Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal and the Bloomberg Business App. By Michael
Speaker 1: joins us right now. He is with JP Morgan Asset Management,
Speaker 1: Global Head of well Equities, bonds, Currencies, Commodities. I don't
Speaker 1: know everything else.
Speaker 2: Let's stick with bonds.
Speaker 3: Let's stay with.
Speaker 1: Bonds for right now. Do you buy across the curve
Speaker 1: right now? Because simplistically it is going to be price up,
Speaker 1: yield down.
Speaker 2: So the product launch of the year isn't chat GPT,
Speaker 2: it's the bond market. It's the repricing of bond just
Speaker 2: across the system. And we are seeing money come in.
Speaker 2: And even though there's a soft landing cap, there's concerns
Speaker 2: about inflation, there's concerns that the Fed could keep rising
Speaker 2: rates indefinitely. Actually, the highs from October almost a year ago,
Speaker 2: have held pretty well in the long end of the
Speaker 2: curve five tens and thirties. So it's not just me
Speaker 2: saying take advantage of the repricing of the bond market.
Speaker 2: We have clients left, right and centered, domestically, foreign countries,
Speaker 2: retail platforms, institutional platforms looking at where to get into
Speaker 2: this bond market, and they are putting money to work.
Speaker 4: Are they chasing income, they chase in total return, worried
Speaker 4: about a slow down, taken on duration. How does the
Speaker 4: nature of that money shift in the last few months, Yes,
Speaker 4: exactly already above.
Speaker 2: They're doing all of those things, and it depends where
Speaker 2: they're coming from. Wealth management platforms are looking at municipal bonds,
Speaker 2: they're looking at corporate debt, they're looking at treasury debt,
Speaker 2: and they're putting ladders of maturities in place. So they're
Speaker 2: buying bonds out to ten years with maturities every six
Speaker 2: to nine months, something like that. So they just want
Speaker 2: to get into the bond market before these yields disappear. Institutions,
Speaker 2: whether they're insurance companies or their pension funds, they're looking
Speaker 2: at their liabilities having deflated, and they're looking to put
Speaker 2: money into the long end of the market, and you
Speaker 2: have a whole host of others that are looking for
Speaker 2: total returns, so you can do pretty much everything in
Speaker 2: the bond market. We haven't seen this since two thousand
Speaker 2: and six, two thousand and seven.
Speaker 4: There's only one sentence I heard in all of that
Speaker 4: before these yields disappear. These yields aren't disappearing. They've been
Speaker 4: quite stubbornly high through some and that's been unexpected for you.
Speaker 4: I know, Bob, relative to your call, what do you
Speaker 4: think is behind that?
Speaker 2: Well? I think there are a couple of things. This
Speaker 2: reminds me a lot of the second half of twenty
Speaker 2: twenty one, when yields were ridiculously low. The Fed was
Speaker 2: talking about transitory, the market bought it. We're looking at
Speaker 2: inflation going up and saying if they leave rates where
Speaker 2: they are, inflation's going to continue to accelerate. Now we're
Speaker 2: looking at rates very high, we're looking at very high
Speaker 2: real yields, We're looking at inflation coming down a lot,
Speaker 2: and the Fed is talking about leaving rates where they
Speaker 2: are indefinitely higher for longer. I want to see the
Speaker 2: summary of economic projections. Tom is it tomorrow? Next Wednesday,
Speaker 2: next Wednesday. Yeah, and the infamous dot plot. They've got
Speaker 2: one hundred basis points of rate cuts priced in for
Speaker 2: next year from the last dot plot, and they've also
Speaker 2: got inflation coming down, So they're acknowledging that if they
Speaker 2: key rates where they are and inflation comes down, then
Speaker 2: policy rates become progressively tighter and the economy may not
Speaker 2: be able to withstand that. I think what's keeping rates
Speaker 2: where they are is the market is believing the FED
Speaker 2: rhetoric and not believing that they may have to cut rate.
Speaker 4: Your previous call of the start of summer was cut
Speaker 4: by September. Clearly they won't be cutting a week tomorrow.
Speaker 4: I want to understand from your perspective, what's going to
Speaker 4: deliver those cuts. And when you're thinking about yields we
Speaker 4: haven't seen since six oh seven. Some people might be
Speaker 4: listening this morning thinking, well, bad things happened after that,
Speaker 4: the bad things happen now. And of course I'm not
Speaker 4: saying on the same scale to the same magnitude of
Speaker 4: what we saw in our way, but are you anticipating
Speaker 4: bad things?
Speaker 2: So at the start of this year we thought something
Speaker 2: like recession by the end of the year. Then we
Speaker 2: had the regional banking crisis, and we thought, well, that's
Speaker 2: going to bring recession forward a few months, so they
Speaker 2: should be cutting by September. And I think what we
Speaker 2: looked at and probably got wrong was the backstop that
Speaker 2: the central banks the FED put in place, the Bank
Speaker 2: Term Funding Program. And we likened it more to bear
Speaker 2: Stearn's ballot. It probably was more like TARP. It just
Speaker 2: created more liquidity, backstopped the entire banking system. These things
Speaker 2: are still hiding in plain sight. The regional banking crisis
Speaker 2: hasn't gone away. I wish you had asked Bill Dudley
Speaker 2: when he was patting himself on the back and the
Speaker 2: FED about no, no, this is all in the rear
Speaker 2: view mirror. Really look at the Bank Term Funding program.
Speaker 2: It's quietly increased in size nine consecutive the last nine
Speaker 2: consecutive weeks. It's at one hundred and eight billion. So
Speaker 2: the regional banks are not working down. They're borrowing and
Speaker 2: that's coming in at five and a half percent. That's
Speaker 2: telling us that they still need cash available to meet
Speaker 2: depositor outflows. So I think there are plenty of things
Speaker 2: out there that are slowing down growth and inflationary pressures
Speaker 2: are coming down for the FED to pause. We've said
Speaker 2: for a long time, you need disinflation and inflation to
Speaker 2: come down to levels they're comfortable with. I think tomorrow
Speaker 2: we're going to get the third consecutive core CPI print
Speaker 2: at point two. That's enough for them to pause. With
Speaker 2: a lot of the other disinflation that we're seeing. I
Speaker 2: think this time for them to cut rates, they're going
Speaker 2: to have to see unemployment go up. So it's possible
Speaker 2: that they may actually tip the economy into recession first
Speaker 2: before they start cutting rates, which would be something new
Speaker 2: for them. It would be positively ECB.
Speaker 5: Like okay, But going forward, then, how does this cohere
Speaker 5: with a three percent yield curve across the board, a
Speaker 5: flat yield curve in the near future by the end
Speaker 5: of this year or even by midyear next year. If
Speaker 5: you have a FED that's being patient, not willing to cut,
Speaker 5: and you have economic data that's coming in hotter than.
Speaker 2: Expected, well, this is the FED that promised us transitory
Speaker 2: and then within a couple months change their mind and
Speaker 2: start hiking rates. We think we're going to see the
Speaker 2: same thing this time. They're going to tell us that
Speaker 2: they're going to keep rates higher for longer until inflation
Speaker 2: is at their target. But the magnitude of the slowdown
Speaker 2: we're seeing across the board tells us that will probably
Speaker 2: still be hitting recession around year end, so they'll be
Speaker 2: cutting rates by then. So I'm still incredibly comfortable that
Speaker 2: we'll see three percent across the curve.
Speaker 4: You think Hyphalonger is just a bad call, or do
Speaker 4: you think they're just misleading us that that's what they
Speaker 4: want to signal currently.
Speaker 2: I think it's what they have to signal because they
Speaker 2: were already wrong once on inflation with the promise of
Speaker 2: transitory they can't be wrong again. They're telling us that
Speaker 2: they're prioritizing inflation overgrowth, and that means, like the ECB,
Speaker 2: you're willing to make the economy a casualty.
Speaker 6: I guess what I'm getting at is do you believe them?
Speaker 2: Do I believe Do you.
Speaker 4: Believe they're prioritizing inflation overgrowth or it's a sign of weakness?
Speaker 6: Do you think the back away?
Speaker 2: Well? I think the consumer is incredibly stretched right now.
Speaker 2: When you look at at the Beige book, you're seeing
Speaker 2: signs of that all over the place. They're talking about
Speaker 2: the last bit of pent up spending on leisure travel.
Speaker 2: They're talking about consumers that are trying to maintain their
Speaker 2: level of spending since their excess savings have run out
Speaker 2: by putting stuff on borrowing, which is a very high
Speaker 2: way to finance yourself. So things are going to slow
Speaker 2: down pretty quickly. We look at news coming out of
Speaker 2: Truest where they're starting to address cost pressures by laying
Speaker 2: people off. So the labor market doesn't look as robust
Speaker 2: as that mid threes unemployment rate. We think that starts
Speaker 2: to go up and it will force the Fed's hand.
Speaker 1: Boy, Michael, JP Morgan, asset management, what I was thinking about,
Speaker 1: and this goes back to you. The acclaimed toughest resume,
Speaker 1: toughest admit in banking, the analyst program of JP Morgan
Speaker 1: is the real yield we're at right now. Began within
Speaker 1: the data that we have in the modern age in
Speaker 1: two thousand and three, and that a huge body of
Speaker 1: our audience has never lived this ray structure and all
Speaker 1: of the follow on to it. What's your council? Does
Speaker 1: someone say, under thirty seven, thirty six, thirty eight years
Speaker 1: old of how to address a whole new world? After all?
Speaker 2: Well, I think you have to understand that markets go
Speaker 2: through cycles. The cycles can be very long. Probably the
Speaker 2: last fifteen twenty years weren't normal. They were the distorted years.
Speaker 2: They were the years that the baby boomers wrecked by
Speaker 2: overleveraging the property market, crashing it and then taking a
Speaker 2: decade to repair. We think we're going back to an
Speaker 2: environment that is more normal, where there is a demand
Speaker 2: for capital, there's a use for capital, it's productive, and
Speaker 2: there will be a cost for capital again, but you
Speaker 2: don't get there all at once. I think a five
Speaker 2: hundred and twenty five basis point rate hike is a
Speaker 2: shock to the system. It will slow things down. We
Speaker 2: think the next move coming out of the Fed will
Speaker 2: be to cut rates. We think you go back to
Speaker 2: two and a half to three percent. Yeah, the next
Speaker 2: tightening cycle, maybe they have to go to six percent
Speaker 2: and you start putting in place the mirror image of
Speaker 2: what we saw in the late eighties and the nineties
Speaker 2: with falling rates. You mean now see rising rates, So
Speaker 2: we have to get them used to. Inflation can be
Speaker 2: real and markets have to price that in, and central
Speaker 2: banks don't always value out.
Speaker 5: There's a lack of clarity in terms of how central
Speaker 5: banks really understand inflation. They say they look at core
Speaker 5: and then headline starts to move sentiment, and then they
Speaker 5: start going after that, how much to higher oil prices?
Speaker 5: Materially higher oil prices play into the risk that the
Speaker 5: FED remains higher for longer.
Speaker 2: There used to be a wonderful chart everyone would dust
Speaker 2: off every time oil prices went up that oil shocks
Speaker 2: create recessions, and it had. It was another one of
Speaker 2: these one hundred percent perfect predictors. And we're getting another
Speaker 2: oil shock at exactly the wrong time, after credit conditions
Speaker 2: have tightened dramatically, after the cost of funding businesses and
Speaker 2: households has gone up a multiple. We're talking about business
Speaker 2: and households having to spend on energy at a time
Speaker 2: when their real incomes are much lower, so they're going
Speaker 2: to have to cut back somewhere else. I think it
Speaker 2: actually is another one of these things that's a warning
Speaker 2: that recession may need more present than the market things.
Speaker 5: When does it count as an oil shock because we
Speaker 5: are seeing prices normalized, They're not necessarily going to the
Speaker 5: highest that we've seen of this particular cycle, but they
Speaker 5: are the highest going back to last year. What's your
Speaker 5: tipping point for when it is prohibitive of growth.
Speaker 2: Well, you have to look at the cost of production
Speaker 2: and the cost of getting a barrel out of the ground.
Speaker 2: And where we are now, and what we're seeing is
Speaker 2: that Opek is telling us maybe demand isn't quite there,
Speaker 2: but they're not willing to live with much lower oil prices.
Speaker 2: They want the volume to replace the demand. It's not there,
Speaker 2: they're going to make it back with pricing, and they're
Speaker 2: going to push prices up. We'll see how high it goes.
Speaker 2: But for me, it's another sort of yellow warning flag
Speaker 2: out there. I don't think it helps the economy at all.
Speaker 2: I think it's another thing that squeezes an already stretched
Speaker 2: consumer bracket.
Speaker 1: The inflation adjusted yield right now, at what level up
Speaker 1: above two percent, does it really begin to impinge on
Speaker 1: the system.
Speaker 2: I think, coming off of several years of infinite free money,
Speaker 2: we're seeing it bite right now. We're seeing it in
Speaker 2: the housing market, We're seeing it in the cost of
Speaker 2: funding credit card purchases. You look at businesses, they front
Speaker 2: end loaded a lot of they're borrowing, but now they're
Speaker 2: going back and they're addressing other cost pressures and they're
Speaker 2: not doing it by just borrowing more and absorbing the
Speaker 2: cost pressures. They're actually starting to cut costs, So I
Speaker 2: think it is now starting to buy. I don't think
Speaker 2: long and variable lags to monetary policy. That law has
Speaker 2: been repealed. I think it still takes time and we're
Speaker 2: still in the early stages of it. I think the
Speaker 2: next twelve months are going to be pretty painful.
Speaker 5: What would you have to say to make you change
Speaker 5: your view.
Speaker 2: I'd have to see a legitimate reacceleration of core inflation,
Speaker 2: and that would tell me that we're in a different regime.
Speaker 2: Maybe the X y Z generation is large enough, they're
Speaker 2: earning enough, they're spending enough that it is driving an
Speaker 2: economy that is going to a new high and central
Speaker 2: banks do have to come in and really dial down
Speaker 2: the desire of the consumer to spend. But right now
Speaker 2: we're not seeing that.
Speaker 6: Are you googling the X y Z generation? Is that
Speaker 6: what you just did?
Speaker 1: Yeah?
Speaker 6: What do you have to say?
Speaker 1: What is the X y Z generation? I've never heard of.
Speaker 7: It, x y Z.
Speaker 5: It's the X the Y one and the Z one.
Speaker 6: Yeah gen x ok, all like combined together.
Speaker 2: Yeah, so think the ninety one verse, the ninety one.
Speaker 2: Verse are now the largest population cohort and they're thirty
Speaker 2: two years old. So that's the one. And if we
Speaker 2: go back to the financial crisis, they were seventeen years
Speaker 2: old and we wondered, how would we get through this
Speaker 2: before they replaced the baby boomer as the dominant consumer.
Speaker 2: Now we're there. That's where we could be wrong. I
Speaker 2: don't think so either.
Speaker 1: The crew that you know after the secondary M album,
Speaker 1: they were never the same.
Speaker 6: Thanks Tom, Thank you, my pleasure.
Speaker 1: Jpmulkin joining us now Doctor Dudley, He writes her Bloomberg opinion,
Speaker 1: of course all of his work at the New York
Speaker 1: Fed in Definitive Market Economics with Bill mccav ed mckelvy
Speaker 1: years ago at Golden Sachs. Bill Dudley, thank you for
Speaker 1: this important essay on the calculus of diminishing turns. How
Speaker 1: efficacious is a lift in capital requirements of our big
Speaker 1: fancy banks.
Speaker 3: I think the question is what problem are you trying
Speaker 3: to solve. Is the problem that we saw in the.
Speaker 8: Spring lack of capital among the big money center banks,
Speaker 8: or is it a problem with supervision, problem with bad accounting,
Speaker 8: problem with bank management.
Speaker 3: I think the problem is not that the big banks
Speaker 3: in enough capital.
Speaker 8: If you remember, money was running towards the big banks
Speaker 8: during the turmoment, we saw and marked not away from
Speaker 8: the big banks.
Speaker 3: None of the bank none of the big banks got
Speaker 3: into any any great difficulty in the United States.
Speaker 8: The problem with raising capital requirements over and over again
Speaker 8: is you're making us banks less competitive, and that's going
Speaker 8: to push activity out into the unregulated non banking sector.
Speaker 3: That the question that that that createses that are you actually.
Speaker 8: Making the financial system safer where you actually make it
Speaker 8: more unstable?
Speaker 1: Should we raise the capital requirements of entrepreneurial upstart banks
Speaker 1: with a rategic gimmick to build growth.
Speaker 8: Well, I think we certainly want to be very close
Speaker 8: close attention to those banks that are using novel business models.
Speaker 8: And I think, as the FIT self admitted that we
Speaker 8: need better supervision. The problems that Silicon Value Bank were
Speaker 8: identified in a relatively timely way, but then the supervisors
Speaker 8: didn't force the banks to make the changes necessary to
Speaker 8: prevent its demise. So I think that better supervision, more
Speaker 8: diverse stress testing, better rules on interest rate risk taking
Speaker 8: could go a.
Speaker 3: Long way to avoid these kind of problems.
Speaker 8: I'm not sure raising the captal requirements of the biggest
Speaker 8: money center banks by fifteen to twenty percent.
Speaker 3: It's the answer here.
Speaker 1: Bill.
Speaker 5: You talk about in your column the importance to recognize
Speaker 5: non banking institutions as competitors and that you really just
Speaker 5: increase their share by restricting the lending capacity of big banks.
Speaker 5: Should regulators be basically going down to lowest common denominator
Speaker 5: of less regulator non banks, or should they put more
Speaker 5: of an eye toward non banks and regulate more closely
Speaker 5: some of those activities.
Speaker 3: I think they should be focusing on what's the best
Speaker 3: solution for the resiliency of the overall financial system banks
Speaker 3: and non banks.
Speaker 8: Obviously, if you increase requirements a lot on banks, you're
Speaker 8: just going to have a bigger non bank regime.
Speaker 3: And the question is does that make it safer or
Speaker 3: does that make it more vulnerable?
Speaker 8: So I think there needs to be balanced here. Also,
Speaker 8: I think that the real question here is what was
Speaker 8: the problem and what's.
Speaker 3: The right solution to solve the soot.
Speaker 8: It's not clear that raising capital requirements on large money
Speaker 8: center banks solves the problems that we saw in March
Speaker 8: this year.
Speaker 5: Can we say that the banking crisis is over to
Speaker 5: the extent that it ever happened, and that going forward
Speaker 5: this is not going to be some sort of bigger
Speaker 5: financial risk that could torpedo the Goldilock scenario, at least
Speaker 5: for the moment.
Speaker 8: You never know, but I think that so far the
Speaker 8: knock going to affect what happened in March are pretty modest.
Speaker 8: I think that's because was concentrated in a few banks.
Speaker 8: It was all happening in plain sight. People knew exactly
Speaker 8: why these banks were getting the difficulty. They could see
Speaker 8: their interest rate risk disclosure, they could see what's happening
Speaker 8: to their capital on a mark to market basis. So
Speaker 8: this is not like the Great Financial Crisis, where everything
Speaker 8: was happening in the shadows.
Speaker 3: People lost confidence in their counterparties.
Speaker 8: So I think, so far, at least, it looks like
Speaker 8: this is a pretty modest knock on effect to the
Speaker 8: new economy.
Speaker 5: So if that's not If that's the case and that
Speaker 5: isn't necessarily a headwind going forward, do you lean into
Speaker 5: this idea that maybe the FED should be done and
Speaker 5: that we are looking at a scenario where they have
Speaker 5: the opportunity to just wait and take a look at
Speaker 5: the data on a longer and longer term basis to
Speaker 5: make any decisions.
Speaker 8: I have no quarrel with the FED waiting to get
Speaker 8: more information.
Speaker 3: I mean, you know, they're pretty confident that Madre policies
Speaker 3: at a restrictive level. If that's the case, it should
Speaker 3: slow the ecomy down. As the economy slows.
Speaker 8: We should have more slack than the way market and
Speaker 8: just puts take away some of the upper pressure on
Speaker 8: wages and bring inflation down. I think the key question
Speaker 8: is how restrictive is manitre Falsy today. It's possible that
Speaker 8: mandre Palsy is not quite as restrictive as the FED thanks,
Speaker 8: and if they find that out over time, then they
Speaker 8: can obviously do more or keep rates higher for longer.
Speaker 4: Bill, I want to finish there. You wrote about this
Speaker 4: earlier in the summer. I don't think it was picked
Speaker 4: up on nearly enough. I've been talking about as much
Speaker 4: as I can. This quote from your column. The redd
Speaker 4: as follows, and I had the quote ready for you.
Speaker 3: Bill.
Speaker 4: There's considerable evidence that lacks have shortened, meaning that the
Speaker 4: economy has already found nearly all of the impact of
Speaker 4: the Fed's actions. Bill, talk to me about that evidence.
Speaker 4: Where do you see that evidence currently?
Speaker 8: I think the most obvious piece of evidence is what's
Speaker 8: happening in the housing sector. The housing sector, you know,
Speaker 8: obviously was hurt a lot by the backup and mortage
Speaker 8: rage from three percent to seven percent, but recently the
Speaker 8: housing market looks like it's bombed out and it isn't
Speaker 8: having any.
Speaker 3: Further weakness because of the rights and rates.
Speaker 8: Another thing is important to know here is Madre Bozi
Speaker 8: works faster than he used to because the FED uses
Speaker 8: for guidance seek guide the market not where it is today,
Speaker 8: but where it's headed. So financial conditions, most of the
Speaker 8: technique and financial conditions that.
Speaker 3: We've seen over the last couple years happened last year,
Speaker 3: not this year.
Speaker 4: I remember Bill, a conference that you and I did
Speaker 4: together together with Muhammad al Aaron in the summer of
Speaker 4: twenty twenty one. I think it was early summer, around
Speaker 4: June time, and you were both talking about how inflation
Speaker 4: may well be sticky than people think. And I remember
Speaker 4: you Bill, throughout the number the maybe rates have to
Speaker 4: go to five percent. Five percent back then sounded absurd
Speaker 4: with through five, with three five, and we've gone right
Speaker 4: the way through five. Bill, what are you thinking about
Speaker 4: now best case on way you think sufficiently restrictive might be.
Speaker 8: I think that it's more likely that they hold rates
Speaker 8: here or maybe one more rate.
Speaker 3: I as opposed to go ever higher. I think where the.
Speaker 8: Market may be a little bit off basis to think
Speaker 8: that the Fed's going to ease a lot in twenty
Speaker 8: twenty four. I think the last mile in terms of
Speaker 8: getting inflation down, I think it's going to turn out
Speaker 8: to be pretty difficult, and so I think that means
Speaker 8: that that's going to take keyp grates higher for longer
Speaker 8: than people think.
Speaker 3: I think that's one of the things that is feeding
Speaker 3: into the bond market. Went by you as a heath.
Speaker 6: Tire, Bill Dudley, Thank you, sir.
Speaker 4: Former New York Fed president and Bloomberg opinion columnists. Some
Speaker 4: fascinating insight there, Greg Barroch of BMP Parabar. He was
Speaker 4: the biggest bear on a street. He was looking for
Speaker 4: thirty four hundred. He's now looking for forty one fifty.
Speaker 4: Here's the quote. The alex for this year was always
Speaker 4: predicated on the idea of seeing a recession in the US.
Speaker 4: I think we've been surprised at the resilience of the
Speaker 4: data here in America, Greg and police to say, join
Speaker 4: us right now thirty four hundred and forty one fifty.
Speaker 4: Let's start there. What do you feel like you got
Speaker 4: wrong and why do you think that's going to persist?
Speaker 9: Yes, I think there's been three drivers of the market
Speaker 9: that have helped this outperformance that we didn't see coming
Speaker 9: this year. One has been the Jenai story, so that's
Speaker 9: much more bottom up story, so it's linked to tech
Speaker 9: and the appetite here to chase those names. I think
Speaker 9: the second one was positioning. We were aware that people
Speaker 9: were under weight coming into this year, but I think
Speaker 9: the extent of the chasing of the market that we've
Speaker 9: seen has surprised us. And the third thing, maybe most
Speaker 9: importantly has just been that the data has been stronger
Speaker 9: than we expected. You know, us, along with many in
Speaker 9: the street, we're looking for a slowdown and looking for
Speaker 9: a recession this year and it just hasn't manifested. And
Speaker 9: really that's a big driver of the unwind of the
Speaker 9: gravity of the bearishness in our core.
Speaker 4: I've reset you're still looking for a negative market based
Speaker 4: on this call at forty one fifty, where are you
Speaker 4: anticipating the weakness comes from given everything you've just told us.
Speaker 9: So I really think it is this manifestation of the
Speaker 9: slowing in the economy. So we know that everyone was
Speaker 9: looking for a slowdown that hasn't manifested as quickly as
Speaker 9: we expected. But that doesn't mean that it's not coming.
Speaker 9: You know, the effect of the massive policy tightening that
Speaker 9: we've had is going to have an effect on the economy.
Speaker 9: It's just taking longer to percolate than people thought, this
Speaker 9: idea of excess savings being run down. We do think
Speaker 9: that the consumer is going to slow. So I think
Speaker 9: many of the reasons that we were cautious on the market,
Speaker 9: we still think a lot of that can manifest. It
Speaker 9: just might manifest us slower pace than we previously expected.
Speaker 1: You've been a complete class act on this reversal. I
Speaker 1: want to talk, I want to dig into it further,
Speaker 1: and that it's been led by seven stocks, it's been
Speaker 1: led by big tech, among others. Ben Laidler, who's been
Speaker 1: dead on a huge bull says they will reaffirm and
Speaker 1: stay strong with your new optimism, your new neutrality, and
Speaker 1: dare I say you're going to announce today that you're
Speaker 1: going to five thousand SPX. Are you going to do
Speaker 1: it with tech as a growth leader?
Speaker 9: It's controlled pessimism at this point, I think. I think
Speaker 9: in terms of market leadership, it's hard to get away
Speaker 9: from tech.
Speaker 6: Know, there is this structural growth story.
Speaker 9: So if we're in an economy that is slowing or
Speaker 9: be a more gradual pace than we anticipated, then the
Speaker 9: structural growth stories of those that are going to outperform.
Speaker 9: The issue with tech is how far it is valued
Speaker 9: this year. So I think the story going forwards in
Speaker 9: tech is going to be about being more selective. So
Speaker 9: we see certain subsectors in tech, things like semis that
Speaker 9: have valued massively this year that maybe might pass the
Speaker 9: bats in a little bit over to maybe software some
Speaker 9: of the tech infrastructure names.
Speaker 5: So I'm wondering about the concepts behind your bare case
Speaker 5: and your ballcase. They follow kind of traditional economics where
Speaker 5: bad news is bad news and good news is good news,
Speaker 5: the bad news being a hard landing thirty four hundred,
Speaker 5: the good news being a reacceleration forty six hundred. Why
Speaker 5: don't you think that a reacceleration would actually prompt more
Speaker 5: aggressive FED action that could torpedo the market? In other words,
Speaker 5: the sort of good news is bad news and bad
Speaker 5: news is good news. I know that Tom's loving this,
Speaker 5: but you know, how much does that kind of come
Speaker 5: into play?
Speaker 3: No.
Speaker 9: I think this is a really good question because when
Speaker 9: we look at the correlation between equities and bonds, that
Speaker 9: gives us a bit of a window into that question.
Speaker 9: So you can look at bond ETF something like TLT
Speaker 9: so long the term treasuries, and you see the correlation
Speaker 9: between equities and bonds really broke down in someone when
Speaker 9: the equity market rallied, and we've had to pick up
Speaker 9: again in that correlation, which kind of points to me
Speaker 9: this idea that equity valuations are again looking stretched relative
Speaker 9: to rates, and that does raise the risk that if
Speaker 9: you get a hotter print, particularly in say this week's CPI,
Speaker 9: the higher rate could be a headwind for equities. So
Speaker 9: I think equities are stuck between a little bit of
Speaker 9: a rock and a hard pace in an economic acceleration.
Speaker 9: If it's too hot, starts to bring rates higher, and
Speaker 9: that can again compress P MULTIPLESE. But a slowdown is
Speaker 9: really the bad case. I think our ball case is
Speaker 9: pretty asymmetric. We're not looking for that much upside. We
Speaker 9: think that upside would be driven more by value stocks
Speaker 9: and CycL cause if we have data surprising to the upside,
Speaker 9: I don't really think that's going to help the names
Speaker 9: that have outperformed this year and driven the valley so far.
Speaker 5: So do you believe in goldilocks or do you think
Speaker 5: that this is people just sort of wish for thinking
Speaker 5: and picking a point along a progression towards something else
Speaker 5: and saying to stay there.
Speaker 9: I think it's very difficult just to stay in this
Speaker 9: benign goldilocks environment. I think one of the things that
Speaker 9: we got a little bit wrong this year was just
Speaker 9: underestimating this kind of piece in the middle. We had
Speaker 9: an issue with the data last year that it was
Speaker 9: way too hot, and our viewers that data was going
Speaker 9: to cool and become too cold and take us into
Speaker 9: a recession. But ultimately, if you go from too hot
Speaker 9: to too cold, you go through a piece in the
Speaker 9: middle where things feel just about right, and that's where
Speaker 9: we feel we are. So we don't think the data
Speaker 9: is going to plateau here, and we don't think we're
Speaker 9: going to stay in this goldilocks environment forever. This kind
Speaker 9: of controlled descent that we've had in the data, we
Speaker 9: think is going to continue to deteriorate and we'll morph
Speaker 9: into a shallow recession.
Speaker 1: Stat theme has been corporations will adjust how linked based
Speaker 1: on what you've been through the last eighteen months? How
Speaker 1: linked is economic analysis with the securities analysis of the market.
Speaker 9: I think that, you know, equity markets are always vary
Speaker 9: linked to the macro, but there are these secular drivers
Speaker 9: that sit alongside that. When we go and look at
Speaker 9: any of the large crashes or bear markets over the
Speaker 9: last hundred years in equity markets that are all accompanied
Speaker 9: with a swift economic decline. But that doesn't mean that
Speaker 9: we can't have these secular themes, things like Jenai that
Speaker 9: drive some dislocation. So I think part of it is
Speaker 9: the magnitude. You know, when you're in a more benign
Speaker 9: economic environment, the economy is not necessarily the primary driver
Speaker 9: for the market. If we do get to a situation
Speaker 9: around the turn of the year where we start seeing
Speaker 9: negative perierroll prints, then I think people's attention will divert
Speaker 9: and people's ability to buy into blue sky thinking becomes
Speaker 9: much more challenged.
Speaker 6: You were allowed to talk about Apple.
Speaker 9: We can talk about it loosely.
Speaker 6: Obviously, I don't let me loosen it up. Let me
Speaker 6: loosen it up.
Speaker 4: As follows, dollars stronger China perhaps developing different tastes nationalism
Speaker 4: shape in perhaps some patriotism at home away from foreign
Speaker 4: luxury items. A multinational is in trouble here with exposure
Speaker 4: to China.
Speaker 9: So I think how I can answer that is think
Speaker 9: about some of the general themes that we think about
Speaker 9: in terms of tech. Those stocks are going to be
Speaker 9: incredibly resilient in a down term. Why because they have
Speaker 9: great free cash flow and amazing balance sheets.
Speaker 6: But that also doesn't.
Speaker 9: Mean that they are immune from a consumer slowdown. So
Speaker 9: one of the things that we think will manifest over
Speaker 9: the next six months is that this tightening of rates
Speaker 9: will affect the consumer. Now, the consumer is obviously consumer
Speaker 9: discretionary is for first pat corps, but there are a
Speaker 9: lot of tech stocks that do face the consumer. Ultimately,
Speaker 9: Apple sells goods and services to the consumer. So will
Speaker 9: they be entirely immune from a cyclical slowdown? That's the question.
Speaker 1: It's like one more thing, except you know it's encore
Speaker 1: shows when you're BNP paried by yourself.
Speaker 4: You say that that wasn't a great song as well?
Speaker 4: I think so that was a song, wasn't it. So
Speaker 4: it's like nineties club music. Yeah, all right, Greg, thank you.
Speaker 3: Greg.
Speaker 1: Bare to help us with Brent at ninety and on
Speaker 1: the reality of Saudi Arabia and one hundred dollars oil
Speaker 1: is Francisco Blanche. He's had a global Commodities and Derivative
Speaker 1: research at Bank of America Global Research. Francisco, you nailed oil.
Speaker 1: You got your ninety ninety one Brent as well. The
Speaker 1: trajectory seems to be to all one hundred and very
Speaker 1: clearly that's what Saudi wants is a domestic reality. They
Speaker 1: have budget requirements, fiscal requirements domestically. Are we going to
Speaker 1: see one hundred dollars barrel because Saudi wants it?
Speaker 10: It's possible.
Speaker 11: Tom, I would say there's three things that have been
Speaker 11: moving oil prices over the course of the last three
Speaker 11: four months.
Speaker 10: Supply, supply and supply.
Speaker 11: We've had Saudi Arabia cutting production for as you know,
Speaker 11: close to a year now, and they started cutting in
Speaker 11: September of twenty twenty two at around ninety five dollars
Speaker 11: a barrel on brands, So clearly they want to have
Speaker 11: higher prices. They're trying to push the market there. What's
Speaker 11: new in the past few months is that Russia has
Speaker 11: finally started to align itself with Saudi Arabia and started
Speaker 11: to take production out the Russians after maximizing volume over
Speaker 11: price over value for much of the past four months,
Speaker 11: they've started to focus on price over volume, and that's
Speaker 11: a new development in Russia, I would say, in the
Speaker 11: last few months. And then also we've had a lot
Speaker 11: of refining issues tom We've we've seen products pretty great,
Speaker 11: diesel being the old market higher.
Speaker 10: So those are the things main supply drivers.
Speaker 1: One of the great things in Kapin's book is the
Speaker 1: new linkage, not like nineteen eighty six, but the new
Speaker 1: linkage between Saudi Arabia and China. Can China live with
Speaker 1: one hundred dollars barrel oil?
Speaker 2: Well?
Speaker 11: I think that the soldies have always been very cautious
Speaker 11: about avoiding demand destruction episodes, and certainly I think they
Speaker 11: will become cautious again if prices break through one hundred
Speaker 11: dollars a barrel, because as we saw last year with gas,
Speaker 11: with natural gas, if prices do get out of whack,
Speaker 11: you can lose all the demand.
Speaker 10: European natural gas demand from industry.
Speaker 11: You remember is lowered today than it was at this
Speaker 11: time last year, with a ninety percent declining prices, So
Speaker 11: you have to be careful what you wish for. If
Speaker 11: prices will up too fast, you kind up hurting consumption
Speaker 11: and China today, as you know, the world's largest oil
Speaker 11: importer by a mile, and UH is facing a pretty
Speaker 11: weak economic outlook ahead because of the real estate challenges
Speaker 11: and the trade war with the US, and of course
Speaker 11: the tech sector also being down. So I think I
Speaker 11: think China has melted in a great economic position to
Speaker 11: begin with. So I think I think OPEC plus will
Speaker 11: be careful of as prices rise.
Speaker 4: Before we dried into the demand side, let's sit on
Speaker 4: supply just a little bit longer. Francisco, you mentioned a
Speaker 4: shift in Russia away from volume surprise, what's underpinning that
Speaker 4: shift is that well understood before we make a call
Speaker 4: about how durable that pivot will be.
Speaker 11: In my mind, the UH the pivot comes after a
Speaker 11: very successful program set up by the US Treasury to
Speaker 11: put a price cap on on Russian oil. Remember the
Speaker 11: price cap Essentially I encouraged Russia to export high volumes
Speaker 11: at low prices, which were then resold real across the
Speaker 11: across mainly India and other China and other clients. But
Speaker 11: more recently, I think the Russians have figured out that
Speaker 11: the rule is too weak, that the Russian tax authorities
Speaker 11: haven't been able to really raise enough revenue, and the
Speaker 11: macroeconomy in Russia has really deteriorated. And of course we've
Speaker 11: seen that with tensions building up within the military and
Speaker 11: the paramilitary or the course of the past few months.
Speaker 11: So I think the conclusion that I believe the Kremlin
Speaker 11: is probably arriving to is that they need more money,
Speaker 11: and therefore the way to do that is the way
Speaker 11: to maximize revenue for the Russian tax authorities has been
Speaker 11: to pressure volumes lower and allow prices to rise. And
Speaker 11: the price of neuroscrew oil, which was creating around fifty
Speaker 11: dollars bureau, is now approaching eighty bucks, well above the
Speaker 11: price cap set out by the US and the European Union, and.
Speaker 4: A screen right now bent crewd through ninety one. So fransis,
Speaker 4: let's talk about demand. The build on the question, Tom asked,
Speaker 4: it's an important one. Have we seen any sign of
Speaker 4: the tear race in demand from China? Even with the
Speaker 4: economic weightness.
Speaker 11: Well, the August numbers were phenomenal in terms of import increases.
Speaker 11: We saw China importing twelve and a half million barrels
Speaker 11: a day on average throughout the month.
Speaker 10: Granted imports in July.
Speaker 11: We're kind of weak, but we hear from China and
Speaker 11: I was in Singapore last week and at meeting all
Speaker 11: the various energy traders. The main message is that Chinese
Speaker 11: demand is pretty healthy, and to be honest, you see
Speaker 11: it in the data. You look at a number of
Speaker 11: air flights, you look at air passenger traffic. Demand is
Speaker 11: still pretty healthy. What's been weak is industry related consumption,
Speaker 11: so think about gas, oil, diesel and the petrochemical complex.
Speaker 11: That's been weak. But I think overall, Chinese demand is
Speaker 11: in a better place. I think even though the real
Speaker 11: estate sector is not doing well, you still have a
Speaker 11: strong services sector comeback after COVID and that's supporting oil
Speaker 11: prices in China and creud runs as well. We've seen
Speaker 11: refineries running over crude oil in China over the course
Speaker 11: of the past few months. So I think Chinese demand
Speaker 11: for oil continues to lead frankly the world most of
Speaker 11: the demand growth this year and probably next year. Will
Speaker 11: still come from Asia, and China will be the bigger
Speaker 11: part of that.
Speaker 5: This goes against the narrative, which is the China's falling
Speaker 5: off the cliff, not do ending anything, and that this
Speaker 5: is entirely driven, that the increase in prices in oil
Speaker 5: is entirely driven by what Saudi Arabia is doing and
Speaker 5: maybe at the margins, what Russia is doing. If we
Speaker 5: don't have that narrative, what would stop oil prices from
Speaker 5: going higher, especially if demand continues strong from China.
Speaker 11: Well, I mean I think I think China overall, like
Speaker 11: I said, it's coming back from COVID. If you look
Speaker 11: at international flights, they're still down fifty percent. Now, there's
Speaker 11: been all of tension between the US and China over
Speaker 11: of course of the last few years, right, and for instance,
Speaker 11: flights to the US remain very very surprised.
Speaker 10: But that's going to have to pick up. And we're
Speaker 10: also going to.
Speaker 11: See a meaningful increase in China flights to Europe over
Speaker 11: the course of the next few quarters. So in my mind,
Speaker 11: I think the Chinese demand story from a service perspective
Speaker 11: is okay. I mean GDP in China is not negative.
Speaker 11: I mean it's weak, but week means four percent, four
Speaker 11: and a half percent.
Speaker 10: That still still.
Speaker 11: Allows for growth in in you know, kind of the
Speaker 11: same things with it after in the West when we
Speaker 11: came out of COVID restaurants, going to the.
Speaker 10: Movies, traveling around.
Speaker 11: I mean the China and the Chinese consumers are doing that,
Speaker 11: and that's supportive of the oil market. And then of
Speaker 11: course to your point, I mean the cartelments and OPEQ
Speaker 11: have elevated prices, have brought inventories on a dowar trajectory,
Speaker 11: and we expect that to continue. So so again we
Speaker 11: are targeting ninety ors bur one brand for next year.
Speaker 10: That's current.
Speaker 11: The current market right now is at eighty six for
Speaker 11: calendar twenty twenty four. So there is a little bit
Speaker 11: of upside in our view from current prices. But I
Speaker 11: think I think if you push too hard, the risk
Speaker 11: is that inflation comes back, and then the narrative that
Speaker 11: we're going to have peak rates with no recession goes
Speaker 11: out the window in my mind, right, So I think
Speaker 11: OPAK has to be considered also about the effects on
Speaker 11: the macromarkets for great rates and the outbook for our
Speaker 11: potential recession in the US and.
Speaker 6: Russelle Francisco always a clinic.
Speaker 4: Thank you, Sir Francisco, Blanche Bank for America.
Speaker 1: This is a joy to do this in remembrance of
Speaker 1: how people stepped up big time in early twenty twenty.
Speaker 1: I have the clearest memory of our first interview on COVID.
Speaker 1: It was with an acclaimed radiologist from Mount Sinai in
Speaker 1: New York who brought into our studios x rays from
Speaker 1: China showing the outside lung damage that COVID could rot. JOHNS.
Speaker 10: Hopkins helped us.
Speaker 1: So much on this and joining us now in the
Speaker 1: booster uproar back the hun Saudi to say she's associate
Speaker 1: Professor of Emergency Medicine, barely describes global parchments to study
Speaker 1: the academics of Professor and Saudi BACTI. Great to see
Speaker 1: you again under always COVID difficulties, to say the least.
Speaker 1: When we were kids, it was routine to get a
Speaker 1: booster shot. Is an mRNA booster shot any different, any
Speaker 1: more dangerous, any more at risk than a tetanus booster
Speaker 1: shot of my childhood?
Speaker 12: Absolutely not. The current new vaccines, I'm not technical. Boosters
Speaker 12: are updated vaccines that are targeted to the current viruses
Speaker 12: that are circulating, but they're equally safe.
Speaker 7: These vaccines have full approval.
Speaker 12: I have gone through all the scientific rigmarole to ensure
Speaker 12: that they're safe and effective for the population BECTI.
Speaker 1: I look at the science here and it seems in order.
Speaker 1: I'm basically appalled at the government response, the messaging from
Speaker 1: the White House to get behind the science community. What
Speaker 1: do you need from the President, What do you need
Speaker 1: from the administration to build confidence in this booster program?
Speaker 12: So I think we clear messaging, this is full approval
Speaker 12: number one.
Speaker 7: Two, we need to hear.
Speaker 12: From the CDC today. They will be deciding who should
Speaker 12: get the booster, who do they recommend, but also the
Speaker 12: reasons for those recommendations.
Speaker 7: Why is that the.
Speaker 12: Current recommendation and what are they trying to do by
Speaker 12: making this recommendation. Are they trying to prioritize those at
Speaker 12: highest risks or are they genuinely saying that the vaccine
Speaker 12: is only.
Speaker 7: Recommended that those people it will benefit.
Speaker 12: So mean clear communication, clear logistical reasons as to their recommendations.
Speaker 7: And the third is.
Speaker 12: We need to make sure our supplies chains are saw strong,
Speaker 12: so we need to make sure this vaccine comes out
Speaker 12: later on this week, that folks know where to go,
Speaker 12: that folks can access the vaccine quickly and effectively.
Speaker 5: How much did the administration and policymakers really set themselves
Speaker 5: back by trying to clamp down on the message so hard.
Speaker 5: Initially there was just a court ruling saying that the
Speaker 5: administration did overreach in trying to strip away any anti
Speaker 5: vaccine messaging. How do you view that in light of
Speaker 5: what you're trying to put forward right now?
Speaker 12: So we view that because it has this paternalistic attitude
Speaker 12: to help, right, but we are all informed parttakers.
Speaker 7: Of our own lives, our own health.
Speaker 12: We have access to information, some good, some bad, some here,
Speaker 12: some elsewhere, And so by having communication that is more robust,
Speaker 12: that's less black and white, that allows for effective dialogue
Speaker 12: that allows individuals to buy into the whole. You know,
Speaker 12: the interventions, the vaccines, the therapeutics, the masking, and so
Speaker 12: what we need is to ensure that there's dialogue, that
Speaker 12: there is debate, that that deep has a scientific foundation.
Speaker 5: There's also been a lot of discussion about side effects
Speaker 5: for the vaccines, in addition to how much they actually
Speaker 5: prevent you from getting more sick. If you're going to
Speaker 5: still get sick and you've already had it and you're
Speaker 5: not going to die. You know, there's this sort of feeling,
Speaker 5: what's the point of increasing the potential risk if on
Speaker 5: the downside, you could just spend another day in bed.
Speaker 5: What's your view on that?
Speaker 12: Absolutely, So, first of all, the FDA would not approve
Speaker 12: a vaccine where the likelihood of you being sick is
Speaker 12: greater than the illness itself, right, That is just not
Speaker 12: going to happen.
Speaker 7: So the side effects of the vaccine do exist, but
Speaker 7: they're over reported, partly due to the media. The over
Speaker 7: report rare events that can be dangerous.
Speaker 12: As far as the illness from COVID nineteen, it affects
Speaker 12: different people differently, So if you have multiple covidbidities, you
Speaker 12: have existing lung conditions, you may in fact require hospitalization.
Speaker 7: Hospitalizations went up by eight point seven percent, so it's.
Speaker 12: Not as if the disease is a benign common cold
Speaker 12: where you're just going to spend extra day in bed.
Speaker 12: I had the pleasure of treating several patients over the
Speaker 12: weekend at Johns Hopkins Hospital emergency department, and the majority
Speaker 12: of my patients went home, but some patients did require admission.
Speaker 7: A lot of patients reported that they were.
Speaker 12: Fatigued, exhausted, couldn't go to work, couldn't manage to activities
Speaker 12: of daily living, couldn't look after their dependence.
Speaker 7: So if you're responsible for.
Speaker 12: A family, the children, elderly parents, or you need to
Speaker 12: go to work, then get vaccinated.
Speaker 7: The chance of you doing.
Speaker 6: That is much greater.
Speaker 5: How is this different from the flu?
Speaker 7: Not significantly.
Speaker 12: The flu has the same constellation of symptoms fevers, chills, cold, congestion.
Speaker 12: COVID will present the same as well rspee and that
Speaker 12: is the challenge here.
Speaker 7: COVID alys will.
Speaker 12: Likely be underreported because some people may assume that they
Speaker 12: just have the flu, and that's okay as long as
Speaker 12: you're staying at home and isolating.
Speaker 1: Doctor ANSARTI, what is the science of masks? I don't
Speaker 1: want the politics, I don't want the mumbo jumbo. I
Speaker 1: can't stand the full disclosure. But what is the science
Speaker 1: of masks in this COVID of twenty twenty four.
Speaker 12: The science of mass is when mass of warm, they
Speaker 12: are effective at preventing onward transmission. A lot of the
Speaker 12: literature that you're seeing right now misinterprets the data and
Speaker 12: how the data is collected.
Speaker 7: A lot of the data.
Speaker 12: Is in non COVID eras in individuals who are not
Speaker 12: customed to wearing masks. But the data from COVID during
Speaker 12: masking and healthcare facilities showed that there was very little
Speaker 12: healthcare worker to healthcare transmission when healthcare workers were wearing masks,
Speaker 12: even if they were COVID at positive at a time.
Speaker 7: So the science shows that masking works. I also hate masks.
Speaker 12: My patients feel better when they see my face, they
Speaker 12: see my smile and be able to reassure them during
Speaker 12: their illness. So I currently I am choosing who I mask
Speaker 12: and who I don't mask with if someone does not
Speaker 12: have opper respiratory illness or flu light symptoms or is
Speaker 12: the immune compromise. I'm currently right now, this is today.
Speaker 12: I'm not masking. In the future, it may change that
Speaker 12: if COVID nineteen cases continue to increase.
Speaker 6: We want to see you smiling without a mouse, don't
Speaker 6: to thank you, don't about to do. On Sunday, then.
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