Markets, ETFs, and Commodities

these fundamentals. Because we do have inflation, we do have rising interest rates, we do have a slowing economy. Howard risk assets to perform in that environment. Let's check in with Mark yesco CEO, CEE, IO and founder of Morgan Creep Capital Management, located in some third rate hamlet called Chapel Hill, North Carolina. I mean, I guess you couldn't find any office space in Mark. Paul's a duke guy

in Durham, North Carolina. But we'll check in with Mark anyway, Mark, what are you telling your clients here as a kind raise all some of these you know, these bricks in this wall of worry here. Now it's a great, great point and uh, you know, congrats to the boys at the University of New Jersey at Durham down the road. Very good. Um, but look, we we are cautious in the current environment. You know, we were living in a world of financial repression. As to me is the biggest problem.

Savers are just being punished with these low interest rates. And although the Feds making noises about raising I actually don't think they can. So that'll cause that'll take one of the stressors away when they finally do what I'll call the Powell pivot and he finally admits that he really can't raise rates. You mentioned that economic growth is slowing very dramatically. We're just gonna see negative growth in Europe in the first quarter, could possibly see little zero

growth in the US. And then corporate profits are rolling over. Earnings estimates are being slashed. So we feel that you should be head with a capital duh. And hedge funds are are likely to have a much better year this year than they did last year. We still do like one area, which is oil. We think energy is an interesting place to be. Things like MLPs good place to hide.

They're just very very cheap because even if everybody wants an e V. It will take a thirty years to everyone to have an EV, so it's going to take a while before oil is not necessary. That what's true, that's that's the only thing that you know, some of

us have range anxiety, right, we like to travel long distances. Um. But but then I think the last thing we're telling people is, uh, don't really stress too much about the noise of geopolitics, really focus on the signal, and um, you know, we think there's lower risk of some big event. And then I think many in the DC area would have us believe, but um, you know, we're we're we're cautious, but but not completely out of markets. So why do you think we've seen such an outperformance of you know,

we were just graphing oil. Um, since the pandemic against the producers and the underlying commodity has done so much better. It's great, great, great point. And I think that the challenges, particularly in the US, we had a lot of producers that were over levered and a whole bunch of them went out of business. So that clearly impacts the indices that that you know, the broad baskets of those producers. There are some individual companies you know my favorite Diamondback Energy.

I would say Fang has outperformed Fang, Facebook, Amazon, Netflix, Google over the past year. Again this year, we think it all out performed for a while. Uh. And then there's a other company like ovent Iv and Marathon Oxy which has done really really well, outperformed oil. But you're right, the basket has underperformed because there's just a lot of companies that uh. And this across all industries. You know,

we we extended credit to not so credit worthy businesses. Um. I say we, I mean the economy, and some of those went out of business I guess in in the lockdowns after the pandemic, and it's it's really been tough. And I think that's one of the reasons oil prices surged so much, is so much supply came offline. So Mark in the fixed income space, do you guys see

opportunities there? Again, we have a federal reserve that is clearly signaled a rising interest rates and if you look at the w I r P functional on the Bloomberg terminal, could be as many seven hikes two. How do you think about that as a rates to fixed income opportunities? Yeah, I'm gonna take the under. I'm gonna take the way under on that. I don't think there'll be anywhere close to seven. I don't even think there'll be, you know, three or four. I think they probably will try to

hike here in March. I think they'll probably whimp out and not do fifty basis points. Um. You know, the challenges have been behind the curve since two thousand. Uh, for a hundred and something years, the average short term rate roughly equal nominal GDP growth. And you know that hasn't been true for eight years. And I think they should get back to a normal functioning interest rate environment. Uh,

because that's what capitalism is predicated on. That you know, you can put your capital at work and get and get paid for it. Think about being in Europe or Japan, you have to pay banks to keep your money. At least here you get zero point five. That's why we actually came up with this thing csh new E t F that takes advantage of spack arbitrage to give people something you know, we think low single digits on their their savings. Because we think traditional bonds, high yield bonds

are very high. Taking credit risk, you're taking duration risk. Both of which look kind of dicey in this market. So having at least something on your your savings leaving makes a lot of sense. All right, Mark, thank you so much. We appreciate checking in with you. Mark. Yesco uh He is with CEO, c I O and founder Morgan Creek Capital Management based in Chapel Hill, North Carolina, which is actually a very very beautiful community there, despite

the University of North Carolina. And you want to see such a great school and they have such a great basketball history. Yeah, just not quite as great as their friends down route fifteen five oh one at the Duke University. But yeah, we all respect the u n C. Chapel Hill there. You're good, good hoops and we love playing against them. We have our E t S. She wants

to talk ETFs, dying to talk ETFs. I was gonna say, Maestro mice Straw maybe has taken there's already an et US are here E t F S arena in the house right now. And we were talking about an e t F fund earlier, weren't we U E s H hre we talking about E s H earlier? Which is um no, I think those are the sp futures. No, it was it was some e t F fund that somehow dealt with SPACs in a way to that's leverage on leverage there, Katie, What do you got for us?

We can talk about spack ets, we can talk about fix income et s because it doesn't sound exciting, but there have been a ton of really interesting launches when it comes to fix income e t s this week. I mean, just today you had State Street and Blackstone launch and e t F that will be half high yield, half clos and they're trying to really appeal to the

retail crowd there, which caught my eye. You also have a bunch of black black Rock alumni debuting UH seven junk on et just today, and then earlier this week you also had a CDs e t F debut. So it's been a really fascinating week for just bond ETFs in general. Speaking of leverage on leverage, Yeah, who buys ETFs these days? Is it retail? Is it institutional? Is it hedge funds? These things? It's a really interesting mix

of both. I mean, institutional and professional traders love et s because the liquidity there is so much greater than you would get in buying any sort of individual bond. So they use them often as liquidity sleeves, but you also have a very sleeve liquidity sleeve. I do too. I try to put that in stories whenever I can.

But I mean they do appeal appeal to retail because some of the products, or some of the asset classes you can get exposure to through an e t F. I mean, if you're a retail trader, you're never gonna be buying, you know, Russian debt, You're never going to be buying oil futures, those types of asset classes that you really can't get exposure to, but now you can through an e t F. You invite it on any

sort of brokerage platform. So it's Tony from UBS ever calls me and pitches an e t F to me, that might be the end of our Oh no, are you not in E t F. I don't know, Yeah, I guess I can. I mean that the low fees, I guess they're targeted, which is pretty cool. I don't know, it just feels a little I'd love to see s

h C s mark Yusco. Right, yes, exactly exactly. So we were talking to mark Yusco about and by the way, you know how I found that I couldn't remember what I had typed in, and I just typed an h I S t go and it shows you the history of all the commands that you've typed down the Bloombergs. You can scroll back. That is a very cool in itself. That is a good another function. You know, I was reading about this fund and I was so mad that

I didn't write about it because it's really interesting. Basically that, um, it feels like he's pitching this e t F A is you can use it almost as a money market fund, like just store your cash here. You're probably going to get a few basis above treasury is not very exciting, but you know it should work all right. So the new issue market for e t f s, where are we kind of over the last twelve months? Is it

accelerating and we kind of peaked on fire? They say, yeah, no, you saw a record number of e t f s launched last year, which is interesting to me because they've all been mostly active and thematic. But if you look at where the money is going, it's all too pretty vanilla funds. It's all SMP five hundred index tracking funds.

So you're seeing this huge surge in issue once. But I mean those new funds are attracting very little of the actual money that's flowing into the e t F market, which is largely just dominated by Vanguard and black Rock UM. And Vanguard has been the boss of e t s really since their inceptions. Right, they own, they own this market. They well, okay, this is the storyline that you have to watch very closely. Black or Vanguard's share of the e t F market has grown every since go year,

for twenty years straight. Black Rock is still your incumbent. I think they control about thirty four percent of all U S E t F assets, Vanguards at twenty nine per cent. So that flippening it's going to happen one day, maybe it's not this year. But I also just think because of you know, the uh, the legend of Jack Bogel and to me, e t F s fits so well with that passive investing legend. But of course they probably have active investing e t f s there as well.

They do, and Vanguard will be quick to tell you that they do have active ETFs. But if you look at their AD two product and they just have a D two products, which is also mind blowing. It's mostly passive. That's where all the money is. And I SPACE E t F gets all the Bloomberg News written stuff on E t F and E t F. E t F go is a great et F and b I E t F s to get the research there. Alright, let's talk global oil Brent crude nine cents. We were on

I guess we still are on a one watch. I'm hearing some hundred dollar numbers coming out of Wall Street. But when we want to talk oil or commodities, pork bellies, crypto, we go to Mike McLane. He's from Bloomberg Intelligence Commodities. Uh. Analysts there. Uh, Mike, you're in a Bloomberg Interactive broker studio. He's here, folks. Usually he's down in Miami Beach kicking back at the pool with a cocktail with an umbrella in it. But he is here in New York working

this week. Mike, what do you make a crude oil? Here? Are we gonna see that one handle? I think it's part of the process that it did in two thousand and eight. Elevator escalator up, elevator down. So right now we're in that upstage today is not so great, but it's factoring a pretty significant armed conflict between you know, with in Europe with a large exporter of crudel and

a large exporter of grains. To me, that's otherwise. Once we get through this period, it happens, are not crudel is going back to fifty and that is are below and because two and two thousand and eight it's peaked at one and then dropped the forty um the next year and then what happened was that we went up to a hundred for till two thousand eleven. Then the whole U. S. Shelle Revolution happened. Oil sands in Canada. That's happening again now. The differences Matt loves is the

evs are really kicking in. That's it's and our consumption in North America peaked in two thousand eighteen, and so it's starting to head lower. So also the key thing is war. Okay, war keeps it elevated and the shorter term, but the big picture is higher prices bringing more supply, and it's worse this time. So here's what that part at that part, I don't we don't see happening yet, right We don't see the shale guys recounts pulling more oil out of the ground. We don't see Texas pulling

the trigger. They just don't seem to be downey at Why why lagging? So what are we doing right now? We're the reciprocal negative negative prices. We're going to do the exact opposite within the next year. Might be three months high prices. Now back to the more enduring trends. So let's give you this fact. Crude picked at one in July m July two thou eight. I think we're catch up to p P. I'd be two hundred dollars. So that's a bear market that's bouncing with an range.

So yes, it's a lot of fear, but this is just the facts of the market. If you can, you can create more of it. We use less of it. And you know, I came from a corn mail background. Twelve percent of our gasoline is from ethanol, which I know you love. I'm against that. Well, I'm not against it if you don't care about your motor, you know, but it's not good. I don't want to put that in my I will drive the extra mile to get pure gasoline. Really, I don't want, Yes, you do. I

don't care, do I you don't care? I don't care? All right? So alright, So, but supply and demand here OPEC has remained pretty disciplined. Is that something you expect to continue it does? Does OPEC really have that much spare capacity? Well, one of the things we've been hearing from the guests we bring on is okay, Saudi does, and you can see it with OPEC GO. It's a really cool chart for spare capacity. Um. But the guests that we have on lately have been doubtful that other

countries really have that much spare capacity. And actually you don't see anything on OPEC GO besides Saudi Arabia and the UAE. Don't underestimate how prices bring on supply and commodities. I learned what I used to have hair. It's just exactly, it's just so entertaining the hair because I remember how we were gonna have peak oil ten years ago, what really peaked consumption in North America, So that will come. The discipline is impressive. Iran could come back and look

at Venezuela. They have as much oils crude at some point that comes back in higher prices, bringing that on. But I think what's happening now is more than macro. I think we're beginning part of the great reversion of this massive period of economic fiscal, monetary stimulus. And so if if we don't have the war, we face the fet If we do have the war, we have other

issues of potential recession. But you know, the unique thing that's really been happening lately, I was impressed with how bitcoin has been a leading indicat If you come in the morning like today, bitcoin was heavy the stock markets. Yeah, you see, you watch the ticker and then you have those days when stock markets down and Bitcoin starts taking up the stock market files. It's amazing how this crypto has become the leading in the lead the indicator markets.

But in a big picture, I think that's what comes out ahead. So I published a piece recently. As we know, lack of supply decline to supply increasing adoptions not not part of multiples portfolios. Bitcoin and you look at crude oil we're using lesson. You mentioned ethano I driven electric and I've had it for eight years now. It's great electric. You know what, if any beach, I'll drive it all the way. It's I lawed you wait, a Shaddy Vault or a bolt A Vault, so they don't make them anymore,

but it's a hybrid. Yeah, So basically I love that car exactly. Um I test drove that when they first came out. So my thing is, as I've been telling Paul and anyone who listened, I love the idea of electric cars. I love the acceleration of electric cars. I missed the vibrations and the sound of an internal combustion engine and shifting gears obviously as well. I love a good hybrid, so I loved the Chevy Vault when that came out, and I don't know why they don't make

it anymore. I love the BMW now has um An X five that has an in line six, so fantastic power plant. That's the power plant that made them famous, and a huge like thirty kilowatt battery. So you can drive miles without a motor, but when you need it, you kick it on. It's your enthusiasm is to me, that's profound because that's where it's going, and it's happening more in the wealthier companies. But I heard last year in China of new auto sales were e vs. Now.

You mentioned hybrids. My mine gets ninety miles for the getting per Gillan and my brother's a mechanics. Is a cool thing about these is they the engine doesn't work, card they last forever because we use electric for stop and go and the engine only works for the long distances it works. It's a good system. I wish they would make cars where you could easily swap out the batteries because my concern is I buy one now or the thirty kilowatt battery, and in ten years from now

there's a five kilowatt battery and the same size. Mike McLoone, thank you so much. We appreciate it. We didn't get to talk pork bellies. We got tripped up by cryptos and concentrated orange. You will do or bellies next time, I guarantee it. This Federal Reserve is looking clearly at some of the economic data coming up, and we want to check in with Michael McKee covers all things economics for us. Here, Michael, as you think about this Federal Reserve,

we're talking about hiking rates. W I r P is saying seven rate hikes this year. What do you think the federal reserve is really looking at in terms of data. Can I also say the word function looks better than ever you. I know we're on radio you can't see it, but it's so improved to the old word functions. So I highly recommend people check it out. The thing that's interesting is that we consider one rate hike to be twenty five basis points. That always is that just the

standard rate hike measurement. Well, it became that under Alan Greenspan the years before they used to announce what was going on, they would raise it by all kinds of numbers, fifteen or ten or thirty five five, whatever they thought was necessary, particularly in the Vulcar years when they were doing UH monetary aggregates as a guide, so they were trying to figure out how much money they'd be creating. But um, at this point the Fed is UH looking

at to answer your question, inflation and unemployment. Unemployment, they noted in the Minutes yesterday had pretty much gotten to where they wanted it to be. It's inflation they're worried about. So the Fed is at this point planning on moving in March. By the way, has employment changed that much or did they just start to get worried enough about inflation that they felt like it was changed a huge amount. I mean, it's it's already down basically to almost where

it was before the pandemic. We were at three point five three point six, and now we're at three, while we're at four, but we were at three point nine. As more people come back, so pretty much at full employment, we're not going to get the same statistics that we got before the pandemic because people have not come back into the labor force. So that great resignation starts. Yeah, well we're all working, so I don't I don't see any of it's not in this room. But but you're right, man,

it's basis points become the standard. And now they don't even do it by basis points. They're doing it by range of now and then it will be fifty. And what the market is doing, and this is your w I. R. P. Lesson is looking at what the effective Fed funds rate is likely to be, which is right now around seven basis points. So if you look at the next move and you see that the implied rate is thirty two basis points, then that's a twenty five basis point move.

So uh, it's it's a little complicated, but once you get used to it. YouTube you know, in terms of that um uh measured policy behavior and the transparency that the FED wants to I mean, are we gonna stick with that throughout the pal FED? Will we ever get back to them saying, you know what, let's have an emergency meeting and you know what, we'll raise my fifty basis points now or forty five. Well, they've had emergency meetings.

They had an emergency meeting, but they can only do an emergency meeting to cut right, Because the could do an emergency meeting to raise if they felt it was necessary. It's it's hard to do because I'm doubtful you're legally they can do it, but you're right, it's it would be a shock to markets. Uh. And it was pretty obvious when we hit the pandemic and markets seized up and weren't working that they had to cut rate. So the meeting, the emergency meeting they held was not a

bad thing. But do you know who was saying this yesterday? Actually I was struggling to remember because I'm getting it was Daniel D. Martino booth Um, And to be fair, her book was titled fed Up, so you can tell where she's coming from. But she was saying yesterday, you know this isn't cool because the FED is so careful when it comes to markets, right, they want to spoot the markets, but they don't care about the common man

paying five dollars at the pump. If they wanted to tackle inflation right now, she was she was saying, and Paul made a great counter argument that it's really about the supply chain. If they wanted to fight inflation, they would just have an emergency meeting and raise fifty basis points now and maybe six eight months from now. That would slow start to slow business activity. Policy working with

a lag, so it's not really going to help. I mean, we were surprised by retail sales yesterday and how good they were, and we've been surprised by how strong consumer credit has been. People want to spend money. Well, retail sales disappointed the last two reports. Think about how bad it was in December, and that was Christmas, but that was because October was better, So I mean we pulled

it forward. That's you're just basically outlining that why it's so hard for anyone to do monetary policy these days, especially when you're working with a blunt instrument like one interest rate. Well, and of Paul's point, if you're if it's supply constraints that are causing inflation, you know, if if I'm paying so much more for my GMC yukon a T four because they just can't make enough, it

doesn't matter if the FED raises rates. Does the FEDS going to raise rates on March sixteenth and on March seventeenth. We aren't going to suddenly have a big supply of semi conductors that all of a sudden show up. So the car problem is going to continue. And that's the issue, is we bought I mean, we've had several separate issues that get rolled into one. The semiconductor's issue was a result of a number of factory problems, and then the

car issues, uh flowed from that. But then we have other supply chain issues where we ordered so many goods that they couldn't keep up with the shipping of the mall. And that's slowly beginning to rationalize, but we're not there yet. Yeah, we just had the lead class go on from Bloomberg Intelligence covers all the ocean shipping companies, the railroads, the truck and companies. He sees it all, and he says

he consisted going to stretch into next year. You know, he kind of thought it might be at mid event where we get some meaningful improvement in supply chain. But now he's pushing that out even further. So that written the Rails. I have took a great Canadian Pacific investor trip through the Canadian Rockies. It was awesome and three day trip, a lot of fun. You know, I bets written the rails? What Greg Jarrett? Yeah, I'm sure he hasn't hold as a whole bolt, you know out in

the West. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to introduce Apple Podcasts or whatever podcast platform you prefer. But I'm Matt Miller. I'm on Twitter and Matt Miller talking about on False Swinney. I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio.