Russian Oil, Markets, And The US Economy (Podcast)

these markets, especially in the commodities markets. Um, you are see natural gas features certainly higher, especially here in the United States natural gas up four point eight percent. That is significant because we've seen all this volatility in the European side, the US side not as developed of a market.

Nevertheless up just shy. Yeah, there's certainly been a lot of volatility in energy markets, and I think the question here also is what is going to be in the next leg, not like the stock market lower, but the next leg higher for a lot of these oil and other energy market Yeah, we're looking at oil at one oh four. When you look at Brent, there is no better expert to talk to about this within Bloomberg Intelligence. Fernando Valley, thank you as always for joining us. We

got to talk about these Russia issues. Bulgaria, Poland. But before we do that, I have a very important question to ask you. Have you seen Mamma Mia. I have not. I mean I saw the movie back in the day with Pierce Proston, but not the show noted. All right, well, Fernando, we appreciate that. Don't worry. It'll all make sense in about eight minutes when I asked that question. But Fernando, let's talk about these headlines coming out of Russia. Essentially

natural gas flows halted to Poland and Bulgaria. Germany very vocal about perhaps supporting a oil ban if it's gradual. Why are oil prices not jumping on those headlines? I think the biggest concern is what's happening with China and the lockdown step we're seeing throughout um throughout the eastern part of the country. How that will reap your cards

in UH, in supply chains and in consumption. The Chinese consumption of oil has already decreased, but if we see more inflation because of supply chain disruptions and the rest of the world, that really puts puts a hammer blow to to consumption of oil and gas globally, speaking of global oil and gas and perhaps you can give us a way to frame the thinking here as a world so much of Europe tries to turn away from Russian energy,

what progress, what might we see in in the nearer term. Well, it's very challenging in the short term to turn completely off Russian gas, uh, specifically because it's so difficult to move gas across oceans. You have to liquefy it. It's very costly and it takes time to build out more capacity. UM. Oil is a little bit easier. But as as vladimire Putting is already showing you, he's not gonna let you cut oil without cutting gas. So you're you're going to be in a tough spot, UH if you if you

give up natural gas in the short term. Today European inventories are only around of capacity. Uh. Brussels wants to fill it up. To how your blast had a nice piece on it today, UM about it? And the only way to get and be prepared in case of a very cold winter in Europe or a winter without a lot of wind power, would be to fill out those inventories up. And you need Russian gas to do that.

There's only so much that us. LOOKI fied natural gas can do in the short term, or even Qatari uh in Australian we just don't have the the spot cargoes to to to reach that level of capacity for Europe without relying at least in part on Russian gas. Fernando, let's put the oil piece of the equation on ice for a second, just given we're looking at one O four on brand literally a down one tenth of one percent. That is not the kind of oil vultility we've seen.

I'm very focused on the natural ass pace because, like I said at the top of the segment, Russia and halting those gas flows to polland Bulgaria claiming that it's because they're not paying in rubles. You do, of course have other European buyers also agreeing to pay in rubles. Just given the dependence and for our US audience, the significance of natural gas in Europe is so important to underscore because this is how they heat their homes. If anyone's ever been to London in the winter, you will

understand why this is such a big deal. If you don't have natural gas to heat your homes, that's going to be a problem going into the end of this year. Now we know a lot of these European authorities have said they're trying to reduce Russian dependence by the end of the year. Dan Jurgen Uh, an oil historian and natural gas story and I should say, has said that plan by the end of the year seems intangible. He's

looking at a five year um kind of time frame. Fernando, my question to you is where the United States natural gas exports fits into this. You mentioned the infrastructure is hard. You have to essentially take natural gas lit will find it, ship it on this tanker across the Atlantic Ocean, but we don't really have this market for it in the US. How long does it take to build out that market so that the US can come and provide those exports

that Russia can no longer provide. Well, I think you framed it beautifully and I think you know you will take at least five years to see a significant increase in capacity. We have some capacity as being built um. Unfortunately, the way that we had trended with the energy transition, we've made it more difficult to build natural gas pipelines. Today.

A lot of our capacity sits in Louisiana, for example, that doesn't have a significant natural gas production anymore, and you'd have to bring that from Oklahoma or from Texas, UM and other regions. So we need to develop the inside infrastructure as well, and that will mean a reversal of some of the recent push to make pipelines more

difficult to be built UM. It will also likely mean that we need to expedite the regulatory process for some of these l en G plants so we can build them more quickly UH and get them to the market. The beauty is that we have a significant resources of natural gas throughout the US. We have the Marcellus in Ohio, Western Pennsylvania and so forth. We have the Permian in West Texas, and we have several other plays that can

give us significant supply, and so does Canada. So we could be long term providers not just to Europe but to other parts of the world. And in fact, natural gas has been the biggest reason why we've decreased UH we decreased emissions globally the switch from coal to natural gas. So it's really an important part of the energy transition, and I think in three to five years we could

make it also a significant part of energy security. Fascinating stuff Fernando Valley, and for those of you who are listing, I did promise a mom a Mia reference. I threw Fernando off at the beginning and said, uh, did you listen to it? Fernando is one of my favorite films. But I think how you framed this oil and gas kind of conflict is so significant. Fernando Valley of Bloomberg Intelligence. We thank you, as always Channelli. This is all gonna

make sense in thirty seconds. Our radio listeners are being like, I don't know, I know, but I have a surprise and I want you guys to stick with me for thirty seconds. But I think what's so significant about the other stuff that Fernando was really talking about is that we're caught. It's a catch twenty two in terms of ramping up these exports when Europe is kind of running

down the clock. You know, I think the Bloomberg headline on this makes everything wrapped up in just one sentence, making energy a weapon, and it truly in this war, energy has become one. And it really comes down to the currency picture, as while we know the ruble weakening, a lot of the funds in these payments are supposed to be happening in rubles according to those Russian authorities. The dollar still stronger, folks, We're looking at x y

one oh three handle. These technical levels are something to watch. E're a weakness, Japanese week end weakness. I told you the Aba reference would make sense. Thanks for sticking with me. For those of you who did, like, we're dancing to Fernando by Aba, a prominent song in Mamma Mia. We of course appreciate Fernando Valley's intelligence and grateful that he was named Fernando. M Tech earnings dominating the conversation when

it comes to the stock market. We had Microsoft, we had Alphabet, we get Meta after the bell, Amazon and Apple as well. Coming in tomorrow on RUG rona senior software analyst with Bloomberg Intelligence joins us right here from the Interactive Broker Studio. On RUG you had some brilliant comments about the liquidity picture of some of these big tech names that used to be such a positive for for for a lot of these companies, especially in this idea of kind of weather ring. A lot of these

inflation pressures, supply chain pressures. Well, don't worry about it. Apple has so much money on their bouncies to cushion that blow now kind of a negative perhaps in this inflationary environment. So I mean, if you think about it, a lot of these tech companies have massive powers in terms of to counter inflation for their products. So from that point, I'm not concerned. I think the concern comes in when investor expectations are not met in some of

these areas. Now, one of the things I've said is, I think it is ludicrous to think about that big tech is not immune to any global slowdown. I really never understand why people think that. However, they still fear better than an average SMP company because the products that they sell I would say majority of these large companies is critical to the client base. So from that point,

like you know, look at Microsoft's results yesterday. Now, if they would have slowed down by just two or three percent, the stock would have been off quite a bit. And that's the part I don't understand, because eventually it will slow down, right well, speaking of the slowdown, and you definitely are not seeing that in Microsoft stock today, right, So what does this mean in terms of what can be expected from a firm like Microsoft where cloud is

king In the next couple of quarters. So from that point, I still think the top line is going to slow down. The third comparisons these businesses as they become big, the law of large number kicks in. You cannot grow these businesses. I mean the cloud business, for example, of Microsoft, at the rate of forty five forever. It's just not, you know, possible from this simple maths point of view. But other

other areas are a little bit more resistant. Now, if office grew twelve percent, let's say it's gonna grow eight percent, So what it's still growing? I mean, that's the part I don't get you me and I think a lot of Bolish tech investors at the moment, I'm curious about the m and A of it all. Because Microsoft has also very notably created this activision deal. I think, I want to say, over seventy billion dollars off the top of my head, is it going to do more? Right?

You have this incentive to spend the money. A five year old could tell you that if your dollar is worth less tomorrow, you buy that lollipop today. What is the Microsoft equivalent of that lollipop. It's it's a very very good question. And I always wonder that when the regulators are going to get to Microsoft also because sooner or later they will. Um. They are the one company that have been able to acquire UM companies while the

others are a little bit more cautious. So then begs the question, well, what do you do with the sixties sixty five billion pre cash flow that you're generating? I do you pay used dividend? Which is it still happened a little bit, but the bulk of that, in my view, is going to go to buy backs. Grana senior software analyst with Bloomberg Intelligence. We keep throwing curveballs at him and he keeps knocking it out of the park. As Tom Keane would say, that's as close to baseball as

I get. I don't watch baseball, but I do love watching Microsoft today. It is a fascinating story, and we thank Rod for me here. Yeah, And you know, I think it's also a huge deal to just talk about can you actually compose or is just transpose what you're seeing in Microsoft and Alphabet to these other tech companies. At the end of the day, UM, they're so different when it comes to their business up models, when it comes to their supply chains, when it comes to their

cash picture. There is simply just a lot going on. We're, of course, I'm gonna keep you updated on all of that, all the stock moves these markets, folks. Is I mean, there's just really something to witness your volatility here the vix handle at a thirty two. The story isn't about do you play tech? Do you not play tech? Our evaluations too high? Not too high. A lot of the conversation is what do you do if you have recession?

The word recession in your vocabulary, whether you're in Europe, whether you're in China, or whether you're right here in the United States, cushioned by some of that stimulus that's really been perhaps keeping the economy float for a while. We're gonna ask all these questions to our very own guests here. Um, if you give me a second, Alex shall Off, co head of Investment Strategies, coming from burnst in Private Wealth Management, Alex, I'm confused, why are stocks dropping?

Why is tech dropping? If they're the haven in this storm of inflation and growth? Critty, It's all about what's going on in the interest rate market. Clearly, the Fed has a monumental task ahead of them. They've got too slow inflation by raising rates, but they can't go enough that they put the US into recession. And that's what investors are most concerned about. It's that balance. Can they get it right? Why don't you tell me? Can they get it right? It's hard. I don't want to say

that there's a high degree of confidence. That's clearly what the markets pricing in is that there's a lot of doubt skepticism about, Uh, can they nail it? The real question, frankly, is what happens if they if they get it wrong, do they Are they able to pull it back fast enough um to correct themselves? Uh? Is frankly a very short recession? Could that be the answer to solve the

inflation problem? A lot of question marks. That's part of the reason why you're seeing the markets behave the way that they are, Not just the equity markets, by the way, there's been a lot of stress and turmoil and the fixed income markets as well. So I think that the answer is remains to be seen. But clearly the market is saying no, but okay, So walk us through that.

For folks who perhaps don't watch the minute mint to minute ticks of the bond market, what does getting it wrong look like in a market that perhaps is getting more and more hawkish, and the actual Federal Reserve is itself. There's so much conversation about markets investors getting ahead of what Chairman Powell was even thinking. If you're pricing in these moves and then the Fed executes, what's the problem here?

Where could this go wrong? That you are? You nail that in the idea that the market is is hyper sensitive to every single word that Chair Powell says, and on multiple occasions, if you really read between the lines, he's telling us relax, everybody, just relax. Um. He he understands the stress of the moment and how each one of these signals that he provides to the market is stressed a hundred and fifty different ways. Um, what could

it look like if he gets it wrong? If if the Fed moves too much on the overnight rate, I think you'll see continued stress in the fixed income markets. You know, a ten year today at two seventy five neighborhood there there's a school of thought that says we end the year with a ten year at to seventy five, and while we continue to push short rates up, that's a much flatter yield curve. So there's a lot of

investment opportunity that's created with a flat yield curve. When you're when you're going to a flattener, there's things called you know, you talk about people not paying attention minute by minute. So maybe this is two inside baseball, but you've got a bear flattener that that could be um uh caused damage in the bond marketing at a bull flatty,

you have all kinds of different approaches. The point is, though interest rates are going up, the market is probably priced well in advanced We've priced in six twelve months from now, and and that's why the bond market actually provides an interesting investment opportunity on a go forward basis because you've already taken the hit, you've already paid the price of admission, if you will, and now as you sit back and clip yields that are much higher than

they were six months ago, it's actually an interesting place to put capital. So to seventy five by the end of the year, which is actually exactly where we are right now on the tenure, we're exactly at two. I'm curious though, what the catalyst is to turn around some

of this selling. Remember We're coming off of a pretty I think a historically bad quarter for bonds in terms of selloffs, and you just made the call the I guess, I guess the bull case for bonds, but once the catalysts were waiting for when it comes to equities in an environment, I might add where we're seeing a much much stronger dollar, there's a number of catalysts uh for the equity market. And maybe this is a little bit of a gentrarian call, but I think there's likes Okay,

here we go. Um. I would say jobs, watch the job's number. That job openings is a huge uh piece of information that we don't think it's getting a lot of attention, and it should. There are some eleven million open positions, there's some six and a half million people looking for that that spread that differential between open positions and people looking for positions, if you would go back over history and adjusted for for population inflation, it's never

been higher. So that's a big number. You can't have a recession when you have this many open jobs to supply chain disruption. What if we are closer than many people suspect to aolving the supply chain disruption. If you look at congestion imports is interesting. I'm on the West Coast, so I look at l A and Long Beach. We're down from the peak from the number of container ships at UH Long Beach in l A. But what's interesting

is there's a new category called slow speed steaming. This came from our Global Logistics Research Group, and this is we've never seen more ships hanging around under slow power. If if you think about the slowdown that's happening in China,

shouldn't say slow down the shutdown, zero COVID shutdown. What if they're going to stop production and stop sending US cargo ships that we can't even unload anyways, and we're able to work through this excess inventory and then have them rebuild it so we could be on the other side of the supply chain disruption as well. Alex shell off with the contrarian call. We thank him as always, first time. We're gonna have you back soon. Let's bring

an Anna Wong, chief US economists for Bloomber Economics. Anna, thank you so much for joining us. Where do we go from here in terms of the strength of the American consumer? I felt like the narrative really the summer of one. So about maybe six nine months ago was this is when the effects of fiscal stimulus is going to wear off. This is when you're going to see that deceleration in consumer spending. Are we there yet? I don't think we're there yet. So American household balance sheet

is at a forty year low. And even though it's true that some of those savings are being run down and the impact of those fiscal stimulus checks would be wearing out, it's still still American household half the runway on the balance sheet to either continue to or expand credit because the real interest rate, in fact is still negative because interest rate is still below inflation. And also that for the UM top forties sixty percentile in terms of income. Uh, those households still have a lot of

excess savings. And those are the ones who are pivoting towards more vacations, consumer and restaurants, going out to movie theaters. Um so, so there's still a lot of consumption. Um yeah, if you will in the US economy. You know, I'm gonna steal a line from Pretty because she said it a few times and it makes me laugh. The china of it all. What about the lockdowns? That are happening that you see in China, and then also kind of these renewed fears about COVID, how might FATS start to

throw things here in the US off the track it's on. Yeah, So you know, the biggest risk to the US economy, indeed, is coming from abroad, from both China and Europe. China's lockdown has to effects on inflation. On one hand, it's very inflationary because of remuge supply chain bottlenecks. But on the other hand, China is a huge commodity demand UH nation. In in in the whole world, it accounts for over

fifty of demand for a lot of commodities categories. So for Chinese GDP growth to plunge like what what we are seeing right now, means that commodity prices ahead would be falling, or at least there would be inflationary force on commodities to fall, whereas um on the other side, you know, the lockdown, would it be inflationary. So on net, what is the impact on US especially It depends on whether US demand for good especially good produced by China,

is softening. And we have been seeing signed since the end of February that US helpful demand of cars or and UH furnishing, household furnishing perils. You know, electronics, stuff that China produce is being softening, and part of that is related to the fact that demand is rotating from goods UH two services and we have we have bought too much electronics over the last few years. Working from home and now we're going back to office, we have

left need for that. So that means that whatever inflationary shock coming from China's lockdown would produce a smaller pass through than the same degree of um you know, lockdown that we have seen last year. So there's there's there's there's reasons to be optimistic, slightly more optimistic about this round of supply chain shocks from China. Well, let's bring in the other major risk, right the war in Ukraine. Here. I believe we have some headlines come out this morning.

Germany ready to support the EU ban on Russian oil if it's gradually will there's something that you heard the French finance Mr Bruno LAMAI are very vocal about a couple of weeks ago. You also heard on the back of that JP Morgan calling for a hundred eighty five dollars on oil. And I was at Sarah Week a month about about a month ago, essentially one of the

largest energy conferences in the world. We were talking about some of these oil ministers from around the world, and they were looking at two hundred dollar oil, three hundred dollar oil potentially on the table, not their base case, but potentially on the table. What does that do to American GDP. Yeah, So, so if oil indeed searched to one A two hundred, then we'll be seeing CPI inflation headline of nine and that will make the said much

more hawkish. That had been talked last week about by one of the f OMC participants, UM flirting with the talks of bits grate hike. So if it's that Tennisinara comes to pas Us with loyal at two hundred dollars preparel seventies five, bits become a distinct possibility later this year, and of course that would squeeze see US economy much more.

But still um Bloomberg Economics sees the chance of the session in the next twelve month as being very very low because of the for the reasons that I have said earlier that the household balant sheets are still very solid. You know, I'm wondering also, we're talking about the risk over session and even if it's further off than it was you know to some before, what about stagflation and how much is that a worry and how much does that start to impact both economic conditions and market conditions,

you know, stagflation. Um. You know, if we're thinking about a stagflation, that's where where growth is stup one percent, between zero to one percent, and inflation at current rate, I still think that I still think that it wouldn't be um ah, it still has a lower probibility than growth being at one or two percent. That The main reason is because the US labor market is really strong. We're expecting to see on employment rate fall below three

points five percent in the next couple of months. And you know, there's one point eight jobs open, jobs opening for every unemployed person, so those openings are not going to evaporate. And but then you know, in twelve months like that quickly. Uh So on the other hand, if we look um into deep into three, yeah, I can see groups flowing too, you know, one percent or below one percent. Um. So yeah, But at the same time I do see that inflation would be down from today's

a point. I don't. I think it's um very likely that in flights it would be sticking around four percent next year, UM. And I don't think in flating of four percent and growth around like one percent would be a major staxation UM scenario. So yeah, below one percent growth potentially on the table. I mean, that's fascinating. Anna. Let me give you one last question here. Historically, if you go back, say fifty years, recessions have come about every three to five years. In the last two decades

we've seen these eight, nine, ten year long expansions. Do you think we're going to go back to the historical norm of a recession every three or five years in terms of the size of the economic cycle. That's a great question. UM. I think that the answer to this is the Power himself has answered this, which is that price stability and maximum employment go hand in hand together. And the reason why in the last twenty five years we have seen long expansion year cycles is because of

priced ability. So oh, currently inflation is so high that it's very hard to have a long expansion cycle because the FAID itself becomes a risk with the you know, deep but great Hicks. So to your question, I think, um, it's more more challenging than ever. But now Annah Long, chief US economists over here at Bloomberg Economics. Always a pleasure. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever

podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. Put on false Sweeney I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio