P&L: Fed Should Do at Least Four Hikes in 2017

place this Wednesday. I want to bring Bob Michael, chief investment officer at JP Morgan Asset Management, who's here in the studio with us in Bloomberg eleventh. Three. Oh, Bob, is this FED meeting a non event at this point? Even if they raise interest rates by a whole quarter of a percentage point? I think they should make it. They shouldn't make it a non event. They should make it an event. They should use this as an opportunity to guide us for what they want want to do

in two thousand and seventeen. Currently the market thinks they should do one or two tightenings. I think they should do at least four. I think they should go in March, and even if they do four, next year plus one in December. That's one in a quarter total. That only gets you to have Fed Funds target rate of one and a half to one in three quarters percent. Why do you think that they should hike four times next year?

Because I think policy at a quarter to a half a percent, or even if they go in December and four times next year at one and a half to one in three quarters percent, looks out of sinc With the evolving economic reality. We talk as though they're already at a zero real Fed funds rate that they're at two to two and a quarter percent, they're at a quarter to a half a percent. They're at emergency levels,

and the emergency isn't there anymore. Okay, you talk about the emergency not being there, But if you are a bondholder and you look at your portfolio, I would imagine that there's a little red light that might be flashing because of all the losses that depending upon when you purchased obviously your bonds. But I'm just looking at the thirty year for now three point one eight percent, the tenure at almost two and a half percent. Uh, When

does a trade turn into an investment in the bond market? Now? I mean who's holding all that paper that's now under water. Well him, you're right it it's shaping up to be allowsy four years ahead to be a bond investor. That much is for sure. I think when you look at the FED funds rate relative to ten your treasuries, there is a pretty good spread. Now we've had a pretty dramatic backup, there are going to be investors who think

that's far enough for the time being. I'm interested to see if the foreign investors come in and help take down the auctions. Certainly pension funds have an opportunity to de risk. You don't go on a straight line up. But I think as the normalization process evolves over the next couple of years, there will be by is a

very backup or second guess. The steepness of the curve is telling me that the Fed is behind the curve, that the market recognizes they need to get to something that looks more neutral, and the longer they drag their feet, the steeper the curve will get and the higher long term meals will become. So here's what I'm confused about.

A lot of people have come on this program and talked about how the effects of President Elect Trump's plans won't really be seen until the beginning of two and eighteen. What's going to sustain this feeling of optimism and growth over the next year, which will inevitably be uh somewhat contentious even among Republicans in the U. S. Congress. I mean, is it just the US and President electrumpers or something

else giving you confidence? I think saying that, pardon me, that his plans won't be seeing the impact until two thousand and eighteen is a load of rubbish. It feels to me as though the Trump administration elect is already running the government. There in the news every day, they're talking about appointments. When you look about when you think about Tillerson's candidacy, it seems as though we're in the consultation period and they're taking feedback. I think his first

hundred days are going to be breathtaking. I don't think there will be a lack. I expect you will see tax cuts by the end of the first quarter that will have an immediate impact. This is not a two thousand and eighteen thing. This is March two thousand and seventeen, and then you're going to start seeing the fiscal span and maybe the deregulation rolls out into two thousand and eighteen,

but they are not dragging their feet. Bob. I just want to have you expand on on this because not many people have been so forthright in describing what they believe will happen in two thousand seventeen with the new administration. And you mentioned news and the control of the news cycle.

Do you believe that that is really what is spurring people's attention because you've never had a president, for example, a president elect that is able to command the attention of the news media or the populace directly the way President elect Donald Trump has well, well, certainly he's understood the value of social media. I think one of the things that that we're talking about here is a bit of the disconnect of where the market's position, what we

expect to happen, and the like. In my view, what's happened is there's been a five percent probability that's become a central case scenario. Another huge mover right now to movers CBS and Viacom CBS down more, Viacom down more than six percent. US is on news that Sherry Redstone withdrew her proposed merger of CBS Corp. And Viacom that ends the potential to create a new colossus in the

television industry. With us to find out more is Alex Sherman, Bloomberg News reporter covering all things entertainment and mergers and acquisitions related. Alex, can you explain what happened here? Maybe a week or so ago that things were looking increasingly unlikely that a deal would come together? And the why depends on which side you ask um. From Viacom standpoint, Viacom met with CBS just before Thanksgiving and has been

waiting for weeks now to hear back from CBS. Viacom believes that their presentation to CBS was so strong for their standalone plan that CBS started to realize, we're going to have to pay a pretty big premium if if we want Viacom to go along with this. Uh, And maybe that made a deal more only because CBS didn't

see Viacom's prospects as strong as Viacom did. From my CBS sources, the main issue was less Moonvez wanted de facto control over a combined CBS and Viacom company, which would mean he would have to convince Sherry Redstone, uh, some of the Redstone's daughter. Some of the Redstone owns National Amusements, which controls both companies. Less, Moonvez would have to convince Sherry to give him her voting shares or at least give him control in some sort of arrangement.

Sherry Redstone was unwilling to do this, and this has been an ongoing conversation and perhaps that was really the sticking point about why this deal failed. Because the two sides realized we were going to reach an impast less Moonves didn't want to do the deal, and that's why this thing fell apart. You know, can I just say really quickly, it seems like the market is viewing this

as a negative for both companies, is it. Well, it's certainly a negative for Viacom in the short term because I think a lot of people do not investors do not really have a lot of faith in Viacom's go alone plan. Viacom is a mess right now, so it's gonna need to be a complete turnaround story. Now. They do have a new CEO bought back who's replacing right, I mean, he's been there in nineteen years, absolutely, so he's been with the cup, so that may or may

not give you faith exactly. Um, but at least he is aware of the fact that Viacom needs to do some drastic retooling. They have a whole bunch of networks that they own that are very much underperforming. Netflix has really cut into the affiliate fees they get paid from other PATV providers for their crown jewels of MTV, Nickelodeon, Comedy Central, etcetera. UM. So that's why I think Viacom shares are falling. CBS needs scale. So the question now for CBS will be is there someone else that CBS

can potentially merge with? Is Sherry Redstone even willing to consider a merger with another company, because again, she's gonna want control theoretically of CBS. So that's why CBS is falling. Alex, I wonder if you could explain that if Sherry Redstone, through National Amusements, has a controlling stake in both Viacom and CBS, can't she just say to the board of CBS, this is what we're gonna do, this is what I want to do, and if you don't like it, we'll

get someone else who will. She can, but I think she risks losing less moon Vez. If she does, he's that key to the whole program. And I think less Moon Vez is seen in the broader media industry as the gold standard of CEOs. He has when Viacom and CBS split back in two thousand six, because they were

the same company. When they split, Viacom was seen as the crown jewel and CBS was seen as sort of the dregs because CBS had this underperforming broadcast network which didn't collect any of these affiliate fees at the time in two thousand six, uh, and they also had showtime. CBS has upended this whole uh the way the whole economic model works by basically saying, and by the way, all the broadcast channels did this, ABC, NBC, Fox, CBS. They said, we should be paid like the cable channels are.

We're part of your cable bundle, and we have NFL football and all these hit primetime shows. Unless Movements has done a great job of keeping CBS number one season after season after season in entertainment. So the combination of sports getting these affiliate fees starting to get paid like a high priced cable channel two or three dollars per month pay TV distributor, which is right up there with some of the best cable channels. He has turned around CBS.

At the same time, Viacom has really suffered under Felipe Almonds. So the whole thing got tilted in ten years. Yeah, I gotta say, I'm kind of confused because Time Warner and Disney shares are down, and I would think that they would be up real quick. Does this make you know what else is down? Which is really on my attention?

Twenty one century Fox. They made this deal last year to buy this last week, I should say, exactly, the bios shares of the UK has satellite programmer Sky that they didn't already own, and Foxes down five and a percent today in the wake of that agreement. So go figure.

Dave Wilson, Alex Sherman, Bloomberg News. I want to imagine a world in which President elected Donald Trump does not adhere to the One China UH provision that has really guided relations between the US and China and frankly China and the rest of the world for the past few decades. I want to bring in Patrick Chauvinik, chief strategist at Silver Crest Asset Management, to sort of break down what the significance of this is. So Patrick, thank you so

much for joining us. Uh. First, let's start with what's at stake with respect to honoring this One China policy. So, the One China Policy was established between Mao and Nixon when he went to China in the early nineteen seventies, and it really laid the foundation for the opening between China and the United States and it's been the foundation

for the relationship ever since. And it basically says that he and i It States throughout the Cold War backed the Republic of China on Taiwan, which had fled to Taiwan after the Communist takeover, and UH, the US wanted to continue to do that, but China didn't want the US to recognize. UH basically recognized that as the government of China. So so they kind of agreed to disagree, and they said, uh, there's one China. The United States

won't recognize an independent Taiwan. But but the differences between Taiwan and China had to be resolved peacefully. Now, the deal between China and the United States doesn't take into account a trade war between the two nations, and that is also something that the President elect Donald Trump has at least sparked debate about, wonder if you could bring that into there, is it going to be a quid

pro quo on Taiwan and trade. Well, that is exactly what the President elect raised explicitly in his interview over the week end. He said, we won't necessarily adhere to the One China policy unless China makes a deal with US. Uh and UH. That raises all kinds of questions because for the past week after the Taiwan call um, all of his cirrocuits, including the Vice president elect, have been saying that the call did not change the US commitment

to the One China policy. And now Trump has raised the prospect that it does and and and it really is kind of a at least China will see it as a dagger to the heart because because this is something that even just in the past twenty four hours, the Chinese state media has come out and said this is absolutely non negotiable, and it's the foundation and relationship and we have nothing to talk about with the United States.

UH if they're going to go down this path. So how can China potentially retaliate for the US rejecting the one China pass. Oh, it's you know, it's it's so u disheartening to start thinking about the deterioration and relationship that could take play. Um. If you know, if if this intensifies, Um, there's any number of ways that the

relationship could break down. And and you know, maybe Trump's defenders will say, well, this is this is hardball, this is brinksmanship, but it's it's certainly, um, the most intense

kind of brinksmanship that you can imagine with China. Can you speculate perhaps or give us some thoughts on Terry Brandt's that he is the governor of Iowa and he has been nominated to be the ambassador to China, and he's got a relationship with the president Chi jing Ping, right, he has a relationship going back to when Chi Japing actually studied in Iowa and also visited Iowa subsequently. Um, you know, the Chinese talk about friends of China, and

it's good that there's a relationship there. I don't think it will change the substance of any of the issues between the United States and China. And ultimately, there's there's one president and he's going to set the tone for what that relationship there is going to be uh and it looks like it's gonna be a rocky one. So Patrick, as an investor, how do you trade on this? It's Uh.

I think the market recently has been sort of blithely ignoring the prospect of trade disruptions, so that they've been looking at the upside of, you know, fiscal stimulus from a Trump administration. Uh. And I think they've been sort of rushing aside and saying Trump can't possibly mean what he says when it comes to trade, because that would be too disruptive. And I have all along taken him

very seriously when he talks about trade. Uh And and because ever since the nineteen eighties, Trump has had a very consistent line and saying the trade is not good for the United States, that the US loses from trade, and so I wouldn't I'm not at all surprised that he's taking a very hard line on it. What's interesting about this, though, is that it has this added component of geopolitical risk that's being added on top of it

in an attempt the game leverage on China. So, Patrick, if you're right, or let's say somebody wants to execute a trade based on the view uh that that President Electrump is very serious and there could be some sort of escalating trade scuffle between the US and China. How could somebody play that, Well, I think you've got to look at countries companies that are exposed to China UM, which have a lot of their uh, a lot of the revenues or a lot of their profits from China.

Major US exporters because this like this trade policy. Well, you know, he already tweeted about Boeing. Uh, There's Caterpillar, There's a whole host of other company companies in the United States that that have UH. China is a major part of their market, and so any kind of breakdown in relationship or tension over that relationship is going to

cast a shadow over over their outlook. The Boston Consulting Group predicts that China is that the consumer market in China is going to reach at least six and a half trillion dollars by any that's got to be at least potentially positive for American companies, right like retailers, Macy's, Costco Target, don't they want to bet on that Chinese middle class. It's potentially huge UM, but a couple of things need to happen. The Chinese need to UH dis safe.

They need to encourage the Chinese consumer, and I would argue by keeping the reman be strong UH is one thing that they can do to to accomplish that. The second thing is that they need to open their markets. They need to be persuaded that opening the markets is not bad for them, it's actually good for them. UH. So some rebalancing needs to take place in the relationship

between China and the United States. The question is what are the tools that the US can use to constructively bring China to the table on that Patrick, What are you looking for specifically that could be uh the one straw too far that means that the relations cannot be repaired between US and China. I think the danger here is conflicting or mixed signals. You know, it's one thing

to change policy. It's another thing, which is what's happened over the past week, to say we're not Asian policy, then say we are changing the policy, especially on something that's very crucial to China. So you don't want to get into such situation where other countries China, lots of other kinds of Japan Taiwan are questioning what the U, what the real US policy is, and where the real red lines are, because that could lead to a serious miscalculation.

Thank you very much for spending time with us. Patrick Chavanicki is a managing director chief strategist Silver Crest Asset Management. Oil prices on a tear up, uh more than double where they were in February. Can of this last? I want to bring in John Killeduff, founding partner of Again Capital, who has gotten oil right time and time again. John, thank you so much for being with us. Thank you. Good morning, good morning, so almost good afternoon, not quite yet.

We're getting there, John. What's your take on this latest leg up in oil prices in Saudi Arabia's planned to cut more than they originally agreed to. Do you think that this is actually going to happen and this will last? Yeah? That m that bit of a throwdown over the weekend after the aftermath of the meeting by the Stati oil minister I think punctuated uh, the sort of change in viewpoint and actions by the kingdom. Um, they have really uh you know, buckled down here and and and given

up quite a bit to make this deal. Happen. I'm basically nothing was required of Iran, for example, to come along here, and even Russian production was fully accommodated in the hopes of getting some kind of stabilization that the Staddi's desperately want and needs. So um, and I think the market has reacted appropriately to this sea change. The question is there's a lot of moving parts in this

market now more than ever before. That's gonna you know, make the upcoming months here, I think quite bolical, Well, give us, give us a little window onto this if you can sch on. I mean, I think from oil independence in the United States, a potential tweet from the President elect and fifty three dollars for a barrel of oil. Yeah. And and while it's a terrific you know, rally off the recent lows we've got as low as forty two

twenty back in November. Um, you know, ten bucks is ten bucks for sure, but you know it's it's not it's not really all that terrific in a reward if you if you think about it from a longer term perspective, when we were you know, at a hundred a couple of years ago. Um. But the problem, the Saudis are going to have now is that we're already seeing it as the resurgence in US shell production which kicked off

this whole, uh, this whole things. We've been in a low oil prices when the Saudis oversupplied the market in order to break the back, or or they thought they could be able to break the back of the shell producers, but they ended up the piers breaking their back as much as anybody else's, So that's gonna be a problem for them. And also to compliance is a problem. And even just last month's Daddy output rose to another new record.

The levels that all these guys are producing, that all these countries are producing at is extraordinary, and there's going to be a lot of cutting that has to occur for the production goals to be reached. And to me, it's it's almost seems unattainable, and certainly given their history of trying to do this, it doesn't work out. So right now oil is about fifty three barrel. In February

it was about twenty six dollars a barrel. Where will we be in six months, Well, there's there's likely to be some more upside here, but I think that as the details come out, and if what the market is going to punish come January and February is the lack

of production cuts if they don't materialize. So I think that at the very least or um in the short term it's some cold weather, we could probably push upwards at fifty five, but I don't think we get much more than that, and I think the downside risk remains the greater risks to this market because of things beyond oil supplies. You know, we come into a demand season that lessons come the spring, and we also have a strong dollar that's going to be contended with here and

has to be still priced into this market. There's been a breakdown in that correlation, and I expect that to come back into the market. So let's say the dollar does strengthen and production cuts aren't as significant as people are expecting, how low could the price go. It's pretty easy to see it get back down towards the recent lows near forty dollars a barrel. I think at this point that that's the easy shot. The question then becomes, you know, will the production cuts take hold at all

or does the deal completely fall apart? And then the market goes into another deep dive price wise. Um, that's a bit of an Allier view, and but it's one I think you have to consider John Keystone XCEL. If the President elect were to indicate his support for Keystone XL and also have Rex Childisen as Secretary of State, and I believe the State Department has to sign off on the deal. Uh what would that do to oil prices?

It should help bring them down as well, a little one little unleash um more supplies out of Canada where the cost of production is relatively low. And but more importantly, it will get that oil really to the Gulf Coast and then out for export. That was one of the criticism of the pipeline. It wouldn't necessarily serve US interests per se, it would really serve the interests of Canadian producers who are trying to outlet their crew to the

global market. And we're seeing more and more of our own u s crewed repwards of around thousand plus barrels per day that are now being exported. Our shale guys are competing for market share in Asia and this this Canadian crewed. If we're able to get down here via a new pipeline, would only would only add to that.

And so this is what I mean about this is being we're in a totally new year in terms of the multiple players and facets to this market, with more supply, more flexible supplies, and even Saudi Raving now selling spot what's called spot or or or sort of cash deals rather than their strict contractual terms that they historically dealt with. We've gotta we gotta leave it there. Thank you very much, John Kildoff. He is the founding partner of Again Capital.

Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at Pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always at catch us worldwide on Bloomberg Radio