Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. For joining us here in our Bloomberg Interactive Broker studio is Erica Adelberg. Does not phone it in, does not meld in. She shows up in the studio, and we appreciate that. She's a mortgage backed security strategist for Bloomberg Intelligence, has been on the street for a number of years. We appreciate getting your time. I don't know, Erica, we
got a mortgage rate north of seven percent. What's going on in the NBS market these days?
Hi, good morning, Thanks for having me on. We actually are seeing a huge decline in mortgage demand, which is just you know, symbolica, the fact that the housing market's really freezing up. New homes are still doing okay, there's a way to for homebuilders to offer lower rates, and frankly, there's more inventory right now. I mean it's about a
third of the existing inventory. Because you can build a new home, you can't get somebody to necessarily sell their home if they're sitting on a three percent mortgage and they'd have to take out a new eight percent one
like Matt Yeah, not selling. Yeah, So the housing market's pretty frozen, and on a seasonally adjusted basis, the mortgage back security loan application index that the Mortgage Banker Association puts out just hit the lowest levels since nineteen ninety five or nineteen ninety six, So I.
Think, so, wait, does this mean for the mortgage back bond market that those are scarce and thus rising in price.
Yeah, it's an interesting a number of interesting dynamics. I actually just sent out a little commentary today. It does mean that new issue supplies going to be very low, which should be a positive for the mortgage backed securities market. But even so, even though you know a lot of these homeowners are well out of the money and they're not going to refinance, you know, anytime soon, mortgage backed security still sensitive to volatility, and they're still sensitive to
what the Fed's going to do. So as a result, you know, we kind of thought this would be a pretty good year for mortgage back security. Not a lot of supply. We thought maybe the treasury market would rally, you know, once the FED was done tightening, but that hasn't happened.
How many does the FED own Do they have a stack of mortgage back bonds?
They said the FED owns about two point six trillion mortgage backed securities. For the past two years, during the pandemic, I should say, in twenty twenty twenty one, they were waving them in hand of or fist to help support the mortgage market and help support bonds overall. And they've stopped doing that because they want rates to rise now they want to slow down the economy and that's been a negative drag on the mortgage backed securities market as well, just not having them in there as a bus.
They're not going to sell them, right in quantitative tightening, they let the bonds they hold off run off, and they don't. But they're not going to sell mortgage back security.
I mean never say never, no guarantees, but they've said if that's happening, it's a long ways in the future, and they'll let the market have plenty of advanced warnings, so you know they're not making any noises towards it. About a year ago, some of the FED governors were at least maybe they're trying to job own mortgage rates higher, who knows, So they were saying, oh, we really don't
want to own this many mortgage backed securities. But you know, there's also not been any move in that direction, so I don't think that's that's certainly not the base case of anybody's expectations.
Okay, what's your take on the long and variable lags, because I've heard an interesting debate. Some people say, because there are no more adjustable rate mortgages except for Paul's, and everybody has locked in a thirty year rate, they're going to be even longer variable lags, you know. But others like Jan Hati has came out yesterday and said he thinks it's shorter, you know, because the FED telegraphs everything they're going to do so far in advance.
And what do you what do you think?
I think?
You know, I can't really compare it to history. I think that you know, if you look at traditionally movements and mortgage rates slash, you know, housing market prices and rents, there's a pretty long and variable lag. But one of the things, you know, aside from you know, perhaps the telegraphing, home prices are actually holding up very well. And I think that's a very key source both of rental incomes
as well as you know, people's wealth effect. So I think to the extent that home prices are kind of failing to fall at this point, I think that does actually make the lags relatively long.
So what's the mortgage backed security market telling you about interest rates? I mean, people are talking about a FED maybe in twenty twenty four cutting rates, but you don't see that in the mortgage rate at all. Seven point five nine percent on the bank rate dot com US home mortgage thirty or fixed seven point five nine percent.
I mean, that's obviously a very current r right. It's it's it's not a forecasting rate, it's not really forward rate, but it is based on to some degree the ten
year treasury you know, plus some spread. And what that's telling you is that we've had you know, that the curve is uninverted a little bit because the markets are telling you that that eields are going to have to stay higher for longer while the FED continues to try to get inflation under control and you know, slow down the economy a little bit.
Can I get any return in your market? I mean, I'm looking at the Is it kind of flat year to date in terms of the works backed security return?
Yeah, it's flat so far, which reminds me there's upside going forward. You know, spreads are very wide, you know, they're they're kind of you know, near ten year wides. They're actually not as wide if you look before the FED started buying in two thousand and eight, you know, and the post financial crisis.
World, they're very wide.
And you know, the Fed's probably not going to come in and save the mortgage market anytime soon. As you said, they're more inclined to sell though I don't think they will. So as there is result, yeah, there's there's a better buffer, you have a lot more yield, you have a lot more spread, But you have to have a little bit stronger stomach too, because you know, maybe the federal continue pushing re hire or at least job runing them higher. So that's what cuts into mortgage out security returns.
So again today we had the NBA mortgage applications decline of two point nine percent versus a prior period of a positive two point three percent. How unusual is that kind of swing period to period.
I think the best thing to think about when you're looking at something like the NBA Purchase Index being right now at the lowest rate since nineteen ninety five, these are percentage changes off extremely low numbers. Okay, so you know, if one more person takes out a mortgage purchase, it's going to influence the.
Number.
So yeah, I think, you know, the direction has to be looked at over a longer period of time. And we're down thirty percent relative to a year ago, and even a year ago rates had already started rising.
Is there a rate where I don't know, the market opens up, people start buying and selling houses again. I mean, at one point I heard somebody say like, yeah, five five and a half percent for mortgage rates, get back down to there.
But boy, we're a long way from that.
Yeah we are. We're currently, as you said, at seven point five percent on the bank rate. You know, it's hard to put a number on something like that. I think part of it will be time as well, because just over time, people have to upsize their homes, you know, death, divorce taxes, defaults, we're it's certainly not facing defaults anytime, staying with unemployment you know, pretty much all time lows.
But you know that being said, time will help. More mortgages are getting originated, albeit slowly at these higher rates, and those people, of course aren't quite as locked in. But I think the mortgage market structure is going to stay, you know, in the very low coupon range for a very long time. So I don't think we'll have the kind of turnover we're used to seeing the housing market for a decade.
You know, it's a great thing.
Downsizing, Yeah, nice that no tax, then cash burns a fraction what it was back in the day.
I'm excited for that to happen to me in twenty twenty years or so.
And when you downsize you can sometimes take out the entire equity of your home and not have to take out a mortgage at all. So those types of things will keep the housing market. And there is a whole bunch of people that are you know, in the next generation that are kind of ready to downsize, you know.
So so those then you got people like John Tucker, who actually does the repairs to his own home right well, he's never downsized.
He still lives in the mansion, still in the sea, but there is a there's a guest cottage on the on the estate. So at some point that's.
What you need to do.
Yeah.
I thought he was going to say I could move in or at least stay there for the weekend.
Yeah, you know, exactly, down to sure. All right, Erica, thank you so much for joining us. Erica Adelberg, she's a mortgage backed security strategist for Bloomberg Intelligence.
At some point we got to talk about porting mortgages, you know, because I locked in a three percent rate, and if I wanted I love my house, I'm not going to sell it. My wife's listening, don't freak out. But if I did want to, I'd like to take my three percent mortgage with me and use it to buy another house.
You can in some cases.
I don't know the exact details, but some mortgages can be ported in some ways.
So in other countries that's definitely true, like in Canada, but I haven't really heard of that being a thing here.
As much Canada.
All right, so you move to Canada, you can't take your mortgage with you.
Take your mortgage with you.
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Let's go across upon and take a look at what's happening the economies of our good friends in Europe and the UK. Doctor Vaniet Estavakava joins us. She's professor of economics at the London Business School.
Professor, seems like the.
US economy is doing pretty well to the point where this FED doesn't need to really do anything to kind of maybe you know, we've got inflation kind of running okay, we've got the economy kind of running okay. Just give us the thirty thousand foot view of Europe in general and then we'll take down a little deeper.
So thank you very much for having me. Always a pleasure to be here. So indeed, there is quite a bit of divergence between the US and Europe and definitely
UK as well, which is due to structural reasons. So the German economy, for example, if you take the biggest country in the Eurozone, is significantly different from the US economy, we would expect that inflation will be high in Germany, and would expect the inflation from the worse in Germany and to see stagnation or even decreasing growth, which is what the recent numbers show based on a few observations. So first, the euro Zone and Germany in general in
general just much more open relative to the US. So if you take one measure of openness which is expert relative to GDP, and just take China, which of course, as we know, has decreased its demand for imports due to the slow in growth in China. So the connection between in Germany and China is two point five percent of the German GDP. So Germany exports two point five percent of its GDP to China. So an external shock from China is going to impact the German economy, for example,
a lot. The difference is with the US the number is zero point six percent, so of course it's not just China. Actually, over the last year, the euro has appreciated against the door by more than ten percent, close to twelve percent.
Thennie, can I just jump in here and ask about quickly about China. I keep hearing that the slump in China is affecting other economies badly, and everyone's kind of writing off the economy there. But aren't they pulling out some real stimulus now? Isn't it possible that the Chinese economy does start to pick up?
Well, they've been kind of trying to do it for a while. I don't think they're proposing anything new. I believe the China is on a downward trend. We're talking about a trend here at and a temporary, essentially one blip deviation from growth. China cannot grow the way it's used for a number of reasons which are quite long to discuss. So I do believe that actually the trend will perceift in China.
Okay, I just wanted to get that straight. I believe you.
I just have been a little bit confused because we report on every stimulus move like it's a huge deal, you know, like, oh man, they're cutting the triple R reserve ratio, and they're they're they're funding you know, little kids and old parents and so.
But but I think I hear you.
I think it's important actually to zoom out and look at not just the recent news, but a compilation of news and trends. I mean, that's kind of what we do usually in Nicoon, not just focusing on single news. Speaking of trends, going back to the euro on appreciation of the euro, twelve percent is massive. This is going to impact the eurosone economy in Germany the most. Now, what else is different for Germany? So there are the major differences between Germany and the US coming from the
fact that Germany is primarily dominated by manufacturing. So manufacturing is still much more important in Germany than the US. So then the shocks are so sated with the high oil price, oil and gas prices impacting the marginal cost of production. The margin for the manufacturing sector is another big problem, right, so those costs had to be passed forward to the final consumer for the manufacturing sector, so the prices of manufacturing goals had to increase more so
high inflation in Germany. Similarly, the labor tightness. So Germany has demographic problems. They have aging population much more than the US. So you have seen the articles that the manufacturing sector is struggling to hire employees aage inflation is going to be higher. So these are structural differences that are here to stay. They're not going to disappear overnight. That are putting the US and Germany in a very
different position. Now, this creates a lot of challenges for SB, of course, because Germany is one of many countries in the Eurozone, and the German economy is also different from Southern Europe and from other countries. So then the question is what is easy to be going to do. I do believe that in general easy it tends to put a high way on the German economy highweight. That's what we saw in the global financial crisis, for example. Probably
it will be the same in this case. Having said that, given that the news are high, inflation above target and actually significantly about target, so more than five percent coinflation is very uncomfortable situation for CB, even if the German economy is so down, even if there is aerization, I do not see how they're not going to keep increasing interest rates. We're not talking about inflation getting to three three point five percent and then having the theory that
maybe they're targeting a bit high inflation. We're talking about till five percent colinflation.
All right, How about the United Kingdom?
What are we seeing in terms of the economy there and what do we expect the Bank of England to do in response?
So for the UK, it seems that there's some evidence that the high interest rates are starting to bite. Having said that the UK has the worst numbers in terms of inflation, in terms of private sector wage growth, I don't see them posing for the time being. I mean, they cannot pose this inflation rate. However, I do expect a recession coming the soon, as probably in the UK. Relative to the ide Eurozone and UK, it's it's it's
unclear which one is going to come first. But definitely we will have a recesion in the UK because they will have to keep hiking and even if current interest rates is going to bite, already starting to buy.
What do you think about the the the release of strategic the strategic petroleum reserve last year didn't really affect the price of oil so much.
Now we're heading back up there.
Even as these problems you know of economic slowdowns hit whole continents like Europe. How does the how does the oil price work into your forecasts for economic growth or contraction tributing.
Too slow slow down? So we saw that gas prices starting to increase again, So let's see what happens with the winter. If we have a mouth winter, it might not be as bad. If global demands loans down, this might offset efforts by all producing economies to decrease the supply, which of course Opek has been trying to do that.
So it is a function of both supplying demand. So it is a function also for although when gas producers do in addition to what happens to demand, I don't expect them to reach the levels of course of last winter, unless there is another massive shock. But definitely are going to put a downward pressure on the growth in the Eurozone and in the UK as we enter the winter months, where we expect prices to increase a bit.
It least.
How about in southern Europe and thing in Italy Spain, those are areas attend Those are economies that tend to be more fragile, and at least here in the US we hear more about that from a weakness perspective. How are they faring in this environment?
Well, it is a special case. I wouldn't put it together an essay. Little with Spain these days besides Italy, other soudthern European economy is actually having better numbers than Germany. They have lower inflation and better growth, so overall, actually they're doing better. But if the CP keeps hiking, of course this is going to have an impact on those economies as well. Yeah, the numbers fitally do not look great. So definitely Italy for number of it's an outlier at
the moment. So that's where there'll be also political conflict because for the hikes are going to potentially upset politicians in certain Southern European countries if they feel they don't need these hikes. So this has always been the problem with the CB. Right, we have a single central bank, many business cycles, no common fiscal policy, so usually the way it is in Germany.
Yeah, that's tough.
If I mean if your biggest economy is your weakest or one of your weakest links, that's tough.
Well, i mean, let's define weakest link. Surely the Spain, Portugal, Italy, Greece. You know those are going to be weaker economies over the longer term, don't you think, doctor?
Oh yeah, of course, I mean there is the trends and there are business cycles, fluctuations. So when we talk about multipolicy, of course, of course the focus is on business cycle fuctuations, and that's where currently the divergence is such that Saturn you're is doing better than Germany in state of state of course, the fundamentals. You can say a better ford, you know, countries like Germany than Greece or Italy for sure.
So you noticed I didn't use the term pigs. Why would you?
Yes, I do not like this term. It's a veryly Greece.
Yes, oh yeah, I mean it's actually I think Portugal, Italy, Ireland, Greece.
Easy, easy on Ireland. Sorry, sorry, all right, doctor, thank you so much for joining us. Doctor Vania Starkeeva, Professor of Economics at the London Business School, I appreciate gatting the view what's happening in Europe.
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Let's talk reads real estate investment Trust. Steve Brown, he can do that for Steve Brown is a senior portfolio manager of Global real Estate at American Century Investments. He joined his live here in our Bloomberg Interactive Broker studio. See what happens to the re market when the FED has eleven rate increases. There's a banking crisis that can't be a good backdrop for reads.
Sure, thank you for having me on. Yeah, reads have been under pressure this year and part of the last year because of the FED raid hiking cycle, and as you mentioned, it's going on for over twelve months. They've raised short term rates basically from zero percent to five percent, so very materially higher rates, and it's impacted basically cap rates and barring.
Costs for real estate.
So reads in general have been under pressure for the last we'll call it eighteen months or so. And we're really looking to an environment when the FED is done raising rates, and that would be a much more constructive environment to own publicly traded real estate.
So you think rates are just going to stay here or we're going to get.
A new dot plot this month? Do you think they're gonna take out some of the cuts?
Right?
I think our basic thinking is the FED is either done or just about done. They could be done because they haven't raised rates since July, and as we move into twenty four, then the next conversation will be when the cuts start. We think that when the Fed's done, that's a much more constructive environment for real estate values
in public real estate. And we think that, you know, we don't necessarily need the FED to start cutting rates, but just having no more rate increases in some stabilization in the bond market, and there'll be a much more pricing efficient market for real estate.
So we're optimistic that the FED.
Is either done or just about done raising rates, and whether they start cutting in June of next year or September of next year, it really is just a more constructive environment when the Fed's done raising rates.
All right, So, I know that there are lots of different sectors within the space, you know, data centers versus you know, housing and things like that versus student housing. Exactly what are the ones that you guys are going to be positioned in for if we are in fact heading into time when rates are no longer increasing, where are you guys kind of placing your bets.
Sure, it's a great question, and you reachs are up about two percenters of this year, so not much going on, but certain sectors like data, center, reads, industrial have done well this year because they have pricing power, and other property sectors have really, you know, performed poorly. You mentioned office that's certainly one of the weaker performing sectors, as well as at least and to a certain extent, retail.
I think we think that if when the Fed's done, you know, the acid class in general should perform better because of more effective debt financing for real estate values, and will the more bombed out sectors perform well.
I think retail is probably going.
To continue to perform better because of lower rates and they have lower valuations a little benefit from that. But some of the other sectors that are haven't performed well this year, such as towers.
Tower reets are love. Towers are big component of the index. They haven't done well for a couple of reasons.
One is the the growth characteristics have been modest exactly because they have sort of very strong pricing power characteristics. They had high multiples, but high multiples and high rates don't go well together. So if the raids start to roll over, tower reach should perform well over the next twelve months.
Paul Paul loves towers, because I'm gonna guess he took somebody's towers, American tower, the public.
We made the fees we made off of those things, gold mines, gold mines, and we rolled the whole for the bankers.
Oh yeah, well, good for those for the sellers, right, I mean, I remember when Deutsche Telecoms took all their towers, they sold them and least them back.
They thought that those assets were worthless, and they were worth seven eight nine times cash low we got them for so anyway, so we made money on the tower of business back in the day. So here in New York City, you're a rika, You're a real sticky. When I yet true, a high quality third Avenue, forty eighth Street tower, when that gets sold in the next year or two, is it going to be ten percent below
where it was? Fifty percent more than that? How bad do you think the office market is in a market like New York Because we haven't seen stuff really trade, so we don't know what the discount really is.
Right, It's it's bad in the sense that we've seen trades, whether they're New York, San Francisco, or other major cities.
What we've seen is some funds.
Some private equity funds give back the office properties to the lenders and then the so the asset is worth less than the loan. So we've seen property declines over the last twelve months in the office sector of anywhere from twenty to forty five percent of transactions that have happened.
So that's what we're seeing.
And I would we would believe that, you know, office values are down anywhere from twenty to thirty to forty percent.
So if a property that you just made hasn't.
Traded and say three or four years, you can probably see a pricing that's you know, thirty or forty percent lower than we're last traded at because of higher cap rates for office and concerns about NLI of the office buildings because of less tenant demand and the continuation of work from home.
What's the best way, I mean reads, You can go and buy them individually. There are also ETFs of reats. There are a number of ways to get at the product. Does the rapper matter or what's your view on that right?
I'd say, you know, certainly from where we stay, we run an active actually managed long only strategy, and I think that the diversity helps total returns, certainly for us and our clients. I think that the you know, there were no even though I mentioned that reads were up only two or three percent this year, there are a number of property sectors that have done quite well, whether it's data centers up twenty twenty five percent, through up ten or twelve percent, multi family up seven percent. So
there's been some real winners. So active management does matter. And I think as we move into twenty twenty four, and as we sort of get into the get past the FED rate hiking cycle and the environment changes somewhat, I think there'll be some continued strong differential and performance of the various property sectors.
Are there to twenty four?
Are there?
I mean the big losers, Steve, I'm guessing like office space here long third Avenue, right, Yeah? Have they lost enough so that they become interesting in terms of you know the multiples.
Sure, in the public sector, I mean the office reachs. At one point this year, we're down forty percent. So publicly traded real estate reflected higher registrates reflective concerns about an economic slowdown, et cetera, et cetera.
So they really had real.
Time pricing and they would be the first to recover of in terms of a recovery in the economy or a slowdown in the rays of rates in the private market, the pricing has not adjusted so quickly. So it's clear today and that's why you reads are training at a twenty percent.
Discount and net asset value.
They're training to get a big discount to property prices, and they reflect both the higher rates in the impact of It's just a modest slow down in demand for certain property sectors like office.
What you mentioned all.
Right, interesting stuff real estate Real Estate Investment Trust. Steve Brown is our go to guy, senior portfolio manager Global real Estate for American Century Investors.
We didn't get to.
Talk about my favorite rate, which is Lamar Advertising billboards. Also did that company public.
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I want to talk about one of the stories crossing the tape. We work to renegotiate nearly all leases exit unfit sites, so we work is still a thing and we talk real estate. We talked at Jeff Langbaum. He covers all the reads and all the real estate stuff for Bloomberg Intelligence Agency joins us via zoom from the Princeton, New Jersey campus of Bloomberg.
Jeff, let's start with you.
Where is we work these days in the marketplace? What's happening with their portfolio of properties?
What's the latest?
So I like the way you put it, Paul, we work is still a thing, although although I mean, you know, it seems like they're hanging on, you know, by a thread at this point. The news out today that they're planning to renegotiate all their leases. I mean, you know, a renegotiation or a negotiation by definition, requires two parties. It's going to be a wide range of outcomes in terms of what their landlords want to do and are
willing to do. Obviously, you've got a market where office demand is light, and so if you've got a tenant that wants to stay in your building, maybe you'd be willing to give them a break. But at the same time, if they're saying they want to stay in their best properties, maybe those are property is where you're not eager to give them a break. Because those may be properties that you could fill with a tenant on perhaps better financial footing.
So it's going to be a long workout, just like the commercial real estate industry broadly is in the middle of right now, and it will be kind of interesting to see how it plays out.
So in terms of we work clients, how many of them have said, you know what this is, this is getting a little sketchy for us. We're going to go over and get some office space with Regis or another competitor.
Well, their occupancy rate has fallen, and so clearly the demand for their space is not nearly as strong as it was. And some cone of that is probably tenants moving to someplace a little bit you know, stronger in a stronger position. Some may be getting permanent office space, some may be just sitting and waiting, but some is just you know, because the market is soft and there's
not nearly as much office demand. And you know, obviously that's the underlying problem for them is they've got these you know, long term fixed lease payments and the revenue's not coming in at the level that they expected it to be. So that's what's triggering the need for them to scale back. But without a bankruptcy, you know, they don't have the ability to just walk away from leases, and clearly seems like they're trying to avoid going that route.
Hey, Jeff, you're the expert on this stuff.
When we see an office trade office building trade on let's say, on Third Avenue in Midtown Manhattan, what kind of haircut is it going to trade at fifty from where it was before? Something less than that, something more than that?
This is going to be ugly, Well, it really depends on what the where it was before is how that's measured, right, I mean, if if you're talking about where values paper values were at their peaks, you know you might see pretty significant haircuts in the in the range that you're talking about. You know, if you're talking about trades relative to the last time of building traded, which may be you know, a decade or more ago, it might not
be as bad. The issue really is going to be where are these where are values now relative to where you know debt can be underwritten, because that's what's going to trigger the need for properties to trade is a financing situation. And you know, we really just haven't seen enough data points yet to know because while there's clearly
distress in the market. It hasn't yet gotten to the point where distressed trades enough distress trades are happening to really know what prices are going to look like.
Yeah, it's gonna be fascinating to see kind of where those values are in some of these big cities New York, San Francisco.
All right, Jeff, thanks so much for joining us. We appreciate you hopping on in short notice.
Jeff Lang BOUNDI covers all the reads for a Bloomberg Intelligence.
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All right, let's talk global energy here. We got Brent crude. I'll just quote Brent crude since we hit ninety dollars a barrel today. That got people's attention. Currently in eighty nine dollars in c.
U cl one for that is it cl one c one is Brent crude. Cl one is imts.
Yeah, I usuld quote name X because like my guy, you know, the.
Wildcatters down in Texas cl one commodity A right, let's talk able commodity. What I'm looking to see because last year in March, the Biden administration started issuing barrels from the Strategic Petroleum Reserve. And so what I'm looking to see is are we getting back to those levels because at the pump, you know, we're there pretty much.
And if the Biden administration.
Thought it was too high the price so they needed to release those reserves for the good of the American people at that time, they must think the same thing again now right.
I don't know. Let's check in with a couple of experts people do this stuff for living. Mike McLoone and Fernando Valley. They cover the Energy Space Force for Bloomberg Intelligence Miami. Mike is zooming in from Miami, and Fernando's here in our Bloomberg in Arctic Broker studio. Hey, Mike, I'll start with you big move higher here in oil. Let's catch on a lot of folks. By surprise, we had some of the airlines today call out higher fuel costs.
Here.
What do you make of it.
It's a balance that will fail. I mean I did this, said the same thing last year when Kroile's got above one hundred. My call as it's going to get to forty and the low this year is sixty three. Okay, didn't get all the way there. But to me, it's just a matter of time. That's what Croil always does. It fluctuates his most autocorrelated acid commodity there is. When it jumps up, it squashes that demand increases the supply.
When it pumps and drops down, it's the opposite. The key thing is what's changed, that's what does Technically, what's changed is this significant excess of supply out the US. So I'm just looking data lately. The net exports from US and Canada liquid fuels this year is going to reach five million barrels a day. Just to put that in context. That's enough. That's liquid fuel, so it includes ath and all everything. That's enough to fill up the the spr what we took out of it in about
seventy days. So this is a problem for the rest of the world, not for the US, particularly what OPEC's doing. I'm sure Fernando can comment on that. But I look at what you're seeing the screen now is what I expect Crudeyle to do is it's got a major problem with the will tilting towards recession. Our model, the economics model, is one hundred percent for the US declining out of China, pmizing,
everything declining in Europe and central banks still tighty. That's the macro and the micros that use you flecate fluctuates, and right now I think it's really very much near the upper end of its range.
I mean, our model, Bloomberg Economics model has a one hundred percent chance for a recession. But it's fair to say the consensus on the street is for a soft landing. I mean, Goldman Sachs is fifteen percent chance of a recession. I guess his models slightly different than ours.
I guess so, Fernanda, what do you know from from the fundamental perspective? What are you seeing at there? Looks like go peck if they want to higher prices that they're they're getting it.
They're getting some of it. But you know, I think when you look at just again Asia, as Mike was mentioning that Germany's number is eleven percent down month over month today on the industrial orders, who's their biggest trading partner China. I think the demand side, as Mike was saying, is really the biggest concern, and if we do have a recession, it's you can't keep ninety dollars a barrel.
I think what there's a discrepancy here on our views versus the street that when Assaudi and Russia agree to cut, to extend the cuts to the end of the year, they're basically saying demand looks soft to us. Not we're going to keep pushing prices higher. They're saying, we don't have a market in Asia, and so that's not a great news for anyone who knows bullish oil. We just extended that because we're not finding that supply balance yet. And as Mike was saying, will continue to grow. I
think that growth is going to moderate. We're going to miss expectations on USHL just because the pace of drilling is lower, the cost of financing is lower. Remember, shale is an ever going treadmill. You're always reinvesting because you have ninety percent declines in the first year. So the shale producers will feel higher interest rates right away, higher inflation right away. Because they're constantly drilling and drilling again to maintain their production.
Well, it's hard enough to get them out there to drill to put new holes in the ground, right, because not only our interest rates rising, but they're afraid of regulation, certainly in this administration.
What do you think.
About the SPR release and its effects, Mike, I mean, I'm looking at the chart for IMAX crude. We didn't go to one hundred until March first of last year. We stayed there until July twentieth, and the crude releases, the SPR releases began at the end of March. Did they have a significant effect.
Well, I still think President Biden, to go down in history, is one of the best crude oil traders ever. He actually did the right thing. What you're supposed to do in backgradation. You sell the liquid and you buy the futures contract. Obviously I haven't bought them back yet. But we just don't need it anymore. We have an excess supply of krugeff. We shut off our exports. We're gonna have way too much of it. So I think it's just the matter of time it gets refilled. But we
don't have to do it anymore. And there's one thing I wanted to kee you off on, Matt is when you go to Europe in twelve years from now, you will not be able to purchase an internal combustion vehicle. This is where we're going.
That's he's trying to He's trying to go. And what I'm doing right now is I have this strategic internal combustion engine reserve.
As I'm cockpiling gas, you'll.
Take the other side, and then I'll say, if you're does that, you'll be able to buy Europe for that. At that point it's for the price of an internal combustion engine car.
All right.
So, Fernanda, what are your companies telling you about where they think oil is going.
I mean, they have not cut in back at all, so they are seeing the undersupply long term, but in the short term they just want to, as Chevron says, winning any environment. I think they have continued buybacks and that is the biggest difference in big oil today versus big Oil in twenty nineteen is they cleaned up their balance sheets so they can afford to continue that share repurchase program even at much lower oil prices. And I think if you ask Mike Worth of Chevron or Darren
Woods of Exxon. They would say, yeah, give me, give us, give us a dip on our stock price, because we would love to improve our returns on capitol by repurchasing some of our shares rather than going out and buying more more small e and ps.
I don't know.
I mean, can I go down to Texas and start drilling? I mean I think I can make money at ninety dollars a barrow.
You would think, But you can't find the Tuobler goods. You can't find the labor, and you're sure not going to get permits to drill a lot of those wells.
That's no fun, all right, Mike from the commodity space, just right away here, what's your number one call?
Gold? The average price of gold this year, at nineteen thirty three, is the highest ever. You can't say that about virtually any other commodity or asset so far. Expected continue in this deepest pockets on the planet. Our buying goal that's Central Banks.
And for now, just real quick, what are your clients? What's like the most in vogue trade you hear from your clients.
Well, people are going for the soft landing movement, and we think that's not quite going to play out well for them. So they're still buying some of the petrochemical names that are exposed to housing some of the e andps, the more lever dnps that are now getting a rise out of the higher oil prices. And we think safeties, especially when you're getting a huge payout from Excellent and Chevron, is a more attractive proposition.
All right, good stuff, Felms appreciate it. Fernando Valley, Mike mcgloane. They cover the energy space for Bloomberg Intelligence. Mike more from a commodityesprespect perspective.
He carvers all.
Commodities for BI and Fernando from the fundamentals the equity side for a lot of the big oil producing companies. It's great to get both of their views when we're talking about the global energy space.
You're listening to the tape Cansur live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa Play Bloomberg eleven thirty.
Let's talk about that right now, because Comments, famous for its diesel engines, is going to build a three billion dollar battery plant with help from the Chinese. And there's a lot of skepticism at these kind of partnerships concerning these kinds of partnerships, including sketchesm that Ford faced building a battery plant in Detroit recently. Let's bring in Elizabeth Bermont. She wrote the Comments story for us. She's out of Munich right now, are you?
Are you in the office? You're not at the at the show? Right? Did you go to the show?
I was at the Munich car size from at Monday through two yesterday and already having lots of fun with it over the weekend.
It's been a great experience.
All right.
So what do we know about this plant that Indiana based engine manufacturer Cummins is gonna is gonna build with China's Eve Energy Company.
Yeah, such an interesting development.
And so, as you were just saying in your intro, come in as a diesel engine maker, and they're having to get ready for what's up next. They're picking Diamad Truck as one of the partners in that venture. The world's biggest commercial vehicle maker and then also packer, and I think that's absolutely the right way to go to partners, strong partners to share the load and gain scale to drive down the cost of switching over to batteries.
Its surprised me given all the rhetoric we see out there on the geopolitical stage, why is China's Eve Energy company the part of this transaction?
Well, because they have the technology. I mean, Eve is not exactly a company that's coming out of nowhere. They are a partner with BMW, and obviously there are these geopolitical tensions with the US and China.
It hasn't stopped other companies from teaming up with them.
You were just don't mentioning Ford and you know, there's absolutely no way around the fact that out of the top ten global battery supplies, seven of them are Chinese. So, whether you like it or not, there's kind of nowhere around working with them.
Does everybody have enough battery capacity, Elizabeth, or are they building these factories quickly to try and get the capacity they think they're going to need five years, ten years out.
You know, it's really interesting when you're comparing where the truck makers are and where the carmakers are. The carmakers are a lot further down the line as we know, and just coming into this conversation, I was just having a look around. You know, is this first of this kind in the US, you know, supplying batteries for trucks.
I think it is.
We've got one announcement from Volvo over here in Europe.
So they're at this much earlier.
Stage of moving into this shift, and hopefully they can learn from some of the mistakes that the car makers have been making, which is to partner up much earlier than they did in order.
To save costs.
Because unlike with cars, obviously, truck makers need to make a profit from their vehicles. So from the get go, commercial vehicle makers they need to offer products where logistics companies stand to stand to stand to make a profit.
I wonder though about the actual materials. So this folk, this factory is going to focus on lithium iron phosphate batteries. Initially, I've heard, you know, Mark Royce from GM tells me the chemistry is going to.
Change every year.
Right, we don't know what it's going to look like in terms of the chem needed in ten years or twenty years, but lithium is already in short supply, right, are they scrambling to get contracts for the minds?
I'm not really sure in terms of that where they stand on that engagement. I mean, the LFP batteries you mentioned that, I think they're a smart initial move because they're cheaper than comparable other chemra chemistries, which will help them from the get go. In the statements from the companies, they were also saying that this is the initial chemistry
that they're going to be working with. So the way that indicates that the way they're going to set this up is that they can switch over to other chemistry and chemistries as.
They become available.
And just on your point about availability of resources to make these batteries, I mean, it's a huge question mark and arguably there will be bottlenecks along the way. These bottlenecks we've seen historically have been able to be resolved, you know, not necessarily battery raw materials, but usually when there is a bottleneck that we you know, humans find a way around them. In terms of the supply again, that was also a big topic at the Communika show
just now. The Chinese have been building their grip on the supply chain like no other nation. And while there is a lot of lithium coming out of the US or Australia as well, for example, eighty percent of lithium refining capacity is currently located in China. So it comes back to the geopolitics that we were talking about earlier on. There's currently nowhere around working with Chinese partners if you want to make battery vehicles and those.
There's also some news coming out of Germany on the China front. Again, Mercedes CEO kind of changes his tune on China as you know, maybe that's not going to be such a great growth market in the next ten years as maybe they thought as recently as a couple of years ago.
What's the background there.
Yeah, he's really changed too, and hasn't he.
We were looking back over his comments from two years ago, and back then he was just saying how the market was still looking awesome basically, and people not being able to.
Get enough from their luxury vehicles.
If the Chinese market really slows, that's a really big problem for the German car makers because even if VW has been losing market share there, for all of the three German car makers, China remains the biggest market, So if people there are no longer or in far fewer numbers buying their cars, that's going to be a big problem.
There are, of course, other markets that they can move to.
We've had some speculation just talking two people at the show that for some of the products from the Mercedes, like I know you love that car, the g Wagon, that they could focus more on Middle Eastern customers, but obviously there are far fewer Middle Eastern customers than there are Chinese customers. Again, though, the US could be another market where they could refocus their marketing efforts or the styling of their cars to see if they can unearth a few more people to buy their cars.
I have always is thought, so I love the G Wagon. I've been a fan since I was nine. I bought one in twenty twenty, which made my pandemic awesome. And I've always thought, you know, they only make like a few thousand at one factory in Grots. Mercedes doesn't even build themselves. They outsource it to Magnus Styre right, and they can't make more, so there's a long waiting list
and they're incredibly expensive. I've always thought Mercedes should try and make like a Volkswagen Bug version of the g Wagon that everyone can buy and everyone would buy, but they don't want to go I guess down market, right, Elizabeth, Well.
They weren't talking about a baby g Wagon, weren't they at the show, which seatellite TikTok. So yeah, I mean I think they. I think even Mercedes is surprised just how many g Wagons.
They can shift.
So if they're adding more derivatives, which does fit the narratives that we're getting from Mercedes that they want to focus on that top performing cars, the top end vehicles within their portfolio, you know, who knows where you know they could go to make the baby do wagon.
I wonder what you think about the new BMW concept. I thought it was horrible, horribly ugly, and I'm a huge fan of the cars the carmaker's history, but I don't know what they're doing with their future vehicles like the XM confuses me completely.
What do you think about BMW?
Well?
I think, you know, car styling is so subjective and you can you can talk to no end about it. I think you really have to take off your sort of Western glasses or even sometimes German glasses in my case, what appeals to me doesn't appeal to Chinese customers, and that's where they want to sell these cars. You know, whether you like the styling or not, I don't think
it really matters. They were going for some a bit of a retro design, you know, we're sort of harks back to their heyday of making these really stylish cars.
So whether that's a bad idea or.
Not, I'm not really sure. I didn't think the car looked terrible. What concerned me a bit more was that this vehicle, alongside the Mercedes CLA prototype that they were showing. Both of these cars are come on the new generation platform for the EVS.
It's not going to be on.
Sale until the first half of twenty to twenty five or thereabout.
We're coming out to your LA petition.
All right, Elizabeth, thank you so much. Elizabeth Barman, team leader, Bloomberg News.
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I'm on Twitter at Matt Miller nineteen seventy three.
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