Bloomberg Surveillance: Geopolitical Risks on Markets

Published Jan 19, 2024, 4:45 PM

 Bloomberg Surveillance hosted by Tom Keene and Damian SassowerFriday, January 19th, 2024
Featuring:

  • Stephen Schork, The Schork Group Principal
  • Greg Daco, EY Chief economist
  • Brian Levitt, Invesco Global Market Strategist
  • Neil Dutta, Renaissance Macro Partner/Head of Economic Research


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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.

This is a joy.

Every research report is the character of the individual. Stephen Schork knows every valve in the Northeast on oil. He's gone out there, He's turned them. When you say what's Harbor doing, he could give you six flavors of the price of oil in New York Harbor. It is an acuity on oil and gas like we've never seen.

He's a shark. Report.

Can't say enough about his work, Stephen, Good morning. As simple as I can. Are we energy independent?

Now? Within the holistic Shark report? Is this nation energy independent?

Absolutely not? Tom, We were up until a few years ago. That is to say, we were reducing a tremendous amount of oil. Now we're back to those levels, and actually we're at record levels. But the investments that we are seeing have certainly held us back. And there is a misnomer out there when people hear energy independent, they kind of think, well, hey, we're not reliant on imports or so forth.

We are.

We do export a considerable amount of products gasoline, diesel, jet fuels, so forth. And we're also at Tom's signific exporters of crude oil. That was never the case up until a few years ago. This is Ina Davian.

I just want to say on YouTube, all the secrets are given away. Steve Short is coming to us from right off the ninth at the Ocean Forest Golf Club, Sea Island, Georgia this morning.

You know, we getting them in the middle of his games.

That's a good Sea Island. You should be going shooting ski shooting down in Sea Island.

Stephen, No, no, no, no, I'm actually doing market research in working this quarter from cursu So and we're on the south part of the island with direct sidelines to the Venezuelan shipping lanes. It's been very interesting. So I was watching the tankers go back and forth. So this is all work related.

There's an umbrella in his tank.

Yeah, sure, Steve, and I have to ask you. We have Brent here at seventy nine oh six grappling with the psychological eighty dollars a hour level, you know, level it hasn't seen since November. Quite honestly, my question for you is in the futures complex, you mentioned open interest on the rise, volumes rise, What are you getting from sentiment? What are options markets telling you?

It's so right now we're starting to see some activity building up. We've had we've been in this significant downturn and oil prices since October, since the start of and I'm going to call it a RAN's war with the West, and we've only seen prices go lower at this time. And I'm of the opinion that really traders are whistling past the graveyard here. But what we're seeing now in the complex, the futures complex is first and foremost, open interest is rising now algebraic notation and prices are falling. That's a negative. Multiply that by rising positive you have a lot of money that's been coming into the market that's been short yep.

And in fact, when.

We look at the large speculators, they are short the equivalent of about six hundred and seventy million barrels of oil. That's about ninety five percent of the strategic patroller deserve equivalent. So you have a tremendous amount of bearish and volume intensity has been building now just based on I just looked at the numbers coming in up until this point, volatility, price variance has been falling. That's starting to rise now and the spreads. You're starting to see a premium being placed into this spot market. So this is clearly a sign that the market's getting ready to potentially explode. You have a lot of money in the market, A lot of that money is short. Trading volume has been intense now volatility is picking up. All you need is hence one more headline, I e. Something out of the Middle East. You got really see oil take off from this point.

You're taking the words right out of my mouth, Steven Opik. Plus can they keep the supply cuts up? Are you expecting them to be able to hold fast in the face of brincrude below eighty dollars?

I know I'm not, and I think with OPEC. People kind of think it's it's not a corporation. It's not that, Okay, the board or the CEO makes a decision and.

The company carries it out.

No, it is an organization that is a multifaceted, all different countries, all acting on their own self interest. And of course Saudi Arabia they're trying to our rate in production, but mainly your African producers need the cash at this point, so it's really difficult now for OPRAT i e.

Saudi Arabia to keep control of production.

One find a question Stephen Short and I look at this with a gale and a guest, John Tucker's down. You're gonna give us a gal and a gas update with a hummer. But are we are we anywhere near a gallon of gas where we shift to electric vehicles? What are six months it's been in the electric vehicle debate. You've provided real leadership here. Electric vehicles need a higher gallon of gas price to succeed.

Yeah.

Absolutely, and Tom, as you know, in economics, there are two variables that drive prices and demand, and that's essentially price shocks, which since the Arab oil and margo in.

The early seventies.

We've had plenty of shocks to the market, but we've never had that secondariable until recently.

I eat the substitute.

But the problem now with substitutes or or with evs is technology. And I'm only to speaking, you know, from my own perspective anecdotally. I have an electric high bred plug in and I love the garden thing. But the problem is I'm not buying them. I'm just leasing them because every three years they technology improved. So now and I'm not the only one, so there's this overhang of used evs that's no one's buying.

So no one's buying those. It's going to be very difficult.

So prices right now under that four dollar gallon are not high enough to really push consumers back to complete ev.

Steven Shark thank you so much for short report coming from his studios and.

Play a lagoton curse out. We literally have research notes.

It's say, Doc Electaco, I mean mister doct.

Ed to see here Mark, and you know people like Mark Crumpton.

He knows everybody's name cold and I'm like useless.

So they got a big flashing billboard here. Gregory daka like Taco wonderful to have you here with Ernst in young Ey he's our chief economist. And it's more than just like market economics, what's GDP going to do. It's like the fabric the makeup of our economics as well. And Greg, I've got to go seriously here to this analysis of the new productivity? Do you and e Y, with all of your abilities in corporate America have any understanding of the new productivity? Or do we have to wait five years to find out what it is?

Do we have to wait until it happens to actually talk about it now? I think we can talk about it today. I think what's very interesting in our insights that we gather at e WHY is that we talked to a lot of CEOs. We talked to a lot of business leaders as to how they're navigating things highly uncertain environment where inflation and cost fatigue remained very much constraint on economic activity and where supply remains very much fragile. And there's a lot of effort happening from CEOs across the different sectors of the US economy that are trying to alleviate some of these pressures. They're looking at ways to improve processes and stimulate efficiency gains via these process improvements. But they're also looking at technology as an avenue to stimulate stronger growth and less inflation.

And that's where to me, this is the heart of the matter. Is we go tech and we say ai AI and it's all ei eio.

It's all technology. And the answer is what matters is tech on Monsanto right exactly? Or tech on DuPont it matters just as much.

Well, Greg, first of all, let me apologize your father for butchering for computing the doctor last name. But you know, in your most recent macropulsey you're talking about the disinflationary winds that are still blowing. And I wonder if you could just help us understand why the market is so hyper focused on next Friday's PCE print. What's so important about it? What should be looking for?

Well, the simple answer is that the FED will be reacting mechanically to inflation developments over the course of this year, and that's why there's a lot of focus on the next data print.

And I think, now, what are we expecting there?

Is it? We'll show, We'll show you know, lower inflation. We're going to see this ongoing disinflationary momentum. We'll likely have core inflation ending twenty twenty three below three percent, which is something that very few.

Four only three and a half. Two and a half is the number we're looking for.

There well, core inflation under three percent, which is quite the feat. I think the disinflationary currents will continue. We have an environment where we're seeing gradually moderating final demand growth. We're seeing supply that is relatively well served. We're seeing an environment where businesses are looking for wage growth compression as an avenue to limit costs. We're also seeing an environment where there is less pressing power and much more sensitivity to increases in prices. And then rent disinflation is still very much in the pipeline. So that's the right combo to get more disinflation.

You know, look ahead in the next week into February into twenty twenty four.

Rent disinflation to.

Me is absolutely of course, it is, of course, But you know, I mean, we could talk about shelter, and we could talk about inflation until we're blue in the face, Greg. But you know, one of the interesting pieces you just put out is on Genai, and you know, Tom is not convinced on Ai. Okay, I'm just gonna preface that, and yet I'm reading this wonderful piece about the productivity boost and you know what the impact of it is and job reshuffling. Talk to us a little bit about what you believe the economic impact of Jenai is going to be.

I think the economic impact of Jenai is going to be felt across most sectors. It may not necessarily be a game changer in the sense that it multiplies the pace of growth by a factor of two or three, but it is going to have a significant impact. The way we look at it is that there's going to be a need and a desire to invest a lot in Genai. There is a need to invest in the infrastructure, the software, the company adoption that is going to lead to a boost of GDP. After that, we're also going to see significant productivity gains. We estimate that over the next decade for the US economy, we could have a boost of three and a half percent of gend.

Okay, guys like you and fancy you see how Greg is dressing now, He said, Ey, he used to dress like a market economist. Now this looks like he's consulting to somebody at ten thousand.

Dollars an hour down in Dallas, flying in.

We're in contacts. Now you ditch the ditch the glasses.

That's the heart of the matter.

Now, did you get wonky or I'm looking at productivity and we, of course we lost this year the giant of productivities, Robert Solo of MIT I got capital dynamics, I got labor dynamics, and I got this.

Wackle thing called total factor productivity. Which of those three is the shock forward to our new American productivity?

Well, it's it's a timing issue, right. Initially you have to invest. So initially the boost to economic activity actually comes from the additional investment capital deepening in the capital deepening and capital investment generally in technology. After that you get the benefits in terms of productivity growth, and it's not going to be some magical number that comes out of nowhere. It's actually going to be more efficiency in the way we do our jobs, and it's going to be across sectors. And I think we have to step away from this notion that it's only going to be low skilled jobs. Actually, high skilled jobs can be augmented quite tremendously by Jenai.

Let me quantify this for our audience here. Greg estimates and the team D and Y estimate that the lift to global GDP from stronger productivity to total Are you ready for this? Between one point two and two point four trillion dollars over the next decade. But that's not just the US now, is it? Where do you think the impact of that productivity boost is going to be felt most? Is it going to be the US? Is it Europe? Is at Asia?

I think the US is going to benefit most from that because the US is essentially leading the way when it comes to these new technologies. But Europe is investing a lot. And then after that you have China and the rest of Asia that's also falling very closely. So that's going to be a positive booth in terms of global economics.

How do you an eye treat China hang saying is greatering, et cetera, et cetera.

What is the ey summary of how China will recover?

Well?

I think we have to understand that China is no longer going to be the global engine of growth that it once was. We're going to be in an environment where there are cyclical headwinds in terms of economic activity. We're seeing less spending in terms of retail sales, industrials activity, the real estate sector. But we're also and very importantly, seeing structural headwinds. The population is not only aging, it's also shrinking. That is a big drag on the economy's potential growth. And I wouldn't be surprised that in the next five to ten years China grows at an advanced economy pace rather than as an emerging economy.

Pervidak with Ey just really really valuable in a lot of different You get a whole different perspective from the major accountancies and consultants than you do from people going, you know what's.

GDP got no skin in the game. That's right, it's an unfiltered, unbiased opinion.

Now, Brian Lovett with Invesco, Brian, I got some chit chat. But because the time, let's get right to it now. Is cash an asset for Invesco?

Well, investors are clearly viewing it as an asset, and I think it does hold the place at certain times. The challenges Right now with yields above five percent, investors are loving it. The risks that they have is reinvestment. And so if we're right, and the Federal Reserve is going to be normalizing the yield curve, well, then those yields will come down. We've been telling people lock it in. If you like yields for thirty days, you'll probably love them for five or ten years.

Brian, I want you to put on your foreign exchange hat for me for a second. I'm going to talk about one of your close colleagues, Alethio de Longez, who's a senior PM head of Global Tactical Asset Allocation at Investco, and his work on factor investment in foreign exchange. Talk to us about the beta regime that we're coming out of, one where FX performance has really been driven by rate differentials. Are we moving into a new regime where value is going to take control of that?

Talk to us well, I think over the next couple of year years we will Typically what happens is the FED normalizes, the ye'll curb. You start to unlock some of the value that exists in the world, whether that's in US value stocks, whether that's in right now international market. The challenge we have in the near term is that we got a lot of returns in November and December. I wish we would have taste them out over a longer period of time. So you've growth below trend right now. The market recalibrating where the Fed's going to be in March and by the end of the year, so you may see a little bit of a quality growthy trade again in here. But if you're an intermediate term investor expecting the FED to normalize the yelk curb, then yeah, value oriented investments should perform well over the next couple of years.

And talk to us a little bit about the the end of QT. I mean there's been some talk that's going to end early. Talk to us about central bank runoff. Does this have the potential to crowd out other fixed and comac and classes.

I don't think it does. I mean the fixed and cume market has been behaving, I would say appropriately. If you look at where the tenure treasury has been, it's now hovering around what the nominal growth potential of this country likely is. So I don't think that this is being significantly manipulated one way or the other. And as the FED has wound down its balance sheet, the markets have operated. The markets have operated just fine. I think it makes sense right now. Policy is just too tight, you know, five and a quarter on the funds rate, slowly winding down the balance sheet when growth is slowing. Policy is too tight, so we should expect an easier environment going forward.

Brian Levitt, thank you so much. Too short of visit. We'll do it again soon, sin soon. Brian Levits with Invesco there with a more holistic view on your asset allocation.

Now joining us a gentleman of inherent optimism.

There's points where he can wax philosophical and get gloomy.

But Neil Dutta with.

Us with run back, and I made very clear he was out front with optimism amid the gloom.

I'm gonna call it fourteen months ago or so. I just looked at Atlanta GDP and.

After a four point x percent Q three, we're modeling out somewhere in the vicinity of a normal American economy. Two point three percent. That seems better than good versus a gloom of recession. Neil Dutta, thank you so much for joining us. Is two point three percent a run rate for the American economy?

Yeah, I think so.

I mean, I think we're probably in a range of around two to two and a half percent. I mean, it's important to note, as you did, that we're coming off of a very strong quarter in the third quarter, so it was I think inevitable that the economy would buckle a little bit under its own weight. I mean, you can't sustain that kind of momentum. But I think what's important, Tom, is that you know that estimate you mentioned, you know, Atlanta fed around you know, let's say two percent. I mean that's despite a pretty significant decline in inventory investment. In other words, inventories are cutting GDP growth, and so final sales look pretty healthy. And you know, I think that's important because you know, ultimately firms are going to replenish inventories, and when that happens, supports the local areas of the economy.

Bob Burgess, Sir Robert Burgess of Bloomberg News, as my chart of the week, folks, it's a log regression of retail sales since time began. I think he goes back to the War of eighteen twelve, And the answer is, with the noise around the Great Financial Crisis and noise around COVID, with the stimulus, we've had a massive retail boom.

Money questioned Neil data. Does retail consumption sales do they come back to trend line or do we assume at some point we see diminished consumption off long term trend.

Well, I don't think it's coming back to that trend line. I mean absence some kind of a recession. You know, people tend to keep on spending money so long as the economy and employment are growing, and that's what's happening, you know, I do. I mean, you mentioned a lot about the stimulus, but I really think that that's you know, yesterday's story. I mean, ultimately, what's driving consumers spending at this point is a revival in real incomes. Right, So inflation has slowed, the labor markets are steady, and as a result, real incomes have been accelerating. So that's ultimately what's driving consumer spending. And I think that that's poised to continue. It's one of the reasons why consumers are a bit more confident. I mean, the fact that prices have come down and that'll likely continue over the next couple of quarters.

That's important.

And you know that decline in price inflation lifts in real incomes obviously, and that in turn supports consumer spending. This story you know, the excess savings, fiscal stimulus. You know, these arguments I think have really outlived their usefulness.

Neo financial markets appear infatuated, infatuated with next week's GDP sorry PCE deflator print. Talk to us about that. What are you looking for next week?

Well, I think it'll be a soft point two. I think the Bloomberg News consensus is point two. I think it's a soft point too. But you know, what I would say is that, you know, for all this talk about the last mile of inflation is the hardest. It's a bumpy road back to two percent. It's important for people to know that core PCEE inflation over the last six months is already running below two percent. Right It's at one point nine percent at an annual rate. So you know, keep in mind that, you know, the Fed believes that core inflation this year is going to be two point four percent a year over year. In the fourth quarter, we're running below that. So I think by the time the Fed meets in March going to have to revise down their core inflation estimates yet again. And I think it's going to be very difficult for them to, you know, push back on raid cuts at that point. I mean, so they may they may either their cutting in March or they're using the March meeting to set up a raid cut.

In by Neil Tom is right, you called it looking back some You know, a year and a half ago, you were fading the hard landing scenario. You were calling for the soft landing and materialized. And here we are today and the markets are still looking for soft landing. Do you agree with that?

Yes? I do. I mean I think, you know, I think the markets are right to anticipate a benign scenario. I mean there's a lot of inertia behind the disinflation process. I mean I think this time last year, I mean Powell probably in my view was probably was prematurely, frankly declaring the start of a disinflation process. I mean at the time, I wasn't arguing for soft landing. I was arguing for no.

Landing, right right.

But but but I think, but I think at this point, you know, we have a soft landing unfolding right before our eyes. I mean, I have a fair degree of confidence that inflation is cooling off. Keep in mind that used car prices will probably decline quite sharply over the next several months. That's not something that we saw in either November or December, but it's it's likely something we're going to see a part of the year. And we know that housing rents are moderating, Well that's growing.

Yeah, that's where I wanted to go because to me, that's the theme for the day. Julia Coronado out with a chart on this. Joe Lavorn I thought it was quite good this morning. Let's hear from Neil Dota of Renmack and Neil, the fact is shelter wrapped around rent and not this goofy oe er, which I have no idea how it's calculated. But what's the actual countable disinflation you see across multifamily, across single home rentals like what Blackstone's doing, and across home ownership in America.

Well, it's interesting you mentioned Oeer. I mean, one reason why that number is looking a little bit firmer, Tom, because the owned housing stock obviously is more single family than multifamily, right, and so single family residential rents have been holding up a little bit firmer than multi than apartment rents. You know, we saw yesterday as an example that multi family completions jump sharply, and so we do have a lot of apartments supply coming on. But I think what's important is that new tenant rents, which is what the BLS released yesterday. That index is down about four and a half percent against against last year. Now, it probably overstates things, you know, that is clear in the data. It tends to over exaggerate the swings in the CPI number, but it does tell you fairly clearly what the direction of travel is lower. And so you know, I think housing and rental inflation will continue to melt over the next couple of quarters. And again I mean that will support a recalibration of monetary policy this year.

I got one final question is really important? Do we need to model out.

After pictures and coutches, Like if we get out in your opening day where the Detroit Targers starts strong, they're going to be playing one thousand.

Ball by you know they're gonna win opening day and then it's down from there.

Neil Daughta, When we get up to April, are we going to have some form of inflation series one point x percent?

Can it get below two?

I mean, it's it's plausible as I mentioned. I mean, we're there, We're already there on a six month basis, and you know, you still have some distance in front of us. So it's certainly plausible that you'll be you on a path Damien's trying to make.

Someone I mean, yeah, you know, I mean, Tom John Lesa. They always want to know from you, because you know, they want to know about the US economy. What I want to know is, I want to know your thoughts on China. I want you to talk to me about China deflation. I want to talk about dollar you on. I want you to talk to me about the property sector and this economy that's so clearly on its back, And forget about investing in China. What's the impact on global financial markets and valuations here?

I mean, I don't I mean to me, China is a bit of a black box. I don't follow it very closely. What I can tell you is that for all the weakness in China, it's important to note that, you know, the emerging markets outside of China had been holding up reasonably well, yes, during this period, So I think that's that's notable.

So maybe you know the.

Two thousands were all about how China was sort of the mental driver of demand globally, and maybe that's not as much the case anymore.

Here's your valuable Neil Dutta, Thank you so much. A lot to chew on there, folks, with optimism on the American economy wrapped around a better than good real wage. This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.

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