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Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast ups United Parcel Service. This stock is up, but it's off two hundred quarter percent today. It's only up about three percent year to date, one hundred and fifty five billion dollar market cap. But we got some problems there potentially later this month with the labor contract there.
Kritty Gupda Markets editor and host of Bloomberg Surveillance Early Edition ge joins us here in our Bloomberg Interactive Broker studio Krity. What are you looking at UPS? Talk to us about the labor situation there.
Oh, there's so much going on. Look, remember when last fall we had those massive rail strikes where the essentially the government had to get involved and say, look, we're shutting down these negotiations because you clearly can't seem to come to some sort of reasonable conclusion. It looks like we're on the cusp of that happening again, except this time with ups. The shares are down about two point
two percent in the pre market over the weekend. They were supposed to have some pretty good negotiations and they were going well until now it looks like they've collapsed. And what's important to keep in mind here is that the contract is coming up pretty quickly to end, So July thirty four first is when it ends. And this is why we care. Three hundred and thirty thousand workers in this country. This is the largest private sector union agreement.
That's the reporting that got my attention. I didn't think about that, but it's massive, yes it is.
It's even bigger than the rail strikes. And this has even as a bigger implication for supply chains, the match of the folks who who can't get their packages. So that's kind of what we're dealing with here. They're going through the nitty gritty. It looks like the union itself has walked away from talks this time around, but some pretty huge implications that this market is really reacting to.
Ye I wanted to ask you more about the supply chain, their creedy, So of course, like no, one wants to get their packages late. That's frustrating. We all experience that during COVID. But what is there like a bigger takeaway here, bigger problem besides delace.
There is a bigger problem.
Look.
So, so the way to think about the shipping industry right now is everyone's kind of tackling a little bit differently. There's three different players here. There's UPS, FedEx, DHL, and they all kind of do a little bit of everything. So they will take your package or a business's package or a freight package via plane, train, automobile, thrown a
ship in there. And what's important to keep in mind is that FedEx and DHL have taken a very different approach than UPS has post pandemic, when everyone was kind of paying top dollar to get their shipments, FedEx and DHL really invested in their labor and that's something that FedEx is now paying for. They're saying, we over hired. Now we're pulling back. So we've see all these layoffs.
DHL they're not doing layoffs, but they are kind of dealing with that crunch now that packages are declining through kind of attrition, and they're saying, we're just not going to replace roles. UPS is a completely different ballgame because they never invested in labor in the first place, and that's a big problem. And a big part of that was because they're unionized, whereas FedEx has more kind of an independent contractor network, which they are kind of now
dealing with as well. UPS said, we're going to focus on margins. We're going to increase prices, They're going to focus on the smaller consumer and make up our margins from there. And you really saw that strategy work because if you look at the stock of the three companies, UPS has won out. They've outperformed over and over and
over again. Except now because of those margins. They're saying, look, we can't pay up, whereas the union is saying, well, our wages aren't rising in line with profits, so why should we work if we're not getting that. So they are making some concessions UPS to these drivers of things like part time drivers changing a little bit of a shift. They're now getting MLKDA as a paid holiday, no more
mandatory over time. There's no two tier system anymore. Basically, part time workers, we're making about five dollars less an hour than full time workers. So there are pieces of the equation, but it's still not at the salary level that a lot of these workers want.
Well, I mean the old contract full time, they can make up the thirty nine dollars per hour. That seems like a good number. But are they saying, yeah, but you guys, being the company made so much money during the pandemic, we want some of that pretty much.
And look, it's also because of the overtime policy, because a lot of these kind of shipping constraints require some of these workers to go over time. And I think it's better perhaps because from an hourly perspective, thirty nine dollars an hour sounds pretty juicy. Let's talk about it from an annual perspective. Full time delivery drivers making about ninety five thousand a year, even though they're doing it through kind of rain, hail storm, through COVID, through all of these kind of issues.
Did they ever get anything for COVID working through COVID?
They didn't. And this is I think where a lot of the parallels with the rail worker story came because remember, for the rail strikes last fall, they weren't getting paid time off, they weren't getting a sick leave for example, they weren't even getting access to benefits. So it's a lot of these same issues. Essentially, these are industries rail
or shipping that are very intensive. Truck drivers really have to have to kind of sacrifice a lot physically but also in terms of family and how much time they get off as well, so they want to be compensated for it, especially with the overtime. And I think that's where they're struggling here, and they're basically saying, look, we've we've made some concessions, but really you got to meet us on the pay and ups just isn't budget here.
Yeah.
I saw with the West Coast dock workers too, even more recently this spring, and as you've mentioned, you know that the government did have to intervene it that we don't think a lot of us probably remember Joe Biden taking a nice trip out there, yeah, to visit.
And I'll say this isn't really quickly. This is an international story too, because Canada also now dealing with with port strikes as well, so you're seeing this all over.
I want to say the world, what's GPS saying. Are they what's their bargaining position? Are they saying we pay competitively. What are they saying here?
So UPS is saying that, look, we are negotiating, we've already made a lot of concessions, which, to be fair, they have a normal mandatory overtime, they've changed their two tier payment system. But they're saying that the team stars kind of have to give some sort of lead here.
And if you look at this last round of negotiations which collapsed this morning, by the way, they're saying that the teamsters are the ones who walked away from the bargaining table, so you have to They're saying, you have to continue this dialogue. Of course, we're going to keep you updated on because this is not over yet. But but we'll see how this is.
What have we heard from the administration is like, I haven't heard anything like President Biden talking about this. Is this just because we've got, you know, three weeks to go before it really gets pretty much?
Look, I don't I think the Biden administration, and Molly correct me if I'm wrong. You're here on the Economics team, they really want to not intervene until they really have to. When you saw this with the rail strike, I keep bringing this back to the real strikes because we just went through this a couple of months ago. Marty Walsh, the Labor Secretary at the time, got involved at the very last minute, and it ended up being because Congress
had to intervene. It was some sort of very old rail laft nineteen twelve that only applied to rail for some reason, and that's what they ended up instigating. But you kind of want to make this work on its own before the Biden administration gets involved, especially because of the political consequences.
Absolutely, I mean, yeah, that is definitely the eleventh hour, Hail Mary. We need to call in the top guns to make this happen. So, yeah, it doesn't seem like we're quite there yet, but it certainly would be concerning over the next three weeks if it does escalate to that point. Does is there an indication that this could be drawn out? For it could? Yeend, it could.
So I think what was kind of the difference again, I'm gonna bring them back to the real strikes, because it's a little bit of deja vous here, is that the voting periods were longer, So you had kind of, Okay, we're going to go to the eleventh hour and then we're going to have three or six weeks to vote and then come back, So it was kind of a drawn out process, specifically because of that law that dayed back to like nineteen twelve or whatever. This time around,
that's not true. It has been voted ninety seven percent by the union that if this agreement isn't hit by July thirty first, which is when the contract ends August first, they are going on strike. So we're still about two three weeks away, but it's certainly something you want to keep an eye on because there is no long drawn out process here. It's very simple.
And Marty Walsh is not going to come in and save the day because he is no longer the Secretary of Labor. I'm just looking at me. He's the director of the National Hockey League Players Association.
Oh yeah, he traded up.
Okay, interesting, all right, So UPS will keep on the lookout for that, because who doesn't receive a package every day at home? I mean every day.
So, and I'll give you an added piece of kind of trivia here. One of UPS's biggest customers is Amazon. So Amazon has their own logistics company, but they're kind of leftover. Goes through UPS.
Really because again I see the Amazon trucks everywhere. Yeah, I mean they've got to have to ask Lee Klascal. This's a Bloomberg Intelligence. They got to be one of the biggest trucking companies in the country. Amazon. Yeah, I think they're headed that way. Yeah, that it's extorting. All right, pretty Goop that thanks so much for joining us. Pretty good to markets report. It does all that Bloomberg TV stuff. We appreciate getting some reporting there on UPS. Again, huge company.
I didn't know. This is the largest private sector union agreement there is. The team starts with the UPS, so we'll keep an eye on that. This is Bloomberg.
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All right, let's get right down to it here. Lots of economic data coming out this week. We got to fed you gonna be making some decision later on here in the month, So that means we need to check in with Ira Jersey does all of that interest rate stuff for Bloomberg Intelligence, Chief US interest rate Strategist Ira, Thanks so much for joining us here via zoom here give us a sense of I don't know where the
FED is leaning. Let let's start this way. Here's my question about the FED, and I just I've been asking it from for some smart people, and this is not a smart question. The optics of it. It just doesn't look good when my FED is raising interest rates every single quarter over five hundred basis points. Then it pauses because maybe that's what you do after you've raised rates so much. Are they really going to get back on and start raising rates again?
Yeah, seems good. It seems like they really want to, Paul, and and you know, they they made it pretty clear at the last meeting that that that you still want to be hawkish. They wanted to make sure that the market knew that if nothing else, they weren't cutting interest rates too early. So I think the bar at this point is actually reasonably Uh, the bar for them to
to hike is actually very low. So you really, as long as you don't have like an absolutely crazy low employment number, if you don't have wages that you know, fall significantly more than than the market expects, and and and if we if we get anywhere near Consensus CPI report. Then I think the Fed's gonna hike. I think it's that second Fed hike that the dots suggested might occur.
That's much more in doubt at this point because you you are seeing a moderation of inflation, just not as quickly as they want so so I think that was a signal that that was signaling a little bit more that the FED wants to be hawkish if they need to be so. So so yeah, so this I think that they'll hike. You know, the market, the market is now almost fully priced for that and also priced for some chance of a of a second hike as well.
So so the market's already there regardless, So you won't see any more, you know, major moves unless the data really shocks one way or the other.
Yeah. So, Ira, We've heard from Powell as well as a few other FED speakers, uh since that June meeting, and I think the market is still fairly confused as to what's going on here. Do we really think the minutes are going to give the answer that everyone's been looking for.
I think that the minutes are going to be probably pretty mixed, you know. Interestingly, even though the dot plot and some of the rhetoric out of j Powell at the last press conference. Overall, our our natural language processing model suggested that actually.
Let's let's take a step back. I know you're a model geek. You have a natural what is it again, a language.
Model, natural language processing. So so we take every cents within the opening remarks of the of Chair Powell's opening statement at the press conference, and then try to determine whether or not that statement is is hawkish or duvish, modestly hawkish or modestly dubvish, and then we combine that
into into an index. And what we actually found was that he was still pretty neutral overall, So he was pretty balanced in talking both hawkish and duvish, even though the dots and some of his rhetoric suggested that the FED is going to hike again. Now, the fact that they're going to hike again doesn't mean that they're going to hike another one hundred and fifty or two hundred basis points. So it kind of makes sense that, yes,
they're getting to the top of the cycle. The question is that they're trying to calibrate exactly where they think the FED funds rate should be in order for inflation to continue to come down and maybe come down a little bit faster than it has in the recent past.
Yeah, so you're so it sounds like, like you said, July seems almost like a given at this point. And Powell even said, you know, he would not rule out consecutive hikes at you know, concurrent meetings. So do we are we already maybe even thinking what's the bar for September?
Yeah?
I think we do have to think about what the bar for September would be, and I think that bar is higher than the bar for July. And it's also one of the reasons why so a very smart investor actually suggested this, and this is an interesting concept, was that the FED was hiking at seventy fives and they hiking in then they were hiking in fifties, and they
were hiking in twenty fives. Now they might be hiking in twelve and a half's and in order, and the FED doesn't do that, right, They're not the Bank of Japan hiking in decimals, So basically every other meeting they could be hiking in quarter point increments. And again it makes sense in that regard from it because it's because they're in this calibration mode. You know, they don't want to go too fast, and they also want to have the ability to stop hiking at any moment, which was
harder to do when they were hiking at fifties. Right now that they're hiking in twenty five, they've skipped now a meeting. It makes it a little bit easier for them to do that calibration. And nobody knows right. So the problem is is that ex ante, it's difficult to know exactly where the FED funds rate should be. I think that they've probably done enough in order for inflation to come down now they just need to give it time to occur. But they don't see it that way.
And you know, until they they wind up with a with a real funds rate that is, you know, significantly higher than headline inflation, that they're gonna still think about hiking, even if they actually don't do it every meeting.
All right, Lisa Promise says, I have to ask this question. She just emailed in from her vacation. Yield curve still inverted one hundred and three basis points. Do we care? Do you care? What's the market telling you?
Yeah, it's just telling us. It's just telling us that that the market is expecting the interest rates to be lower in the future. I mean, that's the whole reason why you get the inversions in the yield curve, is just the expectation that, yes, we're going to have five percent interest rates now, but we might have three percent interest rates, you know, to or three four years from now, and because of that you get this inversion of the yield curve.
You know.
The fact that it's lasted now for the better part of eighteen months, you know, does suggest that the market thinks that we might be heading into a recession or if not a recession and then at least a very significant reduction and inflation over the over the medium term. And it you know, at some point we're going to start to really uninvert quite aggressively, I think, but the timing of that is probably not until it's very clear
that the federal reserves done hiking. Until then, the two year yield is probably going to keep on hovering, you know, kind of just a little bit below where where the high the highest Fed fundrate might actually be, you know.
And it really took until the last Fed meeting for the market expectations to kind of be more in sync with what Powell and the Fed have been saying. Looking at the world interest rate probability function now on the terminal, you know, it looks like those you know, prop those expectations for rate cuts this here dramatically have come down. So you know, what, does the market have some of that natural language processing model that you do, or what is it that they finally believe the Fed?
Yeah?
Yeah, I think that a lot of people thought that the Fed didn't have the resolve to continue to hike interest rates beyond beyond June. So you had a lot of people thinking, oh, the economy is going to fall apart. They've hiked five hundred basis points. We're going to wind
up seeing a recession later this year. But a lot of the data that's been coming in suggested even if we do have a recession, it'll be very shallow and won't necessarily be enough to pull inflation down significantly more So, therefore, the Fed Reserve is not going to be cutting interest rates later this year. Now, Now keep in mind that
is not that we've priced out cuts. We actually still have a cut price for six months from now, right, So the market keeps pricing for a cut six months after the last hike, a cut six months after last hike.
The problem is is that we've pulled forward now when that last hike is going to be, because now if the last hike is in July, then they're gonna wind up, you know, the first cut is now priced for January, and then if they you know, wind up hiking again in September, like Paul was suggesting, if that happens, then maybe the first cuts not priced then until March. So it's always this kind of rolling six month window for the first Cup.
A Ramali and I, let's be honest, we're focused entirely on Wimbledon for the next two weeks. But if I had a spare moment, is there anything in the world of soccer that we should be paying attention to?
Well, the Gold Cup's going on right now. We're in the semifinals or quarterfinals, excuse me. So the US plays Canada and and you have to Later this month starts the Women's World Cup out in New Zealand and Australia. So the roster drops for that are are pretty interesting. You know, especially in the US, we have a lot of younger, younger women's who are going to be headed down to to down Under to play some football.
All right, good stuff. You ask a question, you'll get an answer from this guy, Ira Jersey. He is our soccer guru, is off O or I think he does interest rates and stuff like that for Bloomberg Intelligence. That's what gets the paycheck, so I'm told. So he's our go to guy on the FED and on global soccer as well. So again we'll keep an eye on that. S and P five hundred basically unchanged on the day, we've got to dow off about four tens a one percent.
That's one hundred and twenty five points. For those of you keeping scored at home.
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Paul Sweeney here in the Bloomberg Interactive Broker Studio. Boy, you think about twenty twenty two, that was just ugly for asset allocators. That sixty to forty portfolio did not work out at all for anybody. See think about it here here to date twenty twenty three. Heck of a first half when you look at particular the equity markets, but also fixed income, so brings into question asset allocation. What do you do here second half of the year
going into twenty twenty four? Fortunate? Our next guest does that stuff for living Nimerick Kang co Cio, Senior portfolio manager at north Star Asset Management. He gets his chemical engineering degree. I mean, who does that at Virginia Tech? Really good tech school. Then he gets an NBA from some trade school up in Boston. Yeah exactly. Hey, Nimrit,
thanks much for joining us here. Asset allocation. Where are you guys these days after what's been I think for a lot of people, surprisingly strong first half of the year.
Yeah, thank you for having me. Yes, Going into twenty twenty three, we were very cautious on the markets, you know, like everyone else. We expected this lag between monetary policy and economic effects, which has which is really still a missing in action. Equity markets have been strong. We had been underweight equities going into twenty twenty three, and we remain underweight equities slightly versus targets. And the reason there is that just history shows there are considerable lags between
monetary policy and economic effects. We have never had this kind of steep rice in interest rates over such a short period. Yes, we've seen some effects of that, from the regional bank crisis to you know, the busting of the crypto acids, but we think these are effects that are going to bear out over a much longer time. And in general, we just feel like we're in this period where, you know, a lot of people are calling
this a poly crisis age. There are a number of things that are coming together, but generally all that means is higher level of uncertainty and volatility in the markets. That to us just says that, you know, we just need to be very risk aware and focused on running very diversified portfolios for our clients.
When I hear acid allocators talk about higher volatility, it sounds like more opportunities. So where are you finding those pockets right now to invest in?
Yeah? Yeah, no, really good question. So when we think about higher volatility, of course, you know, right away we think about just going back to the basics investing in those companies where we have pretty strong conviction on the cash flows going forward. And if we have conviction on the strong cash flows and we don't pay too much for those stocks, we know that over the longer time, those companies are going to hold up both in down markets and up markets. They can be both offensive and
defensing foldings. And then of course on the fixed income side, we are taking the opportunity to extend maturities for our clients, getting locking in higher interest rates where we can. And if down the road there is an end to this monetary tightening cycle and we do see interest rates come down, there is that appreciation potential as well.
I'd love to get some on the equity space here. What are some names that you're looking at, What are some themes that you guys pursue when you're when you're looking to you know, invest on the equity side.
Absolutely, So, the way we build our portfolios is we've it's intersection of a number of different factors, but really our process starts with identifying some of those long term societal challenges that we feel are going to need a tremendous innovation to solve. So, for example, we have been in that digital transformation space for a while, and you know, we did not expect this new boom coming from artificial intelligence. That has basically been the big story for twenty twenty three.
But several of those companies have been benefiting from that. You know, that's your Bellweather, Microsoft, Adobe, CRM, all those types of stocks. So that's a theme that's been in the portfolio for a while. We just see that these companies are going to continue to solve the problem related to productivity, labor, productivity, and some of the other challenges that we see. But then on the other side, there
are other examples. For example, you know, all the challenges related to climate change and some of the things that we're coming to see. They're coming together very quickly relating to you know, very high temperatures, hotter summers, draw outs, floods, all types of issues that we're seeing. There some of the companies that we think are going to be at the forefront of challenging them, especially related to water efficiency.
You know, lately we've heard a lot about the Colorado River levels drying up, creating all kinds of challenges there. We have been investing it in a number of stocks. There's some smaller cap companies that are not your household
names like Badger Meter or Asylum. These companies provide instruments, meters, valves, all kinds of other solutions to help drive water conservation measurement and efficiency, and we think the demand for those products and solutions is only going to increase over time.
So nimrate, you're just saying that you came into twenty twenty three underweight equities, looking at the S and P five hundred up sixteen percent year to date, you rethinking going into the second half of the year if that's still where you want to be or sticking to your guns and that and those lags are going to kick in.
Yes, yes, So you know, it's interesting. There's an adage in the stock market nobody knows nothing right, and twenty twenty three definitely proved that by spades if you had to ask anyone. It was interesting. I was reviewing my notes and across the board, you know, there's no way you can have continue to have the kind of interest rate normalization going on as we did, like five hundred basis points on the low end over the last eighteen months and not have a major slowdown in that economy.
Yet the economy has defied all those odds or especially the resiliency of the economy. So I think there's so many different puts and takes that are affecting the economy in general. It's hard to really understand when that inflection point happens between the negatives i e. The credit tightening cycle that we're expecting, just you know, the pressure overall.
Going from a very easy monetary policy, an era almost a decade more than a decade of where there was basically money, there was no cost related to money, to actually having higher interest rates. That's a sizable shift in regime. I was just reading a study which showed that one third of an increase in profit margins for S and P five hundred has come from lower interest rates and reduce taxes. Nothing about the taxes yet, but we know
interest rates are definitely changing. So when we look further out, it's hard to ascern when that inflection does happen. But it's it's hard to imagine that we will not start to see some impact from this type of a sea change in monetary policy. That's just really on the financial side. Now, let me talk about some of the social issues that we're talking about. Yes, you know, despite all the different things that we're talking about, economic inclusion is probably at
its lowest levels that we've seen. It's hard and harder for low income families to meet daily needs. How does that all translate into the broad based ramification. So when we put all that together, Molly, we're still staying underweight equities and again staying underweight but remaining very much invested in these high quality names.
Ah Rightnimmer, thank you so much for joining us. Nimrick Kank coc Cio and senior portfolio manager at Northstar Asset Management, and joining us.
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All right, let's switch gears. Let's go global energy here. I'm gonnat WTI crude oil. It's about two point two percent today, just above seventy one dollars A brow gets my opinion, it gets my attention. I'd been trading below seventy. Let's bring in a couple smart people who know about global energy. That would be Mike mcgloone, senior macro strategist with Bloomberg Intelligence, and Fernando Ali, senior analysts with Bloomberg Intelligence. Mike Joints Is from Miami via zoom and Fernandez here
in our Bloomberg Interactive Brokers studio. Mike, let's start with you down in in Miami dealing with the heat down there?
Good for you?
How is it now?
Oh, it's nice and humid, but I hear it's much warmer up north. It just colder nights.
I'm gonna I'm gonna give you a hard time all summer here because I know you enjoyed in a water time. Hey, Mike, just give us a CeNSE here. What's you know? Just from commodity trading perspective, what do you what do you think about oil? Right here?
It's a bear market? What stops it to me? That it's the bottom line? The question is has the market plateaued? And typically there's no indications that at all. Typically, what it takes for a broad commodity market to bottom you need some form of significant lag to significant feeda reserve easing, and maybe, as Vince pointed at, maybe a week hour and a pretty significant pickup in China demand. They're all
going the wrong way right now. The only thing that's going and really cheap price is the only thing that's going the right right ways. Prices have gotten low. So let's look at let's start with we're talking about WTI. It's around seventy bucks a barrel, and it's almost half last year's price, but it's the same price as it first started to trade in two thousand and five. The bottom line is natural gas, its cousin has already collapsed. It got really cheap, and it's bounced. It got down
to two, it's bounced up to near three. It's in the middle there now, and I think that's the trajectory for crude oil. And the key thing I asked myself is what stops this? As we tilt towards the second half. As Vince pointed out, these long and variable legs, the federal reserve is still tightening, and I don't and our chief economists on along says we're going to get a recession likely in the second half. Yes, it's been delayed, and US unemployments to start picking up around four point
three percent. None of that, to me is good for crude all to sustain a bounce. It might have bounces, but none of that's good for to sustain a new bull market for NATO.
I want to bring you in your your senior analysts with Bloomberg Intelligence here, Fernando Valet, let's talk about so this lot that the Saudis and Russia are extending these oil supply cuts to prop up the market. So do you think it's going to work. This isn't the first time, and like we said, prices are so low.
Well, I think part of the bounce today is that these cuts, the additional cuts started in July, and today is really the first real trading day with volume because we had the holiday yesterday in the US. But even then, you're not seeing the huge jump up in prices. You're seeing a relative strong but nothing really to write home about. And you know, a lot out of the bulcase that was predicated on the lack of spare capacity in global oil production. And when you cut production, what do you
make you create spare capacity? So we don't think that this is necessarily a bullish signal. As Mike was alluding to, Demand is really the biggest driver that we're looking for China demands still not there. We're seeing some weaknesses in the US as well, and on the housing side, on the office real state side. Those are the big concerns for the summer. And when we looked at the inventory report from last week from the EIA, we saw lower
refinery utilization, lower refinery consumption of crude oil. And that's weird when you have crack spreads. The margin that refiners make at nearly two and a half times the average for the past fifteen years, why aren't they running that to just maybe the physical market is not as as tight as we expected.
Well John Tucker, I mean he moves the needlebimes off just on a daily basis, how much he drives back every fifty at the wah wall three fifty at the wah Wah and Route thirty six in Jersey, just to get your price checked there for noan. What are your companies telling you? What are the big majors telling you about what they're doing? Where were they think energy is going? Where are they investing these days?
Well, there's a big bifurcation between the Europeans and the American major oil companies. When you look at the major oil companies, they're saying, we're investing oil is our business, and we're going to continue to invest, and we're going to invest in reducing the carbon emissions from existing production as opposed to investing in new ways of energy, and so far it's proven to be the right call as
far as as a return standpoint. We've seen some of the Europeans like BP and Shell acquiesce before they said they were they were going to let their production fall by as much as thirty percent, and now they're saying, well, well, the prices are too good, the returns are too good, and the returns on the renewables side are not nearly as good as we expected them to be. So we're going to invest on our oil side.
Again.
The question is where do you invest now, Mike.
I want to bring you back in here. You were talking to us before about these different factors right now that are keeping prices low, that we've got the China demand pictures and so great. The FED is obviously not easing. Which one of these are you know you think could among the other factors you mentioned too, what do you think could turn first and really get things moving in the other direction.
That's the big problem, Mollie. Typically for the FED in this case, I think it's one of those most unique cases I've seen in my career in this business of almost four decades, and that is the FED is unlikely to pivot or start easing until markets tell them to, i e. Stock market going down. And this is somewhat the view from our chief economists because the measures they
watch for inflation are very sticky. Personal consumption expenditure is still, howevering just below five percent, and FED funds are heading higher, so I don't see what it's gonna take. And to me, the biggest risk for the second half is something I started really worried about starting pointing out a year agoes. This is probably be one of the biggest economic resets
of a lifetime. And we've had a bounce and we've had all the markets, equity markets think that we're not gonna have a US recession now if we do tilt towards that in the second half, just the normal lag to the most aggressive federal rate hike easing tightening. Ever, Crudel could just be a pawn in that space.
Now.
Crude oil is down ten percent on the year, is not a big deal, but it's Brethren copper. The medal with the PhD in economics. Is it's wiped out a pretty good rally in January. Now it's down in the year two and gold is the best performing commodity. So from a commodity standpoint, gold up, crude oil, and industrial metals down. That's a recessionary trajectory. And then I look over at the yield curve. Okay, that's tilting towards inversion,
recessionary trajectory. And I look at the FED still tightening. There's nothing good in there except some kind of surprise. I can't predict for the commodity market to end, all right.
So, Mike, when people come up to me at cocktail parties and ask me for my commodities call, because they never do, I just quote you and just say, am I still long gold? Short everything else?
Well, I think gold is much likely to continue the rally, to break out above this two thousand level and never look back. It's a matter of time, and crude oils and most commids are going to continue to do what they normally do. They get too expensive and then pendulum swings to too cheap, and it has to get too cheap before they can bounce again. And we're nowhere near that too cheat phase. As Fernando says, there's still a
lot of profits to be made. The average cost of production from US producers is around fifty dollars a barrow, So I just look at forty as the key level should go back to. That was a key level in nineteen ninety I was in the trading pits. Then when Sodom's saying invaded Kuwait, it bounced to forty. And get this, the bounce at the bottom. The ultimate body didn't come until ten until about ten until nineteen ninety eight. Now
things have really changed. Now is the biggest one of the net one of the biggest net energy producers on the planet in the net export.
Yep, Hey, Fernanda, real quick thirty seconds? What do you think? Which company think is the best position here? These big energy companies?
Well, I think Excellent has done a terrific job in turning around as investments by US growing in Guiana by acquiring the Permian Chevron equally has a sizeable permium position and it's in good position. So I think the US over Europe overall.
Okay, great stuff. As always, always get the nice, clean, concise call from both of you, guys. Mike McLoone, senior micro macro strategists with the Bloomberg Intelligence from the Miami office. Some folks referred to now as Miami Mike. I don't know if that's going to stick. Fernando Vallei, senior analyst with Bloomberg Intelligence. He covers the global energy space, covers all the big major oil companies. So we'd like to speak to these two folks get a good view of global energy.
You're listening to the tape Can's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in Appoomberg 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.
Molly Smith and Paul Sweeney here in a Bloomberg Interactive Broker studio. I want to get right to our next guest, Jerry Smith, mediate reporter for Bloomberg News, one of the top media reporters out there, breaking lots of news, and we got him here in studio. All right, So Jerry, I want to start with ESPN. Back on my banking days, we pitched to spin that thing out. We thought we could get forty times earnings, double the value back when
Disney was trading at twenty times. We always got laughed out of the office, if not physically thrown out of the office by the CFO of Disney. What is ESPN going to do? What is Disney to do with the ESPN these days? What do you think going forward?
I think that's one of the biggest questions in the media in business right now, is the future of ESPN. You know, it still makes a lot of money for Disney, and that's important to think about because Disney also has this whole streaming business with Disney Plus, where that loses a lot of money. So the money that ESPN and the cable network business makes is used to fund the streaming business. So you get rid of ESPN and suddenly you have to ask, where are you going to fund
your streaming business? But yeah, ESPN is dealing with the same thing that a lot of cable networks are dealing with, which is cord cutting. The number of subscriptions keeps going down and down, and they have a lot They're spending billions of dollars on sports rights, and they have a lot of high profile talent. Last Friday we saw about
twenty of those people who appear on Camber. Jeff and Gundhy, Jalen Rose, Susi Kolber were three of the big names who were laid off as part of a cost cutting initiative. And part of that is really because ESPN is going to be under bigger scrutiny from Wall Street than ever before. Coming up. They are Disney for the first time in one of the next few quarters is going to break out ESPN's financial numbers for the first time. So that
is clearly ESPN wants those numbers to look good. They are going to you know, they made some cuts to some of the high profile talent.
At least they've kept the high profile tennis talent. I will vouch for that. They're all very much informed at Wimbledon, so happy from my perspective. But I'm wondering, Jerry, because isn't so much of the value of you know, cable right now sports right Isn't that so much of like where people have been saying, this is why cable is still around and why streaming has not completely overtaken it the whole picture.
That's right, Yeah, I mean if the people who subscribe to cable right now are in large part sports fans, some news fans as well, but live sports is really what's keeping the whole industry together. So one of the big questions with ESPN is when do they make that flagship channel available as a streaming service. And the day that they do that could really, you know, unravel the whole business because you could see more people cut the
cord to sign up for this ESPN service. And how much you price it as an open question, but yeah, I mean live sports is really what's keeping and it's the whole business together right now.
And you know, you say that live sports absolutely that's always been the case. But you think about the regional sports network business. The number one player out there's in bankruptcy. You know, a lot of teams aren't even having their games broadcast anymore. So that whole model is really under pressure. ESPN model under pressure. In that background, the rights keep going up. I mean, who's going to pay these thirty forty fifty increase in rates if it's not ESPN.
Right, I think we're really heading towards a cliff with this whole business, where at some point some sports league is not going to be able to command the kind of increase in their rights fees that they have in the past. That hasn't happened yet. It's the amount that live sports costs just keeps going up and out. But I think there's going to be a point where some of these sports leagues are going to take a haircut. I don't think it's going to be the really high
profile leagues. The big one coming up is the NBA, and I think everyone expects the NBA is still going to get a nice premium from what they got. But people I talk to in the end industry to say, look, watch for some of those middle tier sports that are really going to get squeezed right now.
So if it's not if ESPN, you know, you would think this is going to be like the channel here. They can obviously weather whatever's going on in the sports industry. If they're not able to put it together, you know, how are the networks fairing? Obviously ABC still part of the Disney Empire. But when you look at NBC, CBS, some of the other ones that will you know, broadcast live sports, how are they holding up well?
Those broadcast channels? I mean, one interesting trend we've seen with cord cutting is a lot of people who not only cancel their cable for Netflix, but they also get the digital antennas and you can actually get a lot of programming on that, including CBS, NBC, Fox, So those
channels are are weathering the storm better. And in fact, you know the NBA, when they're looking for this next sports right deal, they really want to find a media partner that can offer them streaming and also a broadcast channel like an ABC or an NBC or a CBS or Fox, because those channels have a lot more reach.
We're seeing with these regional sports networks. Just a few weeks ago, the Utah Jazz did a deal where they their games are going to be available over an antenna over a free over the air channel and they did away with their cable deal. They had a cable network that aired their games. That's not going to happen anymore.
So that's something that we're starting to see in the sports business, is the cable channels because of cord cutting, their reach is diminishing, and you're seeing a combination of more free over the air channels and streaming channels to kind of reach the widest audience. Possible. The real question there is at what point can those leagues still command the same kind of money they got from the cable channels.
Right now they're not getting the same kind of money, So how do they make up that loss?
Yeah, if I'm a I think it's some point just going to trickle down to the athletes themselves. If I were somebody, I'd be locking up a long term contract now, know.
Yeah, That's what's fascinating about the sports media business is everything's connected. Everything from how much the sports player is getting paid to the person at home who's canceling their cable service. There's a a chain link and everybody's connected, and so more and more people cut the cord and that trickles down all the way to the teams how much they can play their pay their players.
Does that mean that people are even maybe, you know, if they're not paying to watch this stuff on cable anymore, does it even say like, if you still really want to watch these games, you're going more in person.
That's a good question.
I think attendance and in sports has actually been doing pretty well. I think Major League Baseball attendants is doing well. They actually made an interesting change this year where they made the game shorter, which I think has helped both the viewership and the attendance. But yeah, I mean, that's that's something that years and years ago there were these blackout rules where you could watch sporting events because they wanted to make sure that enough people actually went to
the games. But yeah, I mean, if you think about the business of owning a sports franchise, media rights are a huge piece of it, but also people go into the games, the attendance ticket costs, things like that. So yeah, that's an excellent question. I'm not sure what the answer isre.
You cover the whole media based soup the nuts here, Have we reached peak Hollywood in a sense that boy, the spending on TV shows and movies just exploded due to Netflix and all the other streaming competitors. But now we're seeing companies like Disney saying, oh, we got to
cut costs, including production costs. Your colleague at Bloomberg News, Lucashaw's got a story out about Amazon CEO wants to know why they're spending so much money on program So if Amazon's asking that question, have we maybe had peak spending in Hollywood?
Yeah, I think that's an interesting question. And I'd encourage everyone to read Lucas's story because it's it's really one of the first times we've seen Amazon really look at the cost of their Hollywood studio. I think it helps to think of these streamers as different kinds of companies
with different priorities. You have Apple and Amazon who just have such enormously deep pockets that the losses that everyone's losing money on streaming, but they can sustain the losses much easier than some of these other companies that where media is their whole business, someone like a Disney or Comcast or Paramount, where they're having real cost cutting issues. Again getting back to the whole cord cutting phenomenon, but yeah,
we're starting to see even someone like Amazon. I mean, they're spending seven billion dollars a year on streaming on programming, and then that's a drop in the bucket for them, but they're still looking at these losses.
Hey, you know it's reading a research note by Laura Martin at Needham and Company, and she was talking about Paramount and her question She was saying, Hey, here are the questions I'm getting from institutional investors, and then what came up to Paramount the question was, what are they going to sell? Is that really a story? Is there a belief out there, Jerry that maybe they're you know, Sherry Redstone and the Redstone family and the trust whatever sell Paramount.
I think that's something that people have been talking about for as long as I've been covering this beat. I mean it's years and years. I think that the you know, this is an industry about scale, how big you can be, and I think Paramount, even after they combined Viacom with CBS, has always been seen as being undersized and everyone's always wondering, well, when is someone going to buy them? But you know, there's also the companies that can afford to buy them,
are companies like an Apple or an Amazon. Everyone always wonders, but do those companies really want to get into the cable channel business with all the challenges that they're facing right now? You know, maybe they could just sell off the studio. That might be attractive, But yeah, it's a scale business and they've always been seen as undersized. So I think that's something everybody's always wondering. I think the
Allen and Company Sun Valley conference is coming up. Oh yeah, everybody loves to talk about how there's deals being done.
There's this month.
Right, I believe that's coming up.
Yeah, so that's I.
Didn't get my invite. I'm still waiting, all right, all right, New York Times, we talked about it. The New York Times still cranking it out. It's got a six point five billion dollar market cap. Everybody thought The New York Times was going out of business. A lot of other papers have unfortunately, but just locks up twenty two percent to date. Because content is king. So as long as you got the premium content, they'll figure out a way to get paid for it. In the New York Times,
their app has been extraordinary. Their digital advertising has been great. So there's my little plug. I've been found New York Times company for like, you know, forty.
Years cooking in games. Those are the big ones exactly.
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Let's check about the fixed income business. Twenty twenty two a year two ford get for pretty much everybody in the fixed income space a little bit better this year. So we want to check in with Ward Borts. He is Ward bots. He is the ETF portfolio manager, head of Distribution public Strategies at Angel Oak. So Ward, you know, I'm looking at the two year treasury, I don't know, four point nine one percent. I'll put some money in
there and I think I'll be quite happy. You know, what do you think about fixed to come space these days?
Yeah, to your point, I think twenty twenty two it was painful.
Getting there after years of really getting no yield, no return in the in.
The fixed income markets.
But twenty twenty three has been off to a decent start in fixed income. You know, our view at the beginning of the year was you could get equity like returns in fixed income, and you know, in our head that's kind of called it eight to twelve percent, depending on what interest rates do throughout the year.
We're about halfway there now, right around four percent.
I think high yield so far this year is up five and a half percent, So you know, thus far.
It's been pretty good and our expectation is through the rest of the year.
It's it's not a bad place to be a positioned, particularly given what you've seen on the equity market so far this year.
Yeah, we're you know, I used to cover credit and you know a lot of this. I'm really just scratching my head here because rates have still gone up this year. We are hearing that rates are going to stay high this year, and yet you're seeing high yield, like you said up close, around five and a half percent, investment grade up three percent. Where is the where is this coming from?
It's it's the first time in you know, I don't know how long where carry actually matters. The coupon that you're getting from bonds, you know, or able to offset the increases in yields. So you know, to the point made earlier, if you can get five percent in short term treasuries, even if yields go up one hundred basis points, it's going to be offset.
By the yield you're getting in bonds. And that's really what we're seeing with investors.
We're seeing investors kind of doing the math on that and saying, you know what, I'm going to increase my allocation to bonds a bit to really take advantage of what historically, or for at least for the last ten years, has really been no opportunities.
So how do you play this in the ETF space war.
On? So what we think is attractive, So maybe i'll answer that slightly different. Where do the risk to this? So if we think about our outlook for the rest of the year, we think that the economy is going to start to slow down, So the impact of the FED raising rates over the last year is going to start to be felt and you'll see an economic slow down.
Right now in traditional corporate credit, spreads are very tight, and so we are encouraging investors to underweight corporate credit because if we do see a slow down in the economy, that's going to feed into corporations, feed into earnings. Potentially you can see defaults start to increase, if not late this year, then early next year. And so we're saying underweight corporate credit where you've already had decent returns.
For the year, as it's been highlighted.
And what we really like is mortgage backed securities, So we call this securitized credit.
So these are.
Bonds that you know are issued by Fanny and Freddy.
Or those that aren't backed by the government.
Here, you're able to get similar yields to what you get in the corporate space, if not higher, and we think a lot more upside because these are actually priced a lot wider than historical levels relative to to corporate So we really think that's the attractive place to play in the marketplace. So from an ETF standpoint, if you look at agency mortgage backed ETFs like MVB is A
is a big one. You know you're gonna benefit both if rates start to decline and if the the yields and spreads of these mortgage backed securities start to define. In addition, we have a non agency ETF c A r Y and this is kind of a little bit more bang through your book, a little bit higher yield, but still investing in that mortgage backed security opportunity that we see right now.
And per that, yeah, that what you're talking about here with MPs. What's your view then on mortgages and how does that filter into this.
Call on the mortgage market generally. So that's going to be driven by a couple of things. So one is, you know, home prices, So what do we think is going to happen with home prices, and what you've seen so far this year is generally a stabilization in home prices.
After you know, what everybody knows was an incredible two thousand, twenty twenty one, and even twenty two in terms of home price appreciation, we think you'll start to see a stabilization in home priss, but not really a significant appreciation. So we think from a credit standpoint, those mortgage bonds, those mortgage backed securities are actually in really great shape because the houses that back them are doing great from a price standpoint.
Ward, what do you.
Think about private credit? It's a business, it's a market. It's an asset class that has really has come on to the scene in the last I don't know decade or so, and it's gotten so popular. How do you guys think about that? You've ex bosure there. What do you think about that?
So we do not so. Number one, it has been an explosion.
Uh.
You know, we kind of thought, given the increase in yields that you've seen in traditional public markets over the last year, that there would be a decline in growth in UH in private credit, but but it hasn't worked out the way people continue to demand private credit significantly. And this is really uh, you know, backed by corporation, similar to corporate bonds, except you know, private loans. We think that, you know, from everything we've seen, they'll be
continued growth there. Our concern is whenever you see an asset class explode in growth, as you've seen in private credit, uh, you can see lending standards starts at the climb, and the private credit asset class really has not been tested yet.
And so our concern about it is when you start to see that economics slow down, you've seen significant growth in the size of the asset class, have the underwriting standards held up as much as you know, as much as they were historically where you've got very low default rates and high recovery rates and private right, so you know, in our head, the jury is still out on whether or not private credit is able to withstand the first down tournament the seeds.
All right ward, Thanks so much for joining us, Really appreciate it getting some of your time here. War Borts. He's a ETF portfolio manager, head of Distribution Public Strategies at angel O. Before that, he was a dimensional fund Advisors trade er trading at RBC capital markets, all kinds of stuff there at black Rock as well, so lots of experience out there in the space getting his thoughts on fixing him much better year in twenty twenty three.
And the high yield, you know, return of over five percent or about five percent this year so far as it's pretty done, impressive.
I was just looking even Triple C's up about ten percent this year, so could not seeing the stress yet.
Yeah, definitely not exactly, but that's after a brutal twenty twenty two so a lot of room, a lot of still digging needs to be done to get out of that hole.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio