Latest / Bloomberg Intelligence / Saudis Go In For The Kill As They Target U.S. Oil Producers

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Saudis Go In For The Kill As They Target U.S. Oil Producers · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Swee you.
• 0:05
  Speaker 1: Along with my co host Lisa brahma Witz. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well, it has been an historic
• 0:22
  Speaker 1: forty eight hours for the global energy markets. We have
• 0:24
  Speaker 1: w t I crewed yesterday trading well negative for the
• 0:27
  Speaker 1: first time ever. We're a little bit positive today on
• 0:30
  Speaker 1: that May contract. That's the last day for the trading
• 0:33
  Speaker 1: of the May contract. To give us a sense of
• 0:35
  Speaker 1: what is going on in the global oil markets. Who
• 0:38
  Speaker 1: welcome John Kilduff, founding partner of Again Capital, based in
• 0:41
  Speaker 1: New York City, New York City, John, thanks so much
• 0:43
  Speaker 1: for joining us. What does negative oil negative? W t A.
• 0:47
  Speaker 1: What did that mean yesterday? Well, it meant that there's
• 0:52
  Speaker 1: just an abject gluts of oil uh in the US,
• 0:57
  Speaker 1: particularly you're in the Gulf Coast in the Pushing Oklahoma region,
• 1:02
  Speaker 1: that any more additional barrels are having a problem finding
• 1:07
  Speaker 1: a home. Basically, the folks who have storage all of
• 1:11
  Speaker 1: a sudden found themselves not sitting on a oil tank,
• 1:14
  Speaker 1: but sits sitting in the penthouse. And uh, we're able
• 1:18
  Speaker 1: to charge accordingly. Other words, not only am I going
• 1:21
  Speaker 1: to get free oil, you're gonna pay me to take
• 1:24
  Speaker 1: your oil. And again, it's because of what's happened here
• 1:27
  Speaker 1: over the past number of weeks now, and it's just
• 1:29
  Speaker 1: crash in demand both globally and hearing United States, where,
• 1:33
  Speaker 1: for example, gasoline demand has so John, I'm looking right
• 1:38
  Speaker 1: now at the June contract w T I, which has
• 1:40
  Speaker 1: plummeted to about fourteen dollars of barrel, just to give
• 1:45
  Speaker 1: you a sense. Back in March, when things we're not
• 1:47
  Speaker 1: looking too pretty, Uh, they were twenty almost twenty four
• 1:50
  Speaker 1: dollars a barrel, comparatively high. Um where we headed here.
• 1:55
  Speaker 1: Are we going to see the same kind of trading
• 1:56
  Speaker 1: activity in the June contract as we did in the
• 1:58
  Speaker 1: May one? Yeah, it's very much my sense that we
• 2:01
  Speaker 1: we will. I mean that this is going to be
• 2:03
  Speaker 1: a steady march lower. The physical market conditions are only
• 2:07
  Speaker 1: going to worsen over the next several weeks for a
• 2:10
  Speaker 1: couple of reasons. Um, even though we have the US
• 2:14
  Speaker 1: recount plunging and we are starting to finally see some
• 2:17
  Speaker 1: US oil production get get reined in and decline by
• 2:20
  Speaker 1: about seven thousand barrels from the recent peak by the way,
• 2:24
  Speaker 1: but this market is going to have to stare down
• 2:27
  Speaker 1: a massive amount of Saddi Arabian crude. Oh, the Sadie's
• 2:32
  Speaker 1: are going in for the kill here. It looks like,
• 2:34
  Speaker 1: and um really just you know, put a knockout blow
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  Speaker 1: onto our domestic producers, particularly the shale players, because they
• 2:42
  Speaker 1: have barrel schedule to be heading our way over the
• 2:46
  Speaker 1: course of the next couple of months here that are
• 2:49
  Speaker 1: going to compete for what little available storage space remains,
• 2:53
  Speaker 1: uh and use that crew to run it through their
• 2:56
  Speaker 1: refinery in Texas. That will preclude them from you know
• 2:59
  Speaker 1: what they usually do, which is by at least some
• 3:02
  Speaker 1: US Gulf of Mexico produced crude oil. So, Um, this
• 3:06
  Speaker 1: is gonna get a lot worse still before it gets better,
• 3:08
  Speaker 1: all right, So give us a sense of what that's
• 3:10
  Speaker 1: going to mean for the US oil producers, the shale
• 3:13
  Speaker 1: patch uh companies. Um, you expect a wave of bankruptcies
• 3:18
  Speaker 1: consolidation if in fact this does come to pass unless
• 3:22
  Speaker 1: the administration comes through with some kind of aid package.
• 3:25
  Speaker 1: There's been some hint of that. Yes, there's there's no
• 3:29
  Speaker 1: one there's no way around it that these and these
• 3:31
  Speaker 1: negative prices are are just uh, they're problematic for even
• 3:35
  Speaker 1: companies as large as Conuco and Exxon Mobile, although they
• 3:38
  Speaker 1: will withstand it, uh, and they will you know, be
• 3:41
  Speaker 1: on the other side of this thing and probably be
• 3:43
  Speaker 1: the ones picking up the pieces. Here. You're going to
• 3:45
  Speaker 1: see a consolidation and concentration u emerge in the industry
• 3:50
  Speaker 1: where there's probably only be a handful of really significant
• 3:54
  Speaker 1: the large players because they're the ones with the deep
• 3:57
  Speaker 1: pockets that can afford to a whether this arm and
• 4:00
  Speaker 1: then you know, buy out or or buy these assets
• 4:02
  Speaker 1: out from the auctions and bankruptcies that ensue. So, John,
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  Speaker 1: you did mention President Trump's uh pledged support of the
• 4:11
  Speaker 1: energy industry. So let's go there, President Trump tweeting earlier
• 4:14
  Speaker 1: this morning, we will never let the great US oil
• 4:16
  Speaker 1: and gas industry down. I have instructed the Secretary of
• 4:18
  Speaker 1: Energy and Secretary of the Treasury to formulate a plan
• 4:21
  Speaker 1: which will make funds available so that these very important
• 4:23
  Speaker 1: companies and jobs will be secured long into the future.
• 4:27
  Speaker 1: How much do you sort of uh foresee that helping
• 4:31
  Speaker 1: things given the fact that, yes, federal law does authorize
• 4:35
  Speaker 1: the Energy Department to set aside emergency supplies, but the
• 4:37
  Speaker 1: agency has only ever used about two thirds of that capacity.
• 4:41
  Speaker 1: So how much are we can actually end up seeing here? Well,
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  Speaker 1: I mean, for starters, you know, you know that the
• 4:49
  Speaker 1: Saudi Arabia has never been a friend of ours. Whenever
• 4:51
  Speaker 1: there's oil market turmoil, when the prices are sky high,
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  Speaker 1: they're very slow to put moral on the market to
• 4:57
  Speaker 1: help us out. And then and and right now, Um,
• 5:00
  Speaker 1: I don't you know, I don't want to be over
• 5:02
  Speaker 1: the top about what they're doing, but I mean they
• 5:04
  Speaker 1: are really coming at us hard here. Uh. This is
• 5:07
  Speaker 1: not something an ally or a friend were certainly a
• 5:10
  Speaker 1: country that benefits from our protection should be doing. If
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  Speaker 1: I was the president, I had urged the president to
• 5:16
  Speaker 1: embargo there oil and keep these forty tankers off and
• 5:19
  Speaker 1: away from this market. But um, what we don't want
• 5:22
  Speaker 1: to have happened here, um, is for the oil industry
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  Speaker 1: to get wrecked and then we find ourselves once again
• 5:30
  Speaker 1: vulnerable to the policies of OPEC. Plus and Russia and UM,
• 5:34
  Speaker 1: and we get a tight market where consumers, the US
• 5:37
  Speaker 1: consumers get squeezed again, we go through the whole cycle
• 5:39
  Speaker 1: one more time. UM. That's what I'm concerned about. And
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  Speaker 1: I think to the extent that the administration can lend
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  Speaker 1: some kind of aid and prop up at least a
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  Speaker 1: portion of the industry, they should. They should definitely do it.
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  Speaker 1: They should get oil into the Strategic Patrolling Reserve. I
• 5:52
  Speaker 1: have always been an advocate of using that aggressively because
• 5:55
  Speaker 1: we're up against the cartel. Um. You know, we least
• 5:59
  Speaker 1: the oil when when when OPEC is tightening the spigot,
• 6:04
  Speaker 1: and build it up now when prices are super low,
• 6:07
  Speaker 1: and we'll have an insurance policy in the future, so
• 6:09
  Speaker 1: you know, hopefully they'll get aggressive on an administration we
• 6:11
  Speaker 1: can do something about this. This is not an entirely
• 6:14
  Speaker 1: free market. That's the problem. John Kildeff, thank you so
• 6:17
  Speaker 1: much for being with us. John kilda founder of Again
• 6:19
  Speaker 1: Capital on the oil markets not entirely a free market.
• 6:23
  Speaker 1: Although you can get oil for free if you can
• 6:25
  Speaker 1: store it somewhere, in fact, someone will pay you to
• 6:27
  Speaker 1: take it off their hands. At least when it came
• 6:29
  Speaker 1: to the main contract. Interesting to see whether we'll see
• 6:32
  Speaker 1: the same dynamic again play out with the June contract.
• 6:35
  Speaker 1: John Kilduff saying it looks like it's the very likely
• 6:38
  Speaker 1: possibility given the supplied to Man dynamic and the glut
• 6:41
  Speaker 1: out there of crude. Well, one thing I think investors
• 6:47
  Speaker 1: are beginning to become accustomed to in this coronavirus era
• 6:50
  Speaker 1: in terms of the markets is volatility. I'm looking at
• 6:53
  Speaker 1: the VIX right now up a little more than three
• 6:55
  Speaker 1: full points here to forty seven. That's a long way,
• 6:58
  Speaker 1: certainly from the peak several weeks ago about eighty, but
• 7:02
  Speaker 1: it's also a long way from where we've historically been
• 7:05
  Speaker 1: trading in the thirteen fifteen kind of level, So a
• 7:08
  Speaker 1: higher risk environment for short. Someone to give us some perspective,
• 7:12
  Speaker 1: there's nobody better than David Kotok. He's a chairman and
• 7:15
  Speaker 1: chief investment officer of Kumblan Advisors, about three billion dollars
• 7:19
  Speaker 1: under management. So David, thanks so much for joining us.
• 7:21
  Speaker 1: I don't think we've really chatted much at all since
• 7:23
  Speaker 1: this coronavirus has really become the narrative of not only
• 7:26
  Speaker 1: our lives but also financial markets as well. I would
• 7:30
  Speaker 1: love to get your long term perspective on kind of
• 7:32
  Speaker 1: how you're thinking about this new world that that we're
• 7:36
  Speaker 1: in and how to allocate capital. Well, thank you, Paul.
• 7:40
  Speaker 1: We are hunker down as everyone else in the world
• 7:45
  Speaker 1: who can hunker down just doing our view is a
• 7:49
  Speaker 1: cash reserve in equity portfolios is necessary in bond portfolios
• 7:57
  Speaker 1: highest grade credits. We are about to watch the dismemberment
• 8:02
  Speaker 1: of the credits related to lower grade energy sector, and
• 8:08
  Speaker 1: we expect that to be a worldwide phenomenon. And we
• 8:13
  Speaker 1: have to wait for the elements that we know we
• 8:19
  Speaker 1: must obtain, and they are testing, testing, testing, immune system
• 8:27
  Speaker 1: enhancement antibodies, vaccines, and robust, credible treatments. And as soon
• 8:35
  Speaker 1: as we have those, we can open up and we
• 8:39
  Speaker 1: can get back to work and we can eventually fully recover.
• 8:44
  Speaker 1: We cannot recover before we have these things, and any
• 8:50
  Speaker 1: attempts to recover before you have them is a high
• 8:57
  Speaker 1: risk gamut. We're about to tell that in the United States,
• 9:02
  Speaker 1: where we see people in bowling alleys in Georgia and
• 9:08
  Speaker 1: on the beaches in Jacksonville and assembled at state capitals protesting,
• 9:15
  Speaker 1: and we're gonna find out in two or three or
• 9:18
  Speaker 1: four weeks. If there are infectious surges in those locations
• 9:24
  Speaker 1: or tied to people who participated in those activities, we're
• 9:31
  Speaker 1: going to have that evidence very soon. And a lot
• 9:34
  Speaker 1: of people are worried about what the economic damage would
• 9:37
  Speaker 1: be from a resurgence of cases. You're saying that it's
• 9:40
  Speaker 1: important to hide out in the safest of investments through
• 9:43
  Speaker 1: this all as there is a washout effect of the shutdowns,
• 9:48
  Speaker 1: and we're seeing that certainly in the bond market today.
• 9:50
  Speaker 1: Tenure treasure yelled back at near all time lows zero
• 9:54
  Speaker 1: point five FO. You've been covering treasuries, you could cover.
• 9:58
  Speaker 1: You understood the FED inside now for decades. Where do
• 10:01
  Speaker 1: you think the tenure yield is going basis points here, Oh,
• 10:06
  Speaker 1: I don't know, because the FED is trying to follow
• 10:12
  Speaker 1: a world war to model. Lisa and the World Work
• 10:16
  Speaker 1: to model essentially took the FED and said, we're going
• 10:20
  Speaker 1: to help the Treasury finance all it has to finance,
• 10:24
  Speaker 1: and we're going to become partners with Treasury, and we're
• 10:27
  Speaker 1: gonna set aside moral hazard discussions for later. We're gonna
• 10:33
  Speaker 1: set aside FED independence for later, and we'll deal with
• 10:38
  Speaker 1: that after the crisis and that's what's it worked. So
• 10:43
  Speaker 1: in World War Two, the FED stabilize the entire treasury
• 10:48
  Speaker 1: curve within a few basis points and it became predictable
• 10:52
  Speaker 1: and a reference point. My expectation is the FED will
• 10:55
  Speaker 1: get to that here as well, and we'll have a
• 10:59
  Speaker 1: positive of lee sloped full yield curve of treasuries managed
• 11:06
  Speaker 1: and stabilized by the FED. I sure hope so, because
• 11:10
  Speaker 1: that will then become a platform reference for high grade
• 11:15
  Speaker 1: credit for the entire world, and it is much needed
• 11:20
  Speaker 1: right now. David Kotalk, this is fantastic and really interesting.
• 11:24
  Speaker 1: In other words, yield curve control will be the policy
• 11:27
  Speaker 1: from the Federal Reserve, as it essentially monetizes the debts
• 11:31
  Speaker 1: of the United States by buying up the excess treasuries
• 11:35
  Speaker 1: that the US government sells cells to plug its deficit.
• 11:38
  Speaker 1: Given that model, how big can the Federal Reserve balance
• 11:42
  Speaker 1: sheet get? My estimate is the Federal Reserve balance sheet
• 11:47
  Speaker 1: could grow to between eight and eleven or twelve trillion,
• 11:52
  Speaker 1: and it would be able to be financed and managed
• 11:57
  Speaker 1: and maybe larger. In World War two, when once Pearl
• 12:03
  Speaker 1: Harbor occurred and the FED policy changed in it went
• 12:10
  Speaker 1: on for four years. The Federal Reserve assisted the United
• 12:15
  Speaker 1: States of America in financing the war, and the debt
• 12:19
  Speaker 1: to GDP exceeded a hundred percent, and it had to
• 12:24
  Speaker 1: do it, and we were able at the end to
• 12:27
  Speaker 1: be victorious in a war. This is a different kind
• 12:30
  Speaker 1: of war, but the models of the same and federal
• 12:34
  Speaker 1: finances needed. It's needed in the states and hospitals, in
• 12:38
  Speaker 1: the cities, in agencies and nonprofits for assistance to business
• 12:44
  Speaker 1: or else. We will have a mass of financial failures
• 12:48
  Speaker 1: and bankruptcies and there's no reason to have them. If
• 12:52
  Speaker 1: the policy is to gap across the valley to the
• 12:57
  Speaker 1: other side of the crisis in science and medicine will
• 13:02
  Speaker 1: fit this. So, David, about thirty seconds, just give us
• 13:05
  Speaker 1: your sense of what the government's fiscal stimulus to date
• 13:09
  Speaker 1: and what else you think needs happen. Well, we have
• 13:12
  Speaker 1: two trillion direct, we have an argument of three or
• 13:15
  Speaker 1: four trillion which would be indirect, and we have a
• 13:19
  Speaker 1: current debate for another half a trillion. My view is
• 13:22
  Speaker 1: will need a number of more chanchas of that, and
• 13:26
  Speaker 1: sooner is better than later. So I hope politicians realize
• 13:31
  Speaker 1: it and deliver it. David Kotalk, thank you so much
• 13:34
  Speaker 1: for taking the time. All my best to your family
• 13:37
  Speaker 1: and to yourself as you manage through this. David Kotalk,
• 13:40
  Speaker 1: chairman and chief investment officer at Cumberland Advisers talking yield control,
• 13:45
  Speaker 1: your guild, curve control, and that's actually something that a
• 13:47
  Speaker 1: number of strategists are saying. We seem to be headed
• 13:50
  Speaker 1: towards with the federal reserve buying. The bulk of the
• 13:54
  Speaker 1: treasury issue is that the federal that the U. S.
• 13:57
  Speaker 1: Treasury is selling to plug the skill deficit that we
• 14:01
  Speaker 1: are developing to pay for some of these necessary bridges
• 14:05
  Speaker 1: to get together side. Paul, Yeah, and David suggested it
• 14:08
  Speaker 1: from a fiscal stimulus perspective, there's very likely going to
• 14:12
  Speaker 1: need to be more just given our sense of timing
• 14:14
  Speaker 1: of how this may play out here. So you know,
• 14:17
  Speaker 1: it looks like the government is going to have to
• 14:18
  Speaker 1: remain pretty active here. The Fed has certainly done its
• 14:21
  Speaker 1: job as the dollar continues to strengthen. In light of
• 14:28
  Speaker 1: this flight to haven, flight to quality is the fate
• 14:32
  Speaker 1: of emerging markets, and especially given the fact that the
• 14:35
  Speaker 1: developed nations really have been strapped on their own and
• 14:38
  Speaker 1: dealing with the coronavirus We're so lucky Eric Fine joining
• 14:42
  Speaker 1: US portfolio manager of focusing on Emerging markets fixed income
• 14:45
  Speaker 1: strategy at van Eck Global. We have touched with it,
• 14:47
  Speaker 1: based with him yesterday after the I M F meetings
• 14:50
  Speaker 1: and some of the focuses that everyone is looking at.
• 14:54
  Speaker 1: I just want to start with the flight of cash
• 14:57
  Speaker 1: from developing markets. How much appetite are you hearing from
• 15:01
  Speaker 1: your colleagues and from frankly uh staff within your own
• 15:05
  Speaker 1: company about putting money to work within the developing world
• 15:09
  Speaker 1: given the pain that we're seeing in in places like
• 15:12
  Speaker 1: the United States and Europe and the lack of wellness
• 15:14
  Speaker 1: to take risk. Thanks for the question, and uh So,
• 15:19
  Speaker 1: first of all, last week saw the first influence e
• 15:22
  Speaker 1: M bond funds UM. So that's a narrow answer to
• 15:25
  Speaker 1: your question. Second, I'd say more broadly, e M is
• 15:29
  Speaker 1: different from the pre global financial crisis e M. Before
• 15:34
  Speaker 1: the before the Global financial crisis, when I spent about
• 15:37
  Speaker 1: half of my career UM when something went wrong in
• 15:41
  Speaker 1: the world, all the money flowed out and that was
• 15:43
  Speaker 1: the end of the story. UM. After the Global financial crisis,
• 15:47
  Speaker 1: markets learned that having high real interest rates, independent central banks,
• 15:52
  Speaker 1: good fiscal policy. UM actually generated good returns. And so
• 15:56
  Speaker 1: the big change from this I m US meeting compared
• 16:00
  Speaker 1: to UH past crisis meetings was the discussion was very
• 16:04
  Speaker 1: much who are the winners? Who are the losers? Obviously
• 16:07
  Speaker 1: everything is kind of a loser, right, so it's going
• 16:09
  Speaker 1: to be a big relative question to a big extent. Um.
• 16:13
  Speaker 1: But uh, last week we saw the first inflows in general. Right.
• 16:17
  Speaker 1: I can't talk specifically about my company, of course, um.
• 16:21
  Speaker 1: Um yet um, because that's a matter of official timing issues. Um.
• 16:25
  Speaker 1: But uh, but it hasn't been as bad as it's
• 16:29
  Speaker 1: as it's been in the past. And the other thing,
• 16:31
  Speaker 1: I'd say official support. A lot of this official support
• 16:34
  Speaker 1: is not just to their own economies, it's to the
• 16:38
  Speaker 1: e m s and that's also a big change. So, Eric,
• 16:41
  Speaker 1: we've seen just unprecedented volatility and energy markets over the
• 16:45
  Speaker 1: last couple of days. How does that kind of impact
• 16:47
  Speaker 1: emerging markets broadly defined? Great question? Um. The problem with
• 16:53
  Speaker 1: oil is it tends to correlate with everything, and when
• 16:56
  Speaker 1: the markets seat oiled down, they think it's risk down
• 16:59
  Speaker 1: because they think it's demand down. Um. I think that's
• 17:03
  Speaker 1: generally right, but I don't think that's the right characterization
• 17:07
  Speaker 1: of why oil is down right now. Um, it is
• 17:10
  Speaker 1: about a storage capacity, and it is about a supply shock,
• 17:15
  Speaker 1: not necessarily a demand shock. So that's the broadest point
• 17:18
  Speaker 1: I'd made. The second point I'd make is there are
• 17:20
  Speaker 1: winners and losers. UM. Consumer the consumption basket. The typical
• 17:25
  Speaker 1: consumption basket in an emerging economy is food and energy.
• 17:30
  Speaker 1: So a lot of these countries are seeing their inflation
• 17:33
  Speaker 1: going down. UM. They are not just a bunch of
• 17:35
  Speaker 1: oil exporters. UM. There are even some explicit winners, like
• 17:40
  Speaker 1: South Africa. Strikes me, so I thought that it's complicated
• 17:42
  Speaker 1: and all these countries, but they export gold and their
• 17:47
  Speaker 1: import of oil. UM. So the oil story generally correlates
• 17:51
  Speaker 1: badly and for legitimate reasons. But for me, it's all
• 17:56
  Speaker 1: about the details. UM. And there are winners and losers.
• 18:00
  Speaker 1: And I was glad to see and I m meetings
• 18:02
  Speaker 1: that the focus was not oh, just exit and sell everything. UM,
• 18:06
  Speaker 1: it was very much careful analysis of country by country
• 18:10
  Speaker 1: and what it means. One of the biggest countries in
• 18:12
  Speaker 1: this complex is China, and I've heard a real bullcase
• 18:15
  Speaker 1: made that China will recover first, given the fact that
• 18:18
  Speaker 1: they were first to experience the coronavirus, and we did
• 18:23
  Speaker 1: see signs of that in the economic data. However, they
• 18:26
  Speaker 1: are now facing the decline into band for the supply
• 18:29
  Speaker 1: chain items that they have previously supplied. Given the fact
• 18:32
  Speaker 1: that the rest of the world is shut down, what's
• 18:34
  Speaker 1: the prospect there? Yeah, China is UM. China is one
• 18:39
  Speaker 1: of the most important countries, not just because it's the
• 18:41
  Speaker 1: largest economy and PPP terms from you know, second biggest UM,
• 18:45
  Speaker 1: but UH, if you're going to see a V recovery anyway,
• 18:49
  Speaker 1: it seems to me it's most likely a V shaped recovery.
• 18:52
  Speaker 1: Letters are probably not the best way to answer economic
• 18:55
  Speaker 1: questions this time around, but the most likely to see V.
• 18:58
  Speaker 1: This is the biggest fiscal sting know US they've had ever. Basically,
• 19:02
  Speaker 1: UMU the lockdown team to have been working and they're
• 19:06
  Speaker 1: unwinding and the early data, as you refer to is
• 19:09
  Speaker 1: has been positive. Another key feature of China is it's
• 19:12
  Speaker 1: acting as a global stabilizer. UM. They are keeping their
• 19:16
  Speaker 1: effects stable. That is a very unusual role and it's
• 19:19
  Speaker 1: an important anchor for UH for the e m UM.
• 19:23
  Speaker 1: You will also, I think a big signal will be
• 19:27
  Speaker 1: on whether the Policy Committee coming up gets delayed or
• 19:31
  Speaker 1: not on the last one I see on China is
• 19:34
  Speaker 1: look for lower rates in our framework. Real interest rates
• 19:38
  Speaker 1: are too low there, but you know what frameworks. There's
• 19:41
  Speaker 1: a time for frameworks, and then there's a time for
• 19:43
  Speaker 1: sort of more narrative common sense thinking. UM. I would
• 19:46
  Speaker 1: I I don't think looking at zero percent or a
• 19:49
  Speaker 1: zero is an extreme sort of UH grabbing statement. But
• 19:53
  Speaker 1: I think much much lower interest rates in China as
• 19:56
  Speaker 1: it stimulates fiscally is a very very reasonable um uestion
• 20:00
  Speaker 1: to be asking, and that would boost it. But I
• 20:02
  Speaker 1: would say it's the likeliest to be UM. There are
• 20:05
  Speaker 1: some early signs UM and UH, and so this some
• 20:10
  Speaker 1: of this optimism UM is not unfounded. Hey, Eric, thanks
• 20:14
  Speaker 1: so much for joining us. Really appreciate your thoughts. Eric Fine,
• 20:17
  Speaker 1: portfolio manager for Emerging Markets fixed Income Strategy at van
• 20:21
  Speaker 1: Eck Global, based in UH New York City. So it's
• 20:24
  Speaker 1: interestingly so you think about the risk UH that emerging
• 20:27
  Speaker 1: market investors typically take on for that presumably better return.
• 20:30
  Speaker 1: One could argue there's quite amount of risk of potential
• 20:33
  Speaker 1: return in more developed markets. Now, given some of the
• 20:36
  Speaker 1: pullbacks we've seen in the volatility, we've seen. Yeah. I
• 20:39
  Speaker 1: think what Eric was saying though about the details is important.
• 20:41
  Speaker 1: The idea that lower oil prices will be beneficial for
• 20:45
  Speaker 1: countries that import, even though they could decimate, say the
• 20:49
  Speaker 1: budgets of the likes of Nigeria. Yeah exactly, yeah, exactly.
• 20:53
  Speaker 1: So one one one hand, it's good in terms of inflation.
• 20:56
  Speaker 1: On the other hand, if you're producing that commodity like
• 20:59
  Speaker 1: a lot of the emerging markets do clearly a big issue.
• 21:02
  Speaker 1: Market selling off today SMP off two point nine. We'll
• 21:06
  Speaker 1: have more. This is Bloomberg. As we watch oil prices plunge,
• 21:14
  Speaker 1: the question is what does this mean for inflation when
• 21:17
  Speaker 1: you see that the FED is trying to fight it
• 21:19
  Speaker 1: with everything that they have. The idea of this disinflationary trend,
• 21:23
  Speaker 1: the FED would like to see more inflation. We are
• 21:26
  Speaker 1: yet seeing inflation expectations fall once again. Ira Jersey joining us.
• 21:30
  Speaker 1: He's been talking about the disinflationary pressures. He's chief US
• 21:33
  Speaker 1: interest rate strategist for Bloomberg Intelligence. I want to start there.
• 21:37
  Speaker 1: Given the price of oil, what we're seeing, how correlated
• 21:40
  Speaker 1: has that been to inflation expectations in the near and
• 21:44
  Speaker 1: long term and the fedsibility to change that yeah, so,
• 21:47
  Speaker 1: so traditionally it's been very high. So the correlation between
• 21:51
  Speaker 1: short term inflation expectations, like you know one year and
• 21:54
  Speaker 1: two year is at times over well over correlated. Now,
• 22:00
  Speaker 1: I think the issue with the current move is that
• 22:03
  Speaker 1: even though UH front end contracts of oil so you know, May, June, July,
• 22:08
  Speaker 1: those are all coming down, but when you look at
• 22:10
  Speaker 1: what the markets still expecting for oil in say UH January,
• 22:16
  Speaker 1: it's still over thirty dollars. So the so the thing is,
• 22:19
  Speaker 1: even though we might have a short term dip in
• 22:21
  Speaker 1: headline inflation because of what's going on with the spot
• 22:25
  Speaker 1: oil price, and then your trim oil prices, if they
• 22:27
  Speaker 1: do go back up to those kind of thirty ish levels,
• 22:30
  Speaker 1: then you wind up seeing um basically an unchanged energy
• 22:34
  Speaker 1: component of cp I. So so actually today, ironically and
• 22:37
  Speaker 1: even yesterday, you didn't get significant moves in the market's
• 22:41
  Speaker 1: expectations of inflation. So I were thinking about, you know,
• 22:45
  Speaker 1: all the money that the government is spending here in
• 22:47
  Speaker 1: fiscal stimulus, how concerned is the treasury market for you know,
• 22:51
  Speaker 1: the US budget deficit made quadruple this year to almost
• 22:54
  Speaker 1: four trillion dollars. How's that being reflected in the market place.
• 22:58
  Speaker 1: At some point, we gotta start paying this stuff back.
• 23:00
  Speaker 1: It's not being reflected at all, UM And in fact,
• 23:04
  Speaker 1: it's just the other way. So that you know what
• 23:06
  Speaker 1: what tends to happen with treasuries. So unless you think
• 23:08
  Speaker 1: that the federal government actually will be UM in default
• 23:12
  Speaker 1: at some point in the future, what what tends to
• 23:15
  Speaker 1: happen is treasure yields tend to go down as the
• 23:17
  Speaker 1: Treasury is issuing more and more debt. And the reason
• 23:20
  Speaker 1: for that is because they're issuing that debt into economic weakness.
• 23:23
  Speaker 1: So two things occurred during during those periods. One is
• 23:26
  Speaker 1: there's a lack of appetite for other fixed income assets,
• 23:30
  Speaker 1: and people want to be in the safest assets, so
• 23:32
  Speaker 1: they jumping in by treasuries. And that's exactly what you've seen.
• 23:35
  Speaker 1: That's the flight the quality bid that UM that's been
• 23:38
  Speaker 1: in a lot of the government bond markets over the
• 23:40
  Speaker 1: past couple of weeks. UM. The other the other thing
• 23:44
  Speaker 1: is is that when the I think the expectation by
• 23:47
  Speaker 1: the market is that the Federal Reserve will continue to
• 23:49
  Speaker 1: be very large buyers of the treasury market. And because
• 23:54
  Speaker 1: of that UM there's not a lot of impetus, and
• 23:57
  Speaker 1: and it's very hard to get short the market because
• 24:00
  Speaker 1: you're worried that the that the Federal Reserve is just
• 24:02
  Speaker 1: going to keep on buying and buying and buying, so
• 24:04
  Speaker 1: you won't be able to um to profit from being
• 24:08
  Speaker 1: short the market, except maybe in very short term trade.
• 24:12
  Speaker 1: This is sort of a strange concept. The FED has
• 24:15
  Speaker 1: thrown everything it can think of and may try to
• 24:18
  Speaker 1: throw more at the markets, with its balance sheet expanding
• 24:21
  Speaker 1: by two trillion dollars in a month. You've got Congress
• 24:24
  Speaker 1: expanding its deficit, and yet you have city analysts rate
• 24:29
  Speaker 1: strategists saying that they don't think the Fed's views are
• 24:32
  Speaker 1: expansionary enough that they aren't necessarily easy and accommodative to
• 24:38
  Speaker 1: the degree that would be required given the shock that
• 24:42
  Speaker 1: we're seeing to the economy. Do you agree? So? I
• 24:45
  Speaker 1: disagree with them because I think that there's nothing zero
• 24:49
  Speaker 1: that central banks can do that will stimulate the economy
• 24:52
  Speaker 1: without getting people back to work and having physical distancing
• 24:56
  Speaker 1: rules change at the end of the day, and economy
• 24:59
  Speaker 1: is made up of transactions, and when you have a
• 25:02
  Speaker 1: significant reduction in those transactions that are occurring, and I
• 25:06
  Speaker 1: mean real money transactions, I mean me, you know, I
• 25:09
  Speaker 1: just take me as an anecdote, I've gotten I used
• 25:11
  Speaker 1: to get gas once a week in my car. I
• 25:14
  Speaker 1: have not gotten gas in a month. Right, So you
• 25:17
  Speaker 1: know you wonder why oil prices are low, Well, right,
• 25:19
  Speaker 1: there is the reason and that and you do that
• 25:21
  Speaker 1: over mill Yeah exactly, well, in in part, in part
• 25:27
  Speaker 1: it is and that's because you know of this physical
• 25:29
  Speaker 1: distancing that we're all doing. So because you know our
• 25:33
  Speaker 1: economic activity is lower by ten twenty percent, you know,
• 25:37
  Speaker 1: anything that the Fed does is not going to stimulate
• 25:40
  Speaker 1: demand for credit growth, and that's what you need in
• 25:43
  Speaker 1: order to UM And that's how monetary policy helps, is
• 25:46
  Speaker 1: that it helps people who want loans to be able
• 25:50
  Speaker 1: to get them at much cheaper levels. And they just
• 25:52
  Speaker 1: you know who who's getting out alone at this point
• 25:54
  Speaker 1: to start a business or to buy a car that
• 25:57
  Speaker 1: you can't go to a car show room, so how
• 25:59
  Speaker 1: are you going to buy a car? So alright, just
• 26:01
  Speaker 1: quickly we had we saw negative oil prices yesterday, or
• 26:05
  Speaker 1: we can see negative interest rates. Um well you have
• 26:09
  Speaker 1: in a lot of places, and in fact in the
• 26:11
  Speaker 1: treasury bills traded negative earlier today, so you have, um,
• 26:16
  Speaker 1: I don't think that the Federal Reserve will cut interest
• 26:18
  Speaker 1: rates to negative But you know, is it possible for
• 26:20
  Speaker 1: T bills to trade their on occasion? I think there is,
• 26:23
  Speaker 1: just because of that flight the quality bid that the
• 26:26
  Speaker 1: markets continuing to absorb. Thank you so much, Yeah, thanks
• 26:32
  Speaker 1: so much for joining us. We appreciate that. Ira Jersey,
• 26:34
  Speaker 1: Chief Interest rate Strategists for Bloomberg Intelligence. Thanks for listening
• 26:40
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 26:42
  Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast
• 26:45
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• 26:48
  Speaker 1: I'm Lisa bram Woyd's I'm on Twitter at Lisa A.
• 26:51
  Speaker 1: Bram Woit's one before the podcast. You can always catch
• 26:53
  Speaker 1: us worldwide. I'm Bloomberg Radio