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Very all right, Well, the great monetary pivot is near a central banker's engineer, a once unthinkable soft landing in the world's largest economy. I think to a lot of people, that's the big picture takeaway. After yesterday, the FED gave its clearest signal yet that its historic policy tightening campaign is over by projecting more aggressive interest rate cuts in twenty twenty four, in the process of igniting one of the biggest post meeting rallies in recent memory. We're going
cross asset. We're talking stocks with Bloomberg News Markets reporter Abe. I'll do a little. We're talking bonds with Bloomberg News Rates reporter at Michael McKenzie. They're both here in the Bloomberg Interactive Brokers studio. Michael, I want to start with you with the rates moves. So is that it the Fed's just completely done and five percent was the top of the tenure that's it. That's it all right, interview over. Thank you for your answer.
No, I think Waller laid out the game plan and clearly he's the intellectual force driving this FED reserve. And I think there are a couple of times yesterday when journalists were asking Chairman FORED Jerome Powell, whether you know, giving him an opportunity to walk back and sort of say, hey, you know, Marc has run too far. He just served up the sort of dubbish pivot on a silver platter. I mean, the mark is run and he's going to keep running now because frankly, the rate cuts starting as
early as March. It's on the table.
You've written multiple times this year, Mike, because I've read these stories about how traders have been burned by piling into bets that we're going to get cuts. Are we in the same situation now? It was something different this time, where you're not going to be writing that story in three months from now.
Well, to be honest, that story changed once we got about five percent. Because the ri is reward of buying treasures at with a coupon of five percent, we're very compelling, and we wrote about that in October and when I went out to Los Angeles and southern California talked to bond managers in November. They were optimistic that they were on the right side of this trade. They were loading up on bombs above five percent that I guess at the time they didn't really think we're going to get
this kind of pivot from the Fed. But it's here, and I think it's here now because the data is cooperating. We are slowing. True, the market has been ahead of this. I think Deutsche had the research saying his seventh time a charm something, and it does look like seventh time is going to be the charm. Because the FED is telling you that they want a soft landing, they will start easing. I thought one of my compelling lines from Power yesterday was when he said, we can't wait to
cut rates. You know, we can't wait for inflation to get to two percent before we start cutting rates. He's telling them we're going to start cutting pretty soon if the direction of travel and inflation is down towards that sort of three percent two point nine to handle. So I think the bomb market here is in good shape. I think you're still going to have volatility because it all will take is another you know, sticky sign of inflation early next year, and suddenly that we are back up.
But I think what's really compelling now for the bomb market here is that you've got six trillion dollars of money sitting in money market funds. They now have to make the move. They missed the boat back in November, when you yields are at five percent, you could have locked in a two year at five percent, five year at five percent.
That's gone now.
Then the highest yielding coupon on the treasury curve today is the two year at four forty. Pretty Much everything out apart from the thirty is below four percent. So any backup in yields from here is going to encourage people to start saying I've got to start shifting from cash. And that's a huge amount of money sitting there.
Yeah, the question is where they actually shift that cash. I want to bring in Abigail do Little, market supporter for Bloomberg News. Abigail, I want to talk about the equity portion of this rally. You're to date, the S and B five hundred is up almost twenty three percent. As of this morning, we were talking about a new record high for the Nasdaq one hundred for the Dow. Since pulled back on these, but we're still in that area. This is the rally that caught a lot of people by surprise.
It is indeed, I'm one of them, truthfully, and I've.
Done you and me both friend.
From a charting perspective, the markets had been charting tactically almost perfectly for nearly two years, just in terms of the various moves, and when the market started to rally at the beginning of November, the charts did reflect that. But for me, at least, it was really hard to believe it because FED chair J. Powell had been signaling that the FED was going to stay higher for longer, and even just less than two weeks, that was still
his message. You could make the case that there's two Powals. Now. It's interesting what you're talking about, Tom, in terms of Whiller being the intellectual heft and Powell, you know, decided to go along with him, or maybe that was the plan all along. We just don't know what their I don't want to say trickery is, but their strategy is what I'll say. And so I think that a lot of folks had been caught off surprise by this market starting in early November, mid November, late November, and now
certainly yesterday. Now what makes it very interesting is so the small cap index is still up two point six percent. You have the NAZAQ one hundred now down a quarter of a percent, and earlier today was almost down closer to one percent, So a little bit of a hangover from all of the moving to the upside. But what's really impressive is on the S and P five hundred, the volume today is almost seventy percent above the twenty
day average. So that suggests that the market's all in on the idea that there is in fact a FED policy change and they want in. So the move up two tons of one percent really says nothing, but that volume suggests that folks are really repositioning.
I want to go to you with this question. Abagail And asks the same question to Michael about that six trillion dollars in money market funds. Do you think what portion of that do you think we can expect to go to the equity market? And when and then where do you think it goes? If it's not in the equity market, does it go to the bond market?
So from an equity market standpoint, each of the indexes right now is at a real crossroads. They're basically at resistance, so the selling pressure that has come in, So the NAZAC one hundred, it's record high, it's basically now going back down into the range. We've seen that sort of action a lot of times. It's going to be interesting to see whether or not that money does go into
equities to push it higher or more. Interested in the FED if you can trade with the FED, I mean it's stocks too, but the bonds your trading in the safest asset class in the world. You know that you're backed by the biggest balance sheet in the world. Why not go there? Whereas stocks there's some risk. Right now one month correlations are higher, the vix is lower. That's
a fancy way of saying that. The voltels suggest that in two to four weeks equities could be a little bit dicey because everybody's trying to move from the magnificent seven into other sectors. But the problem is that magnificent seven that's fifty percent of the Nasdaq one hundred, it's thirty percent of the S and P five hundred, So that only goes so far. So I don't know the answer to the question. If I had to speculate at this point, and also technically chart technicals on yields, there's
air pockets. They're just going to keep going lower, So I would say probably more so bonds.
Mike, what did you think of Powell's categorization of the loosening in financial conditions because he didn't put back on them at all, And I'm curious, like what you think he's thinking right now to look at the market action right now.
I think he's and the other members of the effirmc have discovered that once you introduce financial conditions, is best just to stay quiet and move away from that. I think it was an error to do that in the last meeting. They've really set themselves in a trap. And a lot of people have talked about this. Even when they did introduce financial conditions as helping them restrict the economy back in November, there are plenty of people in the bomb market saying why are they doing this? And
I think he just dodged the question. Yes, he just you know, it's I can understand why they did it at the time, but I think it's it's just too much information from the FED, and you can't really I mean financial conditions, I mean the classic financial conditioning. Tinly, we've already seen the mortgage market, but if you look at the NBA weekly data, people are still trying to
get mortgages. At the end of the day, whether you pay seven eight percent, it's a thirty year rate, you know at some point you're going to be able to refinance much much lower. And people who buy houses are buying houses very much a long term perspective.
Can you think about the economy. The number of people who are buying homes is relatively small, even though it has a big impact on the economy because then they go out and buy couches and they you know, redo the homes and stuff like that. But I think that's one of the reasons why we heard from j Powell over the last year that there have been a lot of Americans who are shielded from those higher mortgage rates because they've locked in those smaller mortgage rates. Abigail, I'm
just in the last thirty seconds. What derails this rally?
That's a great question. I think just maybe too far, too fast. And also there are a lot of people like me who are very surprised by FED chair J. Powell's sudden pivots. The best of my memory, it's the fastest since December January of twenty eighteen. I think that there's a sentiment out there that wants stocks to go down. Whether or not that works or not, I don't know, but I would say too far, too fast. I mean the NAZAC one hundred this year, in the first half
it was up forty percent. It was the most ever. You know, buy through physics. Parabolic uptrends can't last. They have to at least consolidate.
Yeah, it's pretty pretty remarkable moves both in the equity market hand and the bond market. A big thank you both of you for joining us for this roundtable. It's Blomberg News Markets reporter al Abigail Doolittle and Bloomberg News Rates reporter Michael mackenzie, both here in the Bloomberg Interactive Brokers studio. Emikrafao and I are just getting started on this Thursday afternoon. It's Bloomberg Business Week.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com. The iHeartRadio app and the Bloomberg Business app, or watch us live on YouTube.
Okay, Emily, you've had some time to think about this. Okay, don't look at the notes. Pop quiz, where do you think the majority of US electricity comes from fossil fuels?
Ah?
Ding ding ding? You're right, Okay, you win. So about sixty point four percent comes from fossil fuels, so natural gas, coal, petroleum. You said solar before that it wasn't when you were right about that. Twenty one percent comes from renewables, so win, solar hydropower. So here we are more than eighty percent. The rest, well, that comes from nuclear energy, which has
remained stagnant over the last decade at about nineteen percent. This, by the way, is all according to the US Energy Information Administration, But our next guest, along with many others, argue that in order to reach net zero goals, governments have to go nuclear. Maria Korusnik is CEO of the Nuclear Energy Institute. It's a nuclear industry trade association that advocates advocates for more nuclear power generation. She joins us on Zoom from Washington, d C. Maria, how are you.
I'm doing great? Thanks good to hear you, good.
To talk to you, and you're in luck because both Emily and I love talking on nuclear energy here. Why do you think, gosh, I want to go in so many different directions, but I want to talk to you about the challenges of nuclear energy. When people say they know it takes it's going to take nuclear energy for us to get to net zero, they also say, well, we also know that it takes so long and it's so expensive to build nuclear power plants here in the US. What would you say to that.
It's say, you have to look at the value of nuclear quite frankly, right, It's that seven twenty four around the clock. Not only is a carbon free, it's highly reliable. And I think we don't talk as much about the
value that you're getting. These power plants are built not for forty years, not for sixty years, you know, eighty years, one hundred years, and so you really have to look at the complete picture that you get when you build nuclear Yes, they're large projects, Yes they're going to cost in order to make that happen, but the value that they bring to the system is really incredible. And again, I think we just need to shift a little bit more to the value conversation.
So you were at COP twenty eight, can you give us a sense of the narrative around nuclear energy? Was the consensus that this is green energy? Like, how were people actually talking about this form of energy?
Absolutely?
In fact, you know, some are coining this the nuclear cop you know, and I've been to the last few COPS and I would just describe nuclear as a little bit trying to get a seat at the table, trying to create some conversation this COP.
You know, we're in the sort of official documents from COP.
We're in what's called the stock take, you know, paragraphs about nuclear, about wind and solar together being what's required. The fact is that, you know, nuclear was never officially credited and mentioned in the way that it is here. Tripling nuclear was a pledge that was signed by twenty four plus countries. The IAEA had a pledge on just crediting nuclear for being part of the decarbonizing solution. Over
forty countries signed that. So I would really say this COP was sort of a real, real recognition of the value that nuclear is going to bring. And quite frankly, we're not going to get anywhere close to the commitments if we don't include nuclear in the solution, we have to be there.
I think people are still scared of nuclear. I have to tell you I grew up and people who've heard me talk about this before apologies, but I grew up near a nuclear power plant in California. It's actually the last online nuclear power plant right now, Diablo Canyon in San Luis, Obismo County. We would have siren drills once
a year. I think it was the first weekend in September at noon when you know, the sirens would go off to to you know, warn people like, Okay, this is what would happen if there were some sort of nuclear meltdown. People had iodine pills at their disposal. Is that, you know. And they grew up, you know, thinking about Chernobyl three Mile Island. You know, get what's the safety around this stuff. For people who say, wait a second, I'm a little scared of nuclear.
Yeah, honestly, it's incredibly safe.
And you know, I also, I'll say, grew up around this nuclear I've operated plants. I've been a nuclear plant operator. I've been a site vice president in charge of one plant. I've been a chief nuclear officer in charge of five reactors at three locations. And I just say, I know nuclear from the inside, and I would live next to a nuclear plant any day they're in. They're incredibly safe, and especially as compared to other technologies that we need.
And I would also say that, you know, nuclear uses the fewest critical minerals. Nuclear uses the lowest land space, if you will, for the volume of energy that it produces. From a life cycle perspective, it is in the lowest use of carbon for the whole life cycle of the plant. It's clean energy and uh, you know, in terms of carbon free and in terms of other emissions and and jobs. You get a lot of jobs with nuclear. There are little economic engines for the local community.
I think to a lot of people it's almost perfect. But I think a lot of people would also say, what about the waste. We still haven't figured out what to do with nuclear waste.
Yeah, you know, I look at that a little differently.
I'm so proud of nuclear for being able to account for all of its waste.
You know, oftentimes we look at nuclear and say, what are you going to do?
And I say, well, you know what, we know where every piece of it is from all of the waste or all of the nuclear power that we've used since the nineteen sixties. We know where every piece of that is. And you're absolutely right. Some of the fuel that we have today, which we call waste, I would prefer to say it's used fuel. And why do I say that, because it can be used again in other types of reactors.
And those other types of reactors.
Are ones that we are trying to bring to the marketplace literally as we speak. And so I would say that used fuel you have today is a future resource and we should look at it like that.
What's next for nuclear in the US? Are we trying to build more reactors actively in.
This So we're building some down in Georgia right now. One went online this year and the second will go online next year. And what we're in the process of doing right now, if you could imagine an innovation pipeline, chocolate block full of different designs, and that is coming out over the next five, ten, fifteen years. And these are partnerships between our national labs and private companies and very much one a beautiful, quite frankly innovation here in
the United States. And I'll tell you nuclear is not just being talked about in the United States. It's being talked about around the world. We just talked about cop but many other countries right now are looking to expand nuclear and they're looking at the United States to help them. So what we need to be doing here in the United States is bringing some of these innovations and getting them built so that these other countries can have a chance to see them and then choose which design they
want built in their country. At cop Poland, for example, said we already have six sites. At each site, we want four small modular reactors. We're teaming with a US company. We want to put twenty four in place.
Maria, I have to ask, what do you make of the price of uranium. It's up seventy five percent this year. I write about ETFs and commodities markets, and there's a lot of interest for buying into this nuclear energy uranium trade. But why is it up so much seventy five percent this year?
Well, a couple of things.
For one thing, we are I think that's an indication that people are bullish, if you will, as they look ahead for a nuclear and I think also we're looking very much at ensuring that we have a solid and stable fuel supply as we move forward. You've seen that we want to invest in the US fuel supply here so that we have not only the mining but also conversion and enrichment services available to this industry, so that
we have a solid supply as we move forward. And so I think a lot of that has put attension on the front end of this fuel supply, and I think that's causing some of that price increase.
Well, it's really interesting stuff. As I mentioned, Emily and I both love talking nuclear so we really appreciate you taking the time and joining us this afternoon. Maria kors Nik a CEO of the Nuclear Energy Institute. It is a nuclear industry trade association that advocates for more nuclear power generations. She joined us on Zoom from Washington, DC.
The issue is just the timetable for these Emily, I just wonder, you know, politicians don't necessarily have long term horizons when it comes to their decision making because of reelection campaigns, and it's so hard to do these big infrastructure projects. So I just wonder, you know, what the appetite is for building more nuclear power in the US.
And like you said, there's so many people that are so excited about this and then there's still some people that just can't shake that idea of Chernobyl.
Yeah, you're listening to the Bloomberg Business Week. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business app, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
Out in the Cold. It's a most read story on the Bloomberg Terminal, and it's the cover of the new issue at Bloomberg BusinessWeek magazine. You can read it now on newsstands, on the Bloomberg Terminal and at Bloomberg dot com slash BusinessWeek. It's a deep dive into the cutthroat world of commodities trading and how individuals can profit at the expense of some of the world's least developed nations.
The trade at the center of the story involves a Swiss based commodities firm, a state controlled Italian energy group in Pakistan, one of the world's poorest nations, which found itself Yeah Out in the Cold. Steven Stepchansky is senior energy reporter at Bloomberg News and part of the team that wrote the story. He joins us on Zoom from Japan. Also here is the editor of Bloomberg business Week, Joel Weber. He's with us in the Bloomberg Interactive Brokers studios, Joel.
Pakistan is a country of more than two hundred million people, and it faced some serious consequences when it found itself in recent years without the leg that it thought it had signed contracts for. I mean, we're talking factories being forced to shut down or dramatically cut their output, people going into poverty. It even trained foreign currency result reserves. This is a huge story. How did it get on Business Week's radar? How did you get on your radar?
Steven?
One word?
And Stephen has been all over energy. And what's interesting though about this was, and we're going to rewound the clock and a'll hear directly from him, because basically, there was a trading opportunity that the outset of the Russia's invasion of Ukraine created. Traders we saw it coming and
were able to do something about it. What ultimately we're going to describe here is I think a glimpse inside the energy trading world that I think is exceedingly rare and what Stephen was able to show us, I think is just an amazing business story. It also speaks to the world's energy resources and how those resources are allocated
and how they move around the world. LNG liquified natural gas is ultimately what this story is about, and it has in general been a very powerful tool that a country like Pakistan, which may not have abundant natural resources to provide energy for itself, is able to import from abroad. But it also becomes a unique vulnerability because of that. Steven, let's bring you in. How did this story find you?
I mean, I'm an energy reporter, right, so I'm like the nerdiest nerd. I'm talking to traders every day. And back in twenty twenty one, so this is years ago, there were some rumblings, Hey, you know, there's some shipments that aren't going to Pakistan.
They should be going to Pakistan.
They're being canceled and Pakistan has a gas shortage. And this was happening in late, you know, twenty twenty one, even before the war in Ukraine began, and you could
really see the start of the energy crisis. But prices were rising at the end of twenty twenty one to basically, you know, near record levels in Asian, record levels in Europe, and there was this view that you know, perhaps some of this LERG was being sold into the spot market and not going to Pakistan because Pakistan's long term contracts are at a more you know, set rate that's several times lower than where spot lergy prices are, and so taking the LERG away from the contract and selling into
the spot market can be a lucrative arbitrage, and it can also be you know, legally acomplished because the contract terms allow for cancelations. There are terms in there for force masure if you're having production problems. So all that kind of came together, and as I was watching what was happening, it was really interesting to also see what was happening on the ground in Pakistan because they were starting to really curtail gas supply to households, to industries.
There was a sort of economic impact, and I was able to because of the sourcing that I have in the way that I cover the market. Almost for every canceled shipment, I would track it one by one and see when Pakistan would come back into the market to buy it, buy some replacement leerng to help you stop their shortage. They were able to do so sometimes but at a very high price. And then after the war began, prices got really high in twenty twenty two and Pakistan's
credit rating got worse. Suddenly, they weren't able to buy LNG anymore. And I was on the forefront of that story as well. They were failing to purchase any more shipment store place their gas.
They were really struggling.
Fertilizer plants were shutting down for for months on end, so it was becoming a food issue as well. It was really fascinating to watch, and it's fantastic jol that BusinessWeek as well had interest in the store, and I could do it in a big way.
To pat myself in the back there, Stephen, bring us to the beginning of a contract like this, right, because the other important thing to mention here, despite maybe feeling like a little icky, there's nothing necessarily illegal as far as our reporting shows here. But there was a contract that was signed between these trading firms and Pakistan. So talk to us about what Pakistan thought it was going to get out of this.
Yeah, I mean, Pakistan signed a contract that was pretty
normal for a developing nation. They signed it back in twenty seventeen at a tender in two the sixteen, which is basically like a public call for offers to supply them L and G for five years and fifteen years Gunvore in any the Italian company applied the lowest offers for the five year and fifteen year contracts respectively, and there was some scrutiny, of course during the tendering process, but in the end, you know, they signed a contract in twenty seventeen that at the time, you know, in
twenty seventeen, when there was abundant leg when people weren't talking about you know, record level LNG prices, this was a pretty solid contract because it had terms and said, hey, if you don't deliver our gas, you have to pay a thirty percent penalty.
We get thirty percent of that money back.
And when spot prices are just a little bit a smidge over or maybe a smidge under long term you know LNG rates, that thirty percent is enough to keep suppliers, you know, sending the LNG to where it's supposed to go. But of course, you know, COVID happened, so prices dropped to a record low pacice and even considered scrapping the contracts on those suppliers because it was cheaper to source energy from the spot market.
But then it flipped around.
When you know, as we saw quickly economies bounce back, there was a shortage of gas around the world, and in the terms of the contract, if you pay a thirty percent penalty, then you can cancel the shipment to Pakistan. And when LNG is for spot LNG is four times higher than a contracted rate. You're paying just a few million dollars versus you know what you can make in the spot market, which is upwards of one hundred and fifty million dollars for a single shipment, So that arbitrage
exists as well. Force masures, I mean the LNG industry using a force majority to cancel a number of shipments had been seen before, but I think until the market got really tight in twenty twenty two, it just wasn't very common because LNG is a smallish industry. It's not like oil where there are tons of players. LNG is
just a handful of suppliers, buyers and middlemen. So if you burn one buyer, suddenly you know you have a smaller pool to sell to So it was sort of unheard of before twenty twenty two to burn a buyer a supplier, but that's sort of what happened.
So who were these traders that made these fortunes and how much money are we actually talking about here?
Yeah, I mean so one of them is a gun War their Geneva base. They're one of the biggest commodity trading houses in the world. They had the contract with Pakistan, and when just the amount of money is large, it's in the hundreds of millions how much they were able to make by diverting supply from the Pakistan contracts into the spot market, according to the sources that we've spoken with. But of course there was one instance where Pakistan had
a contract with Gunvor. They had five shipments left, which is quite a bit of gas for a country like Pakistan, for delivery from March after March April to July twenty twenty two, and when Gunvor canceled the contract, they were able to siphon that gas into the spot market. Of course, Gunbar had dispute over a payment with Pakistan. That's what
they used to cancel cancel the contract. But if they sold those five shipments to Pakistan, they would have made about two hundred million dollars that's the cost or that that's the price that they have gotten on the revenue. But by selling into the spot market they made six hundred million. So already you're seeing there's that four hundred million dollar charge that they or increase in value that they can get by just selling into the spot market.
On top of that.
So you look at all the yeah, exactly, all the other shipments that you could make, you know that those five shipments were just part of this larger story. There were many more cancelations, many more diversions. There's one LNG cargo that Gunvar sent to Pakistan, were only part of the shipment was unloaded at their port and the rest of it went to Turkey where they received three times the price that they have gotten from Pakistan.
So gun War is one of the interesting characters.
As you know, in the piece of single LNG tanker provides enough gas to run Pakistan's entire industrial sector for about five days. So when we're talking a tanker here, that's a significant amount of fuel, especially for an economy that is so dependent on industry and one that is trying to grow at least until it ran out of fuel. Talk a little bit about the implications of a country like Pakistan losing out on a contract like this.
Yeah, I mean it's huge. So Pakistan already has. The whole reason why they're importing LNG is because their domestic gas supplies have been dwindling. They were basically gas rich after the nineteen fifties. They found some really great gas fields and they built their economy around natural gas. But in the two thousand's early twenty tens, they realized that they're gas supplies they weren't producing as much as it would need to, and it actually production was being to decline.
That was partly because of mismanagement, partly because of the fields, you know, kind of deteriorting over time, and then also because they weren't investing enough to keep up with with their increase in demand. And so to fill that gap, they said, hey, we'll import energy. Look finantial gas, which had become more available in the market in the twenty tens.
So there's now losing a shipment. Yeah, no, go ahead.
So yeah, losing a shipment suddenly gas isn't going to household so they're curtailing gas for most of the day. Households only get gas to cook or to heat for sometimes two hours for breakfast, three hours for lunch, and then two hours for dinner, compared to you know the rest of the world where you can you know, flip
a switch and turn on your stove. Industries as well, there are a lot of factories that are had to shut down because they weren't getting the gas, or they had to switch to other fuels they had to use use dirtier fuels like diesel to power their plant, or they're rushing to kind of set up a biomass plant, which what I saw was just them burning a bunch of sticks.
There is this kind of I think I call it icky earlier obviously capitalism that we think that they're within the bounds of the law. But I'm curious, just in your reporting, was there any sort of moral compass that you ran across in anyone here or was it just dollars and cents and this is how it played out.
I mean, I think traders in general look at markets in a way that how can we be as efficient as possible, how can we move these supplies to where you know they're needed? And a lot of the time it goes to the to the highest bidder, and so you know, I've not I got into a bit of this story, but in previous stories, a lot of the
gas was going to richer places. So in Europe they were able to continue operating without you know, pipeline supplies from Russia because they had so much more LNG and sometimes at l and G came at the expense of shipment's not going to emerging nations. And so I think traders often look at, you know, how can we how can we make sure that these capitalist markets work as
efficiently as possible? And and they fill that role right that these traders is are are doing the job that they're hired to do, and they're working within the contracts and the realm that they're that they have to of course, uh you know when when you when you talk about ethics and and things like that, it's hard for them to I think sometimes kind of opine about it because at the end of the day, they have a job to do, they're under pressure to do that job.
And and and they're there to do it.
And what's interesting is when we talk to people in Pakistan, they they don't really blame the traders that much. They they say, hey, you know, these are the contracts that we signed. We didn't sign a good one and people are gonna try to make money. That that's that's the way it goes. And we have you know, a quote in the story like that.
And so where does that leave Pakistan as we head toward a yet another winter here?
Yeah, I mean they're not in a great spot now. They were able to resume buying LERG from the spot market. Of course, energy spot prices have dropped significant flight from last year. The energy crisis has eased a bit, but they're still buying elgi you at a very high price. They still have a gas shortage. There is still gas
curtailed to households. And as it gets colder, yes, not all pack of thing is cold in the winter, but there are parts of the country that can get quite frigid, demand will go up and they're going to have shortages and they might have to curtail more gas to the households.
They might have to protail more.
Gas to factories and industries, and they might have to try to buy more LNG from the spot market, which again is very expensive for them compared to their long term contracts will add to their debt and cause more problems, especially as they're entering an election.
Year next year.
Well, it is a fantastic story. It's the cover of Bloomberg Business Week this week. You can check it out on the Bloomberg terminal at Bloomberg dot com and of course on newstands right now. A big thank you to Steven step Chansky, senior energy reporter at Bloomberg News, joining us just now in zoom from Japan. Also the editor of Bloomberg BusinessWeek, Joe Weber. Here in our Bloomberg Interactive Brokers studios. This is Bloomberg BusinessWeek, a journal.
Yeah about you let me drive?
Oh no, no, no, no, honey, please, I'll do gravel. I want to drive. It's a good question. This is the drive to the Clothes for music. Well don on Blueberg Radio, Well here we go is We just heard from Bill Maloney choppy session. But we are broadly in the green at least on the Dow. Jones up three tenths of a percent. We just heard the numbers from Charlie to the S and P up more than one tenth of a percent. The nasdak can posit up seven one hundred percent. Right. Now,
let's get to the drive to the clothes. We got with us. Andrew cry the co CIO of Crescent Grove Advisors, he's here with us in the Bloomberg Interactive Brokers studio. I want to start with fixed income with you, because what these moves that we are seeing when it comes to especially you know, the tenure, given that roughly a month ago we're at five percent on the tenure. Now we're wow, what sub four percent? Wow?
It's extraordinary.
Did you see this coming? I would say we honest, we.
Had started to inch out on duration because you start to get the five percent, and clients we work with, in particular tax sensitive municipals start to become very interesting on a taxable equivalent basis. If you can lock in longer duration seven eight percent taxable equivalent yields, Right, that's really attractive, particularly from where we came from, going back to the twenty tens your interest rate policy, et cetera. Right, So we'd started to inch out, but we weren't fully there, right,
I mean, we weren't full up on duration. And I
think this move has just been so dramatic. And now the bond map gets pretty interesting at this point in the sense that your cash rate five and a half, you know, or five point three whatever you want to pick your number of money market fund type rate relative to going in today at least a brand new dollar going to work at three point nine percent to ten year, you're really expecting some additional price appreciation to make up that gap, or pretty significant rate cuts, which is perhaps
where the market is headed at this point in terms of thinking about Fed policy. You know, the six cuts now being priced in in twenty twenty four.
I mean, where did treasure yield even go from here? It was interesting. I was talking to a number of colleagues and we were looking at outlooks, and some outlooks said, oh, by the end of twenty twenty four, we'll see the tenure at four percent. And that move has already been done in just twenty four hours. So what's next. What are we actually going to see in twenty twenty four.
Yeah, the poor folks that have to go back and rewrite all these outlooks at this point because of what's happened within the rates market with inequities now at price targets that people were talking about twelve months out. Again, extraordinary moves that we've seen now over the course of the last couple of days, let alone, you know, the last sort of six to eight week period. Look, I think we've probably come a little bit too far, too fast.
That's our view. Just if you look at six rate cuts for next year and sort of how that feeds into the ten year pricing and the overall sort of soft landing thesis that people or really you know, it's underpinning that move. We just tend to think that it's gonna be a little bit choppier than that. And there's actually there's a great piece this morning from when your colleagues Cameron christ talking about the FED cutting because they think they can, as opposed to because they have to
in this environment. They feel like they've got scope to take down rates because they're seeing the soft landing play out when they do that. I tend to think of more incrementalist approach is warranted as opposed to being so dramatic, you know, the flip side of what we saw perhaps going into the rate hiking cycle where they felt like they really had to catch up, they were behind the curve.
So I don't think they feel like they, you know, they're forced into a position where the economy is really deteriorating at this point, they're going to have to take big, chunky moves in an accelerated fashion. If that's the case, then why not play it out a little bit more slowly, a little bit more gradually. So we tend to think six is too many. You know, probably three that the Fed is talking about is more appropriate in terms of expectations.
So when you say that you think we've come too far, too faster, you're referring specifically to you rate cut expects Are you referring to what we see in the bond market right now? Are you referring to just this rally that we've seen over the last seven weeks in the equity market.
I would say all the above, Yeah, just in terms of the move, the dramatic amount of sort of repricing that we've seen across the curve really but in particular the ten year if you want to point to that as being again an extraordinary Keep coming back to that word move that we've seen, the rate cut expectations that we're seeing next year, and then the repricing of equities sort of alongside that, you know that rubber bands being stretched pretty far at this point, we think, and ultimately,
you know, you come back. It's a supply and demand game. At some point, the incremental buyer just sort of peters out right. We've seen such a rapid move off the lows eight weeks ago, roughly speaking, we just think that probably a little bit of a breather is warranted in that scenario.
What about for stocks? Do you think the Fed put is back?
It certainly seems like they are. They've tilted the balance towards being a little bit more accommodative going forward, or they're willing to step in right if they start to see a little bit of economic deterioration. Clearly they're still keyed in on inflation, but they've changed the balance, they've
changed the narrative at this point. I think as we look at stocks going into next year, really today, it'd probably be a microcosm of what we would think about going into twenty twenty four, meaning a rotation out of some of the really big winners, the megacap tech names, and into things that would sort of represent a catch up trade, if you will, small caps, more value, you know, cyclically sensitive types of names across the market that have
been left behind in this period where the Magnificent seven we're outperforming so dramatically. So again we would look at again a day like today and just say this is probably what we'd expect into twenty twenty four. Not to say the tech's going to be bad, but we just think the relative value trade is now on.
If one of your clients missed out on this rally, maybe they were hesitant to put money in because they said, wait a second, I'm getting a little nervous that inflation is going to be sticky, and suddenly there's this RiPP or face off rally over the last seven eight weeks. What's the opportunity left for them?
Well, here's what I would say for and foremost is that the opportunity cost of that is not what it was back in the twenty tens, Meaning if you're in cash, if you're in short term fixed income instruments, you're still you know, earning five to six percent. If you you know, went out into a little bit of credit, let's say, or short duration maybe or even make a marketing fun right, right, So I think that for us gives us a little bit of comfort and you feel like, again, the opportunity
cost wasn't what it was in the past. So that's one thing at this point going forward. You know, if you miss this, we wouldn't necessarily chase it. Based on everything we've kind of talked about thus far, I don't think we'd be inclined to really jump in. Maybe you start to nibble it some of the things that I talked about that offer more of a relative value story small caps non US.
But then when could you see opportunity to get back in.
Well, so I think in terms of larger cap stocks, that's where we'd be a little bit more cautious. We think going into the beginning of next year, at some point there's going to have to be a little bit of a recalibration. Again, just go back to pure supply demand dynamics. You're going to exhaust the demand side of the equation in terms of who's the incremental buyer point.
We think whether it's five percent, ten percent, whatever, that sort of corrective reset phase looks like is going to offer the opportunity then to get a little bit more bullish, you know, into the balance of twenty twenty four.
You said today's action was a microcosm of what's going to happen. So we're seeing small caps rally, but we just have a minute left. We're also seeing some speculative tech rally Kathywood's Arc Innovation ETF, some of the most shorted stocks in the market up six percent. Are we going to see that kind of animal spirits continue as well?
I think you could see, you know, broadly speaking, if the soft landing narrative continues to play out, that bodes really well for risk assets. And I think that could bring people back to the table with some of those more speculative names, some of the things again that have been left behind now over the last twelve to eighteen months, we're beat up so badly as rates were moving to
the upside. I think this exuberance, you know, as rates potentially start to move to the downside, could kick back in. I think it's I think it's definitely something you could see going forward.
Uh.
The other thing would be, you know, if you look even at like private markets companies that we're waiting to ipo, you know, the IPO window opens rounds. That's the other big question waiting to christ right because of risk appetite. Andrew cry Co cioa Crescent Grove Advisors here in the Bloomberg Interactive Brokers Studios.
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