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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hortern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App.
US Interior Secretary Doug Burghram joins us.
Now.
Secretary Burghram, thank you so much for being with us. I want to start with just how important it is right now for the United States to increase energy supplies across the board, not just with drilling, but across the board the face of the demand coming from AI.
Well, good morning, Lid. You say, yes, it's absolutely essential, and this is.
Part of the just a noun to National Security Plan that the White House has released. That Security plan mentions energy twenty three times. There's an entire section about energy dominance, and folks should think about energy dominance as the ability for the US to sell energy to our friends and allies so they don't have to buy it from adversaries, particularly those adversaries that are either funding terrorism or are funding wars, actively funding war machines, and so it's core
to the strategy right now. But it's also, as you've talked about on the show, is about with AI because never before in a history have we been able to convert a kill, a lot of electricity into intelligence.
The demand for that, regardless.
Of stock prices or stock movements, the demand for AI for intelligence applied to every job, every company, every industry is going to continue to increase the demand.
For electricity around the world.
The US as an energy dominant country, now the largest oil producer in the world, largest LG exporter in the world, and growing quickly with that strategy, it bodes well for the future of the US, both in terms.
Of peace and in terms of prosperity. Secretary, I'm sure.
You're aware WTI is under sixty dollars a barrel. What's the impetus for the oil and gas companies in the United States to continue drilling wells at this price level, which potentially could be a loss for them.
Well, I think one thing that we know that in Trump administration we're cutting red tape so rapidly. We think that one of the early targets we had was cut ten percent of the cost away from those producers just by cutting red tape. So if you think about sixty bucks to day, it might be what sixty seven bucks was a year ago because of our ability to take
cost out for those producers. And there's example after example, whether it's from the EPA, the Department of Energy, Department of Interior, where we've been able.
To help reduce costs.
And of course this industry has been better than almost any in terms of gaining productivity. The shale producers now drilling three mile laterals instead of two mile laterals, up to four mile laterals in many places offshore. We've seen examples overseas of people driving building ten mile laterals when they're getting after the shale rock, all with the same.
Small well pad on the surface.
So, you know, great for great for land management, and great for energy production.
And kudos to this industry.
This, the entire shale revolution has occurred through innovation, and that innovation is going to continue, and with AI applied to that, it's going to even get even better. So I see the leading companies are getting their costs down even as demand is going up.
But Baker Hughes is talking about drilling reactivity has falling sixteen percent since Trump took office this year. The President loves to talk about drill, baby, drill. Do you expect that to change those numbers to change next year?
Well, I think again, I have to take a look at the at the numbers when we talk about drilling activity. In my home state of North Dakota, we had a number of the well count was going down, but the miles of lateral productive rock could be going up.
And so you know, analysts have.
Got to make sure that they're actually keeping up with how fast this industry is changing, because we've got again record production occurring right now and we expect to see records through twenty twenty six.
One area where you have seen price increases has been natural gas. Natural gas prices rising to the highest levels in the US going back to twenty twenty two, and a real question on how much the US can continue to export to places like Europe in the face of significantly higher prices here in the United States. How do you plan to sort of set policy so that the US can be a big exporter to places like Europe while not allowing prices to go up so significantly in the future.
Well, again, the key is its supply and its infrastructure. We have places in the US right now where again, there's not one price for gas in America as you know. I mean, even though we've got the markets and we've got Henry Hub, but we've got we've got widely raging prices, I mean even in the different and a price in Pennsylvania versus in New England because the lack of natural gas pipelines that have been blocked into places like New England.
And when we think about we think about markets, you're talking about AI and the Capital spen and going against AI where we're an AI factory where we're actually creating and manufacturing intelligence. Those plants are going to go to the places where states have low electricity prices and policies are setting price, not just markets. And we've got policies in blue states around our country. California. You mentioned California.
Sixty three percent of California's oil is being imported from foreign countries because of blocking of pipelines coming into that state. They have a record number of internal combustion cars in California. They have more internal combustion cars than any other state as cars. And yet two refineries have announced that they're shutting down in California because of policies, not because of lack of demand, not because of lack of consumers.
And so what's going to happen.
You're going to have oil tankers and refined products coming into San Francisco Bay and coming into Long Beach and record numbers in California. Because of policies, they will have higher gas prices than virtually any other state. So again, we have a we have a strategy in America to help every state. The Trump administration wants to have low affordable energy prices for everybody, whether it's heating your home
or driving your car, or producing electricity for AI. But we're going to need the collaboration from states to make sure.
And if states don't.
Want to collaborate on that, then you're going to see this uh trillion dollars at AI, a historic amount of spend, all going towards states that have pro energy policies that drive down prices.
Secretary, We've seen a significant increase in energy costs especially for individuals who live near data centers. How is the US going to do both at once, both support these AI inities but also make sure consumers energy prices remain affordable.
Well, if you said on the show, I mean these prices are in electricity are local, not national.
And so there are the examples that you think.
We're driving that analysis right now and we're going to be publishing that from the White House to the National Energy Dominance Council, the Department of Energy doing great work on that. But a lot of the higher prices that you're seeing are not related to the AI data centers. A lot of the A data centers are going to be off the grid, behind the meter and then producing adding more energy.
Then and putting some of that energy onto the grid. So we could be actually increasing.
The supply in some of those areas where we've got increased pricing. It's because of the policies they pursued the last five years of having unreliable, intermittent and highly subsidized and projects, including things like offshore wind where people were spending eleven billion dollars to create one gigawatt of intermittent, you know, versus spending one or two billion dollars to create one gig a lot of assured seven by twenty
four hour powers. So the policy choices of the last five years, driven by sometimes climate extremists, were the ones that were that were that are driving up the prices you're seeing. I mean, electricity costs three times as much in New England as it does in North Dakota. That is not that is not because of data centers. That's because of policies.
Stay with us, Mulplinpex Savana's coming up off.
To this, Kate Moore of City Wealth writing, we remain fully invested in equities on this nominal growth backdrop and prefer gold over long and duration as a hedge to risk given.
The upward pressure on rates.
Kate, I am so pleased to say, joins us now for more.
Kate, good morning, Thank you forboding with warning.
So this has been a market that you've been cautious about for a lot of this year. You still see reasons that maybe the everything rally can't continue for.
Hours, but the tone has shifted. Why.
Okay, So it's not that I've been cautious, it's that we didn't aggressively add to risk because we prefer to take our exposure in large caps, and I continue to even after seeing some of the small cap rally. I think most of that and you kind of let into this a moment. Ago has been around rate cut expectations, and relative to some others, we don't think the FED should be cutting of rates at every meeting from now
until next June. I know some people are hoping for that and some pricing that in, and we think small companies desperately need that in order to really sustain a rally and to have better earnings and fundamentals. So we prefer to take our risk in the large caps space. We've done quite well there, but it's not that we've been out of the equity market or been underweight in any way a shape or form. We just want to be where their earnings are and where the free cash is and where we have visibility.
And that served us really well this year.
So what you're saying is it sounds like you don't buy that there is this truly durable rotation into small caps and to expand out of just where the leadership has been.
Is that correct?
Yeah?
I want to.
You know, so many people have written their year ahead report saying once again, same thing they did at this time last year. Next year is going to be year of broadening. It's going to be your broadening in sectors, it's going to be your broadening in terms of regions. And I'm not a buyer of that today, this first week in December. And let me explain why. Because we
are kind of later in the cycle. We are at a point where you can pick and choose whatever economic data you want to fit the narrative you want to tell about the overall macro and what policy might do to respond to that macro. And I think you have to be very anchored to fundamentals and where we have visibility into fundamentals.
Where we can see earnings, where.
We know that companies have the ability to weather any kind of sort of storm in the economy, whether that's a bit of inflation spike or a slightly weaker labor market or policy headwind. That's where we want to be anchored, and I think many investors will as well. You don't just rotate for the sake of rotation. You just don't
buy the laggards for the sake of it. In fact, we've done a bunch of quantitative studies to show that when you employ that strategy, particularly after a full year performance of kind of tech and comms, etc. You don't perform as well. Some of these things that are doing well deserve it, and we don't rotate for the sake of rotating. But isn't the.
Table set this time around better than it was last year in the sense that the FED looks likely remain accommoative. You have deregulation push from this administration, and the trade policy uncertainty is now behind us.
Well, so let me say this, We are really constructive on the deregulatory side, and it's a reason we've been talking about the opportunity in banks. I realize I do work in a bank, but I also can be objective and my job is to make my clients money in all parts of the cycle and in all sectors. So yeah, I see the regulatory side is a good tailwind for parts of the market and for the economy. On the trade side, much of the uncertainty is behind us, but
not all. And I like to say we were past peak tariff shock, but we're still kind of working through what's going to happen with the IEPA tariffs, which tariffs are going to be enduring.
What will trade life like look.
I'll be honest, I'm encouraged when the administration is pulling back or rolling back some of the tear of stay employed. I think that I'd like to see a more moderate inflation environment. But we know that higher prices are still filtering into the costs and to the end prices that companies are charging consumers. So I don't think we're past the concern. I think people are tired of talking about it and want it to go away. But inflation, I think is spicier than many are pricing in the market.
That's a core of you of mine.
Lisa and I've been talking about all week what the signal should be from the dollar stores and Walmart. Is it a good signal in the economy and the consumer or is it actually.
A negative one.
I think it is a cautious signal. I think we are getting consumers who are continuing to spend. We like this, but they're continuing to spend in a way that is conscious of you know, brand, it's conscious of value, and it's.
Conscious of like, you know where the best deals are.
We all know how this went kind of over Black Friday and the following weekend consumers are if they're in the big box stores, they're using their phones to price check at the same time, and we saw more people shopping online than in the stores than we have historically.
Continued that to see that trend.
And that's largely because people are comparison pricing on non prices, and I think that's a smart thing to do, but they are not stopping spending. But we do need to be recognized that we are at this later part of the cycle that consumers are a bit fatigued. This has been a tough year. They don't feel many things are affordable, from the regular basket of goods to housing, et cetera.
And we need to listen to that.
In the administration needs to listen to that as well.
So you talk about how you are somewhat looking at the large caps to continue to outperform, you're not screamingly optimistic about the US economy at the same time not seeing long duration as a hedge. I wonder how much this has to do with the glut of supply not only coming from the treasury market, but also from the corporate bond space, as it helps to finance a lot of the AI tech boom that we're seeing.
Yeah, so we've seen some sort of an uptick in some of the financing for AI projects and AI adjacent projects and infrastructure, but it's not setting off any.
Alarm bells for US. Frankly.
On the duration side, the thing that we're most concerned about is that we are exhibiting very little fiscal discipline in the US government. That is not a political statement, that's true across both Republican and democratic administrations, and that the rest of the world is kind of waking up to this, and that this is not a great picture
over the medium term. Frankly, if we think inflation is going to be a little spicier, and we think that they were likely to get no fiscal discipline in twenty twenty six, you know, the likelihood that bond yields stay where they are and move a little bit higher, that we're not going to get a lot of juice, you know, I think.
Is quite high.
We prefer to hedge our long equity position with more gold at this point.
Well, I wonder where credit fits in with this.
I'm saying this after Warner Brothers and Netflix their tie up has been confirmed this morning. That deal is expected to close of twelve to eighteen months. Netflix has been talking about using a lot of cash as well as buying shares. That is code for deb markets that are going to be financing this since they don't have that
cash on their balance sheets. At what point do you think that the credit market is going to experience some fatigue with the massive issueance and seeing not only from AI but from some of the other eminent activity that's come down the pipe.
Yeah, I mean, this is an excellent question and actually something we've been spending a lot of time on our research side on this week, because we're asking ourselves, you know, how much juice is they're left in the credit market. We know spreads on the IG and the high yield side are close to the fifteen year tights. It's great if you're a company that's issuing, it's not so great if you're looking for like a great total return from that ass a class and as acid allocators, that's what
we're really examining. So while I'm not calling for any significant spike in defaults, we have to ask ourselves, relative to equities, can we get the returns that we need on a risk adjusted basis from credit at this point and we're less convinced, and we've been a little bit underweight relative to our index. So if you're underweight credit, but overweight equity, but overweight equities and underweight long duration, balancing out with goal balancing out with this is a
new portfolio allocation. This looks like a different kind of model than you know, pre pandemic, the sixty forty type of allocation. It absolutely is and a big project we're also undergoing is really kind of rethinking how we construct portfolios in general for all of our clients. They need to be outcomes based and not just static based on
a sixty forty benchmark. You know what part of the portfolio needs to be generating growth, income and uncorrelated returns, and then where do the traditional asset classes and factor exposures fit into that. So this is a huge project for us and we are really really excited about.
What will take it.
Stay with us. Multilemberg Savannah's coming up.
Off to this.
Cossa's Hunter of Economist Intelligence saying a hasset led FED could go in multiple directions, writing if the hase To who wrote about the deleterious effects of inflation shows up at the FED, the markets should feel relieved. If his loyalty to the president shows up, markets may show concerns. Constance joins us. Now, Constant is great to see you.
Thank you so much for being here. I want to start with why we haven't seen more concerned markets yet, because ultimately, if you're looking to the market as a barometer of fear, you're not saying any huge red flags.
So you're seeing zero fear.
And part of that could be that markets are looking sort of short term, right they know that there's going to be another or think that there's going to be another FED rate cut in December. Also, it's the makeup of the FED, right, the FED was designed as an institution to be immune.
From political pressure.
So whether you're talking about the terms of the governors, whether you're talking about the way the regional presidents are set up, so all of this is a very intricate timing game. I think the markets are betting on the fact that the Supreme Court will punt the decision to after February and so therefore Lisa Cook will remain in place. Right, that's really critical because if you have a threshold of five or four governors, they can overrule of the president's terms.
So there's a lot going on in terms of timing, and I think the market is betting on a few things that will keep that independence in place regardless of who is fed share. But also, if you look at Kevin Hasset's work from before he joined the first Trump administration, it really centers on the importance of keeping inflation low because the tax code is geared towards benefiting low firms during periods of low inflation. Right, So it depends on which Kevin Hassett shows up.
Yeah, it depends on which economy shows up too, right, because ultimately you're at the behest of the market and of the economy. Right now, we're kind of flying in the dark because we aren't getting a lot of real time data.
We should have just gotten the Non Bails report.
Sorry, newsflash, we're not getting it until December sixteenth. But right now we are looking to September PCE report coming up in about ninety minutes time.
I mean, what do they do with this?
How do we understand whether inflation is the bigger problem or whether it's the labor market.
Well, we pretty much know what the PC report is going to say with regard to inflation because a lot of that is derived from the CPI and the PPI. So we think it's about two point nine percent for a headline zero point two two percent for core. Those are both month over month numbers, right. The more interesting thing is going to be looking for any signals in
the wage and income data. And so we are looking for a little bit of softness in the wage data, but that's going to give an indication of the strength of the labor market.
When you say which Kevin Hasseid shows up, isn't he being chosen because the one that is going to be Donald Trump's chief marketer when it comes to the economy. Isn't it going to be him that is going to listen to him when it comes to lower rates, because it's the only reason why he's being chosen.
I don't think it's the only reason why he's being chosen. I mean, he is an economist who has a long track record of being in DC being a policy maker. He basically crafted the TCJA and he was very influential and the Cares Act. So I think I think is
he's being chosen for those reasons. But remember he's going to have to convince his fellow board members and the presidents who are going to be voting next year, that his policy direction is the direction that the FED needs to go in, and that is a big question mark. I mean that is he's going to have to use a framework, and he's going to have to think about policy within that framework. And keep in mind, we have the benefits of the One Big Beautiful Bill Act coming
the delayed tax refunds. We're looking for over three percent GDP growth in the first quarter, about three percent in the second, and about three percent in the third. How do you cut rates into that environment?
Do you think that potentially the rebates we're going to get the One Big Beautiful Bill and the fact that this administration is talking about two thousand dollars checks is going to make the inflation picture that much harder for the FED next year.
Well, the two thousand dollars checks, I think we need to put aside because.
We keep talking going, but they keep talking, do keep talking to and it's a midterm election?
Yes, fair enough, but yes, that would put more money in people's pockets, and it would make them able to withstand price increases because I think what you've seen with the tariffs is a lot of concern about people's ability to handle price increases. Firms have absorbed some of that tariff increase, They've reduced hiring in order to sort of compensate for that, and so the question is how much
are they going to be able to pass on? It would stand to reason if people have more money in their pockets, companies are going to be able to pass on bigger price increases.
We're talking about a federal reserve that's set to ease policy, and we're talking about pain among the consumer base at the same time that Wall Street is talking about enthusiasm for mergers and acquisitions. We've been talking on morning about this deal of Netflix agreeing to buy Warner Brothers. We're talking about returns that are likely to be above ten
percent on the S and P next year. Is this a potential headwind or a tailwind for essential bankers that are both looking for some sort of boost from consumption that will come with more of the wealth effect, but also could potentially be fueling froth in markets that seem pretty accommodative.
So it all comes down to productivity, right, If we really are getting the productivity gains and not just from when we say AI right. It's not just generative AI and chat GPT, but the productivity gains from just regular AI right are still being diffused throughout the economy, and that is an important driver of productivity growth.
So it really comes down to are.
We in a period of enhance productivity growth, in which case the markets are not excessively frothy, in which case the Fed has a lot more room to maneuver because ultimately that will help inflation. But there's going to be a lot of noise in the first and second quarter in the data, and it's going to be very difficult to interpret the underlying.
Factors that are happening in the economy.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, a gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.