This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.
Let's kick off this OUs conversation with Emily Rowland, co Chief investment strategist at John Hancock Investment Management. Emily, great to catch up with you. In the last down on Bloomberg TV, we spoke to Ben Ladra v Toro, who referred to tech names as teddy best stocks. You huk them, they happen you sleep at night. They delivered decent gains, at least for him because he was long tech through most of last year. Emily, do you still like those so called teddy best stocks.
Yeah, we were long tech last year as well, really as a function of our preference for quality. So we were looking for companies with great balance sheets, tons of cash, low interest burdens.
And we still like tech stops.
But we've got to recognize the fact that the S and P five hundred growth index is now trading at a forty four percent premium to its twenty year average. So tech stops were up about fifty eight percent last year on about five percent earnings growth. Now, don't get me wrong, five percent earnings growth was of the best globally in the US tech sector. But I think it makes sense for tech to potentially take a bit of a breather here.
We're not downgrading it.
But I don't know how much you can expect this year after such an extraordinary twenty twenty three.
What are you doing on sixty forty I mean, to me, this is a really important question. I've seen huge failure of some of the marketing concepts like target benefit programs and all the rest of it to get to an asset allocation. What do you do sixty forty forward?
I mean, what an incredible year in twenty twenty three for a sixty forty portfolio after horrible twenty twenty two is up about eighteen percent last year. You know, when we look at it and everybody was calling for it to be dead, right, the death of the sixty to forty portfolio clearly very much alive and well, when we look at it, we're modestly adding to our.
Positions in fixed income. And to us, it's a math game.
You know, you look on the stock side of the house, it's you know, you're sitting at nineteen and a half times forward earnings. You've got twelve percent earnings growth penciled in by analysts on the street. It's just a tough starting point. We're not saying equities will do horrible this year. It's just the bar is really high. And when you look at fixed income, you know, four or five percent on high quality bonds.
Of course, there was a better entry point back in.
October, but we still look at the income on high quality bonds is a great way to sit here, get paid to wait, as we might experience some more volatility as the lagged impact of said tightening does cause crafts to form.
In the economic picture and in the labor market.
Is there such a thing as growth y value? I mean, I know you're going to tell me there's a partition between value and growth. But if I'm upset with thirty multiples or twenty two multiples, where's that grossy value? Or at least I can hide Yeah.
Absolutely.
So when we look on the value side, you've got to be really discerning because there's a lot of sick locality inherently in value indices. So we're looking at areas that have a high quality element to them. So healthcare, for example, one of our favorite sectors. I know a lot of people have been coming on here talking about healthcare. It's trading at a ten percent discount to the broad market. We think it's going to benefit as consumer behavior shifts.
Maybe we're not going to buy all the stuff we want. I know we were talking about ath leisure earlier. By the way, I have an eleven year old daughter. I'm here to tell you ath leisure is alive and well. But people are still going to do the things they need to do. They're going to go to the doctor, they're going to get medical care. Utilities another area that got really really hurt down, you know last year, everybody left it for dead. It's trading at a twenty percent discount.
So we could see a rotation into those sort of dogs of the Dow as potentially tech takes a breather into twenty twenty four.
Emily, one thing I've really been struggling with in twenty twenty four is what is the biggest risk. Is it a reacceleration of inflation or is it recession.
Oh that's the question of the year, I think, and you know, I think, as you're looking at looser financial conditions, this is going to be one for the history books. Right was the FED to dubvish over the last two meetings, suggesting that cuts are coming. In the summary of economic projections, markets are pricing in five six rate cuts this year, and of course that's caused the loosening and financial conditions which has been really spurring this pivot party that we've
been talking about on the show this year. Right now, the pivot party's feeling a little bit like maybe a hangover. Maybe we're like trying out dry January here or something.
Is the markets are now back to.
This good news on the economic front, which is causing yields to back up being sort of bad news on the equity front. So our as recession goes, I think everybody's sort of tired of talking about And frankly, Matt and I don't really get paid on our views on
whether recession plays out or not. We get paid on how we think about positioning into this environment, So maybe if it could, you know, we're prepared if an economic contraction takes place again lead leaning into high quality bonds, looking at income, and then rotating into these more defensive parts of the market that should benefit on a relative basis if something breaks. If something breaks and we do see that contraction play out, I.
Guess that the way this folds into positioning is leaning into high quality income producing fixed income. Does this really get up ended if the economy is hotter than expected and if the pivot party, as you pointed out, has just run way too far.
Yeah, I mean there is a potential here, you know, certainly for rates to chop around. We're watching energy prices closely, which could play into the inflation picture here. Of course, the data on Thursday on CPI is going to be you know, critically important here, so there is a risk here that we see a reacceleration. It's just hard to imagine an environment where inflation goes back to the nine
percent that we saw in the summer of twenty twenty two. Obviously, there was some very unique sort of pandemic era dynamics there around supply chains, around fiscal stimulus, so we think that ultimately we go back to a low growth, low inflation, low rate environment which really permeated the markets and the economy for much of the last decade. Nothing changed except we pumped five trillion dollars of stimulus into the US economy.
There's forces out there that are very much disinflationary, and we think over the longer term, that's where we go, and we're headed in that direction certainly as we start the year.
I mean, I mentioned ben Light and he talked about the opportunities in Europe. Is the buys still America US stocks it is?
I mean, you guys have been talking a lot this morning about how horrible, for lack of a better word, the data is coming out of Europe and certainly in Germany, and it's interesting to see, you know, stocks.
Really not reacting to that. In Europe.
You know, there's been buoyancy, there's been participation. The weaker dollar has helped non US equities. But when we look to the US, we're holding up the best around the world. Economically, our labor market is undoubtedly the strongest across the world, and earning estimates here are more robust than they are in other areas. And then Finally, we just have more
high quality stocks here in the US. So we do still have a preference for US equities over international, especially over emerging market equities, where we think China is going to be challenged into this year.
Interesting, Emily, thank you. Am we Rout in the of John Hancock Investment Management.
Brook Sutherland knows this cold. She's a Bloomberg opinion columnist, and she knows that Clyde Cessna in nineteen sixteen invented our aviation world in Wichita, Kansas. So we're going to go to Wichita right now and talk about how we actually build the things we take for granted. How shattered is Ava Kansas this morning? Brook, how not afraid? But just how is there confidence broken?
I think you have to be rather concerned in Whichita? I mean that is the home of Spirit Aerosystems, which is the supplier that makes the fuselage on the Boeing Max. Now this is not it's not clear yet if this was a Spirit issue, but they have had a history of quality control glitches just in this past year, really, and there's a lot of scrutiny over the relationship between
Boeing and Spirit Aerosystems. This used to be a part of Boeing until back in two thousand and five, executives decided they could boost their profit margins by focusing on design and outsourcing some of the actual manufacturing work. But this was really just a set of factories. This was never really meant to be an independent business, and I think this relationship is going to get a lot of scrutiny.
There's been speculation of could Boeing buy Spirit Aerosystems. I think that would be very complicated, considering Spirit has since diversified into contracts Airbus and the military. But I do think both Boeing and Airbus down the road are going to work at vertically integrating more of that aerospace structure's work because it's just not a tenable relationship.
Is this enough for Airbus to get a legit foothold into American aviation?
I mean, I think they have one. What's interesting is that Airbus has remained much more vertically integrated than Boeing ever has. They'd outsourced some stuff here and there, but they have not done it to the extent that Boeing did, And in hindsight, being twenty twenty, that was clearly the right decision.
I'm wondering the decision by the airline companies of which planes to buy. Why it is that United and Alaska Air had a disproportionate number of these particular jets. Is it just the roots that they decided to fly on, Was it just simply availability?
Was it the cost?
I mean, I think it's a little bit of both. The reality is we have a duopoly. It's Boeing and it's Airbus, and Airbus is sold out of its Marquee narrow body jets into the twenty thirties. I think, you know, depending on the roots you want to fly. Fuel efficiency engines are also a concern. So the max Jet only takes the engine from CFM International, which is the joint
venture from Saffron and ge Airbus. You can choose between that CFM engine or a variant of it, or the GTF from RTX, which of course is having problems of its own. They've had to do a very costly recall of that engine technology because of again a manufacturing glitch that time involved powdered metal. So if you're an airline, I don't really know what's your best option is because you're now having problems with both of these aircraft, but
you don't have a lot of alternatives. The one thing we should say is that so far, all of the investigations the grounding is really focused on the Max nine, so that actually makes up a relatively small percentage of the overall operating Max fleet and the order backlog. So the Max eight is really the workhorse of that Boeing family of jets, and that so far has not come under scrutiny, although it's a fair question as to whether it may at some point.
George Fergus of Loloberg Intelligence was on yesterday and he was talking about how there are some serious staffing issues since the pandemic and that could play a role in some of these supply chain issues or at least some of the assembly line issues and the lack of assiduousness
to tightening the bolts. Do you buy into this? This is something that you've been hearing from other executives of industrial companies that they just do not have the quality or number of staffers to really make sure that things are done properly.
Absolutely. I mean, I think if you look back to the pandemic, we bailed out the airlines, but we did not bail out the aerospace manufacturing supply chain, which was a very created a lopsided dynamic where these companies just laid off in mass and then they could not hire people back when they wanted to. Now, I would also put some of the blame though, on these aerospace manufacturing companies, because we have long had supply chain issues in this
corner of the world. Even before the pandemic, companies were struggling to ramp up production to meet Boeing and Airbus goals, and so you would think that maybe these companies might have had some price of mine to hold on to the workers. And I've written about the railroads who are making some structural decisions about not laying off workers when times get tough, and whether we should see sort of a similar mindset shift in the aerospace world. I think that would be very necessary.
I mean, Brook, you're expert at this. In the last hour, I talked about Boeing and I looked at a fancy Bloomberg chart, and I'm saying something happened starting on and around twenty sixteen as simple as I can. Did they lose the culture? Did they lose the engineering discipline when they exited Seattle?
I think at this point, you have to look at deep rooted cultural issues. I mean, it has been one problem after another at Boeing, and I know Dave Calhoun has been very resistant to conversations that this is the cultural problem. He's resisted more sweeping overhauls of the engineering ranks, or management ranks or the culture there. But I think what's needed is a true reset. And I go back to GE because there are a lot of crossovers between
GE and Boeing management. Over the years, that company went through a proper cultural reset and it is now on a much healthier path. It's breaking up, but it's making money again, it's generating cash flow again, and it is
overall a much healthier company. And I think that when you have these type of crises, and especially when it's sort of something as basic, potentially as screwing in the bolts on a door, you have to look at how did we get here and what sort of cultural norms are in place that would allow this type of thing to happen, allow planes to be delivered in this condition.
Broken Resistant of regulates us to that conversation.
I don't think they should be resistant because I think their reputation is also on the line here. Now, remember that the FAA is supposed to be inspecting and checking every single max plane before it is handed over to customers. That was a protocol that was put in place in the wake of those two fatal crashes. When it came out that that flight control software was much more prone to being triggered by malfunctioning sensors than regulators realize and
also a lot more powerful. Their reputation of the FAA really took a hit in that accident, and this was meant to be part of their response to that. So the FAA also missed something here, and so I think it should be in their interests to try to beef up scrutiny of Boeing and also the overall aerospace safety infrastructure. I mean, this is not the only issue that we've had.
We've also had close calls on the runways, and I think we've gotten very comfortable as a country because we've been lucky enough not to have very many fatal accidents in recent years. But you cannot get complacent about aerospace safety.
We just quickly, where is your focus right now? Is it on Boeing spirit error systems? The individuals that make the fuselage for the seven thirty seven? Is it on the carrier Alaskaare is it on the FAA? Where's your focus?
Well, I would say all of the above, because I follow all those companies, But I think Boeing is the most important story here. How do they react to this, What types of changes do they make, whether that involves their supply chain, whether it involves management. If you remember, back in sort of mid twenty twenty two, there was an unusual number of Boeing customers calling for management changes. Now that has since sort of quieted down, but I do wonder if in the wake of this accident that
might start to pick back up again. Now, Boeing did name the chief operating officer last month, Stephanie Pope, who's ahead of their services arm, sort of making her the heir apparent to Dave Calhoun. I would keep an eye on whether any type of management changes happened sooner rather than later. But I would also say that this is a company that could really use some fresh eyes and maybe promoting from within my race and more eyebrows.
Interesting I broke this was great brook sepal and that of Bloomberg opinion.
What we know for certain is Ian Bremer and all of you raise your group, have to rewrite their top risks for twenty twenty four on January ninth. That's how fast things are happening. He is here today with the top risk. What a grim set of risks in an election year. How uncertain is it to get to March or to get to say the middle of May.
Well, first of all, happy new year, Tom, and to all of you here at Bloomberg Surveillance. It's so nice to join you as we kick off twenty twenty four on January ninth.
No, I don't think we have to rewrite these risks, but.
I think we have to recognize just how incapable we, the United States and our present set of global leaders are in trying to contain the geopolitical risks and conflicts.
That we face today. You just saw the entry we had.
Blinken standing there in the Middle East saying they need to understand We need them to understand.
The hu Thies need to understand the need to stop this.
He could have easily said, the Hamas needs to understand they have to let these hostages go. The Israeli war Copit cabinet needs to understand that they can't continue to expand the fighting in the region. The United States has zero ability to actually make those messages land with the actors on the ground who are escalating this.
Triangulate this right now with Freed Zakaria's essay and Foreign Affairs Magazine in his Post American World. In the Bremer Post American World, you say the US is battling itself. That sounds a lot like Zakaria twenty years ago. Triangulate right now the lack of confidence you have in our US geopolitical strategy.
It was about twelve years ago when I first came up with this idea of a G zero world where the United States was not going to be willing and able to be the global policeman, the architect of global trade, and the promoter of global values, but that no other country or group of countries would be able to step into its place, and that as that geopolitical recession played out, there would be more conflict, There would be more vacuums that would be filled by rogue actors who take advantage
of the comparative chaos, of the lack of leadership. Twelve years of that gets you much bigger.
And unmitting fighting.
We see that with Russia Ukraine started in twenty fourteen, nobody really pushed back, and now we are here in twenty twenty four and that war is turning trajectory in a way that none of us are comfortable with.
In the West.
You see that in the Middle East, and that is set to expand significantly. And we see in the United States itself that we are increasingly a tribal, non functional democracy and crisis.
Very simple point.
When you have the former Secretary of Defense under Trump saying this man is a threat to democracy. He was in charge of American national security under Trump. When you have the person who is running having tried to subvert a free and fair transfer of power, doing everything in his power.
To do so.
In a functional democracy, that would be the number one issue of the election.
Nothing else would be close.
So is it that we're somehow getting our facts wrong, or is it that the United States is not a consolidated functional democracy because there ain't no other advanced industrial democracies. No one else in the G seven is having the problems in legitimacy of its political institutions at the United States is experiencing in twenty twenty four.
What do you think those What do I think which you.
Think it is? Do you think it is a functioning democracy?
No, No, I think it's a hybrid system. I think the US democratic institutions have significantly eroded over the course of the past several decades. We have normalized that because all of the things that are unprecedented as they happen, and we still live here in the United States, we're basically saying, well, okay, I guess that's the way it works now. So impeachment doesn't work, and we can impeach someone twice and they can still run again.
I guess that's the way it works.
You can have ninety one indictments and I guess that's the way it works. You can post and say things that you never would have heard. I guess that's the way it works now. In a set again, he's the context of the world's most powerful, very functional economy and
the world's most functional, very powerful global defense capacity. You'd say, well, maybe it's okay that the United States isn't a functional democracy, but it will be different, and so yeah, I think we can't normalize the dysfunction of the US political system, the illegitimacy of its institutions and the fact that democracy in twenty twenty four in the United States is in crisis.
That is the reality, and our allies know that.
They're deeply worried about it, all of them around the world, and our adversaries see this as potentially a huge opportunity for themselves.
So when do you see us twelve months from now, what do things look like?
Well, first of all, let's talk about March April May.
Tom said, you need to completely rewrite this.
Then when Trump gets the nomination, which is very very likely, he will overnight become far more powerful on the US and the global state. All of the Republicans will be loyal to him in a way that right now they still have hedging capacity and the media that is following and supporting Trump, and the ability to raise money to drive that campaign.
And that means his policy pronouncements like.
There would never be a war against Israel if I was president, because I showed the Iranians I announced that assassination of Cosumsulamani. Well, that's going to be the policy for Trump, and therefore the Republicans Zelenski corrupt.
I'd end this warrant to day.
I'd show him what's what I'm not going to give him billions and billions of dollars on the back of the American taxpace that becomes the policy. So the Overton window right of what is an acceptable policy framed debate in the United States is going to change very dramatically when Trump becomes the nominee. Again, assuming that it's not given, but assuming that in twelve months time, the stakes are a lot higher for both leaders than they ever have
been before. Right, So if Trump wins, Biden and many many people around him believe that they will face legal jeopardy, that Trump will politicize the FBI, the dj the irs and go after them and a McCarthyite, you know, prioritization of policy, where Trump of course faces potential prison time. So the stakes are much much higher than we saw in twenty twenty.
Just quickly, I is Biden the antidote to this at a time where we're there are real questions around the Defense secretary and his absence, his undisclosed hospitalization in the sense that President Biden is not very popular and isn't really addressing that.
I was a little surprised that we had no idea where the Secretary Defense was for several days in the middle of the war. That usually happens in China, that doesn't happen in the United States. Yeah, And I discussed that with an official yesterday and he kind of had a chuckle over it.
It's exactly what I said yesterday.
Yeah, is it really I missed that I talked to you said, man, no, no, this is a Chinese official. But it was pretty funny. We all had a good chuckle over it. Not not what you want to see.
Look, I think that Biden has the intention of being the antidote. He wants to follow rule of law. But I mean, we're in the fourth year of the Biden administration and the country. The reality is the country is more politically divided. Our institutions are weaker today than they were when Biden became president. So he does not have
the ability to resolve the divisions in the United States. Look, you look at Russia and Ukraine today and you'd say that Zelenski would like to end the war, but he doesn't have the ability to do that, right, And that's the problem. We have these major conflicts geopolitically between Russia and Ukraine, between Israel and Hamas, and between the United States and itself. And in none of these cases is
diplomacy and option. And in none of these cases do the principles have the ability and the willingness to stop the fighting. That that's what twenty twenty four is. That is when I look ahead in twelve months time, that's where we are. That's what jizra means.
Always an interesting rate. Thanks for Johannissa. It's going to catch on in prema if you write A great.
Part of what you get here is the view from a different geography, Nadiere. Martin Wiggens, director, it's veeeling capital. We're thrilled that you Jones today from Oslo, Norway. What is the oil distinction of your Norway? It's not that much production, but Norway gets so much credibility within oil analysis. How does that work?
Thank you? Well, we are, of course a steady producer, right, we are a country that delivers oil. Of course we are not at peak production and we're declining quite steadily when we look forward after twenty twenty five twenty six, and on top of that energy transition as well. We're the forefront in terms of test us buy and things like that. But we are very reliable in producing and delivering oil and natural gas, as we saw when this war started in Ukraine.
A two part question, is there a one price for oil now and is that Brent crude? And how does the massive American production change your calculus on what Brent does.
The US market is a huge influencer and it influences not only the oil price, it influences shipping prices and how movements go all around the world. When we look at Brent, of course there is the North Sea which is setting the benchmark, and we look at those physical grades, but they're very small relative to the overall picture. When we see what is the swing crude right now because of the OPEC cuts and because Saudi of Arabia, yes they lowered the official selling prices, but they're towing the
line and maintaining low production. That swing producer right now is the United States. And that is why it's a huge.
Influence, amazing change. Yeah, it raises the question just how influential the cartel still is, just how much power do they have?
But this was I think the big fear that played out yesterday because by lowering those prices, Saudi Arabia has been saying throughout December. Demand is good, but by dropping it so steeply in two dollars, they're saying, oh, actually demand is not that strong. At the same time, when we saw US production jump one point one million barrels per day year on year last year. Oh, are they starting to go for market share? That is the concern.
But it's normal for them to cut prices in January, so the market is waiting to see, Okay, are they going to be cutting in February March, and then they start to get worried. So although we had a big sell off yesterday, we've bounced back and we think that positioning is still late on this move.
I'm trying to remember the year when was the market share gained year? Was that twenty fourteen, twenty fifteen when they made a massive push for that Yes, that all.
Absolutely, when we finally got that shale invasion on the global market, which we've been waiting for, to be honest, for more than a year, and the demand just kept growing in Asia until it broke the back.
Do you think you would see a repeat of that? Is that what you're suggesting we're looking out for.
We do not see that right now at all. Being the case because the US growth in those years, we were looking at one point five two million barrels per day year on your growth, one point one is punchy when the market was expecting five hundred thousand barrels per day, but it's not enormous.
But there is actually an analogy, which is when oil prices fall to a certain level, the shale patch doesn't make sense and production stops or slows and you see rigs taking it offline. Are we close to that kind of point? If the US is the swing producer, are we close to them adjusting supplies in response to a lack of demand.
We would need to see WTI trading in the low sixties before I think there is a change in behavior. But because we have such a low duck count right the drilled uncompleted wells, the response will be slower. So this is where we expect seasonally a slow down in that production because they're not so personic prices. They're steady prices, but we're not going to see that kind of growth we saw last year. The big change though, is we should start to see rig counts actually increase some which
we didn't see last year. And that's what the market really got wrong.
Bear with me because this is sort of complicated, But I remember when people argued that part of the reason oil prices were going down was because rates were so high. There was an actual cost to parking your capital and a physical good that wasn't generating the same kind of income that t bells were. If the FED cuts rates, could that effectively send more investors into oil and cause oil prices to rise.
It could, yes, And because especially the expectation, well that demand will be higher, right, So then we when we look at our forecast right now for the US, we're only seeing maybe fifty hundred thousand barrels per day year in year growth in demand. It can be much higher. When we look at China, the expectation is four hundred thousand barls per day. Ye're in your growth versus one point six last year. It's very tepid. Changes can absolutely drive that. The big driver this year though is non
OECB Asia ex India, ex China. That's five hundred and six hundred thousand barrels per day year on your growth that didn't come last year that we thought would come last year.
We haven't even mentioned the conflict to the Middle East. Yeah, and I'm really struggling to even understand what to look for to understand when this will influence oil prices, because everyone was expecting it to and then it didn't. What are you watching for to understand that, yes, this is going to actually have a disruptive influence.
Firstly, we're watching crude flows and product flows right so we have seen less Russian creed going through the Red Sea, but that's alongside what they were supposed to cut, so there's no big change there. We're also looking to see product exports out of the Middle East into Europe. Those should really slow down. Those should really pump up Middle distillate prices, which then should support oil. That's the part that we haven't seen yet.
I want to take a summary question back to your work at Morgan Stanley at Philbro years ago. All that you've done commodities, Where in God's name is US oil policy or US oil production in five years or ten years? Do you have any sense of the dynamic we have out to twenty thirty.
I believe that there has been a strong understanding that we need to maintain energy security, the reason we maintained lower oil prices last year, and the year before was because we had a strong spr and because we have massive productions. So I think the investment will continue to be in natural gas and in oil. China is taking this out of our playbook, being the number one investor in renewables, big oil producer, importing gas, and so I
think we will absolutely continue to do this. However, when we look at these golden patches, maybe there's only two million barrels per day additional growth to come, it's still a massive number fifteen millions.
It's in just on US production and reserves. So we drained the strategic midterm reserve, yes, a couple of winters ago. What's left and when are we refilling it? And are we going to do that going into an election this year?
Well, I think this depends a lot on that relationship with Saudi Arabia. Right when we had this near piece coming before the Hamas attack, we had Saudi Arabia announcing more oil coming back, and then we had immediately after the attack, Biden saying we're going to buy oil at seventy nine ARLs and Beryl they bought a very small token amount, but we're in a happy range. I think for the electorate of course the electric would like it lower, but we're not in a dangerous range. So I think
slow buying will continue. But I also think we will see policy that is supportive of continued investment in oil and gas, and that will really support things forward.
Nadia, thank you. It's going to say it here in New York City. Nadia Massen wign that as fell in capital.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern, Bloomberg dot Com, the iHeartRadio tune In, and the Bloomberg Business App. You can watch us live on Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg