speaker 2: to the question of a recession, I do notice as
Speaker 2: well that lots of commentators are saying just because we
Speaker 2: don't
Speaker 2: the imbalances right now that this is if we do
Speaker 2: have a recession is going to be a shallow one,
Speaker 2: I don't think I necessarily agree with that. I think
Speaker 2: once recessionary processes take place and and start to get
Speaker 2: into motion things breaking the economy that we don't necessarily
Speaker 2: anticipate this is what happens in every recession. The other
Speaker 2: factor that I think ways against the U. S. Economy
Speaker 2: next year is that monetary policy has
Speaker 2: been tightening at a very very fast pace compared to
Speaker 2: the last 2030 years. And the other one is that
Speaker 2: is facing a very adverse global environment of growth in
Speaker 2: china slowing growth in europe slowing contraction expected actually in
Speaker 2: europe for the first half of this year. So the
Speaker 2: external environment is not that favorable. And then domestically we
Speaker 2: have very tight monetary policy as well given the headwinds,
Speaker 2: why do you think the Fed is still going to
Speaker 2: get to 5%.
Speaker 2: Well I think the headwinds are more based for the
Speaker 2: second half of the year. And I think the Fed
Speaker 2: is so focused on realized inflation and the trend of
Speaker 2: three month moving annualized average of core inflation that I
Speaker 2: think it will need to continue hiking and delivering on
Speaker 2: those hikes that have been already priced in the market,
Speaker 1: bolena. Sebastian page emails in. I'm kidding. But for Sebastian
Speaker 1: page who's expert diversification is wonderful book out on allocation
Speaker 1: in realities folks. A colleague of Lorena's at T Rowe price, Lorena,
Speaker 1: one of the great things lisa and I see is
Speaker 1: O E C D views grim. I. M F views
Speaker 1: grim is now this is a loaded question is now
Speaker 1: the time to buy international Andy em equities. That's simple.
Speaker 2: So this is the most anticipated recession in history. Is
Speaker 2: that what you're saying? So has all the bad news
Speaker 2: been priced in and is it time to dip into
Speaker 2: those more risky assets? I think we're still on the
Speaker 2: fence about them because of the question that we just
Speaker 2: discussed that once we get into a recession, things can
Speaker 2: break unexpectedly. So I think we're still being a little
Speaker 2: bit more cautious in our portfolio.
Speaker 2: Will be able to tell you more. I
Speaker 1: think this is a very fair answer. You know, we
Speaker 1: make jokes about people on the fence but I think
Speaker 1: there's a huge body of people right now on the
Speaker 1: fence about go long am go along international burnt once
Speaker 1: burned twice, three times four times on and on and on.
Speaker 1: There's a lot of people on the fence
Speaker 2: especially we hear about the debt GDP that Damien Sasser
Speaker 2: record highs, which is going to be a pervasive concern
Speaker 2: for a longer period of time.
Speaker 2: Lorena, when you look at what's going to happen next year,
Speaker 2: how much confidence do you have that the that the
Speaker 2: inflation is going to come down enough to support this
Speaker 2: expectation that we see over at HSBC for example that
Speaker 2: the 10 year is going to get down to 2.5%
Speaker 2: because of that long term reversion back to what we
Speaker 2: used to know.
Speaker 2: I think there are some tailwinds for inflation next year.
Speaker 2: So Chair Powell very helpfully split this into three pillars
Speaker 2: in his speech at brookings last week. I think the
Speaker 2: first pillar of Kohler goods is coming down significantly next year.
Speaker 2: We still have the effect of the dollar appreciation, feeding
Speaker 2: into core goods with a lag. I think we have
Speaker 2: those rising inventory levels and slowing consumer demand for consumer
Speaker 2: spending on goods and the improvement in supply chains as
Speaker 2: well as transportation.
Speaker 2: I also look at private sector rental prices. They do
Speaker 2: feed into the rent components of C. P. I with
Speaker 2: a lag and I think they're telling me that around
Speaker 2: the second quarter of next year we look at significant
Speaker 2: progress there as well. But I think on average, even
Speaker 2: if inflation remains sticky in the other services components, on
Speaker 2: average is going to be trending down in a sustained basis.
Speaker 2: But we shouldn't extrapolate this into the
Speaker 2: the Fed is going to cultivate significantly immediately as we
Speaker 2: hit a rough patch in the U. S. Economy just
Speaker 2: real quick before we let you go, where have all
Speaker 2: the missing workers gone? This is something that jay Powell
Speaker 2: has been talking
Speaker 1: about.
Speaker 2: We this is a great question and we did a
Speaker 2: deep dive across our fixed income division here to look
Speaker 2: into some of the factors that are keeping labor supply
Speaker 2: so depressed the ones that really stood out to us
Speaker 2: is the interaction. First of
Speaker 2: of demographics and Covid, we knew that we had a
Speaker 2: demographic had went to uh, labor supply. And then Covid
Speaker 2: made people retire even sooner than they would have otherwise.
Speaker 2: We also have a big big hole in our labor
Speaker 2: supply from the lack of migrant workers, uh immigration Visa
Speaker 2: processing collapsed in 2020 and 2021. We estimate about 1.5
Speaker 2: to 2 million workers are missing
Speaker 2: from this. And then we have other, more structural long
Speaker 2: term factors that are keeping depressed prime age workers, especially
Speaker 2: male workers. So, lots of demographic, lots of structural factors.
Speaker 2: Keeping labor supply low. Can monetary policy do anything about this?
Speaker 2: We don't think so. So they just have to bring
Speaker 2: down demand for labor.
Speaker 1: Very good. Thank you so much Ballerina with this with
Speaker 1: T Rowe price.
Speaker 1: Let's go to Washington now and figure out what happens
Speaker 1: not in Atlanta after George about what happens in the
Speaker 1: white marble of Capitol Hill. Henrietta trays joins Economic Policy
Speaker 1: director with veda partners in serious capital Hill cred, how
Speaker 1: does your world change now? What does the gridlock look
Speaker 1: like in 2023?
Speaker 2: Well, helpfully for the democrats, they are locked and loaded
Speaker 2: in the Senate. They've got their 51 seats. They can
Speaker 2: hold committee hearings, they can confirm whoever they need to.
Speaker 2: Um it's going to smooth passage and honestly lift the
Speaker 2: fog of the last couple of weeks that has sort
Speaker 2: of settled over D. C. As everybody on the Democratic
Speaker 2: side and the republican side wait for the outcome of
Speaker 2: last night's election.
Speaker 2: So that decisive win should clear us up on a
Speaker 2: lot of really niche issues. Things like whether the Boeing
Speaker 2: jets will be certified whether the Durbin amendment on Visa
Speaker 2: and Mastercard will be approved. Whether we can't get a
Speaker 2: pipeline permitting bill through the government funding package, there's hopefully
Speaker 2: going to be a lot of movement.
Speaker 1: So maybe the power changes for joe Manchin cinema of Arizona.
Speaker 1: And that
Speaker 1: on the republican side where McCarthy is not even sure
Speaker 1: he's going to be speaker. Are there joe Manchin like
Speaker 1: people or a cadre within the house republicans that can
Speaker 1: block what McCarthy and the Republican leadership want to do.
Speaker 2: Yes, absolutely. I mean there's a four vote margin and
Speaker 2: I would say that in order to be functional for
Speaker 2: the big tent, that is the Republican party. Over on
Speaker 2: the House side, kevin McCarthy or whomever the next speaker
Speaker 2: is really needed 20 or even 25 30 extra votes
Speaker 2: in the sort of middle of the road camp. Now
Speaker 2: you have a very fractured Republican conference in the House.
Speaker 2: I think it'll be really difficult and fascinating to watch
Speaker 2: the january 3rd election for speaker. And then again, as
Speaker 2: we get into college
Speaker 2: july or even september at the latest, the debt ceiling fight.
Speaker 2: It could very well be that whoever the speaker is
Speaker 2: in the beginning half of the year is not the
Speaker 2: speaker in the back half of the year based on
Speaker 2: what they've got coming. We started this conversation talking about
Speaker 2: the iphone and the TSMC production outfit they're building over
Speaker 2: in phoenix. We haven't talked about who's going to staff
Speaker 2: up some of the production that were on shoring or
Speaker 2: near shoring. How much are you seeing that continue to
Speaker 2: percolate in discussions in Washington
Speaker 2: with some real policy of how to bring more people
Speaker 2: back to the labor force and train them for some
Speaker 2: very highly specified roles. It's funny you mentioned that I
Speaker 2: was just at a lunch with a guy that you
Speaker 2: guys speak with all the time, tourists and slack and
Speaker 2: Apollo and we were talking about exactly that. How are
Speaker 2: we getting get immigration to tick up so we can
Speaker 2: get everything from those high tech jobs down to the
Speaker 2: farm workers in. Um, and there is a couple of
Speaker 2: separate bills that are pending right now. I do not
Speaker 2: have any kind of high odds that they'll be approved
Speaker 2: before the end of this year. I think the
Speaker 2: split in the House and Senate is just too severe
Speaker 2: and to get anything on immigration done even helpful stuff.
Speaker 2: So to that end, I sort of look to Mexico,
Speaker 2: there's been a lot of talk from, for instance, the
Speaker 2: Commerce Secretary about how you can get a really helpful
Speaker 2: supply chain build out on, you know, testing these products
Speaker 2: or packaging, these products from Mexico, which
Speaker 2: to be near shoring or friend shoring. So I think
Speaker 2: to look look for a lot of that, a lot
Speaker 2: of optimism on that front, I don't know that there
Speaker 2: will be an immigration deal that brings in a whole
Speaker 2: host of workers that were obviously gonna need for those
Speaker 2: new production facilities in Arizona and elsewhere. Well, and these
Speaker 2: are the two issues that I've been looking at the
Speaker 2: labor market. Everyone's saying it's so tight in the United
Speaker 2: States and then we're building out these factories and wondering, okay,
Speaker 2: well who's going to come in and work for them.
Speaker 2: And the second point has been gasoline prices that have
Speaker 2: been coming down dramatically. And this has been one of
Speaker 2: the key mark hallmarks of president biden's past couple of
Speaker 2: months in terms of the spr releases and we're seeing
Speaker 2: now crude prices almost down to that threshold where they
Speaker 2: said they would start buying and rebuilding their inventories. When
Speaker 2: did they pull the trigger? How much are you hearing
Speaker 2: conversations about that in D. C.
Speaker 2: Um I think there's a lot of mixed bag on
Speaker 2: the oil and gas front. Um one of the areas
Speaker 2: that I've spent a bunch of time recently is the
Speaker 2: idea of that windfall profits tax out in California that
Speaker 2: we're monitoring very closely. I do think that there will
Speaker 2: be efforts to replenish the spr, especially after after we've
Speaker 2: depleted it for the last however many months now. Um,
Speaker 2: so I do think that there is a lot of
Speaker 2: encouragement for that and that would be done at the
Speaker 2: administration level. So hopefully you don't need Congress to win
Speaker 2: In on that. But certainly you see a more proactive
Speaker 2: house and Senate members writing a lot more letters trying
Speaker 2: to advise the president trying to advise the Fed on
Speaker 2: what they should do from here on out. And it's
Speaker 2: really gonna be up to the agencies up to the
Speaker 2: executive branch because Congress is not going to get anything
Speaker 2: done after call it December 23 to be generous
Speaker 1: Henrietta are incumbents more entrenched as we move forward.
Speaker 2: I think incumbents are definitely entrenched and what we have
Speaker 2: here is a unique situation where so many of the
Speaker 2: House republicans are relative freshmen. They all come in since
Speaker 2: 2016 when president trump first one. Last time I checked,
Speaker 2: I think it was like 75% of the House Republican
Speaker 2: conference is all new since 2016. So technically they're incumbents,
Speaker 2: but that's a pretty um Kuki said
Speaker 2: of incumbency environments or experiences that they've had. So I
Speaker 2: would expect for incumbents to sort of stick with what
Speaker 2: they know caucus pretty hard, especially on the Democratic side
Speaker 2: where kim jeffries is gonna try to, you know, figure
Speaker 2: out how his caucus works. But the Republican conference is
Speaker 2: so fractured. Incumbency means sort of a different thing on that.
Speaker 2: On that level. You're gonna get uh that that freshman
Speaker 2: That since 2016 class, that acts a lot differently than
Speaker 2: the old guys
Speaker 1: never born in Washington. She says best value in the
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