Latest / Bloomberg Intelligence / Should the Real Price of Oil Be $20 a Barrel? Smead Asks

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Should the Real Price of Oil Be $20 a Barrel? Smead Asks · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and 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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• 0:16
  Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. What would twenty dollar
• 0:30
  Speaker 1: a barrel oil look like? What would it do to
• 0:34
  Speaker 1: companies around the world? Well? Bill smed is the chief
• 0:37
  Speaker 1: executive officer and the chief investment officer of Smede Capital Management,
• 0:40
  Speaker 1: helping to manage more than two point to billion dollars
• 0:43
  Speaker 1: in customer assets based in Seattle, and he's here to
• 0:47
  Speaker 1: tell us more. Bill, always a pleasure. So a barrel,
• 0:51
  Speaker 1: go ahead, give us how we get there? And then
• 0:53
  Speaker 1: what does the world look like if a barrel is
• 0:56
  Speaker 1: really real? Well, the first thing to understand that twenty
• 1:00
  Speaker 1: dollar barrel number is in two thousand and fourteen dollars. Uh,
• 1:05
  Speaker 1: So as the years go by, uh, we're using constant
• 1:09
  Speaker 1: dollars to look back at a hundred and sixty years
• 1:12
  Speaker 1: of participation in in in of oil in mainstream economies
• 1:17
  Speaker 1: and it's spent about seventy percent of the time during
• 1:21
  Speaker 1: the last hundred and sixty years around twenty dollars a
• 1:24
  Speaker 1: barrel adjusted for two thousand and fourteen prices. Now we
• 1:28
  Speaker 1: know that it's been as high as a hundred forty
• 1:30
  Speaker 1: five and two thousand and eight in terms of two
• 1:32
  Speaker 1: thousand and eight prices, and we know that it it
• 1:35
  Speaker 1: has been all over the place in those a hundred
• 1:37
  Speaker 1: sixty years, but using a constant dollar two thousand fourteen,
• 1:41
  Speaker 1: most of the time it's spent around twenty and when
• 1:44
  Speaker 1: it goes wild, uh, it gets around a hundred and
• 1:47
  Speaker 1: ten or a hundred and twenty adjusted for two thousand
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  Speaker 1: fourteen prices, which ironically is where we were in two
• 1:53
  Speaker 1: thousand fourteen at about a hundred fifteen dollars a barrel bill.
• 1:57
  Speaker 1: This is a really compelling point to me, especially because
• 2:00
  Speaker 1: last year we were talking about deflation. This year we're
• 2:03
  Speaker 1: talking about reflation, and a lot of it boils down
• 2:06
  Speaker 1: to the price of oil. It's giving people the impression, uh,
• 2:10
  Speaker 1: and and the reality that prices are increasing. Do you
• 2:13
  Speaker 1: think that if oil prices were to fall back down
• 2:16
  Speaker 1: to twenty dollars a barrel, people would start talking about
• 2:18
  Speaker 1: deflation again, Well, sure of course they would. I think.
• 2:23
  Speaker 1: You know, we're looking at very long duration, you know,
• 2:26
  Speaker 1: ten year oriented things, and so a way to look
• 2:29
  Speaker 1: at this is in the next year. Something could cause
• 2:33
  Speaker 1: oil to go higher in the next year. But if
• 2:36
  Speaker 1: you look at the hundred and sixty year chart, every
• 2:38
  Speaker 1: one of those rallies in in in the oil bear markets, which,
• 2:42
  Speaker 1: by the way, oil has spent the time in bear
• 2:45
  Speaker 1: markets and only of the time in bowl markets if
• 2:49
  Speaker 1: you look back at a hundred sixty years. So the
• 2:52
  Speaker 1: thing I noticed in the easy way for me to
• 2:54
  Speaker 1: think about this is what is the investor sentiment. I've
• 2:57
  Speaker 1: never seen so many investors, both profess stional and individual
• 3:01
  Speaker 1: investors so anxious to see something work right everyone, Oh gosh,
• 3:07
  Speaker 1: the oil stocks are cheap from historical basis. Look at
• 3:10
  Speaker 1: all the oil they've gotten the ground, YadA, YadA, YadA. Well,
• 3:13
  Speaker 1: the people in Los Angeles are driving their their hybrid
• 3:16
  Speaker 1: and electric cars and and uh you know they faced
• 3:19
  Speaker 1: real stark you know, technology realities. It's funny the the
• 3:24
  Speaker 1: S and P loves technology and the only place they
• 3:27
  Speaker 1: don't trust technology is in the oil market. Expand on that,
• 3:32
  Speaker 1: because you've talked about this in the past, and it
• 3:36
  Speaker 1: has been verified that we are now pumping the same
• 3:40
  Speaker 1: amount of oil out of the ground in the United
• 3:43
  Speaker 1: States through the operation of fracking and other techniques, but
• 3:47
  Speaker 1: with many fewer rigs. Well, yes, and that's because the
• 3:53
  Speaker 1: remember the rig counting. That kind of stuff has to
• 3:57
  Speaker 1: do with getting it up and going uh. You know,
• 4:00
  Speaker 1: it's like a spaceship. You blast off and then once
• 4:02
  Speaker 1: you get into outer space, you're on momentum. The same
• 4:05
  Speaker 1: thing with with drilling wells. Once the wells drilled, right,
• 4:09
  Speaker 1: then then all you do is have that thing pumping
• 4:11
  Speaker 1: it out at the top. So don't confuse those those
• 4:14
  Speaker 1: two things, right. That is the eagerness on the part
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  Speaker 1: of people to uh poke new holes in the ground.
• 4:22
  Speaker 1: And we just went through a five to ten year
• 4:24
  Speaker 1: era where every Tom, Dick and Harry around the world
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  Speaker 1: was poking holes in the ground. I remember being in
• 4:29
  Speaker 1: London five years ago or four years ago, and the
• 4:32
  Speaker 1: fun you know, the London newspaper was talking about fracking
• 4:36
  Speaker 1: in northern England. It's like, if they're fracking in northern England,
• 4:40
  Speaker 1: they might as well be fracking in California because there
• 4:42
  Speaker 1: aren't any places left to poke holes in the ground.
• 4:44
  Speaker 1: All right, well, I like I like that expression. Uh,
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  Speaker 1: but what does this mean going forward for your investments?
• 4:51
  Speaker 1: Because if you have twenty dollars a barrel of oil
• 4:54
  Speaker 1: at some point in the future, it doesn't really necessarily
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  Speaker 1: guide you right now. What should people be doing you
• 5:00
  Speaker 1: prepare for the potential for this price swoon? Well that's
• 5:04
  Speaker 1: a great question, because, uh, you know, we're we're bottom
• 5:07
  Speaker 1: up stock pickers. And the thing that we notice as
• 5:11
  Speaker 1: an overlay, the most important overlay, is just the sheer
• 5:15
  Speaker 1: demographic movement that occur in the United States. Over the
• 5:17
  Speaker 1: next fifteen years. We're going to become a society dominated
• 5:20
  Speaker 1: by thirty five to forty four year old people that
• 5:23
  Speaker 1: have two kids on average. So what it means is
• 5:26
  Speaker 1: it would be extremely favorable over a ten year period
• 5:29
  Speaker 1: if you're forming a lot of households, and these households
• 5:33
  Speaker 1: get formed in a place they can afford to raise
• 5:35
  Speaker 1: a family, that that that gasoline prices would be moderate. Right.
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  Speaker 1: In other words, if gas prices just stayed around two
• 5:43
  Speaker 1: or two fifty a gallon around the country during the
• 5:46
  Speaker 1: next ten years, that would be very favorable on this
• 5:50
  Speaker 1: booming number of thirty five to forty four year olds,
• 5:53
  Speaker 1: So household formation is very bullish if if commodity prices
• 5:58
  Speaker 1: don't go wild, it's very favorable for that. Secondly, in
• 6:02
  Speaker 1: the S and P five, the market is completely infatuated
• 6:06
  Speaker 1: with technology stocks, and technology stocks make up We count
• 6:10
  Speaker 1: Amazon and Netflix and technology so about twenty of the index.
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  Speaker 1: The only time that's ever been bigger was in ninety
• 6:18
  Speaker 1: eight ninety nine, and that was a disaster. For example,
• 6:21
  Speaker 1: in ninety nine, UH, the technology sector was seven percent
• 6:26
  Speaker 1: of the S and P. And by the way, Microsoft
• 6:28
  Speaker 1: was a big time glamour stock already by by so,
• 6:32
  Speaker 1: so the the markets here are in this weird conundrum
• 6:38
  Speaker 1: where professionals are super bullish, including bullish. The value guys
• 6:42
  Speaker 1: are just bullish as all get out on oil, and
• 6:45
  Speaker 1: then the growth guys are just as bullish as all
• 6:47
  Speaker 1: get out on technology. And John Maynard Keane's UH says
• 6:51
  Speaker 1: that victory, security, and success go to the minority and
• 6:54
  Speaker 1: never to the majority. So UH, you got to kind
• 6:57
  Speaker 1: of pick your way, So go ahead and pick your
• 6:59
  Speaker 1: way through this. Give us the detail, give us some names. Well, well,
• 7:02
  Speaker 1: first of all, we like the home builders, so we
• 7:04
  Speaker 1: own NVR, and UH we own Lenar and Uh, the
• 7:09
  Speaker 1: SMP has point one three percent of the index and
• 7:13
  Speaker 1: home builders. Uh, just as an example, they've got two
• 7:18
  Speaker 1: in in tech and they've got point one three percent.
• 7:21
  Speaker 1: So if homebuilders do well the next ten years is
• 7:23
  Speaker 1: these people age. Uh, SMP is gonna make no money
• 7:26
  Speaker 1: from it, or hardly any money from it. We we
• 7:28
  Speaker 1: we like the things that the market just hates. Uh.
• 7:32
  Speaker 1: We're gently tiptoeing around beginning to buy in the anti
• 7:37
  Speaker 1: Amazon world. Right In other words, you know which of
• 7:40
  Speaker 1: the retailers are going to survive? Uh? So Uh, you know,
• 7:45
  Speaker 1: we own Nordstrom, and we think they have a future
• 7:47
  Speaker 1: once people settle in on whatever pattern there is and
• 7:50
  Speaker 1: they get over this fascination with buying something online and
• 7:54
  Speaker 1: having it delivered. You know, once that gets to be five, six,
• 7:57
  Speaker 1: seven years old, it's not going to be quite as
• 7:59
  Speaker 1: exciting as it is uh right now. And then lastly,
• 8:03
  Speaker 1: there's this innate fear that the wonderful economics in healthcare
• 8:07
  Speaker 1: are just going to implode. And so you know, we
• 8:11
  Speaker 1: still like we we you know, we like the pharmaceuticals,
• 8:14
  Speaker 1: we like the am gens, and and very dangerously have
• 8:18
  Speaker 1: been waiting our way into express scripts, because that seems
• 8:21
  Speaker 1: to be, you know, the most hated stock in America lately.
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  Speaker 1: Thank you so much. Bill Smeaede, Chief executive Officer and
• 8:27
  Speaker 1: chief investment officer. It's SMAD Capital Management, which oversees two
• 8:31
  Speaker 1: point two billion dollars. It's based in Seattle. Well, you
• 8:46
  Speaker 1: know all these brahmins. We've been talking about a US
• 8:48
  Speaker 1: border tax, and of course one of the industries that
• 8:52
  Speaker 1: has been highlighted by President Trump in regards to a
• 8:55
  Speaker 1: border tax is the automobile industry. And we've got a
• 8:58
  Speaker 1: Chris Writer, here's our European Transports editor joining us from
• 9:03
  Speaker 1: Bery Lynn to tell us a little bit more. And
• 9:05
  Speaker 1: he's got some additional info because of a new study
• 9:09
  Speaker 1: that was just completed and it has some rather useful facts,
• 9:14
  Speaker 1: or at least the proposed facts about the cost of
• 9:18
  Speaker 1: this tax. Chris, great to have you with us, as always,
• 9:20
  Speaker 1: just detail exactly who put the study together and what
• 9:24
  Speaker 1: are some of their most important findings. Yeah. Well, the
• 9:28
  Speaker 1: study was put together by a consulting firm based out
• 9:31
  Speaker 1: of Munich, um pretty well connected and respected within the
• 9:34
  Speaker 1: auto industry. It's called Roland Berger Um. And so they're
• 9:38
  Speaker 1: they're findings basically say that the backlash for the border
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  Speaker 1: tax would do more harm than good essentially. I mean,
• 9:45
  Speaker 1: the headline figure is that that across the board that
• 9:48
  Speaker 1: UM US consumers can kind of expect costs of vehicles
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  Speaker 1: to rise by about three thousand, three hundred dollars per
• 9:55
  Speaker 1: vehicle UM and that you know, that's the cost of
• 9:58
  Speaker 1: the vehicles, you know, for the for the industry itself,
• 10:00
  Speaker 1: and so you know, the impact of the industry trying
• 10:03
  Speaker 1: to trying to absorb those costs and pass on some
• 10:06
  Speaker 1: of the consumers UM, you know, could push the whole
• 10:09
  Speaker 1: the entire industry into UM into losses. So, Chris, this
• 10:13
  Speaker 1: is a pretty dire warning basically saying that every auto
• 10:17
  Speaker 1: company in the world will suffer if these proposals are
• 10:20
  Speaker 1: put into effect. Can we take a look at the
• 10:23
  Speaker 1: actual agency providing the study data, I mean, are they
• 10:27
  Speaker 1: normally do they normally come from a certain place when
• 10:30
  Speaker 1: they put this out, and what was sort of their
• 10:32
  Speaker 1: motivation behind doing this study? Now? Yeah, well, I mean
• 10:36
  Speaker 1: I think that's a fair question because I mean, ruland
• 10:38
  Speaker 1: Berger UM they're well connected in Germany, they're like very
• 10:41
  Speaker 1: well respected. But they also because in Germany they're also
• 10:44
  Speaker 1: pretty close to the German automakers, um to be sure.
• 10:47
  Speaker 1: And so I mean you're getting like a view of
• 10:49
  Speaker 1: the world like based on sort of the European auto
• 10:53
  Speaker 1: ins the German automakers, which are you know, even according
• 10:55
  Speaker 1: to their own this study, is that um that they
• 10:58
  Speaker 1: will be hit the most. That the cause to the
• 11:00
  Speaker 1: European automakers, Um, it's going to be six thousand, four
• 11:04
  Speaker 1: hundred dollars per vehicle, whereas the Detroit automakers obviously hit
• 11:08
  Speaker 1: a lot less, like the Big three in Detroit, um,
• 11:10
  Speaker 1: just by fift dollars. So you see that like sort
• 11:13
  Speaker 1: of a European skew here a bit on the study
• 11:16
  Speaker 1: that you know, they're trying to like head off, you know, um,
• 11:20
  Speaker 1: this sort of impact on their automakers there, right, So Chris,
• 11:24
  Speaker 1: somebody could argue, well, you know, if they're pretty closely
• 11:26
  Speaker 1: tied to the German automakers, they're going to try to
• 11:30
  Speaker 1: paint this proposal as catastrophic for the entire industry around
• 11:33
  Speaker 1: the world, including the United States. Have there been other
• 11:36
  Speaker 1: studies done that edify some of their claims that are
• 11:40
  Speaker 1: done away from this potential I don't want to say bias,
• 11:44
  Speaker 1: but this potential leaning. UM, well, I think like that.
• 11:48
  Speaker 1: Everybody's got an opinion about something like this, you know,
• 11:50
  Speaker 1: so it depends on what kind of you know, what
• 11:52
  Speaker 1: side of they camp here on. I mean, the other
• 11:54
  Speaker 1: side will say that, um, that the tax incentives um,
• 11:58
  Speaker 1: lower tax rates, you know, more consumer power will eventually
• 12:01
  Speaker 1: you know, give consumers like more ability to spend money.
• 12:05
  Speaker 1: You know. That's the other side coin and that UM,
• 12:07
  Speaker 1: you know that it's supposed to create manufacturing jobs, encourage
• 12:11
  Speaker 1: more manufacturing within the US to avoid these kinds of taxes,
• 12:14
  Speaker 1: to lower the costs. Um. So that's that's the argument.
• 12:18
  Speaker 1: You know, that's the other side of the argument. So, um,
• 12:20
  Speaker 1: you know, kind of depends on which side of the
• 12:22
  Speaker 1: camp you want. You want to um you prefer, you know,
• 12:26
  Speaker 1: and and and to what kind of credence you're going
• 12:28
  Speaker 1: to give a study like this, Chris, I was trying
• 12:30
  Speaker 1: to find out the number of automobiles produced in the
• 12:34
  Speaker 1: United States by foreign owned or headquartered automobile companies. It
• 12:40
  Speaker 1: is significant if you have a seventeen million annual run rate.
• 12:44
  Speaker 1: Let's say that's just the number of automobiles sold I
• 12:47
  Speaker 1: guess in the United States. Uh, if we stay on
• 12:52
  Speaker 1: that trajectory, Is there any insight into what might happen
• 12:56
  Speaker 1: to those operations in the US, because whether it's high
• 13:00
  Speaker 1: or Mercedes or BMW, I mean, the list goes on
• 13:03
  Speaker 1: and on. I think Hanta in fact, actually produces more
• 13:06
  Speaker 1: automobiles in the United States and it does in Japan.
• 13:09
  Speaker 1: But yeah, I mean, I think that the problem is
• 13:12
  Speaker 1: essentially like about whether there's going to be like a
• 13:15
  Speaker 1: boon and uu um auto manufacturing as a result of this,
• 13:18
  Speaker 1: as a result of the um um a border tax
• 13:22
  Speaker 1: and any kind of restrictions, is that there's really no
• 13:24
  Speaker 1: no growth in the US market anymore. I mean, it's
• 13:26
  Speaker 1: like where we're at now. It's seventeen million is basically
• 13:28
  Speaker 1: the cap. You know, it's basically peaked, and so you
• 13:31
  Speaker 1: can't you know, I mean, as you know, the industry
• 13:33
  Speaker 1: is doing well already. It doesn't need a lot of
• 13:36
  Speaker 1: extra help from for border tax well, right, you know,
• 13:41
  Speaker 1: And there's certain there's certain rationales in that, like just
• 13:44
  Speaker 1: like the low cost vehicles like just can't be made
• 13:46
  Speaker 1: like you know, at like US labor rates, you know,
• 13:49
  Speaker 1: they're made someplace else. And also the interconnection of the
• 13:52
  Speaker 1: entire auto industry where these parts come from all around
• 13:54
  Speaker 1: the globe and then maybe get assembled in the US,
• 13:56
  Speaker 1: or maybe US parts get assembled in Mexico or wherever.
• 13:59
  Speaker 1: That it's so interconnected that like just putting a border
• 14:02
  Speaker 1: up in one place doesn't really solve the problem because
• 14:04
  Speaker 1: it just it just redistributes the cost. Chris Writer, I
• 14:07
  Speaker 1: really appreciate your joining us right now to talk about this,
• 14:11
  Speaker 1: because it is clearly a huge concern for automakers around
• 14:15
  Speaker 1: the world. To the fact that people are actually creating
• 14:18
  Speaker 1: these studies and coming up with estimates is telling in
• 14:20
  Speaker 1: and of itself. Chris Writer, European transports editor for Bloomberg News,
• 14:25
  Speaker 1: speaking with US from Berlin. We have heard a lot
• 14:41
  Speaker 1: about the wall that the US is ostensibly going to
• 14:44
  Speaker 1: build on the border with Mexico, but we are just
• 14:49
  Speaker 1: now getting some details about what it may look like.
• 14:52
  Speaker 1: On February, there was a pre solicitation notice posted on
• 14:57
  Speaker 1: the Federal Business Opportunities website, and responses poured in from many,
• 15:01
  Speaker 1: including Bill Sandbrook, CEO of US Concrete, who joins US
• 15:05
  Speaker 1: now from Ulis, Texas. Bill uh first of all, can
• 15:09
  Speaker 1: you just give us a sense of where this project
• 15:12
  Speaker 1: is in terms of the planning stages and the details
• 15:16
  Speaker 1: that are coming out. Surely it's a good morning. The
• 15:20
  Speaker 1: as you said, initial solicitation was posted on February and
• 15:26
  Speaker 1: subsequently in the last couple of days there's been some
• 15:28
  Speaker 1: modifications to it requesting concept conceptual designs for thirty feet
• 15:35
  Speaker 1: high concrete wall segments UH and those designs have to
• 15:40
  Speaker 1: be submitted by March twenty. Out of those designs, there
• 15:44
  Speaker 1: will be prototype selected and then final bidding with pricing
• 15:49
  Speaker 1: needs to be received by May three. What would be
• 15:53
  Speaker 1: the estimated time to complete such a barrier, Well, the
• 15:57
  Speaker 1: entire the entire barriers. You have to be seen how
• 15:59
  Speaker 1: much of that very long border is going to be concrete,
• 16:02
  Speaker 1: because the solicitation was very explicit that there would be
• 16:06
  Speaker 1: other materials also UM providing some of that border protection,
• 16:11
  Speaker 1: including fencing, some redundancy of electronic monitoring, and obviously there's
• 16:16
  Speaker 1: large bodies of water and rivers and mountains, so it's
• 16:21
  Speaker 1: very difficult to say, you know how long an entire
• 16:24
  Speaker 1: wall structure where wall barrier would take to build. Bill,
• 16:28
  Speaker 1: do you have a sense of what the process is
• 16:30
  Speaker 1: from here? I mean, yes, the government is actively soliciting
• 16:34
  Speaker 1: proposals from businesses and prices that a potential project would cost.
• 16:39
  Speaker 1: But do you have a sense of what would be
• 16:40
  Speaker 1: required on the government's side to get something like this
• 16:44
  Speaker 1: done from a budget perspective as well as even the
• 16:48
  Speaker 1: planned perspective. Well, the budget perspective, I think the administration
• 16:53
  Speaker 1: and member members of the Congress of Senate have to
• 16:56
  Speaker 1: work on the funding mechanism. But all along they said
• 16:59
  Speaker 1: that it's not going to be an obstacle, so I'm
• 17:01
  Speaker 1: confident that money will be procured from some source or
• 17:05
  Speaker 1: or reshuffled around within the current existing budget. Um As
• 17:10
  Speaker 1: far as the government process, they're going to have to
• 17:13
  Speaker 1: be analysis of these prototypes by by government procurement people,
• 17:18
  Speaker 1: selection of the prototypes, republished, what the actual bid documents
• 17:22
  Speaker 1: are gonna look like, so people know exactly what they're bidding,
• 17:24
  Speaker 1: and then it's going to have to be an analysis
• 17:26
  Speaker 1: of those bids that come in. As far as business,
• 17:29
  Speaker 1: as you said, there's been a lot of interests in
• 17:31
  Speaker 1: the solicitation, both from contractors who would actually build the structure,
• 17:35
  Speaker 1: to material suppliers like myself who would be working with
• 17:38
  Speaker 1: subcontractors or the general contractors giving pricing for various prototypes
• 17:43
  Speaker 1: and various amounts of our material in various remote parts
• 17:46
  Speaker 1: of the country so that a qualified bid could be submitted. Bill,
• 17:51
  Speaker 1: I gotta say, you know, I appreciate your work because
• 17:54
  Speaker 1: I saw some of your guys at work yesterday at
• 17:56
  Speaker 1: LaGuardia Airport. I know that that's just one of the
• 17:58
  Speaker 1: many contracts you have. Maybe you could give people a
• 18:02
  Speaker 1: little bit of detail about the importance of the New
• 18:06
  Speaker 1: York metropolitan region as a market, because you've also made
• 18:09
  Speaker 1: some acquisitions here in high profile projects residential and so on,
• 18:13
  Speaker 1: and then also take us out to what you're doing
• 18:16
  Speaker 1: with Google uh and your operations on the West Coast
• 18:19
  Speaker 1: in California. Sure, thank you. Both of those areas are
• 18:24
  Speaker 1: very very important to us concrete. They both have very
• 18:27
  Speaker 1: vibrant underlying economies and very very vibrant construction dynamics existing
• 18:33
  Speaker 1: in in both those metro areas. As you said, we
• 18:36
  Speaker 1: are doing the LaGuardia Airport right now. We made a
• 18:39
  Speaker 1: series of acquisitions over the last two years, and with
• 18:41
  Speaker 1: the largest manufacturer of concrete in the Five Boroughs, we
• 18:45
  Speaker 1: have seventeen concrete plants and over four hundred mixer trucks
• 18:48
  Speaker 1: in the Five Boroughs in any given day and We're
• 18:51
  Speaker 1: very bullish about New York because the Port Authority of
• 18:54
  Speaker 1: New York and New Jersey's ten year Planning UH document
• 18:57
  Speaker 1: came out recently with significant signific vacant infrastructure spent within
• 19:02
  Speaker 1: that document. In California, we do very large work. We've
• 19:06
  Speaker 1: done the forty Niners Stadium in Santa Clara, We've done
• 19:09
  Speaker 1: the Oakland Bay Bridge, and we have been successful in
• 19:12
  Speaker 1: getting the procurement for the the Google complex, which is
• 19:16
  Speaker 1: over a hundred thousand yards of concrete and UH. It's
• 19:19
  Speaker 1: a testament to our to our teams, especially in California,
• 19:23
  Speaker 1: with the complexity of the designs for specifications that a
• 19:27
  Speaker 1: forward thinking company like Google would have for their campus,
• 19:30
  Speaker 1: and we're able to supply that that very specialized concrete. Bill,
• 19:34
  Speaker 1: I want to talk about the supply of workers. If
• 19:38
  Speaker 1: there is this development of a wall on the border
• 19:41
  Speaker 1: with Mexico, will you be able to find sufficient workers
• 19:44
  Speaker 1: and are you able to find sufficient workers as is
• 19:46
  Speaker 1: right now for your current projects. It's a very interesting
• 19:50
  Speaker 1: question and we work on this all the time, depending
• 19:53
  Speaker 1: on how busy the underlying economy is. Our our major
• 19:57
  Speaker 1: un employment umbers exists within our ready mixed truck drivers
• 20:03
  Speaker 1: they have to be skilled, they have to have some
• 20:05
  Speaker 1: credentials with a commercial driver's license, and it is a
• 20:08
  Speaker 1: tight market in in Texas right now, specifically in the
• 20:13
  Speaker 1: Dallas metroplex. The oil fields are a little bit slower
• 20:16
  Speaker 1: the Eagle Ford which is in South Texas, and the demand,
• 20:20
  Speaker 1: the labor demand isn't as significant as it in Dallas.
• 20:23
  Speaker 1: We have to work on it every day and we
• 20:24
  Speaker 1: would have to be very creative in how we procure
• 20:26
  Speaker 1: truck drivers and make sure that they have the ability
• 20:30
  Speaker 1: to live and work in some remote areas of the
• 20:33
  Speaker 1: country going forward. I want to thank you very much
• 20:36
  Speaker 1: for spending time with us. Bill Sandbrook is the chief
• 20:39
  Speaker 1: executive of us A. Concrete treasuries in the US are
• 20:56
  Speaker 1: down for a twelve straight day. That is the longest
• 20:59
  Speaker 1: stretch it's two thousand and twelve or more. Perspective on this,
• 21:03
  Speaker 1: I want to bring in Tom Tucci ahead of US
• 21:05
  Speaker 1: Treasure treating at CIBC World Markets Corporate. First, I want
• 21:08
  Speaker 1: to start with just the magnitude of the move. It
• 21:13
  Speaker 1: is not that huge. It's not like the losses are
• 21:16
  Speaker 1: so significant, and yet it's really the momentum that we're
• 21:20
  Speaker 1: seeing with yields going higher and bond values going lower.
• 21:24
  Speaker 1: What do you make of that? Well, I think the
• 21:26
  Speaker 1: pace of the sell off has been slow because it's
• 21:29
  Speaker 1: been very well advertised that the FAT is going to
• 21:32
  Speaker 1: be raising rates most likely in March. That's priced in
• 21:36
  Speaker 1: um and positioning is very well set up for that,
• 21:39
  Speaker 1: so you it's not like the markets being caught off guard.
• 21:42
  Speaker 1: And I think that's the reason why you haven't seen
• 21:44
  Speaker 1: an acceleration or repricing of the market so much higher
• 21:47
  Speaker 1: yields as time goes on and we unfold some more
• 21:49
  Speaker 1: information than the market has the ability to price in
• 21:53
  Speaker 1: more tightenings fiscal policy and the like, and that could
• 21:56
  Speaker 1: move rates higher. Well, Tom, you know, I was speaking
• 21:59
  Speaker 1: with somebody this more Ng who said that a lot
• 22:01
  Speaker 1: of this is simply a symptom of the increasing influence
• 22:06
  Speaker 1: of algorithmic traders in treasuries, that there is this momentum
• 22:09
  Speaker 1: trade now that's more prevalent in this U S Government
• 22:13
  Speaker 1: bond market than it used to be. Do you agree
• 22:15
  Speaker 1: with that? Well, I think the algorithm trading is has
• 22:17
  Speaker 1: a heavy influence on a day to day market making business. UM.
• 22:21
  Speaker 1: As far as the bigger moves concerned, I'm not so sure,
• 22:24
  Speaker 1: that's the same factor, but I think on a day
• 22:26
  Speaker 1: to day, minute to minute that I think they have
• 22:28
  Speaker 1: a huge influence on the treasury market. Well, maybe that
• 22:31
  Speaker 1: gets into my next question, and Tom, maybe I just
• 22:33
  Speaker 1: need a little education. I'm curious, is there any idea,
• 22:35
  Speaker 1: Is there any way to know how much money or
• 22:37
  Speaker 1: how many orders does it take to actually cause a
• 22:40
  Speaker 1: decent shift in price? Now, I think you know, your
• 22:43
  Speaker 1: biggest example would have been the day after the election. UM.
• 22:48
  Speaker 1: That's when algorithm trading suffers because there's there's business that's
• 22:53
  Speaker 1: happening UM on a large scale UM, and it dwarfs
• 22:57
  Speaker 1: what's happening on the market making side of things. And UH,
• 23:00
  Speaker 1: markets tend to reprice in those environments. So I think
• 23:03
  Speaker 1: it has to do with what the fundamentals are and
• 23:07
  Speaker 1: what the actual size of the transactions are in the marketplace.
• 23:10
  Speaker 1: When when the markets relatively quiet and orderly, algorithm trading
• 23:14
  Speaker 1: is very successful. UM, when you start to get some
• 23:17
  Speaker 1: information that's new to the market and positions are off sides,
• 23:21
  Speaker 1: then it's a little bit of a different story, and
• 23:22
  Speaker 1: those same machines back away from being aggressive market makers overall,
• 23:26
  Speaker 1: and that that leads to the bigger moves. So, Tom,
• 23:29
  Speaker 1: what do you hear from clients? Is your since the
• 23:31
  Speaker 1: moves that we've been seeing over the past two weeks
• 23:34
  Speaker 1: are being driven by fund managers who are changing their
• 23:38
  Speaker 1: allocation or is it changing or are the moves resulting
• 23:42
  Speaker 1: really from this sort of market making activity now? I
• 23:45
  Speaker 1: think specifically it's it's portfolio managers of trying to re
• 23:49
  Speaker 1: end treasuries, trying to rebalance themselves for a higher rate structure.
• 23:54
  Speaker 1: As I said, we have basically a hundred percent priced
• 23:56
  Speaker 1: in for a March rate hike, and after today we
• 23:59
  Speaker 1: basically have to full rate hikes priced in by September
• 24:02
  Speaker 1: of this year. So what ends up happening from here
• 24:05
  Speaker 1: is just like everybody else, myself, you, We're all looking
• 24:09
  Speaker 1: to see what's going to come out of the administration
• 24:10
  Speaker 1: as far as fiscal stimulus is concerned. And I would
• 24:13
  Speaker 1: argue that the next move in the market will be
• 24:16
  Speaker 1: dependent on whether that that fiscal stimulus comes sooner or later. Um,
• 24:21
  Speaker 1: what happens when the market has this big of a
• 24:23
  Speaker 1: short base waiting for lower prices higher yields, If they
• 24:27
  Speaker 1: don't get a strong slew of information, then they tend
• 24:31
  Speaker 1: to cover and that's when we start to get a
• 24:32
  Speaker 1: little bit of rebound and a bounce in the marketplace.
• 24:34
  Speaker 1: So I think the next trade from here, we can
• 24:38
  Speaker 1: expect to see a strong non farm payroll number correlated
• 24:41
  Speaker 1: with today's ADP number that we saw, so we should
• 24:44
  Speaker 1: look for Friday's number to be relatively firm. Obviously, the
• 24:47
  Speaker 1: hour the average hourly earnings number will be a key
• 24:50
  Speaker 1: component as far as what the Fed has been watching.
• 24:52
  Speaker 1: They were they're looking for wage growth. Wage growth will
• 24:55
  Speaker 1: continue to pave the way for them to remove accommodation.
• 24:58
  Speaker 1: But I still think that over roll, it's really about
• 25:01
  Speaker 1: what's going to come out of the administration. Whether it's infrastructure,
• 25:03
  Speaker 1: whether it's tax policy. Those are the things that will
• 25:06
  Speaker 1: drive the next move, the next leg in the market.
• 25:09
  Speaker 1: What kind of time frame are we talking about? And
• 25:11
  Speaker 1: I wondering if you could tell us if your strategy,
• 25:13
  Speaker 1: you know, what would it be if you thought they're
• 25:16
  Speaker 1: not going to be able to get much done before
• 25:17
  Speaker 1: the August recess or they might get one thing done
• 25:20
  Speaker 1: before August. Yeah, it seems to me that with the
• 25:23
  Speaker 1: delay that's happened in this Obamacare repeal and replace, it's
• 25:27
  Speaker 1: kind of put everything on the back burner. Now, if
• 25:29
  Speaker 1: you listen to the Treasury secretary, he talked about August
• 25:33
  Speaker 1: was a time frame in which they're becoming with some
• 25:35
  Speaker 1: kind of tax reform. So I would imagine it's going
• 25:38
  Speaker 1: to move into the latter half of the year, but
• 25:41
  Speaker 1: specifically into the fall time frame before we see anything
• 25:44
  Speaker 1: of any consequence as it relates to this, Tom, what's
• 25:48
  Speaker 1: your what's your best guest? Do you think that we're
• 25:50
  Speaker 1: going to see a rally at some point in bonds
• 25:53
  Speaker 1: as people sort of reassess the possibility for fiscal stimulus.
• 25:56
  Speaker 1: I think that's a potential just from the standpoint that
• 25:58
  Speaker 1: you know, there's still is a demand end for yield overall.
• 26:01
  Speaker 1: But I think that rally is more it's not based
• 26:04
  Speaker 1: on real genuine demand for the long term. I think
• 26:07
  Speaker 1: people are starting to get defensive realizing that the fete
• 26:10
  Speaker 1: is in motion and will be so um and that
• 26:13
  Speaker 1: some other things are happening around the world as well.
• 26:15
  Speaker 1: I mean, you look at what's happening in the bond market.
• 26:17
  Speaker 1: You know, we we've been on this show multiple times
• 26:20
  Speaker 1: in the last ten years talking about how the bude
• 26:22
  Speaker 1: market has carried a bid into treasuries that been in
• 26:25
  Speaker 1: the bone market is starting to fade as well, so
• 26:27
  Speaker 1: that anchor that's been helping out the treasury market um
• 26:31
  Speaker 1: is starting to loosen as well. So I think there's
• 26:33
  Speaker 1: some things in here that would generate, you know, expectations
• 26:36
  Speaker 1: for higher rates to be met. Yes, of course, there
• 26:39
  Speaker 1: could be a rally in any one of these days
• 26:41
  Speaker 1: where we could get some shortcovering, but I think overall
• 26:44
  Speaker 1: we're looking at a general trend of upward interest rates.
• 26:46
  Speaker 1: All right, Thanks very much. Tom Tucci's the head of
• 26:48
  Speaker 1: US Treasury trading at CIBC World Markets. Thanks for listening
• 26:58
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 27:01
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• 27:06
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• 27:09
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  Speaker 1: Lisa Abramo. It's one before the podcast. You can always
• 27:15
  Speaker 1: catch us worldwide on Bloomberg Radio.