Full Transcript for PCE, Yields, and the Tech Trade

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00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts. 00:00:05 Speaker 2: Radio. 00:00:06 Speaker 3: News. 00:00:12 Speaker 4: This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. 00:00:27 Speaker 5: Mike Rhee is going to say I shouldn't do this. Senior U.S. economist, RBC. 00:00:31 Speaker 3: But I got a good ADP number 14 minutes ago. And so I look at the yield and we are 5.57 in the 30-year bond. Are you guys micro-looking at yields coming off 18 lines of economic data here today? 00:00:47 Speaker 2: I mean, you said it. There's a lot to digest, right? So you're going to have the employment data. We got the sneak peek this morning. We get the inflation data. We get the revisions to GDP. And we do get some of those other measures, I think, that are important signs for AI investment. We do think that continues when you look at things like durable goods order. So a lot to unpack. But at the end of the day, if everything is looking positive, I think you can expect that rates continue to move higher. 00:01:16 Speaker 6: I mean, let's just set oil aside because it whips around every day based upon social media posts here. 00:01:22 Speaker 7: Underlying inflation, how do you view that? 00:01:24 Speaker 6: Because it's there, it's sticky, and I think it's definitely got the attention of. 00:01:29 Speaker 7: The Federal Reserve. How do you think about underlying inflation? 00:01:32 Speaker 2: Yeah, we are concerned about it right now. And the way we're thinking about it is kind of putting it into three buckets. And you have your services, which we're splitting out. You have the housing component, which we think the disinflation there is largely done for this year. Maybe you get a little help next year, but for the most part, it's just going to move sideways. 00:01:50 Speaker 5: And that's a big chunk of the bucket. 00:01:53 Speaker 2: Then you have core services, ex-housing. And with the labor market doing as well as it has been, there's really little disinflation. So the wage component, what's contributing in terms of compensation there, unlikely to provide any help. And when you look at what's left to provide that help in core goods, I'm concerned because when you think about the energy story, it's freight prices that are starting to look like they're moving higher. And when you look back at 2020, they're comparable in terms of a year-over-year change. And that's going to start to bleed through into the core goods space. All of this says inflation's moving in the wrong direction. 00:02:35 Speaker 6: Yeah. So, I mean, we'll see core PCE today on an annualized basis, 3.3%. So that's not what the Fed is looking for here. So- On the other side of the equation, the labor market, I mean, it seems pretty darn solid, right? Is there any cracks underneath the surface that we should be paying attention to? 00:02:54 Speaker 2: No, and we've been looking. We put a piece out last week, and it's something I look at. Some of these measures that most people don't pay attention to, things like part-time work for economic reasons, aggregate hours. And when you look at those, it's really hard to find any weakness. The aggregate hours really continues to grow. That just shows a continued demand for labor. And when you look at things like part-time for economic reasons, again, suggesting hours aren't being cut. In fact, they're being expanded. And I think despite some of the Headlines about recent grads struggling. At the end of the day, at a 4-1, it's hard to argue there's weakness in the labor market right now. 00:03:37 Speaker 5: Mike Reed with us as we go into the economics. Alexis will have that for you in a moment. 00:03:41 Speaker 3: The privilege he has of working with Francis Donald. 00:03:45 Speaker 5: Five days a week. Mike's got to have patience. 00:03:48 Speaker 3: Summarize, is it Nathan Jansen who does your Canadian-U.S. border? 00:03:53 Speaker 6: Yes. 00:03:53 Speaker 5: Are these reports, particularly PCE, affected by tariffs? 00:03:57 Speaker 2: Yes. 00:03:58 Speaker 5: Yeah, they are. 00:03:59 Speaker 2: And so one of the things we're thinking about is certainly on the Canadian side, how that's going to impact the Canadian economy. It's going to be more impactful there. You know, right now, based on the current environment, we do think it could reduce employment there up to about 90,000 jobs. 00:04:17 Speaker 5: What about here? Is it part of our inflation plan? 00:04:20 Speaker 2: As far as the direct tariffs on Canada, not so much. We think it's more about kind of a negotiating strategy between the two sides. But more broadly, we still have tariffs that are in place. And one thing we're concerned about is the rundown of the pre-tariff inventories that we saw last year. We still think you have about a quarter or two of inventory drawdown. 00:04:46 Speaker 5: Inventory drawdown. Very interesting. Mike Reed with us. 00:04:49 Speaker 3: We're going to come back, give you the best we can on the economic analysis here. 00:04:54 Speaker 5: Equities lift. Futures up 11 into the report. It's Bloomberg's surveillance. 00:05:01 Speaker 8: And the Fed's preferred inflation gauge is out, and it shows inflation heated up in August. The personal consumption expenditures price index rising three-tenths of a percent month over month as consumers paid more for many goods and services. Year over year, though, the PCE index up 3.4%. This is less than the 3.7% expected and less than the 3.7% we saw the prior month. Let's move to core PCE, which excludes volatile food and energy prices. Month over month, rising 0.2%, so less than the 0.3% expected. And right in line with the prior month, core PCE year over year also coming in a bit softer here, up 3% versus estimates for 3.3%. The prior month was also 3.3%. Wireless telephone services and

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airfares driving core inflation higher. Meantime, consumer spending rebounding sharply in August, up 9 tenths of a percent in line with estimates and a lot higher than the 2 tenths of a percent rise we saw the prior month. Meantime, personal incomes up a scant two-tenths of a percent. So we were spending more than we were bringing in. So once again, a bit of a surprise here. A softer than expected read on PCE. PCE up 3% core, that is, year over year. Estimates were for 3.3%. So still, guys, well above the Fed's 2% target. But a bit better than expected. 00:06:30 Speaker 5: Tom and Paul. Alexis, thanks so much. 00:06:32 Speaker 3: Markets, the futures up 10 now, up 33. NASDAQ up half a percent as well. Yields come in and they begin to come in as people digest Alexis's report. 10-year yield in three basis points, 5.20 percent. 00:06:47 Speaker 5: We're advantaged. 00:06:48 Speaker 3: Mike Reed with us because Francis Donald and Mike Reed do nominal GDP analysis. Like nobody, major shout out to the economists who noted domestic nominal GDP. Mike, 6.1% GDP price index plus upward revision on. 00:07:09 Speaker 5: GDP annualized, 2.2. 00:07:11 Speaker 3: I'm rocking 8% simplistic nominal GDP. 00:07:16 Speaker 5: That's a banana republic. How do we bring that down successfully? 00:07:22 Speaker 2: I don't know if you can, I mean, this, a big part of this is the AI story. And if the fed is in a hiking cycle, that's not going to stop the continued investment we see in AI. As we saw earlier, look, the data for the consumer is concerning. You have spending outpacing incomes, you have inflation moving in the wrong direction. Yes, we got a weaker number than expected, but I think that's due to methodology. So looking ahead, This is just, you have forces at play that aren't going to be resolved by a hiking cycle. 00:07:55 Speaker 7: And you mentioned the spending here. 00:07:57 Speaker 6: I mean, personal income rose 0.2%. Personal spending rose 0.9%. 00:08:04 Speaker 7: That's not sustainable. I can't keep hitting my credit card every week. 00:08:08 Speaker 9: For that stuff. 00:08:09 Speaker 2: Oh, and that's where we're really concerned. One of the measures I like in this report is the measure of non-mortgage personal interest payments. And when you look at that as a share of disposable personal income, which is the same denominator as the saving rate, it's about 2.5%. So I'm curious to see what it is today. But when you think about what's ahead, if the Fed continues to hike, that's going to move higher. And the number that concerns me is 2.8%. If you take out the COVID recession, the past three recessions prior to that, when you've hit 2.8% of that non-mortgage personal interest payment, we've gone into recession. So that is to say, It's really something that's going to squeeze consumers. 00:08:50 Speaker 5: Okay, repeat that again. That's so important. You said what is 2.8%? 00:08:54 Speaker 2: So it's the amount of interest consumers are paying in terms

of non-mortgage payments. So things like credit card loans, auto loans, student loans, any personal loans. 00:09:04 Speaker 5: All the other loans we have. And that's becoming elevated. 00:09:08 Speaker 2: And it didn't shift lower when the Fed was cutting. And so if you continue to see consumers, to your point, use credit cards to spend. This is going to continue to squeeze them. 00:09:20 Speaker 5: Mike, don't be a stranger. Mike Reed with us. Thank you so much. RBC, I'm sorry, folks. 00:09:25 Speaker 3: RBC people, it's the Royal Bank of Canada and always will be. Mike Reed of RBC to give us perspective. Futures up 30 now. They launch a NASDAQ up four-tenths of a percent. The VIX comes in from that 16 level. To 15.76, a little bit of dollar weakness here. Haven't seen that since Eric Winograd was, you know, ages ago studying Chinese history. I mean, I'm looking here, 10-year yield in two basis points. I'm shocked a 30-year bond doesn't come in 5.56 as all sorts of good things. We have wonderful conversations today. You go from Max Kettner to Mike Reed. Now, Eric Winograd with his chief economist, Alliance Bernstein, always with important perspective. I look, Eric, at where we are in your idea that inflation– is sticky and not accelerating. I think to all our listeners, that's the key debate. 00:10:24 Speaker 5: Discuss that. 00:10:25 Speaker 10: Yeah, look, when the Fed embarks on a tightening cycle, typically it's because inflation is going up. That's not really what we're seeing here. We're just seeing it not come down. And if you look at today's data, there's more of that in there, right? The PCE index, the core PCE index are running above the Fed's target, but they're gradually moving in the right direction. And so that's a different type of tightening cycle than many people are used to. They're not trying to slow the economy. They're not trying to crimp things down here. They're just trying to accelerate this process. 00:10:54 Speaker 7: So what happens with the next. 00:10:55 Speaker 5: To the second, the third? We had someone in earlier five rate increases. It's nonlinear. 00:11:01 Speaker 3: When do those rate increases click in? to bring your inflation where it is down to something more acceptable. 00:11:09 Speaker 10: So that's the classic challenge for central banking, is that you can raise rates today and it doesn't move inflation tomorrow. It takes nine to 12 months. And that, to me, particularly in an environment where you're trying to get inflation to move just a little bit quicker, is a recipe for a very gradual cycle. There's no urgency here, right? Inflation is not accelerating. They just need to get conditions or they believe they need to get conditions a little bit tighter to make it go a little faster. To me, that's a recipe for a constrained, gradual cycle rather than a rapid, aggressive one. 00:11:38 Speaker 3: U.S. 00:11:39 Speaker 6: Second quarter GDP was revised up to 2.2 percent annualized compared with the second estimate of 1.5 percent. Chairman Powell would say that's solid. That is solid. So, I mean, the economy is strong. But part of the cost of having a strong economy is having a certain amount of inflation. And some folks are coming in here saying, hey, the 10-year yield at five and a quarter, whatever it is, that's consistent with how this economy is growing. 00:12:07 Speaker 7: Is that fair? 00:12:09 Speaker 10: I guess I would look at it and say, yes, the economy is solid. And the way I think the Fed is thinking about this is the economy is solid enough to allow them to embark on a cycle to get inflation to come down a little faster. If the labor market were weak, if the economy were weak, they probably wouldn't be doing that. They'd figure the economy would bring inflation down on its own. As far as the 10-year yield, what's really interesting is if you look not just at the last rate move, but go back to the last several rate moves, all of which were cuts, by the way, right? This cycle is unusual because when the Fed was cutting rates, long bond yields were going up. And now that they've raised rates, long bond yields are still going up. So that tells us that this cycle isn't really. 00:12:45 Speaker 7: About the Fed. 00:12:46 Speaker 5: What is it about? 00:12:47 Speaker 10: You know, that is a mystery. And I'm sure that you have lots of people who come in here to you. 00:12:51 Speaker 5: There's an elephant in the room called the debt and the deficit. 00:12:54 Speaker 3: Sure. 00:12:55 Speaker 10: But that's been true for a very long time. And there's no particular reason to think it's accelerating. Well, during the entirety of this cycle, the answer to that is yes. And there is nothing that changed at the point when long bond yields started to go up. I strongly agree with you that that plays a role in this, but I don't think it's the only. 00:13:12 Speaker 7: Variable at play. 00:13:13 Speaker 10: Yes, we're running irresponsible fiscal policy. To have a 6% of GDP budget deficit in an economy that is strong or solid or stable or whatever you want to pick doesn't make any sense. You combine that with policy volatility and unpredictability, right? You have tariffs on, tariffs off. You have oil prices up. You have oil prices down. Geopolitics on, geopolitics off. the Treasury Department changing its issuance calendar, we're intervening in FX markets. All of those argue for higher risk premium as well. So when I look at where the long bond yield is, I don't think it's any one explanation. I think it's a smorgasbord of all these different variables that are combining to put it there. 00:13:50 Speaker 6: Chairman Warsh is just absolutely adamant about getting that inflation number down to 2%. Based upon my two semesters of economics at Duke, I feel like I'm an expert, I don't see the real magic of 2%. I mean, we're at 3% core PCE today that just got reported. Maybe that's where our economy is. I mean, we're reshoring all this stuff. We're cutting

immigration, so we've got some wage inflation. 00:14:14 Speaker 7: I don't know. Maybe that's the new number. 00:14:16 Speaker 10: So the magic of 2%, and you're right, there's nothing magical about 2%. When the Fed picked 2%, they picked it because it seemed like a reasonable number and because the New Zealand Central Bank. 00:14:25 Speaker 7: Picked 2% first. 00:14:26 Speaker 10: It's not like there was some deep mathematical analysis that concluded 2% was optimal. 00:14:30 Speaker 7: But now that you've picked it, that's the target. 00:14:32 Speaker 5: And in order to retain their credibility. 00:14:37 Speaker 10: They feel like they need to adhere to that 2% target. I believe and have believed for a long time that in the grand scheme of things, they'll be satisfied if inflation runs between two and two and a half, as long as inflation expectations stay contained, precisely because there is no magic to 2%, right? What they're really looking for, what any central bank is really looking for is the idea that when households and when businesses make their plans, they don't think about. 00:15:03 Speaker 7: Inflation, right? 00:15:05 Speaker 10: And that's what they're targeting. And I suspect that for most people, the difference between 2% inflation and 2.25% inflation is a rounding error that they won't perceive in their daily life. But in order to get back to that point, the Fed believes that they need to reinforce their credibility. And that's what they're doing by starting what, again, what I expect to be a limited tightening cycle, but by raising rates at this point. 00:15:27 Speaker 5: Eric Winograd, thank you so much. 00:15:28 Speaker 3: With Alliance Bernstein this morning out of Dartmouth with all of his good academics here. And to have back-to-back Mike Reed and Eric Winograd is what it's about. 00:15:38 Speaker 5: Stay with us. 00:15:39 Speaker 12: More from Bloomberg Surveillance coming up after this. 00:15:49 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:15:55 Speaker 1: Eastern. 00:15:56 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. 00:16:00 Speaker 1: Or watch us live on YouTube. 00:16:02 Speaker 7: This is Joe. 00:16:02 Speaker 5: I've been saying for like three weeks, get Nordvik. Get Nordvik. You can't get Nordvik. He's still recovering from the World Cup. Jens Nordvik joins us. 00:16:09 Speaker 3: Exciting data with his wonderful work on foreign exchange, but it's really broadened out. Does foreign exchange tell us, inform us, is the deepest system about fixed income, about commodities right now? 00:16:23 Speaker 11: I think it's pretty clear that the epicenter of what has been happening over the last couple of weeks, couple of months, really, has been the fixed income market. And, like, we. 00:16:35 Speaker 11: We merged Exanta data with Vanda earlier this year to get the equity coverage as a part of what we offer and even the equity space. All the questions are fixed income related now. When is this dramatic rise going to stop? When is equity going to be okay again? I think that epicenter is very clear. 00:16:55 Speaker 5: Do you need dollar to break as a change agent? Do you need to see DXY go $ 199. 00:16:59 Speaker 2: 94? 00:16:59 Speaker 5: Does it need to finally break? 00:17:05 Speaker 11: So I think we're in this kind of really interesting environment, right, where currency markets haven't really moved that much, except the Korean won that has been on this crazy AI, maybe not crazy, understandable AI trend. But I think what we're looking to in currency markets is we're going to get to a point where the fixed income markets are going to be at a kind of breaking point where we're going to have to have some kind of intervention, right? We can't have 30-year yields continuing to go up, you know, every few months, 50 basis points. It's not going to be sustainable. And we've seen it already in the U.S., right? Scott Besson came in and said we're going to try to stabilize with the buybacks. You discussed it earlier this morning, right? It hasn't really had a huge impact so far, right? 00:17:52 Speaker 7: But eventually. 00:17:53 Speaker 11: we'll have to have some type of backstop from central bank balance sheet to other balance sheet to stop it. And that will be when the currencies react, right? Because that's when the market can see, okay, there's a liquidity that's coming in to stop the yields rising, and that's going to then move into the currencies. We're not there yet, but I think this year is a transition year where we'll get to that point. 00:18:14 Speaker 6: Jens, just looking at your notes here, and as you talk about the long end moving higher, you talk about a corporate bond deal that may be impacting the paramounts in the market was $ 52 billion worth of investment grade, high yield bank loan, a lot of paper coming into the market, but I've never heard or seen anybody discussing whether a corporate bond deal could impact the broader treasury market. 00:18:37 Speaker 11: No, I think it's, it's when the markets are so on edge, as we're seeing right now, like the catalyst kind of broadens out and even smaller things can actually kind of destabilize the market. So, Obviously, there's a lot of focus on the hyperscale issuance, which is now starting to compete in the long end with the US Treasury market as being an equally important issuer from the US Treasury. It's something that a couple of years ago, if I've said that on- Do you agree with that? When we do the projections into 2007, it looks like the issuance above 10-year, because the data centers are very long-term financing projects, it could be of roughly the same magnitude as the Treasury is. Yeah. If I come here and said this a couple of years ago, you'd probably kick me out of the studio saying, okay, what are you smoking? 00:19:28 Speaker 6: But this bond sell-off, it's been a global

issue. It's not just the U.S. So what is that telling you? 00:19:36 Speaker 11: Yeah, so we've seen it over the last couple of years, right, that global bond markets are so tied to the U.S. that it's quite hard to see any decoupling. But I do think if you look at the curve shapes, you can see. like the most extreme example is Switzerland, right, where they have no debt. You don't have curve steepening there. So there is some differences. And I would also say if you look at this week, right, and even today, like which curves are steepening, The U.S. curve is still steepening today. The French curve is still steepening today. So that does seem to be a trend where, OK, global bond yields are correlated, right? But the slope of the curve is more problematically steep in the places where the debt issues are the most severe. 00:20:21 Speaker 3: Jens Nordvik with us with the Castani. 00:20:23 Speaker 5: We're going to continue with him coming up. 00:20:25 Speaker 3: Lisa Abramo is with Ken Griffin on his very important day for Pittsburgh's Carnegie Mellon as they look to Miami, I'll give you a treatment on there in a moment. We are advantaged to have Jens Nordvig with us with these headlines. Let me go through these bombshell headlines. BMW of Germany targets shedding a fifth of managers for AI. BMW targets three to five percent automaking return on sales two years out. BMW expects management cuts to be completed by summer of next year. BMW's management job cuts are part of an AI buyout, whatever that means. BMW to add more high-end models above the X7. BMW to reduce variance to discontinue some models. I look at this yen and it just speaks of the impact of China. I mean, it just screams for Volkswagen, BMW, for Ford and Jim. Your thoughts on how China is pricing their goods? 00:21:33 Speaker 11: Yeah, absolutely. A couple of decades ago, there was this concern that Japan was going to take over, right? And the Japanese automakers were gaining market share from everybody, including the U.S. ones. And now we look at what's happening in China, right? And the speed at which China is taking market share globally is so much faster than what Japan ever did. And obviously the headlines you're reading out, right, is a reflection of that. Like German car producers are just really pressured Number one, because they don't sell cars in China almost at all anymore. And number two, because they're also getting threatened at home from the EVs. So this is a very challenging situation for Germany. The only offset they have really is that some of that production capacity is moving to military production because Germany is ramping up their defense spending. That's the only offset. But we also have the much higher natural gas prices. So the challenges are multifold. 00:22:33 Speaker 3: Don't be a stranger. Jens Nordvik, thank you so much for the Exante. Brilliant research notes. I will say his book of a lifetime ago on the Euro was absolutely definitive. 00:22:44 Speaker 5:

Stay with us. 00:22:45 Speaker 12: More from Bloomberg Surveillance coming up after this. 00:22:56 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:23:01 Speaker 1: Eastern. 00:23:02 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. 00:23:06 Speaker 1: Or watch us live on YouTube. 00:23:08 Speaker 5: Let me explain Paul Sankey, folks. 00:23:10 Speaker 3: For years, you'd get the Deutsche Bank Research, and this is before the Internet. 00:23:15 Speaker 5: It was chiseled in granite. It was chiseled in granite. 00:23:20 Speaker 3: Excuse me. 00:23:22 Speaker 5: Let's go. 00:23:23 Speaker 7: Let's get into this right here. 00:23:24 Speaker 9: Chiseled into ground. 00:23:25 Speaker 7: Chiseled into ground. We used to get the paper research reports. All right. 00:23:29 Speaker 6: You know, we were sitting here with Paul Sankey, lead analyst at Sankey Research. He is the go-to voice on global energy. Paul, I've been reading over the last 24, 48 hours that a lot of crude is getting through the Strait of Hormuz, like a lot of crude. 00:23:42 Speaker 7: Why is Brent still at $ 103? Why are we trading this stuff at $ 80 a barrel? 00:23:46 Speaker 9: Well, I think it's going to come down because, yes, you know, the numbers we're getting are actually 20 million barrels a day right now, the very latest. 00:23:53 Speaker 5: So the U.S. 00:23:54 Speaker 9: Has absolutely thrown the military, the Air Force particularly, into, for example, I was told they have eight F-15s constantly running up and down the petrol line to protect the petrol line. And the F-15s apparently... faster than the drones. So, you know, it makes you wonder about Top Gun and stuff. But, you know, what strikes me, obviously, is the enormous expense of this effort. And it's clearly an all-in military effort by the US to. 00:24:22 Speaker 5: Get the oil flowing. 00:24:23 Speaker 9: And that's succeeding. I think the problem is, you know, what happens once we get through the midterms, because it's clearly an unsustainably expensive effort right now. And what you're seeing, I was just looking at the charts, is actually Year forward, crude is now moving up quite aggressively. So you're above 80 for one year delivery. So, you know, this time next year, the price of oil has gone up quite a lot. 00:24:46 Speaker 7: Why is that? 00:24:47 Speaker 9: Because I think everything you're looking at now is pointing towards 2027 being a problem as well, you know, because we've drawn down, we've run through the six or seven buffers that we had in global oil, which would be some of the less well-known ones were, for example, that Saudi and UAE had major inventories in Asia already stored. An obvious one is the Strategic Petroleum Reserve. Those are getting tight. There is another release of the Strategic Petroleum Reserve coming through, but you've gone from one and a half million barrels a day of drawdown to more like 150,000 barrels a day there, and that simply can't go on forever. So this is a short-term sort of sugar rush of crude that we're getting that is clearly, I don't think the US military effort can be sustained, quite frankly, at this level of expense. 00:25:33 Speaker 7: When you get the oil out, then what do we do with it? We got to refine it, right? 00:25:37 Speaker 9: That's the second problem is that I keep saying you're pushing on a string. And the fact of the matter is the constraint is not crude. The constraint is diesel. And we're getting almost no diesel out of the Straits of Hormuz. The Kuwait refinery used to supply 60% of Heathrow's jet fuel. That's all now missing. And you really have basically an energy crisis again in Europe that We're hoping it won't be as bad as it might be because we're looking for a warm winter with El Nino. But I think we're also looking at a very volatile winter. As you know, we just had a nor'easter here in September. That's very early. It's not unknown. But it looks like we might have energy disruptions from force majeure, from God himself or herself. 00:26:20 Speaker 13: Right. 00:26:20 Speaker 5: Paul Sankey with us, folks. Sankey Research. Thrilled he could be with us today. 00:26:24 Speaker 3: I should say in the plague that I'm getting over, now I have two people on the Bloomberg Money Team, Paul, with us out today. 00:26:31 Speaker 5: Yes, I saw that. 00:26:32 Speaker 3: Folks, if you've got this flu thing going around, this pneumonia thing, go to the doctor. 00:26:37 Speaker 5: Don't be a hero. I can't say enough the care I've gotten. We're working it in every day. 00:26:43 Speaker 3: Paul Sankey, I think Paul's dead on here in that the public is looking at simplistic politicians. 00:26:50 Speaker 5: And their rhetoric. 00:26:51 Speaker 3: If you were talking to the politicians with their simplistic, you know, primetime news soundbites, what would you say to them that they need to understand? What's the come-to-Jesus moment the politicians need? 00:27:06 Speaker 9: I think free markets, you know, I think the idea that we would ban diesel exports in order to short-term bring the price down because the Russians banned diesel exports and the Chinese banned diesel exports, you know, that's one of the sort of Comparisons that makes you realize what a terrible idea it is It's like no, you know, we got to this position of the world's biggest oil and gas producer and exporter an amazing position that's greatly underestimated by almost everybody in terms of the benefits that it's brought to the US and Then to turn around and start mucking around with it at the margin in a way that you know you get a six you get a whatever it'd be a 90-day benefit of lower diesel prices and And you get a 20-year discount for not being an investable place to put money in refining. 00:27:48 Speaker 3: So then how do you perceive, say, next summer, a gallon of gas or a gallon of diesel or just the price of

Brent? 00:27:54 Speaker 9: Well, one comparison that we're using regularly is if you're at 650 diesel, you're at $ 250 a barrel. I think that would help people realize what the issue is. You've got $ 100 crude, you've got 250 diesel, and we use diesel. everything that is out there is that because of what's happened in Hormuz and because it looks like it's Structurally going to be very risky what's happening here as well as the Iranians have no radar So they're just randomly throwing missiles hoping to hit a boat, you know, it's a very inefficient way to do it, thankfully But it really tells you they're not stopping, you know, we're gonna have to either continue massive military presence down there you know that military presence right now is causing massive spikes in tanker rates because the tankers are The state companies are using the state ships to get through the strait because they're prepared to risk. And then they're putting it on commercial tankers outside the straits. That's adding $ 25 a barrel to the price of crude to get from Saudi to China. Last year, it was under $ 2 a barrel. So you have a structural transport increase. This week, Tom, just on Monday, I was at the Total Energies Analyst Meeting here at Columbus Circle. And a couple of things they did, one I thought was brilliant, is that Total Energies voluntarily put a cap on gasoline and diesel prices in France. So the company actually did it themselves. And that would be a suggestion to me for a Valero. You know, let's get, you know, 100,000, 200,000 barrels of price capped diesel to the farmers. And that will probably satisfy the politicians a lot. But broadly speaking, because of the enhanced risk, you actually need higher inventories, arguably, than you were holding before the crisis. And inventories have been radically drawing down. So a couple of important numbers just to finish. You drew down 4 million barrels a day of global inventory suddenly in September. So the drawdown suddenly accelerated because we'd blown through the buffers that we talked about. And then, of course, you lost the petrol lines. So the market got panicky, and that's why we're at 100. But at the same time, actually, the US military effort was massively ramping up the crude, which takes 50 days to reach its destination. So I think we're going to come off these level of crude prices quite aggressively, assuming they maintain the 20 million barrels a day of exports that they're achieving right now, apparently. But you're going to remain in a major issue for diesel because you're actually doing nothing to address the diesel problem. The other thing I'm watching, Tom, finally, is just whether or not treasury rates, interest rates disconnect from oil. Because as you know, for the past eight weeks, six weeks, we've had a one-on-one oil moves a percent. Those guys, you know, you can just check. 00:30:27 Speaker 5: Overlay the charts. 00:30:28 Speaker 9: I've just seen this week the beginning of oil trading off, but the interest rates continuing to rise. And I think that's going to be very scary for the market if that starts. 00:30:36 Speaker 5: Get one more in here, Paul. 00:30:37 Speaker 11: All right. 00:30:38 Speaker 6: Here's the simplistic question of the day, because I'm sure 99% of our audience wants to just know this. 00:30:44 Speaker 7: When do we get back to normal? 00:30:46 Speaker 6: Do we ever get back to where we were January, December in terms of global energy and all the way from your world in the oil fields all the way down to my pump on Route 36 in the Jersey Shore? 00:30:57 Speaker 9: Look, I tell you this. My standard line is if you're worried about World War III, you shouldn't be because you're in it. And, you know, this is World War III, and there's a number of higher levels than the usual trench warfare in Ukraine. You have a situation here where you have an AI World War. You have a finance World War. You know, we call it OFACs against UCAVs, which is the U.S. sanctions against drones. And that's just, that's, you can split the world east-west basically with a second frontline through Tokyo and Korea and Taiwan and Australia. How do we resolve this? I really would love to see the Chinese get on the same page as us. But, you know, I think Wall Street always supported Trump taking on China. The execution at times has been suboptimal, we can say. But I think the general idea is, you know, was that we have to make some sort of new industrial policy in the U.S. and reduce the power of China over time. And that's, you know, hopefully something that can happen in the future. But at the moment, it's pretty intractable. It's pretty difficult to see how we normalize, certainly how we normalize ever again the straightforward moves because it's a structural damage that we've. 00:32:04 Speaker 5: Paul, thank you, thank you, thank you. Paul Sankey, folks, with us here. Stay with us. 00:32:11 Speaker 12: More from Bloomberg Surveillance coming up after this. 00:32:21 Speaker 1: Julie Beals is incredibly gifted. 00:32:22 Speaker 4: I knew her ages ago at Merrill Lynch when she was 15. 00:32:40 Speaker 3: And she's worked her way through with some sterling West Coast academics at Kane, Anderson, Rudnick. So usually we talk to her about, you know, economic and that. But Julie, your note is just incredibly prescient on AI. You've been going to the boring meetings of people trying to figure out data centers and all that. Here's George Noble, the giant of fidelity overseas this morning. This anthropic IPO is the most dangerous deal I've seen in my 45-year career. Julie, from your perspective, where are the mega people? Where is AI? Sam Altman, Darius played on Saturday Night Live this weekend. Where are they in six months, or for that matter, six years? 00:33:24 Speaker 7: Oh my gosh, that is a big question. 00:33:25 Speaker 13: I think the real challenge that they have is that they're in this chasm in their business model where they really are

just huge users of capital, and they need that in order to continue their growth, and they need the growth in order to continue to draw investors in. 00:33:41 Speaker 1: And I think that the problem that. 00:33:43 Speaker 13: They have is that They've unleashed this technology and taken very little responsibility for a lot of the problems that it has. 00:33:50 Speaker 3: Right. 00:33:51 Speaker 13: And I don't think that that's something that people are going to put up with. 00:33:53 Speaker 9: Right. 00:33:53 Speaker 13: Like if my kid in preschool bit another kid, that's on me. I can't just, you know, pretend that that wasn't on me. And I think that that's the real struggle is we're looking for them to have some real accountability or else why should these models be as large as they are? 00:34:08 Speaker 3: George Noble brilliantly quotes the American for the Canadian philosopher Wayne Gretzky. 00:34:14 Speaker 5: You've got to skate to the puck. 00:34:16 Speaker 3: Julie knows this because he was iconic at the LA Kings as well. Now the puck is going to the customer, Mr. 00:34:23 Speaker 5: Noble says, and the customer is scared. 00:34:26 Speaker 3: Is there a customer out there, Julie, based on the meetings you've gone to at Morgan Stanley and other shops? 00:34:33 Speaker 13: I think there absolutely is a customer, and I think that this technology has applications that are going to be really life-changing for all of us. The problem is trying to predict it with any kind of certainty is, to me, really, really difficult. Think if you were an accountant when spreadsheets came out. You would be pretty worried about your job, but if you look forward, we've actually hired more accountants over time. 00:34:56 Speaker 7: So it's really. 00:34:56 Speaker 13: Difficult to know exactly what the implications of the technology are going to be. I think I like investing in companies that I think will be beneficiaries of it from a standpoint of they're going to integrate it and become more profitable on their own side, rather than saying, I want to be in the picks and shovels because I just don't know what the duration is and how big it's going to really need to get. 00:35:16 Speaker 3: Julie Beal with us right now with an active market, Dow up 26 points. Paul, I got to go. I got a headline here, Italian bond risk. It's now up in a full stick, 100 beats. French Germany has just exploded out seven basis points to 125. If you don't know what that means, it doesn't matter. We'll say it in French later. But then, Paul, the 30-year bond, we all understand that, rounded up 5.61%. 00:35:39 Speaker 2: Yep. 00:35:42 Speaker 3: Julie Beal can't move up to 6,000 square. 00:35:45 Speaker 5: Feet in Hollywood. Exactly. 00:35:47 Speaker 6: Julie, how does higher interest rate environments, which Thomas is pointing out, just moving more and more on the high end here, what does that mean for stock investors, maybe small and mid-cap investors? 00:35:57 Speaker 7: It's got to be a headwind. 00:36:00 Speaker 13: I think if you're thinking about small cap as a group, in general, higher interest rates are harder because most of them are borrowing at the banks, and so they're on variable rates. And a lot of them are highly levered. I think if you can avoid companies that have a lot of leverage, that's what you definitely want to be doing. But the reason why interest rates are going up is important too, right? If it's solely about inflation... that's not great. But if it's also about their strong economic growth and their strong labor markets, that tends to be actually better for small caps. You have to kind of take a more nuanced look at it. 00:36:32 Speaker 6: So how are we thinking about just an environment where this stock market has been driven by earnings and earnings have just been extraordinary over the last several quarters? 00:36:43 Speaker 7: What's the earnings growth story looking going forward from your perspective? 00:36:47 Speaker 13: I think going forward, we want to continue seeing a broadening of the growth in earnings, right? The numbers have been pretty eye-popping, but the problem is that it's concentrated in technology with a huge chunk of it being the revaluations of these private. 00:37:02 Speaker 12: Companies, right? 00:37:02 Speaker 13: Non-operating earnings, not actually selling more stuff, but... non-operating earnings and then what we're seeing in energy and it's hard to know how long that improvement in earnings is going to last we want to see more breadth into manufacturing and into other pockets of the economy in order to feel really really confident that the growth is durable. 00:37:21 Speaker 3: Julie, thank you so much. Have to run with breaking news, but just love, love, love your research. Julie Beal with his chief market strategist, Kane Anderson Rudnick. 00:37:28 Speaker 4: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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