This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Bromoids, along with Tom Keen and Jonathan Ferrell, join us each day for insight from the best in economics, geopolitics, finance and investment.
Subscribe to Bloomberg Surveillance.
Undemand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app.
The inflation fight is an over, speaking of CBS over the weekend, joining a chorus of Fed officials pushing back on ray cut speculation in the wake of Jpow's dubvish outlook, Former New York Fed President Bill Dudley, calling POW's comments a gamble warning quote. There's plenty that can go wrong. Power has repeatedly emphasized that the Fed must finish the job.
Yet the more weight he puts on cutting rates to avoid a recession, the greater the risk of falling and failing to control inflation of markets getting a big, unpleasant surprise one way or another. Twenty twenty four promises be an interesting year. Thanks for tearing that up, Bill. Let's start the conversation there, just why do you think that is so risky? And what on earth happened at the news conference last week? We spoke immediately afterwards. You've had an extra week. What was that, Bill?
I think he's been very pleased with how the economy has performed to be pretty stridy growth. Yet the inflation rate has come down, so the prospects of the soft landing have gone up.
I think that's all really good and positive.
What I don't understand is why you'd want to add fuels of the fire and cause financial conditions to ease substantially, which is whether he provoked last week. The stocks are up quite a bit, bonnials are down, financial conditions are much more accommodative. The Goldman Sachs Financial Conditions Index, for example, it is by a four percentage point at a time that the economy has been growing, and above trempe ss.
To me, I'm worry the defense is not going to finish the job. He's behaving a little bit more like Arthur Burn than he is like Paul Bunker.
Bill, let's build on that just a touch more. Do you think he's seduced by the prospect of net and the soft landing. Do you think that's what sucked him in a little bit.
Well, I think that's certainly what he's trying to achieve, and if I was in issues, I would do the same. I think there's there of a contest going on right now between how to think about monitary policy. Is policy really tight because real rates are high and inflation's coming down, or is policy not so tight because financial condition that
needs significantly and that's providing support to the economy. If we look at the Atlanta Fed GDP now has for the fourth quarter, it's now tracking two point six percent after a five point two percent growth right in the third quarter. So it's not really clear that the economy needs a lot more accommodation to support itself.
Bill, do you think the Fed jer J. Powell understood what he was going to do to markets?
I think that he certainly.
I hope he understood that he was coming across with a very optimistic sort of framework for markets to that I digest.
I think that's true.
As Austin Golsby said a little a little bit earlier, that this is a forecast, and so if the forecast doesn't materialize and the FED rate cuts that are the promise won't materialize, either, so the market may be get a little bit ahead of itself. This is how Powell thinks the world is going to evolve. Paul thinks the Fed is going to be cutting rates in twenty twenty four.
But it's possible that the economy could be firmer for longer, inflation could be more stubborn in the rate cuts might not actually turn out to materialize.
The reason why I ask that is because feedcher Powell had an opportunity to push back against the financial conditions and the easing that we have seen. He had a chance to say this is problematic and moves counter to our goal.
Of bringing inflation down. He didn't.
And you're saying financial conditions still matter. So why do they still matter? Is it becoming inflationary or at least not necessarily restrictive in a way that's problematic for the Fed to see financial conditions easing as much as you've pointed out they have.
Well, the big problem here is that if financial conditions ease a lot, that provides impetus to economic growth. If the economy grows faster, the labor markets tighter, wage inflation's higher, and then it's harder to actually achieve your two percent inflation objective. So the question is does the economy need more fuel? Does the economy need to grow faster? I would say probably no. Labor markets already very very tight. Wage inflation is Paul has acknowledged, is above a level
consistent with two percent inflation. So I'm not sure why you'd want to put more fuel on the fire.
But do you think we've learned enough about the cycle so far though to draw conclusions about the contribution of the labor market to overall price pressure and just discount it and say it's not as important as we thought it was.
Well, I think it's.
True that there's a big labor force supply benefit that you got. Last year. A lot of people rejoined the labor force, so the Fed got sorry, had had skicking to do.
They had pretty sturdy growth, but it didn't generate inflation pressure because the labor force expanded to accommodate that growth. Now, the question is is that going to continue in twenty twenty four. That's a really important question in the eco gal Look, I'm going to continue to see that kind of rapid labor force growth that accommodates pyerial gains of one hundred and fifty one hundred and seventy two hundred thousand a month.
Do you see reason to believe that it won.
I think that that there's some reason to believe that some of the labor force pers we saw last year was a catchup, right. Basically, you opened up immigrat again, so you had a surge of immigration of legal immigration into the US last year. Worked from home allowed working age women to re enter the layer force. But whether that trend is going to continue at that pace, I would be a bit skeptical about that.
There seems to be an acceptance or reacceptance of the concept of transitory at fedchair among the FED officials, particularly FED Shair J.
Powell. Are you pushing back on that?
Are you saying it's still too early to say that there's still stickier aspects to inflation that they're discounting.
I think a lot of the inflation pressure clearly was transitory.
A lot of the upper pressure you saw on goods prices was just to the pandemic and people increasing their demand for goods temporarily during that shutdown period. Now we've opened up the economy, the demand for goods falls, and so that all.
That price pressure goes away.
I think the problem on inflation is really more about pressure on resources in the labor market. The libor market is still very very tight, Wage inflation is still too high, and if the economy grows at above trend pace in twenty twenty four, all that pressure on is going to increase rather than diminished. So the real question I have in my mind is monetary policy as tight as the
FED thinks it is. And I think the fact that the FED is pivoted in this way by easing financial conditions that makes monetary policy less restrictive rather more restrictive going forward.
Some people have speculated that the FED wants to cut rates in the first half of the year and avoid making any moves whatsoever the second half because of the presidential election.
Do you buy into that?
No, I don't buy into it.
I think at the end of the day, the FED accident completely a political matter, because they understand that if they start timing rate cuts or rate increases with the political cycle, that politicizes the FED and puts them in the middle of the whole debate. So the best thing the FED can do is they totally ignore the political cycle and do what they think is best to achieve their dual man date objectives.
Let's just sit on the comments we've heard so far. We've had clarifying remarks from New York Fed President John Williams, year old Saint Bill, clarifying remarks from Gilsby over the weekend, from Mesta this morning and the Financial Times Bill. How does that work? These speeches, these interviews are scheduled well ahead of time as we know. Is there someone on the committee the Border government has that sends out a message to for one and says, let's all get on
the same page. I need you to say x y C.
Bill.
Does that ever happen?
So the answer is yes and no.
Yes, John Williams, when John Wayns speaks, you have to believe that that's been carefully choreographed with the Board of Governors and Jay Paul. When other Fed presidents speak, No, that's not choreographed. That's them operating on their own. So Paul speaks, you want to pay Paul's speech, You want pay attention to John Wayne' speech. You want to pay attention because they're part of the Troyka, the core group that sets monitor policy for the FED.
So I think, look, I think I think people are pushing back a little bit.
I think the market is sort of running away from them when when the story isn't really completed yet, I mean Paul's Paul's remarks last week. We're all about how he thinks things are going to evolve. We have to see if they actually evolved in that way to provide the motivation for rate cuts.
Hi, Bill, I appreciate the update, great pace of morning. Enjoyed the raid. Bill down be there of Bloomberg opinion on the gamble. He thinks this federal Reserve is taken with the grand pivot that was seemingly unofficially announced. I'm really placed to say that. Revisiting a surround a table at Prayer Misra portfolio manager at JP Morgan Asset Management more than Prayer. We were talking last week on Wednesday, going into that news conference with chairman pound pushback, I
was with you. Surely we were going to get pushed back from the chairman. We didn't get any Your point, I think is an important one, and we dusting off the twenty nineteen playbook. And for those that might have forgotten, what is the twenty nineteen playbook?
So in twenty nineteen, what the Fed did was try to, you know, cut rates. They cut rates seventy five basis points, really trying to extend the cycle. I think this is the power Fed. This is the Fed that says once they get the green light from inflation. What did surprise me was how quickly they convinced that inflation is actually going to head all the way back down to two percent.
They're trying to get that soft landing. They're really really trying to get that, and if that means that they can normalize policy, that they can get real rates I think closer to one percent, one and a quarter. They think they can actually extend the cycle, that we don't get that recession. I think it's a little, you know, a little bit of a risky move here, because what if inflation does tall but if you're at two and
a half, that's not that far from two. Now, whether it will work or not, I think that's the trade for six months out right now we're in immaculate disinflation. We're seeing growth slow down but not to recession levels, and they're hoping that by these preemptive rate cuts that they can actually you know, get that. Yeah, that's soft landing.
Language matters, you didn't say easing, you said normalize. What's the difference.
There's a big difference to not every rate cut is essentially created equal. I think the Fed right now, the market's hearing the Fed is cutting to the Fed is easing. I think what they're trying to do is get rates to some sort of neutral level. We don't know what neutral is now. We'll be debating our star for the next year. You know what's that level at which point policy is essentially accommodative. We're very far from accommodative. In fact,
Japao said that last week. He said, we're well within restrictive territory. Normalizing, in my mind, is getting rates to you know, feed funds two seventy five, three percent, something in that range. Easy would be. Well, you know, below that, we're talking one percent two percent. The market right now
is pricing in normalizing. So when I hear that too much is getting priced in, No, we're pricing in inflation getting back down close to two percent two two and a half, and you know growth in that one percent range two seventy five or three percent fed funds is normalizing. I actually think we still don't price in this chance. So the FED may have to cut well through that because they're trying to extend the cycle. But what if the damage has already been done? What if the lags
kick in. I think there's a chance that the Fed may have to cut, you know, well south of that three percent level, which the market is not pricing in, which is why I think there's more room for rates to decline.
Why do you think there are so many Fed officials lining up to push back, and we heard from Fedshair Japowell if it is consistent in with what they hope to do.
I think they're really trying to prevent getting bullied by the market to cut all the way down to zero a one percent. Whether that will work or not, I think the market's saying it's not.
Even bullying them to that degree.
They're only billing them one hundred and fifty basis points exactly.
But what if the growth data does start to slow down? Then I think the market might say, well, you're going all the way down to zero, and I think the Fed is saying, well, there's a very different bar. There's a different bar to normalizing, We've we've reached that bar, and then there's a different bar to actually take rates into accommodative territory. It's a very nuanced message, but it's very hard for the market to actually make that, for the for the FED to make that point, and secondly
for the market to hear it. So I think the trade for today is the Fed's going to ease. They're trying to get that soft landing until we see data that it's not working. It's risk on.
Well, here's my issue.
There was a time when we thought that the easing and financial conditions mattered, that it actually would have some sort of stimulative effect on the economy and potentially on inflation.
FED shir J.
Powell had the opportunity, he had a soft path respond to that.
To basically lean into that message.
He did not do we take a message from that if they don't care about the easing and financial conditions, or do we take a lesson from all of the.
Other Feed officials that are trying to say it still does matter.
So I think financial conditions are always context dependent, meaning you know, financial conditions have yeast, but so has inflation. Inflations come back down. Look at three month moving averages. We're running, you know, south of two and a half percent, and the growth data is weakening. I mean, even if you look at payrolls, which is the strongest part of the economy, if I strip out a few sectors, it's
actually looking pretty weak. The consumer is levering up, and you know, we are seeing essentially a pickup in default. So I think if the household sector is starting to weaken, the FED looks at easy in financial conditions and says, actually it's appropriate. So I don't think they push back now. If we see a reacceleration and growth, absolutely, the Fed's going to push back. If we see inflation stalling out,
I think they'll say not so fast. But for now, if growth has slowing down, I think financial conditions matter a lot less.
Let's go through the levels two year right now, for forty two tenure at the moment three ninety thirty years, just about four percent. How much space is there for you to the fall from here given everything you've just told us.
I mean, it is going to depend on the data. My views. Things are slowing, and even though financial conditions are easying, the Fed's talking about rate cuts, it's hard for that to have an impact on the economy that quickly. So I think this zero to five or seven year part of the curve can absolutely decline a lot more. We should price in at any point a ten to fifteen percent chance of a recession. You start to put that in and then you're looking at the ten year
or the five year closer to three percent. So I think there is room for it to decline. May not be a straight line. We've come a pretty long way, very quickly. Two months ago we were at five percent on tens. We're talking about, you know, the supply narrative, so it's moved a long way. I think it can consolidate, but I don't think we're getting much of a backup, so I would use any backup as an opportunity to buy.
I think we can have a pretty flat gurve around three percent, and for the next few months.
Let's talk about the shack of the curve on place you went there. You've alluded to this. Just why is this curve still at negative fifty one two year versus ten yere Why don't we get in that classic end of cycle boast state to come through what's happening?
I think that's you know, do your question earlier around normalization versus easing. I think the market that's the part of the market that understands. So this FED is not talking about easing all the way down to zero, the curve will really steepen. I think when we see signs that were in front of a heart that a hard landing is in front of us. If we're still in a soft landing, I think we have a very flat curve. There should be some term premium there. But here's my
pushback to term premium. There's six trillion sitting in money market funds. It's felt cash has felt good, right, I'm earning more If the FED hike's more well, I'll earn more well. Now, actually think about reinvestment risks. As the FED starts to cut rates, those rates are not going to stay that high. Money is going to move out. And it's not obvious to me that all moves to stocks when real rates are close to two percent? What bonds start to look very attractive as well?
You said things with slowing Can we finish there? What is guiding you? Where are you looking across your dashboard right now, looking at various economic indicators? What's guiding your assessment of why this economy is going? Because I've looked at a range forward looking indicators for a while now, I've been signaling slow down and then Q three happened, So what are you looking at right?
So you know, I think Q three part of why Q three happened or that strength and the data was real income surging, inflation decline, but wages was still high. Well that's starting to decline because if you look at wage growth. So what I'm looking at is I'm basically looking at the household sector. So I'm looking at small business hiring. That sentiment seems to be slowing, you know, And I'm looking at the consumer. So at the margin
you've seen cracks. We still don't know if the cracks will be systemic enough and can the FED this preemptive easing actually prevent the cracks from deepening. But there are cracks in terms of the consumer you know, leverage in terms of consumer deforce delinquencies, so there's signs of trouble. I think it still too early to say is this hard landing, but we should put in some probability of a hard landing there.
It's good to say, you always So it's pretty much for the JP Morgan acid matter. Let's get straight to the conversation. J Philoscy is found lonely oh year constructive on the equity market. Now he's got a company, tons of company. The founder and principal at TPW Advice we joined us now, Jay, it's wonderful to catch up with you, sir. How good does that external validation feel for you this morning?
Well, it's been makes up for a warm, wet and windy Monday.
Morning in New York City, that's for sure.
So now it's you know, as you guys have been talking about you and Lisa and others, markets of rallied the rally right in your face. It's been very difficult to stand aside.
It's a classic. As we talked about your end rally.
You have a gate a calendar end of the year, you're under performing, because you have cash, you have to participate. And I read something infintwit over the week where it was like pain levels ten out of ten, right, So there's a lot of pressure on people to perform in this period and so there's a big chase going on and as you see it's continuing now into week eight.
Jay, you weren't bullish for the sake of being bullish. So let's talk about your framework, the process you've been calling for this return to macro stability away from what we've been experiencing over the previous twelve, eighteen, twenty four months. Jay, why are you still so convinced by that? And why is that the big outlook for you next year?
Yeah, I would say John, it's actually been three years, right, We've been in three years since COVID of you know, lots of volatility, you know, the inflation's fight, the central bank response, all these things have manifested.
We've had conflict, we've had climate issues.
So it's been a period the last three years of macrovolatility, and my view is that we're now exiting that period and we're entering a period of macro stability. All that stuff is in the background. It's all been in the past. It's been priced in, it's been discounted, and going forward, I think the outlook is pretty pretty positive. The FED is done, we're moving from a rate height cycle to a rate cutting cycle. We have economies that are doing
reasonably well. The US is growing this quarter two and a half percent, probably going to grow two and a half percent of the year next year consensus is one and a half. It's quite likely that that's going to be revised up, as you've talked about people revising up their targets.
Europe is bottoming.
People love to bash Europe, but European equities have also been up seven.
Weeks in a row.
And then you have China, you know, struggling to get going on the traction front, but still growing.
At five percent per annum.
So I think the negative outlook on things is just misplaced. It's been revealed to be placed by the market reaction. Market knows better than any one of us what is going to happen, and that's why it's forward looking, and that's why you in turn have to be forward looking. And so when we did our twenty our twenty four outlook, we had four macro surprises. One of them the first
one was lower than expected inflation sooner than expected. That's already playing out and the market is reacting to that. Another one is a return to macro stability and the unlock that it can present in terms of all that money well over at trillion dollars that when into money market funds can now start to come out. And that's why I think, well, the market is surely going to take a pause and surely going to pull back, and
that's all good, natural and healthy. There's so much money that needs to participate that I think that macro stability, the unlock of all that money that went into money market funds, provides a nice cushion so that I don't think you have to worry about a big down draft in twenty twenty four.
You've been enthusiastic about non US stocks for quite a while, including European banks. You were early to this party as well. Now we are seeing that broadening out. How much more conviction do you have now than say, six months ago, that that can continue.
Yeah, no, great question, Lisa. And look, our view, our framework has been very simple. We believe in keeping things simple. Lower inflation leads to lower rates, leads through a weaker dollar, leads to better out performance outside the US and good performance for commodities. Our Friday Musings last week was titled get Real, and the case we made was to.
Get real means get real assets.
And so we're really constructive on emerging markets, both debt, inequity.
They've been the.
Huge laggard, no one owns them, completely under priced, completely dismissed. We see big opportunities in em around the regionalization of supply chains. This fits right, John, you talk about framework. Our framework is the tripolar world, regional deepening in Asia, Europe and the Americans. And we're finally starting to see the opportunity to invest in that pieces with emerging markets Mexico and the Americas, Poland in Europe, Vietnam in Asia,
beneficiaries of the regionalization process. And then just to finish on commodities, commodities are one thing that haven't participated and yet what is a big beneficiary of a weaker dollar in lower interest rates commodities And so that's the opportunity as we see it right here. If you want to buy something now, you buy commodities. You buy oil, you buy copper, you buy gold miners, you buy agg We're exposed across the spectrum. So our two big bets for next year emerging markets in commodities.
Just real quick, can you take a page from Dalio's book and say cash is trash?
At this point, you know, cash is definitely a lagger, and that's what I said six months ago when everyone loved it. It's going to be a lagger. So yes, cash, you make four percent. Equities are up twenty percent. I would rather have the twenty percent, And so that's what's going to take money out of the money market fund and put it into risk assets as we return to macro stability in twenty four in twenty five.
In my view, very wise, Jay, because when people do call it trash, typically bad things happen. That was the right way Leason to answer that question.
All Right, there we go. That's called diploma diplomacy.
Although I will say that his note, I just have to read the way that it began.
Wow.
One has to admit that external validation, especially from a well respected source like.
The FED, sure feels good.
This is someone who is definitely taking a victory lap after a really stellar year.
As well deserved. Jay enjoyed the Christmas holiday. It's going to catch up Jack Peloski, the of TPW on the Nightist. Let's talk about the other the war between Israel and Hamas. Eliot Akiman joins us now the US Marine Corps veteran and former White House fellow. Elliott, you've got experience of this. It's valuable to us to lean on it. So thank
you for joining us again. The door to door combat that we're seeing take place in Gaza, the fock of war, so to speak, and the tragic loss of life, both civilian loss of life and what we saw in the last few days hostages losing their lives as well. Elliot, can you talk to us about the nature of combat right now and how on earth these things happen?
Well, the one thing I think is worth emphasizing is it's very difficult to overstate how chaotic this type of urban combat is, how difficult it is in certain situations to know exactly what's going on. So obviously, you know, this incident where these three hostages were killed is a tragedy. You know, it's important to us to just bear in mind the context and which happening in which these Israeli soldiers that have been fighting for weeks house to house,
room to room in Gaza. You know, I fought in the Fallujah battle in two thousand and four, and oftentimes, you know, it can be difficult in the heat of the moment to know, you know, who's a friend, who's a foe, even when someone would be appear to be surrendering. I actually have a friend of mine, Dan Malcolm. I wear a bracelet for him, one of his bracelet for twenty years, and he was on a rooftop in about thirty minutes before he was shot dead by a sniper.
A group of individuals who we thought were civilians looked like they were trying to surrender. In fact, they weren't civilians. They were insurgeons posing as civilians. They were trying to surrender so they could figure out where our positions were. Now, this doesn't excuse what happened in Israel, but I hope it just gives a little bit of a context for the types of conditions these soldiers are dealing with.
As you know, Elliot, in the court of public opinion, accidents don't seem to mean anything. It's the loss of life that is important. There is pressure building to end this war and quickly, And what we often hear about is time. How much longer can it go on for? I think you draw a really important distinction between time based policy and condition based strategy on the ground. Why is that so important, particularly for this conflict and for where this administration in America stands on it.
Well, I think we've seen in the past that this administration has got in itself in trouble when it's leaned on times based conditions. And I'm speaking specifically of Afghanistan. You know, when we pulled up on a calendar that of not making sense on the ground. And I think in the case of Israel, you know, the objective of the Israeli government, as they've stated, is the destruction of Hamas.
If you pull out before that job is done, you know, it's basically analogous of you know, if you had cancer, finishing your chemotherapy when you've only got ninety five percent of the cancer, it's going to metastasize and grow again. So in my old business to military business, we are to say, which is, you don't want a gentle surgeon when you will go in to get these jobs done.
You've got to get the whole job done, and you don't necessarily want to do it gently because you can wind up causing more damage than if you just get it done decisively. So, and I'd also just point out it's sort of strange to see this juxtaposition of needing the speed and needing this finish and demanding that it be finished within days and weeks in Israel, while seeing sort of a willingness to allow the war in Ukraine to kind of just drag in year over year over year.
So I think it's important to also keep those two in our minds.
Is Lloyd Austin a gentle surgeon.
I don't think Lloyd Austin visionlessly is a gentle surgeon. But I think what the administration is calling for by saying let's just finish this in this pressure campaign is basically asking Israel to engage in gentle surgery. I don't think Israel is going to. Frankly, I think there is a level of result there that we can't completely appreciate
in the United States. But I think there is a danger there that if they were to in this fight right now, when it's mostly done but not all the way done, that this would just wind up being an even worse conflic because they're going to start fighting it again, you know, months or years down down the road.
One of the best voices we could talk to because you can appreciate what it is in a region like that that is engaged in hand to hand combat and that has been going on for a while. The civilians, and this is sort of one of the big fears is that the humanitarian crisis is getting incredibly difficult to deal with and you cannot get aid in if there
is active combat. Is there any corollary to this moment where there could be some way of assisting civilians while continuing the campaign that you see as well continuing?
I mean this gets down to the particulars on the ground. You know, what areas are safe. Are there areas that the Israelis feel they've sufficiently cleared out of Hamas fighters so they could allow civilians to come back into those areas and get aid to them. And you know, hopefully we can start to maybe see something like that where
Israel has areas that they feel they can control. But you know, again, you know, they shouldn't be forced to do that before they're ready to do it, at the risk of having to go fight this fight all over again. Because Hamas is a determined adversary. You know, we've seen that, We've seen now the images of these tunnels that are
wide enough to drive cars through. You know, Hamas is determined to destroy Israel, and Israel, I think appropriately is determined to defend itself and make sure that that can never happen.
If you look at financial markets, it's as if nothing's really happening. I think there is a belief from investors that this conflict will remain contained, and yet there are some cracks in that theory when you start to see attacks come from houthy militants on foreign shipping companies, and foreign shipping companies start to think about pausing the use
of the Suez Canal. I just wonder, Elia, how convinced you are that this particular conflict will be contained to where it's playing out right now.
You know, it's less that I'm convinced that the conflict will in all cases be contained, and we've seen that it hasn't actually been contained where we've seen attacks on US troops in Syria and Iraq from Ranian militants. But I think what probably gives individuals confidence and gives me confidence is that if it starts to really overflow into areas that are problematic, the United States and as allies have the capacity to quickly contain the conflict.
That the US Navy.
Goes up against some vessels from houthy rebel groups, the US Navy is going to win, but you know, we don't want it to get to that point. And I think, in addition, what's going on Israel, the US Department of Defense and the Biden administration is very very closely watching these other events in the region.
Just quickly, Elliott, how much does it changed the game that this is essentially the first war that's been live streamed.
Well, I think the game is so much as tactical decisions. Things that happen, you know, on the ground are immediately projected out to the entire world and have strategic implications. And we saw that recently with the deaths of these three hostages. And you know we've seen that, but not only in Israel. I mean, well have seen the Ukraine as a war that has been a social media war,
as was Afghanistan. And so really in the last handfull of years of political capitalist of war has changed because as you just put, you know, these wars are live stream the runover social media and we all experience them.
Edie, thank you for the update. We appreciate it as always. Elia Akman then leading on his leading on his personal experience and in Irock.
And now Sweare.
Kevin book has been covering this trying to understand the implications. And I'm so pleased to say joins us now co founder of Clear Food You Energy partner is Kevin can we just start by trying to understand how important this red Seat passage really is for shipping.
Thanks good Martie, thanks for having me.
It's eight percent of global energy, about nine percent of global oil and petroleum products. So an enormous amount of energy that goes into the world goes through the Red Sea.
So what is the potential consequence if these attacks do continue? How much more time is required to ship things in alternate routs, how much more energy will be used?
Oil will be used for those shipping routes.
Is relatively insignificant compared to the supply impact.
There's two aspects to this.
The first is the additional latency introduced by going through the Suez Canal and then around Africa, and that depending on the speed of the ships moving, and they do move somewhere between ten and fourteen knots, you could have anywhere from between ten days to two weeks even a little longer. The second is capacity constraints on the Suez Canal itself, and to some degree, the number of ships that move through is one aspect of it.
They're also the size of the ships that move through.
The Suez Max tanker size is so called because it's the maximum size tanker you can move through the Suez Canal, and obviously the limitations in fleet capacity can introduce additional pinch on supply.
Right now, crude treated on the n IMAX is up two point three percent.
Is this sort of appropriate in your view?
Do you think that we should see an even bigger pop and oil price is just simply because of the supply constraints that could come from prolonged shipping passages.
Well, yeah, we thought it was significant when we wrote about it a week ago, and we noted how audit was that the market wasn't yet pricing it in. As for the magnitude of the increase to date, I mean, obviously the numbers I gave you would be staggering. If that amount of supply was disabled, we would see double digit moves in the oil price on a dollar for barrel basis. But a lot of this depends on really the decisions that actors make, and there's a lot of
players in this. Questions about whether or not the Saudias, for example, will continue to ship through the Red Sea, and whether or not they believe they're at risk of attacks, the risk tolerances of other players, and for that matter, the evolution of the task force that the US government is working right now actively to stand up with other players in the region emulating a similar task force in
the strait of hormones. Last variable, not to make this more complicated, is the question whether or not the Eisenhower carrier strike group, which moved into position potentially to strike the Huthis, risks a different kind of escalation that could produce reprisals in other parts of the region.
Given all of those variables, what's the appropriate price for oil?
Well, we thought we saw pressure to the upside a week ago, we're seeing it now.
We think there's a room for more.
At this point.
What kind of response would be de escalatory versus escalatory?
Right, there's this.
Group that you said is trying to come together to come up with a way to deter Hoo they militants. What are you looking for as a response that could relieve some of the pressure on oil versus the opposite.
Well, it really depends on the root cause of the problem.
Here.
The Huthi seem to be doing some It's fundamentally and conceptually similar to US secondary sanctions. Initially, they started targeting anything with nexus to Israel and Israeli ownership or management of the shipping company or the tanker, or for that matter, just cargo's going into or out of Israel. They've cast the net even more broadly. Now a stand down, some
sort of accommodation that they have a narrower focus. That kind of thing might potentially take some pressure off the Maritime Task Force to the degree that it can provide security for tankers in the region. Might not eliminate the risk premium, but it could potentially keep it from rising.
At this point, a lot of people are discounting a lot of the geopolitics, simply saying the US pumping record amounts of shale gasoline prices on average in the United States are basically three dollars on average, and you can see that across the nation. How much does US production offset a lot of the potential geopolitical headwinds that could cause prices to rise.
Well, so there's.
Two things that are really offsetting, and one is, of course the prolific production here in Guyana and on Brazil. You're seeing non OPEC production surgeon and that has buffered prices. And of course we can't overlook demand weakness in China. But the other side of that is that the supply cushion that you get from spare capacity from OPEC producers is usually something else that can come to the rescue.
But in this case, that supply cushion is less available because part of that supply could potentially come out through some of the very same choke points.
That we're discussing today.
So for that reason, I think we may see more risk showing up in price perceptions as we go forward.
But yeah, we've been sleeping.
Through some very serious potential supply risks for some time, very reassured by production.
Well, this is the reason why some people are wondering what did they get wrong? How much do you think is that the demand side is offset by the increase in electric vehicle use and other alternative sources of energy.
Well, so, so every million electric vehicles on US roads, where we drive more with less efficient cars than other parts of the world, is only about thirty thousand barrels per day of demand destruction. So we're selling more than a million a year. That's not really showing up that much. You see the bigger numbers posting in China, and now you're getting bigger displacements, but still that's not changing the demand picture.
Demand is going ahead, at least in the near term.
There are a lot of folks who would say that maybe the predictions of a plateau or even a peak this decade or even premature. So with that in mind, I think we shouldn't discount that there's an immense appetite for crude oil out there still and liquids generally, and with that, supply risks still very much matter.
To put this all together, people have been talking about ranges heading into twenty twenty four, ranges that oil could move within, given the need to both not loose money on product producing oil in the US and also the desire for Saudi Arabia to make a certain amount per barrel, what is that range? Given the risks and give in the supplies that we've seen from the US.
Well, the idea that there's sort of a natural eight handle floor established by fiscal break evens or other mathematical computations has a little bit, you know, of I think hopefulness to it. There's two active wars going on right now in energy producing and consuming areas, with risks potentially in Venezuela as well, although they currently seem to have abated with.
That in mind. I think it's a bit odd to look.
Only at supply demand balances and assume that the world as it is today will be how it is in the coming year. But if you do look at that, you see supply outstripping demand in the first half of the year. Our latest look by College Jack Brusau looked ahead at it and it looks like there's still weakness, and with OPEC plus clamping down, the incremental clamp down isn't necessarily enough to stem it in the near term.
But this is where geopolitics comes in, and.
Always it's important to remember there's an alignment of incentives here for Iran and for the other folks who are aligned with Iran.
The idea of a higher oil price because of geopolitical risk isn't a bad thing. It's a tailwind.
Kevin Book of Clearview Energy. Thank you so much for being with us. 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 on Bloomberg dot Com, the iHeartRadio app Tune In, and the.
Bloomberg Business app. You can watch us.
Live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg