Latest / Bloomberg Intelligence / Weak Dollar To Continue As Central Banks Reallocate: Borthwick

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Weak Dollar To Continue As Central Banks Reallocate: Borthwick · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Questions
• 0:34
  Speaker 1: about the US dollar and that's why we have Douglas Barthwick.
• 0:37
  Speaker 1: He is managing director in the head of FX at
• 0:40
  Speaker 1: Chapola Dane and a company and he joins us now. Doug,
• 0:43
  Speaker 1: thanks very much for being with us. Just a question
• 0:46
  Speaker 1: about the dollar is why is the dollar not looking stronger?
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  Speaker 1: I mean maybe it's a sort of fastle argument, but uh,
• 0:55
  Speaker 1: let's see macro backdrop. US growth is good, tax cut
• 0:59
  Speaker 1: has already been one, and perhaps even another one in
• 1:02
  Speaker 1: the offing. A dollar, though, has fallen if you go
• 1:05
  Speaker 1: back all the way in November sixteen the end of
• 1:09
  Speaker 1: it's fallen more than ten percent against the basket of currencies.
• 1:12
  Speaker 1: Why are there no dollar bulls out there? Well, there
• 1:16
  Speaker 1: were a lot of dollar bulls about back in November
• 1:19
  Speaker 1: of two dozen sixteen. As you as you discussed, but
• 1:21
  Speaker 1: they've sully been squeezed out of the woodwork. I think
• 1:24
  Speaker 1: that there's an expectation. Are folks certainly expected that as
• 1:28
  Speaker 1: a fed race rates that be positive for the dollar,
• 1:31
  Speaker 1: but they forgot at the same time as that, as
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  Speaker 1: the fed rais rates, other countries that also start raising
• 1:35
  Speaker 1: rates as well, or start moving out of the quantity
• 1:38
  Speaker 1: of easing that they were getting into. And against Europe specifically,
• 1:41
  Speaker 1: you've seen Europe turner and and now start to discuss
• 1:44
  Speaker 1: getting rid of their quantity of using. You've got the
• 1:46
  Speaker 1: Chinese talking about getting rid of theirs, and that creates
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  Speaker 1: some headway against which the dollar has a tough time
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  Speaker 1: and strengthening. But at the same time, you have to
• 1:55
  Speaker 1: remember the global central banks have been incredibly overweight the
• 1:59
  Speaker 1: dollar dollar, especially given what was happening in Greece about
• 2:03
  Speaker 1: ten years ago. Neither the grease issue is something that
• 2:06
  Speaker 1: no one talks about. These CenTra bank reserve manders are
• 2:09
  Speaker 1: reallocating back again and they're taking some of that overweight
• 2:12
  Speaker 1: dollar exposure and they're putting it into other currencies. The
• 2:14
  Speaker 1: euro is a good example of where money's going. Money
• 2:17
  Speaker 1: is also going into the end but a lot more
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  Speaker 1: money is going into the Chinese currency because the Chinese
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  Speaker 1: currency is not seen as a reserve asset as well,
• 2:24
  Speaker 1: and so instead of allocating money towards the dollar, you're
• 2:27
  Speaker 1: seeing center banks now allocated to different currencies, and that's
• 2:30
  Speaker 1: also seeing dollar weakness, you know, and Doug your rays
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  Speaker 1: really interesting question. How much is this a normalization of
• 2:37
  Speaker 1: the dollar relative to the rest of the world, and
• 2:39
  Speaker 1: how much is this an overcrowded trade the dollar will
• 2:42
  Speaker 1: keep on weakening. Well, it would be I think that
• 2:46
  Speaker 1: the dollar would be an overcrowded trade if if if
• 2:50
  Speaker 1: center banks were extremely underweight the dollar. Unfortunately, they're still
• 2:54
  Speaker 1: extremely overweight the dollar, where as much as portfolios are
• 2:58
  Speaker 1: still in the US dollar. However, maybe their trade flows
• 3:02
  Speaker 1: go to the US and so I would expect that
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  Speaker 1: you continue see this reweighting going on for quite some
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  Speaker 1: time now. Before the euro dropped down to one fifty,
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  Speaker 1: remember we were training over one fifty and right now
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  Speaker 1: that you'res trading at one twenty three the figure. So
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  Speaker 1: in my mind, you know, maybe we're halfway through in
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  Speaker 1: the move. But essentially, but before the European crisis, the
• 3:22
  Speaker 1: dollars in a weakening trend. It was just interrupted by Greece,
• 3:26
  Speaker 1: and now we're slowly getting back into that weakening trend.
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  Speaker 1: But I think the center bank managers, especially when it
• 3:31
  Speaker 1: comes down to the Chinese currency, are more interested now
• 3:34
  Speaker 1: in putting less weight into buying US treasuries and more
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  Speaker 1: weight into buying treasuries in Japan, let's say, and certainly
• 3:40
  Speaker 1: in China. So do you have a particular level for
• 3:43
  Speaker 1: the dollar euro right now? Dollar, you're as you said,
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  Speaker 1: one twenty three, let's call it, Well, it's one three
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  Speaker 1: right now. I think we're going to see up to
• 3:50
  Speaker 1: that one thirty and one level for sure, And I
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  Speaker 1: think it's just really a matter of time. It's it's
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  Speaker 1: not about the direction. I think it's more about the pace.
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  Speaker 1: And I think that the US is very concerned about
• 3:59
  Speaker 1: making sure that the case is not too fast of
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  Speaker 1: dollar weakness. But this administration, as we all know, once
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  Speaker 1: a week or dollar they just can't talk about it anymore.
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  Speaker 1: Now I'm wondering the flip side of a week dollar
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  Speaker 1: has been, at least in the in the past few months,
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  Speaker 1: a strong emerging markets currency basket of currencies, and do
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  Speaker 1: you expect that to continue? Yeah, they're really one and
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  Speaker 1: the same. So if you're short dollars, let's say the
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  Speaker 1: dollars the strengthened considerably, maybe ten. A lot of these
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  Speaker 1: emerging market countries have significant dollar debt exposure, so if
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  Speaker 1: the US dollars was the strength and significantly, that would
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  Speaker 1: cause their debt exposure to go up and their interest
• 4:38
  Speaker 1: payments may be unpayable. You could have a new emerging
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  Speaker 1: markets debt crisis. So as long as the US dollar
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  Speaker 1: continues to weaken, that's very positive for the emerging market
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  Speaker 1: countries that have that dollar exposure. Well so, so just
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  Speaker 1: I'm wondering what would you have to see to make
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  Speaker 1: you change your mind about the thesis that the dollar
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  Speaker 1: really is in a study weakening kind of pattern here? Um, well,
• 5:01
  Speaker 1: but I have to see. Well, I think that if
• 5:03
  Speaker 1: there was a domestic implosion in the US, so sort
• 5:07
  Speaker 1: of a mortgage crisis like we've had before, then something
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  Speaker 1: like that would see changes in the US and a
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  Speaker 1: new quantitative easing in the United States that would then
• 5:16
  Speaker 1: turn this around, this dollar weakness. And I think the
• 5:19
  Speaker 1: quantity of easing again would be the way to have
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  Speaker 1: that happen. But I don't see quantity of using on
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  Speaker 1: the horizon right now, especially given the FED and where
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  Speaker 1: it's standing. Cottney thoughts quickly on let's say dollar versus
• 5:31
  Speaker 1: the looney versus the Canadian dollar. I think the dollar
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  Speaker 1: Canada will continue to move lower, just as dollar Mexico
• 5:38
  Speaker 1: continues to move lower, really on the back of the
• 5:40
  Speaker 1: fact that I think that folks fears about NAPTA are
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  Speaker 1: going to end up being overblown. I think that NAPTA
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  Speaker 1: will end up being done and that'll see then a
• 5:48
  Speaker 1: flow back into Canada because the Canadian dollars obviously had
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  Speaker 1: a lot of weakness on the back of fears over NAPTA.
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  Speaker 1: Now Mexico has not had weakness. In fact, the Mexican
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  Speaker 1: pacer has continued to shrenden. So I think that dollar
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  Speaker 1: Canada is gonna play catch up and you probably dollar
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  Speaker 1: Canada through by the end of the year. Doug Borthwick,
• 6:04
  Speaker 1: thank you so much for joining us. Doug Barthwick, Managing
• 6:07
  Speaker 1: director and head of f X for Exchange, Chapter Len
• 6:10
  Speaker 1: and Company, talking about why the dollar just isn't getting
• 6:14
  Speaker 1: the bid you would expect given the uncertainties out there.
• 6:32
  Speaker 1: President Donald Trump has said that Amazon does not pay
• 6:35
  Speaker 1: its fair share of taxes. The President also has said
• 6:39
  Speaker 1: that Amazon does not pay fair rates to the US
• 6:41
  Speaker 1: Postal Service, and indeed, the President on a tweet recently
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  Speaker 1: said that it's reported that the U. S Post Office
• 6:48
  Speaker 1: will lose one and a half dollars on average for
• 6:50
  Speaker 1: each package it delivers for Amazon. Here to help us
• 6:54
  Speaker 1: understand more about the relationship between Amazon and the US
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  Speaker 1: Postal Service is Satish Jendle. He is the president of
• 7:01
  Speaker 1: s J Consulting and he joins us from Swiftly, Pennsylvania. Said,
• 7:06
  Speaker 1: he's always a pleasure. Now just give people a little
• 7:09
  Speaker 1: bit of your background so they understand your expertise in
• 7:12
  Speaker 1: the world of logistics and transport, and then help us
• 7:16
  Speaker 1: unpack sort of the back and forth between President Donald
• 7:19
  Speaker 1: Trump and his comments about Amazon and the US Postal Service.
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  Speaker 1: Thank you, PIM. I have been dealing with the Post
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  Speaker 1: Office for the parcel services since nine when I actually
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  Speaker 1: utilized the Post Office from my days at FedEx Ground
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  Speaker 1: for deliveries too many of the residential area because they
• 7:40
  Speaker 1: have the best network for it. And since then I
• 7:44
  Speaker 1: have worked with them also as a consultant to help
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  Speaker 1: them implement the Parcel Select service, which is the service
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  Speaker 1: that Amazon uses for the last mild delivery, what residential
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  Speaker 1: packages that it has. And for us to Trump, with
• 8:00
  Speaker 1: all due respect to him, to suggest that the Post
• 8:04
  Speaker 1: Office lose his money on Amazon is almost him creating
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  Speaker 1: fake news that he tells every well else about not
• 8:13
  Speaker 1: putting out fake news. And there is a Postal Regulatory Commission,
• 8:18
  Speaker 1: which is another congressional body appointed by the Congress and
• 8:23
  Speaker 1: the President. They have an oversight on the Post Office
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  Speaker 1: and for any special pricing that they give out for
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  Speaker 1: parts of services to any customer, whether it's Amazon or
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  Speaker 1: ups fed X, which are very big customers of the
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  Speaker 1: post Office, Postal Regulatory Commission has to prove it and
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  Speaker 1: post Office has to demonstrate to them that they are
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  Speaker 1: covering their cost not just a variable cost, but also
• 8:48
  Speaker 1: the fixed cost that is part of the post offices
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  Speaker 1: network which is supported by the first classmal So let's
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  Speaker 1: get sort of the facts of what the arrangement is
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  Speaker 1: between the Postal Service and Amazon. And is there any
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  Speaker 1: sort of if not, you know, factor based truth to
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  Speaker 1: what President Trump is saying, uh, sort of anything to
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  Speaker 1: sort of edify the sentiment that he's expressing. But there
• 9:15
  Speaker 1: is uh comments. There are comments by ups fed X
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  Speaker 1: on occasions that they think the post Office parts of
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  Speaker 1: services are not covering the full cost of what it
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  Speaker 1: takes for them to deliver. And they say that partly
• 9:32
  Speaker 1: because they are a competitor of the post Office, even
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  Speaker 1: though they used the post Office for that delivery of
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  Speaker 1: their residential packages, just like Amazon does, so it can
• 9:44
  Speaker 1: provide some noise in that system. In addition to that,
• 9:47
  Speaker 1: you have some self side analysts who put out reports
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  Speaker 1: where they suggest that Amazon only pays two dollar per
• 9:54
  Speaker 1: package and that it costs a lot more. They do
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  Speaker 1: not have understanding of how the last mile works and
• 10:02
  Speaker 1: it is the best service that post Office has and
• 10:05
  Speaker 1: they actually make money on parcel select from all the customers,
• 10:09
  Speaker 1: including from Amazon, UPS and FedEx. All right, now, let's
• 10:14
  Speaker 1: step back for just a second and get your thoughts
• 10:16
  Speaker 1: about how the logistics supply chain will be affected by
• 10:21
  Speaker 1: the various tariffs that have been spoken about and that
• 10:25
  Speaker 1: you know about, and what that would mean to the
• 10:27
  Speaker 1: cost of actually getting the goods and services to the
• 10:30
  Speaker 1: people that want them. You know, any time you and
• 10:34
  Speaker 1: it's not just the amount of tariffs that they impose.
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  Speaker 1: When you add tariffs, it slows down the processing of
• 10:40
  Speaker 1: the goods that are being moved across the borders, and
• 10:45
  Speaker 1: through our ship matrix technology that you're aware of, we
• 10:48
  Speaker 1: have visibility to how many international packages get delayed when
• 10:53
  Speaker 1: they have to be processed for customs. So when you
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  Speaker 1: add another tariff on top of regulatory regular or approaches
• 11:01
  Speaker 1: that are used to know what is coming and going out,
• 11:04
  Speaker 1: you are going to slow down and that is going
• 11:06
  Speaker 1: to discourage cross border e commerce. That's a really interesting
• 11:11
  Speaker 1: point because Bloomberg Intelligence put out some research today looking
• 11:15
  Speaker 1: at the container shipping industry and how it wouldn't be
• 11:19
  Speaker 1: that affected by the tariffs as proposed so far. But
• 11:23
  Speaker 1: you're suggesting that simply the delays involved in imposing these
• 11:27
  Speaker 1: tariffs could throw a sort of wrench in the system
• 11:30
  Speaker 1: more than people are expecting. That is absolutely correct. That's fascinating.
• 11:34
  Speaker 1: So can you give a sense of what the economic
• 11:36
  Speaker 1: impact would be. I think companies like ups, FedEx DHL
• 11:42
  Speaker 1: may notice slowing down of cross bordered e commerce, UH,
• 11:47
  Speaker 1: including the retailers who are selling things. They may not
• 11:51
  Speaker 1: sell the products as to the same numbers and growth
• 11:55
  Speaker 1: rate that they're expecting. So anything like at that interfered
• 12:01
  Speaker 1: with the speed and efficiency of moving cords between bios
• 12:06
  Speaker 1: and sealers is a negative for the retailers and for
• 12:10
  Speaker 1: those involved in moving it. Satish Jandel, thank you so
• 12:14
  Speaker 1: much for joining us and for that really interesting and
• 12:17
  Speaker 1: important perspective. Satisha Jandel is president of s J Consulting
• 12:21
  Speaker 1: Group based in Pennsylvania, with a long standing relationship with
• 12:25
  Speaker 1: the US Postal Service and the logistics industry. Saudia Arabia
• 12:44
  Speaker 1: has been in the news quite a bit in recent months.
• 12:47
  Speaker 1: Not only is there the foot see e M inclusion
• 12:51
  Speaker 1: of Saudi Arabian stocks, but also we are all wondering
• 12:55
  Speaker 1: when is Saudi Aramco going to file or what may
• 13:00
  Speaker 1: be the biggest initial public offering in history? Joining us now.
• 13:04
  Speaker 1: Dr Ellen a Ward Energy markets and policy analyst and
• 13:07
  Speaker 1: a nonresident scholar at the Arabia Foundation. She is also
• 13:11
  Speaker 1: the author of a book that just came out, Saudi Inc.
• 13:15
  Speaker 1: That really tracks the history of this nation through the
• 13:18
  Speaker 1: eyes of the Saudi Aramco behemoth. So you know, as
• 13:23
  Speaker 1: we sort of prepare for this I p O that
• 13:25
  Speaker 1: that may or may not happen this year and possibly
• 13:28
  Speaker 1: may not happen next year. One is the most underappreciated
• 13:32
  Speaker 1: fact about the family behind Saudi Aramco that might, you know,
• 13:37
  Speaker 1: factor into people's understanding of this. Well, the most underappreciated
• 13:41
  Speaker 1: fact about the family that owns Saudi Aramco is that
• 13:46
  Speaker 1: they've always historically allowed a Ramco to be independently run.
• 13:51
  Speaker 1: The company makes all of its own decisions, it collects
• 13:54
  Speaker 1: all of the money. It's financially independent, just like any
• 13:58
  Speaker 1: other corporation, and it pays taxes to the Saudi government.
• 14:02
  Speaker 1: And the Saudi government has never tried to control Aramco's finances.
• 14:06
  Speaker 1: They've always let it be, let it run itself and
• 14:10
  Speaker 1: be the most profitable company it can be. What do
• 14:13
  Speaker 1: you want people to take away from the book in
• 14:15
  Speaker 1: terms of learning about how Saudi Arabia operates, but also
• 14:19
  Speaker 1: its role in the Middle East and its role as
• 14:23
  Speaker 1: probably the largest oil exporting nation in the world. I
• 14:27
  Speaker 1: believe it's about total crude oil exports come from Saudi Arabia,
• 14:32
  Speaker 1: and we're talking about over a hundred and forty billion
• 14:35
  Speaker 1: dollars of crude exports. I'd like people to take away
• 14:39
  Speaker 1: the fact that this has been a very long term
• 14:43
  Speaker 1: plan for the saudis that ever since the beginning, they've
• 14:46
  Speaker 1: seen the potential that their oil industry could be and
• 14:49
  Speaker 1: They've always operated with UH stability in mind, and they
• 14:54
  Speaker 1: partnered with the Americans and they maintain stability for many
• 14:58
  Speaker 1: many years with the idea that that would be the
• 15:02
  Speaker 1: most profitable long term. They never nationalized in a violent
• 15:06
  Speaker 1: way like Iraq or Iran. They bought out the company
• 15:10
  Speaker 1: and then once it became a Saudi company, they expanded
• 15:13
  Speaker 1: it globally. One thing that I'm struck by, as you said,
• 15:17
  Speaker 1: you know, that's perhaps it's under appreciated how independent Saudi
• 15:21
  Speaker 1: Aramco is. Uh. You know, perhaps this is stemming from
• 15:24
  Speaker 1: the fact that the government has thought of as a
• 15:27
  Speaker 1: pretty controlling, family run kind of entity, and that the
• 15:33
  Speaker 1: government has sort of been more of, I don't want
• 15:36
  Speaker 1: to say a dictatorship, but certainly an oligarchy. So I'm wondering,
• 15:39
  Speaker 1: you know, do you think that the optimism that we've
• 15:42
  Speaker 1: seen with respect to the shares being included in the
• 15:45
  Speaker 1: foot see em index and then the sort of the
• 15:47
  Speaker 1: rise there as well as just sort of the anticipation
• 15:50
  Speaker 1: of broader visions from the new from the new ruler
• 15:54
  Speaker 1: with respect of the plan, do you think that the
• 15:57
  Speaker 1: optimism is warranted, is not fully executed yet in the market,
• 16:03
  Speaker 1: or is overblown. I definitely think the optimism is warranted,
• 16:06
  Speaker 1: but proceed with caution as always in this case. One
• 16:10
  Speaker 1: of the interesting things that I read about in my book.
• 16:13
  Speaker 1: An example of this is when Saudi Aramco was becoming
• 16:17
  Speaker 1: Saudi Aramco and transferring from an American company to a
• 16:20
  Speaker 1: Saudi company. The government originally wanted to take control of it.
• 16:25
  Speaker 1: The Finance ministry wanted to run it, and the CEO
• 16:28
  Speaker 1: at the time Ali and the EMI. He told me
• 16:30
  Speaker 1: this story. He said to the king, he said, you
• 16:33
  Speaker 1: cannot expect a Ramco to be as profitable to run
• 16:38
  Speaker 1: as a good company should if they're not in control
• 16:41
  Speaker 1: of their own finances. And a Ramco has always been
• 16:44
  Speaker 1: this kind of rock of stability there and so I
• 16:47
  Speaker 1: certainly expect that to continue. What role do you think
• 16:51
  Speaker 1: that the the current ruler of Saudi Arabia and the
• 16:57
  Speaker 1: power there of Crown Prince Mohammed been Salmon known as MBS,
• 17:04
  Speaker 1: what do you think they foresee about the future of
• 17:06
  Speaker 1: Saudi Arabia. Inasmuch as what of the government's revenues come
• 17:13
  Speaker 1: from oil? This is a very interesting point, and the
• 17:18
  Speaker 1: government revenues have come from a Ramco. Ramco has historically
• 17:21
  Speaker 1: paid very high taxes between eight and taxes to the government.
• 17:26
  Speaker 1: This has been changed in preparation for the I p
• 17:29
  Speaker 1: O two I think about, and so the government is
• 17:33
  Speaker 1: going to need to make up those revenues somewhere. They
• 17:36
  Speaker 1: may get it in dividends from the company, as they'll
• 17:39
  Speaker 1: still be the vast majority shareholder, but they're going to
• 17:42
  Speaker 1: be They're going to have to look for those that
• 17:46
  Speaker 1: revenue somewhere else, and they're starting to raise taxes and
• 17:49
  Speaker 1: encourage other industry to come into the Kingdom. It's a
• 17:52
  Speaker 1: very ambitious plan, it's very risky, but they are moving
• 17:57
  Speaker 1: forward with it. Can you handicap the likelihood that Saudi
• 18:00
  Speaker 1: Aramco would decide against an i p O. After all,
• 18:05
  Speaker 1: when it comes to a Ramco, I wouldn't be surprised
• 18:08
  Speaker 1: if the company is a bit resistant to the idea
• 18:11
  Speaker 1: of the I p O and would like to at
• 18:13
  Speaker 1: the very least take more time with it. I think
• 18:17
  Speaker 1: that they want to make their own decisions and they're
• 18:20
  Speaker 1: certainly looking to consider all of the options. CEO Aminoster
• 18:24
  Speaker 1: has been very positive about it. However, he said, a
• 18:27
  Speaker 1: Ramco is a great company, and it's a very efficient company,
• 18:29
  Speaker 1: and I think that if they do decide to go
• 18:33
  Speaker 1: forward with this, people will see that. On the other hand,
• 18:36
  Speaker 1: the decision is ultimately going to be made by what
• 18:39
  Speaker 1: people at a RAMCO called the shareholder, which means the
• 18:42
  Speaker 1: government and in this case most likely the Crown Prince,
• 18:46
  Speaker 1: and he may have some different ideas in mind when
• 18:50
  Speaker 1: it comes to the purpose of the I p O
• 18:52
  Speaker 1: than a RAMCO might prefer. Like what well, it said
• 18:56
  Speaker 1: that he would like to use some of the money
• 18:58
  Speaker 1: that they make from the sale of the shares to
• 19:02
  Speaker 1: fund his p if the public Investment Fund, and a
• 19:06
  Speaker 1: RAMCO is probably a little less excited about that. They
• 19:11
  Speaker 1: certainly have enough money, and I believe Aminasa has said
• 19:14
  Speaker 1: they will be using some of that to fund greater
• 19:16
  Speaker 1: downstream expansion, which is really where their vision is going
• 19:20
  Speaker 1: right now. China imports quite a bit of its energy
• 19:25
  Speaker 1: from Saudi Arabia, as Saudi Arabia an ally of the
• 19:30
  Speaker 1: United States. Does the US trade tariff confrontation with China,
• 19:36
  Speaker 1: does that play into the relationship between China and Saudi Arabia.
• 19:40
  Speaker 1: I don't think it does at this point. Saudi Arabia
• 19:42
  Speaker 1: and China have a very strong relationship. Saudi Arabia and
• 19:45
  Speaker 1: particularly a Ramco has been had been angling to get
• 19:48
  Speaker 1: into China for many years, and their relationship is deeper
• 19:52
  Speaker 1: than just a basic oil export situation. They own refineries
• 19:57
  Speaker 1: there along with Chinese interests. They have long term contracts
• 20:01
  Speaker 1: to deliver crew there. They have a students, they say,
• 20:05
  Speaker 1: A Ramco sends students young Saudis to China to study,
• 20:09
  Speaker 1: to learn the language, to be able to work their
• 20:11
  Speaker 1: long term so that relationship is much deeper than any
• 20:15
  Speaker 1: tariff or trade war can damage. Thank you very much
• 20:19
  Speaker 1: for being with us. Dr ellen Wald is the scholar
• 20:22
  Speaker 1: at the Arabia Foundation and the author of the new
• 20:25
  Speaker 1: book Saudi Ink, a History of a Saudi Aramco and
• 20:28
  Speaker 1: the family that controls the multi trillion dollar enterprise. Well,
• 20:45
  Speaker 1: when it comes to investing, are you a raccoon? Are
• 20:48
  Speaker 1: you a coyote? Are you someone who's interested in risk parody? Well?
• 20:53
  Speaker 1: Rob Coach could be all these things. He's the managing
• 20:55
  Speaker 1: director of quantitative Strategies at Salient and they are based
• 21:00
  Speaker 1: into Houston, Texas. He joins us here in our eleven
• 21:03
  Speaker 1: three oh studios and you can follow Rob on Twitter
• 21:06
  Speaker 1: at Roberto M. Crow Chase c R O ce Rob,
• 21:11
  Speaker 1: thanks very much for being here. I mentioned raccoons and
• 21:13
  Speaker 1: I mentioned coyotes because Salience is also the home to
• 21:17
  Speaker 1: uh what I considered to be two very interesting continuums
• 21:21
  Speaker 1: of information, the Epsilon Theory newsletter and the Salient blog.
• 21:26
  Speaker 1: And uh, let's speak of my asking you about what
• 21:30
  Speaker 1: actually is risk parity? What is that? What is that
• 21:33
  Speaker 1: when it comes to investors? And then tell us what
• 21:36
  Speaker 1: kind of animals we might be sure? Risk party is
• 21:40
  Speaker 1: a portfolio allocation that tries to use information about the
• 21:44
  Speaker 1: riskiness and the relative riskiness of different types of assets
• 21:47
  Speaker 1: like stocks and bonds and commodities two size positions, so
• 21:50
  Speaker 1: that you're not really making a bet on any one
• 21:53
  Speaker 1: of them. You really want to have balance across the
• 21:57
  Speaker 1: different types of economic regimes that we could face the future.
• 22:00
  Speaker 1: The idea is that you really don't know what the
• 22:02
  Speaker 1: future holds, so you should really be uh ready for anything.
• 22:07
  Speaker 1: I'm so glad you're here today because the market is
• 22:11
  Speaker 1: that certainly the equity markets are seeing a real risk
• 22:14
  Speaker 1: off feelthough backing away from some of their earlier lows. UM,
• 22:18
  Speaker 1: you're not seeing the same reaction in bond markets, And
• 22:22
  Speaker 1: I'm wondering when you are sort of betting on traditional correlations,
• 22:26
  Speaker 1: how challenging is that to truly kind of hedge or
• 22:29
  Speaker 1: be you know, sort of diversified and and sort of
• 22:32
  Speaker 1: distributing your risk. Sure, So the thing is there is
• 22:36
  Speaker 1: no traditional correlation. Recently, the correlations between stocks and bonds
• 22:40
  Speaker 1: have been negative, but if you go back further, they
• 22:42
  Speaker 1: were very positive in other environments. So the key is
• 22:45
  Speaker 1: to adapt and so understand what the correlation environment is
• 22:48
  Speaker 1: like today, Understand what the volatility environment and the conditioning
• 22:53
  Speaker 1: of each of these asset classes is today, and that
• 22:56
  Speaker 1: tells you a little bit about how likely they are
• 22:57
  Speaker 1: to respond to different economic shocks, if you will. So,
• 23:01
  Speaker 1: when when the market does sell off on a day
• 23:03
  Speaker 1: like today, are you in there buying? So we're not
• 23:06
  Speaker 1: buying the dip Explicitly, what we're doing is we're figuring
• 23:08
  Speaker 1: out where risk is and we're updating our information about
• 23:11
  Speaker 1: the riskiness of each of these markets based on what
• 23:13
  Speaker 1: we're seeing today. But you're trading. Yeah, sure, we're trading.
• 23:16
  Speaker 1: We're rebalancing every day. But Rob, let me go back
• 23:18
  Speaker 1: to your idea about what is risk parity, because isn't
• 23:21
  Speaker 1: the risk always there? The risk is always there, but
• 23:23
  Speaker 1: it changes. So how does it change. The likelihood that
• 23:27
  Speaker 1: the market will drop two or three percent in a
• 23:29
  Speaker 1: given day changes dramatically from one environment to another. So
• 23:33
  Speaker 1: if you look last year, you know three percent inter
• 23:36
  Speaker 1: day moves didn't really happen, whereas they are commonplace. This year,
• 23:40
  Speaker 1: we've seen the market up one and a half, then
• 23:42
  Speaker 1: down one and a half, closing flat several times this year,
• 23:46
  Speaker 1: and and so that means that the risk environment has changed,
• 23:48
  Speaker 1: and the likelihood that you lose big on any given
• 23:51
  Speaker 1: day is different today than it was last year. But
• 23:54
  Speaker 1: that implies that every investment is being made at the
• 23:57
  Speaker 1: market right now. If you're risk is built into the
• 24:02
  Speaker 1: price of what you paid for a specific asset, your
• 24:06
  Speaker 1: risk might be wildly different than the risk of someone
• 24:09
  Speaker 1: who's making that specific bet today. I totally agree, But
• 24:14
  Speaker 1: we try to view the world and mark to market terms,
• 24:17
  Speaker 1: because at the end of the day, if your portfolio
• 24:20
  Speaker 1: loses fift today or over the coming week, even if
• 24:24
  Speaker 1: you paid a lot less, you're going to feel something
• 24:27
  Speaker 1: and your behavior is likely to change. So it's very
• 24:31
  Speaker 1: very hard behaviorally to separate yourself from where where the
• 24:34
  Speaker 1: market is. If you really can do that and step
• 24:36
  Speaker 1: away and not pay attention to what the market does.
• 24:39
  Speaker 1: Maybe buy and hole makes a lot of sense. All right.
• 24:41
  Speaker 1: So when the market has been volatile, frankly, risk parity
• 24:45
  Speaker 1: and managed future funds have come is sort of under
• 24:48
  Speaker 1: attack by a lot of people that have become a
• 24:50
  Speaker 1: whipping post saying that these are the funds that sell
• 24:52
  Speaker 1: when things are down and buy when things are going up,
• 24:55
  Speaker 1: and they've underperformed as a result. What do you say
• 24:57
  Speaker 1: to them? First of all, they really have an performed
• 25:00
  Speaker 1: a result, are in risk parity position sizes today are
• 25:03
  Speaker 1: much much smaller than they were coming into the year,
• 25:05
  Speaker 1: and so we're much more protected against you know, the
• 25:08
  Speaker 1: downside that we're seeing today. All right, But what about
• 25:10
  Speaker 1: the managed future? Is a concept that sort of the
• 25:12
  Speaker 1: momentum trade that people pile in as things sort of
• 25:16
  Speaker 1: heat up, and that's the reason why we've seen sort
• 25:18
  Speaker 1: of the bigger move up or down in the stock
• 25:21
  Speaker 1: market heading into clothes and sort of these uh, these
• 25:24
  Speaker 1: bigger swings. Do you think that that's true? I don't
• 25:27
  Speaker 1: think that the managed features is big enough to exacerbate
• 25:30
  Speaker 1: the swings as much as you know, equity managers just
• 25:34
  Speaker 1: throwing in the towel. The thing about managed futures is
• 25:37
  Speaker 1: that the they have a plan, The strategy has a plan,
• 25:40
  Speaker 1: and that means that you you trade in a very
• 25:43
  Speaker 1: controlled way because that controls more impact costs. Whereas you know,
• 25:47
  Speaker 1: people who are throwing in the towel, that's much more
• 25:49
  Speaker 1: likely to be what hammers the market on any given day. Now,
• 25:53
  Speaker 1: that's a behavioral characteristic exactly right. Okay, So let's use
• 25:58
  Speaker 1: some animal analogy because I know that on the Epsilon
• 26:01
  Speaker 1: Theory letter on the blog, uh, you talk about how
• 26:05
  Speaker 1: you have a choice as an investor. You can be
• 26:07
  Speaker 1: a raccoon, you can be a coyote. You can also
• 26:10
  Speaker 1: be a victim or try to insulate yourself where you
• 26:12
  Speaker 1: can actually engage in what is going on. Can you
• 26:16
  Speaker 1: maybe describe quickly for people what that means and how
• 26:18
  Speaker 1: they can apply to their investment thesis. Absolutely, So, you
• 26:23
  Speaker 1: know the idea of being a hunter or being willing
• 26:27
  Speaker 1: to go out there and take risks that maybe other
• 26:30
  Speaker 1: investors don't want to take and get compensated in return
• 26:34
  Speaker 1: for that. That that's what I would think of when
• 26:36
  Speaker 1: I think of an investor who's willing to take on
• 26:39
  Speaker 1: a risk Perry portfolio that's sort of uh different from
• 26:42
  Speaker 1: the norm. Or someone who's willing to sell volatility perhaps
• 26:46
  Speaker 1: uh a little as a small part of their portfolio.
• 26:49
  Speaker 1: It makes sense to do that over time, But that's
• 26:52
  Speaker 1: sort of outside the mainstream. Uh. There are other investors
• 26:55
  Speaker 1: that shy away from taking those kinds of risks, and
• 26:58
  Speaker 1: you know, the preponderance of of you know, the makeup
• 27:01
  Speaker 1: of of investors is likely to be that most people
• 27:03
  Speaker 1: would rather buy protection than sell it. That kind of thing,
• 27:06
  Speaker 1: and the demarcation how you feel about buying protection versus
• 27:10
  Speaker 1: selling it really is the litmus test for whether you're
• 27:13
  Speaker 1: a fox or a raccoon. I'm just interested that you're
• 27:17
  Speaker 1: saying that you think that the market action has sort
• 27:20
  Speaker 1: of stemmed from capitulation among equities, certain in equity investors
• 27:25
  Speaker 1: that are throwing in the towel. Have you really seen
• 27:28
  Speaker 1: a lot of that. What we've seen for sure this
• 27:31
  Speaker 1: year is a totally different conditioning in the market relative
• 27:34
  Speaker 1: to how responds to news. Uh. We see that we
• 27:39
  Speaker 1: would call that higher risk and sort of a bias
• 27:41
  Speaker 1: towards the downside. When we build our portfolios, we take
• 27:45
  Speaker 1: what we see in terms of where the more how
• 27:46
  Speaker 1: the market is condition today into account and that helps
• 27:49
  Speaker 1: us size our positions and helps us size relative positions
• 27:53
  Speaker 1: across different asset classes. So when you're talking about conditioning,
• 27:56
  Speaker 1: you mean people are conditioned to be pessimistic headline crosses.
• 28:00
  Speaker 1: There will be more conditioned to sell that they will
• 28:02
  Speaker 1: to buy, exactly right, And that's the opposite of last year.
• 28:05
  Speaker 1: If you look at what was happening last year, by
• 28:07
  Speaker 1: the dip was the word of the day, and if
• 28:10
  Speaker 1: if markets went down by one percent, you frequently saw
• 28:13
  Speaker 1: the clothes coming in flat. Uh, significant buying action anytime
• 28:17
  Speaker 1: there was a significant dip, So that that leads me
• 28:20
  Speaker 1: to believe that was a totally different conditioning because buying
• 28:24
  Speaker 1: the dip was really the only thing it added quote
• 28:26
  Speaker 1: unquote alpha last year. Rob Coachy, thank you so much
• 28:28
  Speaker 1: for being here. Really interesting to hear your perspective. Rob Croachy,
• 28:32
  Speaker 1: Managing director of Quantitative Strategies at Salient, which is based
• 28:35
  Speaker 1: in Houston, Texas, talking about the shift, the dramatic shift
• 28:41
  Speaker 1: in conditioning people getting a little more pessimistic despite frankly
• 28:45
  Speaker 1: the optimistic economic data that's been coming out. A lot
• 28:47
  Speaker 1: of questions are really interesting. Thanks for listening to the
• 28:55
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 28:58
  Speaker 1: to interviews at Apple podcast As, SoundCloud, or whatever podcast
• 29:02
  Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
• 29:05
  Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo wits one.
• 29:09
  Speaker 1: Before the podcast, you can always catch us worldwide on
• 29:12
  Speaker 1: Bloomberg Radio