Energy, The Fed, And Germany (Podcast)

there on w T corude oil. You know, one dollars sixty cents of barrel seems pretty sticky right about there, And you know you think about global energy um and it's it's you know, many people have called it a crisis situation in Europe in particular. We want to get some color on that. We're gonna check in with Jonathan Maxwell, CEO and co founder of Sustainable Development Capital l lp UH. Sustainable Development Capital operates as an investment banking firm for

energy efficient project finance. Jonathan, thanks so much for joining us here. You know you're based in the UK, I believe, and I'd love to get your thoughts of just kind of the overview are kind of the energy issues, the energy security issues, the energy crisis type of issues that Europe is facing now and potentially into the winter, So thank you for having me on. I mean, the Russian invasion of Ukraine has sparked, well re ignited, i should say,

an energy crisis in Europe. We've had a very steep rise and energy prices in one, low levels of storage, low wind production, um so already difficult market background, but coming into this year with the Russian invasion of Ukraine curtailed supplies of gas coming into Europe. The word that

I had applied to which I liked was gastastrophe. So you know that is the problem, the supply of gas from Russia via Ukraine, because that's forty percent ish of the whole European gas supply at stake, in fact higher earlier in the year from Germany. So you know, that's a huge problem for Europe and has created a crisis not just in terms of pricing and supply, but also trying to find solutions to that problem. You know, how how do you replace the natural gas, how do you

actually provide generation? And what can be the solutions in the short media and long term. Well, in every crisis, there's an opportunity, right I don't know who said that, but um, what what is the opportunity here? I mean, is it for just diversifying their resources, you know, diverse, diverse, fying their energy providers, or is it for diversifying the kind of energy that Europeans use? So you know, as with any solution, it's it's going to be a number

of a number of pollutions to the problem. You know, the biggest one, the real fact of life is the percent of Europe, like North America, eighty percent of years energies or gas and calls. So taking a significant cut on gas means it's got to be replaced from somewhere. So there are all turns in diversifying sources of natural gas supply. In the meantime, Sadly, for decarbonization, Europe has leant back on its coal generation, so Germany, Ireland, even

the UK have got coal. Is up seven percent, says the I A European coal demand in Europe driving global demand up two peaks not seen since twenty thirteen. So diversifying fossil fuel, the opportunity is to try and replace those types of that type of generation with cleaner forms of generation. Um, the trying to replace that with renewables has its own challenges on supply chain, resources and time. You know, it takes three or five years to build solar and wind on shore. It can take ten to

fifteen years to build offshore wind in nuclear. So you know how you solve the problem in the short run. Actually, I think it's a massive opportunity because while we're strut spending so much time asking how to replace Russian gas. Actually, in the European Commission said if every unit of natural gas that we don't buy from Russia, they said, is two point six units that we don't have to Sorry for every unit of gas that we don't use, there's two point six units we don't have to buy from Russia.

Why it's because we're wasting most of the energy in the energy system. There is an enormous amount of inefficiency in Europe, about two thirds of energies wasted somewhere between the generation, transmission and distribution process. To the opportunity extraordinaries about in the US, by the way, So the opportunity which is extraordinary is to invest in solutions that reduce energy use um and reduce energy demand. So you know,

what you've seen as a massive response of Europe. They had a policy last year which I think frankly they were mumbling, but at least it was a policy saying energy efficiency first, not second or third, but energy efficiency first. But it's now critical there is no solution to the problem other than being more efficient, so they have now introduced the policy to reduce gas consumption by fift Are there companies that are focused on increasing energy efficiency? Big names,

big projects that we should know there are. There are very very large projects being done in aggregate, individual projects a smaller ten fifty a hundred megawatts read a hundred million dollar projects. So on site solar, on site generation even using natural gas, but where you can capture the heat co generation it's called so co generation, solar storage, ground and surce heat gar firmal. So there is a

very large marketplace. In fact, the International with New Billenese Agency globally says that that market is worth about ten trillion dollars compared to say three to five trillion dollars

of the renewable energy market. So recognizing that so much energy is wasted in the global energy system, the i e A, the International Video Bill Energy Agency, and the growing umber of utilities and specialist companies are targeting the energe efficiency and distributed generation space because that is the way of delivering lower cost, lower carbon, more relable energy into the market. All right, Jonathan, thank you so much

for that update. We appreciated. I learned something new there about the energy inefficiency and how much energy UH is lost or wasted between you know, getting out of the ground and getting into the home. Jonathan Maxwell, CEO and co founder of Sustainable Development Capital. Again, it's operates as an investment banking firm for energy efficient project UH finance a fandevit. I'm not sure why he's still doing this stuff, but he's the chief investment officer of Manetta Group. UH.

Thank you. Twenty seven billion assets under management, ranked in the top ten by barons among independent registered investment advisors, So some real real money under management, UH. Efan, thank you so much for joining us here. What do you make of this, I guess rally in the stock market over the last several weeks. Are you buying into it or is it just a little bit of a head fake and we still need to be cautious. How do

you think about that? It's really interesting, I mean, the market does look now like it has something to prove. We're heading towards the best month since the end of twenty It comes off the back of a really awful start to the years. Look at the SMP when the worst starts to the year for the first half in a hundred years, so clearly what we were coming off the bottom. There has been cash on the sidelines for

some time. We've seen the assets and money market funds rise, so clearly there is still a sense that there is really no alternative to being exposed to equities at this time. So that's the momentum. Seeing as to whether it's a head fake or not, I actually think it has some legs this rally because we look at some of the indicators. The consumer has very low levels of debt today, we're seeing ultimately at a company level, we don't see many

defaults coming. So even though margins are going to get tighter and we're going to see some pressure in terms of pricing power and ability to pass through some of those prices, there are a lot of quite positive indicators and underlying some of this negative momentum, all the headline around recession and even when it comes to inflation, yes, these two inflation indicators today were positive. That comes off

the back of our historic high for June. We still have to remember that this is still follow on of some of the constraints that we've seen come out of COVID. The supply chain restrictions are still in there, with a little bit of demand destruction happening around the higher prices. You see that with oil. So overall, I'm pretty sanguine. I'm reasonably optimistic that this market has some legs. Do you not expect the Fed to just keep on hiking and hiking? I mean three and a half four percent,

five percent? Is that you think just not going to happen, especially if inflation comes down in the growth softense, well growth softense, let's face it, Uh, we're in a we're in contraction period right exactly. Well, certainly the Fed seems to make me it's a confirmation bias that played, but it seems to think that already if actions have had some effects, it took. It's looking at the weakening markets,

and Elon Musk agrees. He says more of their prices have come down than gone off recently, exactly, So there's an indicator. And remember cassy Wood out of that arc has had for some time. She's talked with the deflationary impulses and markets which are are offsetting the inflationary impulses, and those deflationary impulses are why we had no inflation for so long. So many of those deflationary impulses have

not gone away, with the exception of labor. Clearly, we saw that labor indication today that's starting to turn around. But remember a labor having some price in power is a sign that labor is strong, and it's the employment picture is strong. Will that be the the buffer that prevents the economy from flipping into recession? Maybe even We're kind of just in the middle here of this earning cycle here, Big tech week this week, and we had some really good numbers out of Amazon last night and

pretty good numbers out of ap All here. What are your takeaways here, but that midway through this this earning cycle here, I think it's very lumpy. We we did see some less positive numbers from Amazon before when it looks like they had perhaps that excess inventory or they

were suffering from supply chain issues. And then the very same week we have this canary in the coal mines from from Walmart much more less of a perhaps discretionary, more of a staple type retail because it is lower end, and that that they clearly are seeing a contraction in demand, they're seeing high inventories. Target is is in a moment of fire sales situation around it's inventories. So that picture is still mixed. I think it's really a question of lumpiness.

Some companies maybe took their lumps earlier and some are taking them now, and so I don't actually see that there's an overwhelmingly, overwhelmingly clear picture coming out of that. In terms of consumer demand, I think we can all say that the consumers have said it's stronger than they've been in the past since situations like this, because of

their low debt levels. But they are going to be reacting to to these these pricing pressure and they're going through reacting to some of their COVID lad largess coming off. But you still think there's no other place to be, there's no alternative to us docks. Um, what do you see happening in bonds and fixed income after they're horrible, terrible,

no good first half? Yes, exactly. Well, actually that has has been a bit of a turnaround too for for years, bombs haven't looked like a great place to put money. They despite their being in a bond in its bold bomb ball market, they have looked like very uninteresting um from a return perspective, especially when that return is after inflation. Still on a real basis now because of the change in rates and a little bit of spread widing, not

a great deal. We're actually thinking some reasonably compelling yields in investment grade and high yield, and even though after the high levels of inflations they won't be particularly interesting on a real, real basis, they are a huge, hugely different from what they were in the past, so there is an alternative sequities. But I think ultimately you need to be invested across the boards. You need to have broad based different by exposure equities, bond and alternatives, and realistate.

Like your previous plot suggested, there really is no time to be too much in cash. A little bit of dry powder help all right, Evan, thank you so much for joining us. Really appreciate getting your perspective. Efan Devitt, chief investment officer of Moneta Group, giving us her thoughts on these markets. Group. One of my best friends is here Neil Grossman. Uh and just turned sixty five, So happy birthday to you, Neil Grossman. I see that you

got a gold box conjecture cake. What is that? Gold box conjecture is one of the oldest unproved mathematical theorems. That's something I've been actually working on myself for about twenty five years. And there's a painting in our apartment. But the conjecture is relatively simple. Number theory is actually

quite manageable and understandable. So God Christian Goldbach and in the late mid sev dred sent the letters of the most famous mathematician of his Timelineard Oiler, hypothesizing that every even number is the sum of two prime numbers. And you can also flip that into one which says that every number is the average of two primes. It's neved. This is the kind of guy we're dealing with. I

just wanted to set that up for you. So UM physics degree studied a little bit of cosmology under Stephen Hawking and Cambridge, and UM has advised that, I said the Norwegian Central Bank now he runs t k n G Capital and UM discusses economics and policy with FED officials. Let's talk about Jerome Pale's meeting on decision, Well, not just on Wednesday, but what the FED has been up to trying to catch up and trying to catch the curve,

if you will, because they missed it so badly. Are they going to be able to do that without driving us into a to stop inflation, without driving us into a deep deeper session. I think they're gonna struggle. But I don't even think he's trying to catch up. I mean, let's be clear a few things. They spent what five years or seven years arguing that they needed to push inflation a little hot, just to push up the average

to two percent. You know, he's saying, we want to get to a two percent, but he he's years behind. If he wants to get back to two percent, averaging they got to go to one percent for almost a decade. And what's interesting is we'll we'll finish this year having average probably six and a half to seven percent for

two years. If all you do is luck get lucky enough to go immediately to two percent and stay there ten years in the future, you're still almost twenty percent or whatever plus away from what your original target was. They've set off distortions that will continue to propagate and compound for many years. But you don't hear anybody talking about unwinding the impact of what we what's right behind us, which is really the problem. They won't right well, they're

afraid of it. That's what's behind us is all the stimulus we had, Well, the stimulus, the stimulus, and and and and and and seven and seven or eight percent annualized inflation for two years. By the way, it took Vulcar post folk, youre pardon me, it was like twenty five years before we reached an ambient state of steady

state of two to two and a half percent inflation. Now, it may not be the same this time, but you should be expecting that it's going to be a glide if they're lucky of a number of years to get even close to the tool. So let's talk about that then. I mean, as an investor, you have to try and figure out what the FED is going to do, not what they should do. What do you think we're going to see in terms of a terminal rate? Do you think they're gonna turn around and start cutting? Are we

going to see a recession? Are we in one right now? Um, we're not in a recession right now. My view, I think we were just talking about this. I think you've seen two negative quarters of real GDP and I think we may see two more. But the difference between what we would feel as a recession in a real way and what you're seeing statistically is the fact that inflation is not and real GDP is nominalist inflation. Nominal GDP is very strong still relative to the last Well it's

not that high, but let's take five or six. It was that way last year, but relative to the last twenty years, that's still a very strong number. We're still at almost historical lows. And unemployment, I do think that you have a very Um, you're you're probably likely to have a disappointing number this month and maybe even next month in employment. But I don't think you're pushing up

the unemployment rate all that far. But man, if you can't have nominal GDP and four or five unemployment after spending six trillion of fiscal and doubling the balance sheet to eight trillion, what can what can you do? Strows with? Right? Well, that's that's that's the problem. We were were were you know again, we we basically um borrowed money to keep

things afloat. You know, on a on a year on year comparative basis, it's going to be very hard for a while for the economy to compare compare to what was the fiscal rainfall of COVID relief. And so you you have a natural problem built into the into the GDP numbers on top of everything else. And you know, look, as long as the balance sheet isn't being reduced, and I think this is one of the biggest things out there. Um, if they really want to bring inflation down, that balance

sheet should be going down already, and not slowly. I think it's much more effective to deal with the balance sheet than they are reducing the balance sheet. You're just saying, they just started, but it's slow. Well, they're gonna let it. They're not. They're not really selling very much. They're they're letting run off much much more. You think they need to be more. Well, still, it's still expanding. Actually, right in the last few weeks listening, we only have two

and a half minutes here. What are you doing right now in the market? Are you buying stocks after the drop that we've just seen. I was here with you. A month and a half ago. I bought I've had actually had a pretty good I sold yesterday, and what I'm looking for, Honestly, I'm not worried about five up

or down here. I think that either I was thinking we get to maybe I'm worried that we're gonna hit the fall and there's a lot of people getting excited, and all of a sudden we hit October and inflation still isn't dropping and you are seeing slowed down. So what I'm beginning to do for myself is to buy far out of the money, protection and fairly good size so in case we have because it's not very expensive volatively, although it's little highs come down a lot in case

we have a catastrophe. That's what I'm really worried about. It interest rates. One last thing, if I had to be be, I'm a little short bonds now, but not very much. I think yield curve steepeners or if you want to get technical, yield curve steepeners in forward space or where I think you should be doing, because I just think there is so much risk yield curve steepeners in forward space yet complex here. Well, well, just to

put a good word in for Bloomberg. One of the few systems you can easily use to figure it out. It is right in front of you. Bloomberg Technical Analytics is fabulous for this type of stuff. We like it when people put in a good word for Bloomberg, which I will never use any of those things. Probably, I'm like, I'm d e S. I'm good to me. The Bloomberg terminal is like a Ducati pana gali, you know, V four S. I love the bike. I bought the bike, and I can extract maybe five to six percent of

its total. I don't think I don't think you're even close. I think it's like sitting on top of a Saturn B five. There. All right, that's a better comparison. Neil Grossman, thank you so much for joining us here. Neil Grossman, t k n G Capital in the Bloomberg Interactive Broker Studio, which is huge. You get a gold star for coming in. He brought us a bottle of wine. Yeah, we'll pop that baby. He made this wine. He made this one at the Canoe Hill Vineyard. It's getting a lot of recognition.

That's like drinking a second growth board dough. I'm excited. All right. I don't know what that is, but the drink at the where you go out east. All right, Neil, thanks so much for joining us here. All right, how about this. For a decade, Berlin commended moral and financial authority in the European Union, guiding policy and playing bad cops to the weaker southern economies. The energy crisis has upended that balance. Maria today o joins us. She penned

those words. She's a European reporter for Bloomberg News and she's doing some opinion stuff right now, which is good for us. Maria thinks, well, it's not great for us. Why because she's she's doing this stint with Bloomberg Opinion, which means she hasn't been on Bloomberg TV for like three weeks since the point, and we miss her, I know. But she gets to spreader wings a little bit and do some other stuff. She's so talented. Maria, thanks so much for taking the time to join us here. I

love this piece about Germany. Give us a sense of Germany's position in Europe today because it does feel a little bit different because you know, this energy crisis is really exposing their vulnerability. Yeah, and the ideas and lee as that came to mind for me to write this piece.

It was really the words of the Spanish energy minister who came out with a lot of bravado saying, you know, Spain did a homework with manager economy in a way that is more sustainable, and it's it's words are really echoed the way that the Germans used to talk about the Southern Europeans to say, you went on this debt kind of spiral and you did not manage your finance is sustainable and now where we have to come to your rescue. So essentially what you see now it's the opposite.

And the European Commission they get it. The European countries are gonna have to lower their energy consumption. It's going to be supply but also demand. And what they argued that everyone has to cut it down by the Spanish, the Portuguese, the Greeks, all of them said that's not gonna work. We're not gonna accept one targets for all. What I would say, however, and that's all to my piece, is that I don't think this is a return to

the old tensions between the North and the South. I don't think they want that a lot of those dynamics and did after the pandemic, the joint vaccination and all of that. But I do think that this was the end of Germany always being right, Germany always be in the country that at the table kind of says, listen to me, I know what's best for you. Clearly now it's obvious that Germany was blind to its own faults for a very long time, and everyone else now sees

it well, either blind or willingly. I mean, um, we were talking to somebody I think yesterday about why Germany allowed itself to be so dependent on Russian natural gas, and he said, you know where former German Chancellor Gerhard Schroeder is working these days. He's on the board at gas from and he's hanging out at Vladimir Putin's palace. Um. You have to wonder. And yesterday I was talking my dad actually about this. Uh, how is history gonna judge

angel a miracle? You know, when Maria, you and I were at the G twenty together in um in Hamburg, she got a standing ovation and was considered the leader of the free world at the time. Now it looks like she was in Putin's pocket. Yeah, and you remember Matt last year in Berlin at the election, you and I were at times critical, you know, we said, for all of the time at miracles a woman that kept Europe together. There's a lot of issues underneath that have

not been very nice. You know. Angela Merkel had this fundamental view that politics and trade, security and defense, all of this could be run separately. It was a huge mistake. You can't separate the politics from the trade and your security. They're very connected. We also talked about the fact that she was someone who at times appeased some of her rivals, and not just at home, but also outside Russia Hungary.

She always had this idea that okay, they're bad guys, that it's better to keep them engaged, then pushed them in the corner. She was never very forceful. That also became an issue. You know, Vladimir Putin could see it. The Germans were not really going to go rough on them, and then of course the North sting too. I mean you remember, up until a few months ago, the Germans still we're not willing to say, yes, we're gonna ditch

it if the Russians invade Ukraine. I think that gave Vladimir putting a sense that listen, Germany is not going to go all out to help the Ukrainians, so that that really was something that they that they had in their minds before they invaded Ukraine. I think it's been a major wakeup call for the Germans. I think it's

a huge shock for them. I don't think they even realize the impact of this has or the damage that has done to the reputation and frankly, met I don't even think the Germans understand how big a crisis this is, but also just how badly they judged the entire thing for fifteen years. I think it's a moment that so searching for Germany. But I don't think they're ready to

eat humble pie yet. By the way, the Europe. By the way, this morning, when I heard the French GDP numbers and they were better than had been anticipated, my first thought was because they had those nuclear reactors at full blasts right now, and Germany has decided in its wisdom to scrap nuclear power and they're going to go

through with that. They came out with GDP that was less than had been anticipated, and I wonder if we're going to see a divide along you know, nuclear lines now Maria, where the French GDP continues to outperform, the French economy continues to outperform the German economy because the Germans are going to have to start rationing and shutting down factories um come wintertime, and the French are going to be heating their homes with nuclear power. And look

on Matt. I also think it's the way that you frame it is great because it also shows fundamentally that for ten years we all repeated and heard and and especially something of your bean country. They were told, your economy has to be more like the Germans. Look at their industry, look at all the things that they make. They're very good at that. But you realize that this is an economy that was built on very shaky grounds.

Like it's on the one hand they got a major boot by using Brussian gas and then they're exporting a lot to China. So look at the Fans the foundations of your industry and your egonomy. In the one hand we have Russia and the other China. So for ten years and the idea that we all heard repeatedly, I mean everyone knows some Spanish you have to be more like the Germans. Not everyone knows your Spanish, try to

model yourself after Germany. I think now it's pretty obvious for everyone that this is very shaky, and for a lot of the other European countries, by the way, they say, Okay, we did have a credit bubble, we had a real estate bubble, but why is an energy bubble different or better than what we did? Right? All right, Maria, that is great stuff, A great column out today. I recommend

folks take a look at that. Uh you can get that at Bloomberg dot com, Slash Opinion and also b I O P I N go for all the pining stuff today covers Europe for Bloomberg News, Bloomberg televis doing a stint at Bloomberg Opinion. Some great stuff. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. Yet I fall Sweeney. I'm on Twitter at pt Sweeney.

Before the podcast, you can always catch us worldwide at Bloomberg Radio.