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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. We begin this out where stocks holding at record highs as optimism grows over and enter the war. Darius down of forty two macro writing the twelve month outlook is bullish. The next few months, however, may prove volatile. Darius joins is now for more. Darvis, good morning, going to see you. Oh great, see you, Jay, Welcome to the program as well. What's going to be the source of that volatility?
Well, I think we're not out of the wood yet as it relates to the strait of Hormoz dynamic and we also have the return of credibiles positioning across gold financial markets. So if we get another axio setline that is leaking in the wrong direction, then you can have a little bit more volatility. But when you take a medium term view on the markets and on the economy, things are about as good as they've been in a really long time.
I'd say since early twenty twenty one.
Let's just stay on that. Look at the economic data, look at the earning. How impressive is it that we've got a central bank that's still holding onto an easing bias.
Well, that's a hotly separate conversation.
But the thing I'd say about the FED is the biggest mistake the FED can make this year is doing anything. This is an economy that has accelerating inflation when you look at the inflation components that they care about, this economy that is accelerating bank credit growth. At the same time, we have a productivity boom, and we are, in our view, we think we're heading into a job with recovery. So on the push pull dynamic there, it's just say the
FED should stay on hold. I think that would be The markets would probably not like the FED doing anything in any one direction because it would create tension on the other side of the mandate.
It's not totally unrelated, though.
The whole point is when you have such robust growth to John's point, the strongest as you were saying since twenty twenty one, and then you have a FED with an easing bias, how much does that increase the risk of an inflationary kind of impulse that creates a headway that people aren't really pricing in.
Yeah, well, I think we're already seeing the inflationary impulse.
If you look at, for instance, score PC.
Inflation on three myth vnualized basis, we're a four point four percent supercore PC inflation, we're four point five percent. So we already have the inflationary impulse. And so the best thing that FAY can do right now is to
jawbone that away to the extent possible. And our view, we think it's going to go away because if you look at the relationship between productivity growth, we think we're in a one hundred and fifty to twenter basis point acceleration and trend productivity growth that should knock off about forty to fifty basis points from trend inflation, while at the same time you have some very depressing components in the labor market that are weighing on wage inflation.
From a cyclical and structural standpoint, the.
Real inflation dynamic in the economy when we get past this inflation shock should be much lower.
At our pain, you said that there was this depressive factor coming from the labor market. How would this market treate a very hot labor market report tomorrow, Let's say the number of jobs created much above what people had expected. Let's say wage increases much more than people expected.
Yeah, I think what's going to happen is the market's going to price in more tightening in the short short rates curve. And so that's, in my opinion, I think
that would be an appropriate response from the market. But the reality is, we don't think that dynamic is sustainable when you look at you know, for instance, core private services payrolls, which lops off healthcare, social services, education, and government basically everything that the government is the main consumer or the employer of that peaked two years ago two years ago. And so in our view, we think this AI dynamic is real. I mean, it's hard to statistically
test it, but we think it's real. We think we've never seen a trend like this with the tabooming economy.
Do you think when it comes to AI that actually it's going to help international stocks over US stocks.
Yeah, I think it's going to help all the stocks that have been left behind by the megacap tech companies. And the reason we say that is not because we're bearish on the megacap tech companies, is that we think that the transfer of that technology will create a convergence in productivity, create a convergence in margins, create a convergence in ultimately evaluations with the stocks that have been left behind from a capital allocation standpoint. When wen't we see that,
I think it's already ongoing. And the trade started a year and a half ago, so I think that trade. I mean, we obviously took a pause in the context of this straight or Her Moves dynamic, because that's a cyclical headwind in the economy.
Once we open the straight or.
Her Moves and those barrels of petroleum products are flowing, I think the market's going to start to look around and say, hey, we have a lot of credit bullish positioning here. We don't have any credit bulist positioning here, but we're going to see a convergence in the operating.
And just sit on that just for a moment. The biggest risks of the tank rally might be a reopening of the strain.
Yeah, well on a relative basis, I don't think you're going to sell tech stocks on that, but I think on a relative basis, yeah, can we.
Just finish on the capex boom from big take? Do you think that is a bubble? How do you think about the capex intentions from a handful of companies.
Well, look, I'm not smart enough to determine if it is or is not a bubble, but I will say very better, much better investors than I have have said when something doubles in three years and were obviously seeing a double one nick Ai capex in.
One year, it's a bubble.
And so the key takeaway is that whenever you have these historical capex bubbles, you go back to the railboat bubble, the consumer durable goods bubble the end, and the it capex bubble.
They tend in in secular bear markets.
So I think that's where we're headed longer term, but I don't think that's a medium term risk.
What do you do with chips in the meantime seems to be a question I get along. We've seen this massive rally. Something that is stuck out for me this week was a comment from Barclays. We caught up with mister Oltman over there and he said, we need to focus on where we are, not how we got here. How we got here was super fast, vicious rally. Where are we now? The valuation? What is the price we're paying up for somebody? These chip stories.
Yeah, I mean it's.
Loony tunes price. But again, twice a silly price is not twice as.
Silly, right.
I think that our friend David Eino has said that a while back in the meeting. So the thing I just say on the chip stocks is that you have to take profits and start to look at businesses that are going to have a faster convergence in their profitability.
These are lower comparative based.
Businesses from the respective of margins, from the respective for earnings. So you transfer that technology, we're going to have a fast rate of change in their growth rates.
In our opinion, that's a durable catalyst.
So just pick them out. What sectors are you focused on right now?
I mean financials are the obvious component. The banks, The banks, Yeah, the banks I mean.
There's so much more. I mean it's very dark. But the banks a lot of you.
Know, employee compensation as a percentage of their total revenue.
You're expecting job cunts.
I mean it's the underperforming banks will cut jobs. Underforming companies will cut jobs. But the best performing companies will just stop hiring. And we've seen that in the labor market. Little hire, we'll fire, stay with us.
More Bloomberg surveillance coming up after this. So here's the laces this morning. Oil hovering their triple digits after plunging on hopes of a deal between the US and Iran. Max Layton the city joined US now for more, Max, welcome to the program. Hopium will drive the paper market, it will not help demand a supply clear at spot. Can we just start with physical? How tight are things still? What kind of prices are people paying up for physical barrels?
Sure?
Yeah, so the physical barrel price isn't isn't too much higher than the futures price. Actually, we've done a lot of questions about that particular subject over the last couple of weeks, and you know, it reminded me of what happened back in twenty twenty when oil went negative at WTI, actually across the USA, physical barrels went negative and price negative that day and the next day across the US,
even though they didn't fill up on storage. And the point I'm trying to make here is that actually there's a lot of information in the futures price. People talk a lot about how spot price is the real physical price, but the spot price this this physical price actually, for example in the second quarter twenty twenty, actually priced off
the futures price. So I'm not sure it says clear cut as Hey, all the information's in spot because a lot of the spot people, you know, they will be trading based on where the futures are.
Max.
This is really important. I just want to build on that because most people thought, particularly in the commodity market, that we'd see paper prices converge up to physical But physical has converged down to paper.
Markets, right yep. And that's despite MAX.
That's despite Max the strait still being closed.
Yeah, And look, a lot of it is to do with the I think the fact that there's you know, it's quite binary in some ways. It's very difficult to predict if in particular, the IRGC leader Vahiti and mons tabacome Any are going to do a deal or not. And you know, I think it's fairly clear the US would like to deal, certainly, you know, on their terms. But in that environment where you basically don't know if there's going to be a deal or not, very difficult
to predict. With this new leadership in Iran, you know, you're going to be subject to news and you're going to be moving around like crazy. Like a week ago, we're trading one hundred and twenty five front month and we're now at ninety eight. And it's on some hope of a deal, of an hope that we'll talk about.
A deal, but putting a deal to a side the actual physical market and basically what you're saying in terms of if the physical market is coming down to where the futures market is, that basically shows that the world has enough oil right now, doesn't it.
Well, I mean it does.
Over the last couple of months, what we've lost, what we've actually lost in physical barrels is less than what we built over the preceding twelve months. So there's been quite a There was a decent buffer that we built up in the vicinity of seven eight hundred million barrels globally. Now most of that built in China, but even still globally, we built some significant barrels in the lead up to this,
and we're kind of eating through that aggressively. Physically, the impact is going to be much more kind of spread out over time, and I would so, for example, even if there was a deal today, it would take at least a couple of months to ramp back up production to minds, to do all those kind of logistical things, and you would roughly double the losses that we've already seen over the last two months over the next two months. So physically, it's going to happen over time, yeah, I
mean that. And the other big thing is, obviously, as you draw the inventores, there's a convex relationship between inventries and price, so you know, as you as you So initially we're just drawing what we built over the proceeding
twelve leading up to the conflict. But eventually, certainly by the time you get into the third quarter, and that's why a lot of people are talking about that being the pinch point, then you get you can potentially get inventries down to levels which are consistent with you know, one hundred and fifty one hundred and eighty dollars brand two hundred dollars plus product prices, that kind of thing. So the physical that pool is a bit more gradual.
Max, just real quick here, what would it take for you to actually lower your forecast for oil prices?
Is given that you.
Seem to see the market as much more realistic than other commodity strategists.
Yeah, So look, I think it's all about for me, it's about any signs that this regime is going to put, is going to do a deal, and that they're essentially going to put I guess you know, one of the benefits of them doing a quick deal is it can be tied to legitimacy that they don't want to disrupt the global economy and that they'd rather do a deal and in exchange for obviously reduced sanctions and a number
of other monetary benefits. So I think any sign because to me, when I take this to an extreme, I think this regime can last not just months. I think this regime can last under blockade for years. It's plausible that they simply print money and prioritize that money towards you know, the pro regime portion of the population, and so when you think about it from that perspective, this regime a lot of the choice about when they deal, how they deal is up to them.
Stay with us more Bloomberg surveillance coming up after this, Terry Hanks of Pangaea Policy writing, we put the potential for snap back to hostilities as more than a trading risk at least. Terry joins us now for more. Terry, welcome to the program. This White House seems pretty committed to de escalation. They had the opportunity to escalate things earlier this week when things got volatile. What would it take to resume hostilities?
Well, I'll take the answering that question, John, I'll take the other side of that argument. The White House would very much like to de escalate, but they wanted to de escalate based on Iran not getting a new and the strait of horn Mooz reopening.
So as long as around won't.
Agree to that, they're going to continue to do that, continue to push, and they're also you know, continuing to ratchet up the economic pressure on around. One way to look at this is that the White House is betting that the economic pressure on Iran causes around to buckle before there are serious consequences worldwide. But fundamentally, if Iran remains recalcitrant on any of this stuff and sticks to it,
then I think you're that. I think you are, you know, at least likely to see not just rhetoric on ramping up. I think you're likely to see some action to show people that in Iran that the United States is serious about this terry.
Though when it comes to this one pager, a lot of reporting about it basically outlines something very similar.
To the JCPOA.
How is that in and of itself acceptable to this White House?
Well, I think there's a lot of crossfire reporting on this, and Marie, frankly, you get the kind of memorandum of understanding, and at the same time, the memorandum of understanding is supposed to describe a condition where serious negotiations will start based on that memorandum. So you know, there's a lot of gauze here, and you know, Trump is trying to limit their options in order to provide more progress and
ultimately get them do a deal. But you know, the way I would look at that is, you know, I don't think that's certainly the base acceptable condition to the United States. Equally importantly, I don't think it's a base acceptable condition to our Gulf allies, who very much want to see the Iran genie put back in the bottle and for a generation at least, and want a situation where they don't have to worry about Iran as a threat overall.
But when it comes to this White House, they're clearly concerned about how stocks around the world are being drawn down when it comes to fuel and other gasoline products and the midterm elections.
How are they weighing both.
These options, because obviously, if you escalate in terms of kinetic hostilities, that's going to be an increase in oil prices.
Well, yeah, of course they're concerned about the economy, and they should be. But at the same time, I think it bears understanding that they're not concerned just about the economy. You know, there's there's a there's a long litany of things that we all could say. You all said on air, I've said, you know that there are lots of downsides for Trump going into this, and yet they did it anyway.
So there's a you know, there's there is a geopolitical problem here, the iron nuke problem, and now the straight problem that is underappreciated. I think in a lot of this and was was considered by this White House to be so important that all the downsides, you know, didn't balance it out.
Terry Wiki the potential political rammifications correctly here. Yesterday we saw the Indiana and Ohio primaries actually on Tuesday, but yesterday we got the actual results, and some of the candidates that President Trump supported, even at the behest of.
Incumbents, were the winners.
It seemed to indicate the President Trump still has quite the clutch over the Republican Party. Are we overestimating the political laws from this conflict in the midterms today?
I think so, Liza on Behalf are for a number of reasons. One is that Trump showed in Indiana that the base will come out and the base will be motivated to.
Give him what he wants.
So you consider that accounter to the enthusiasm gap that so far as favorite Democrats. Secondly, on the redistricting business, you know, there's a lot of people who come on and will tell you, oh, you know, the Republicans are going to lose this and all the rest redistricting effects potentially as many as two hundred out of four hundred
and thirty five seats in the House. Firstly, Secondly, if you bring all those redistrictings together, it comes up with assuming that the district stay R or D, it comes up with a very tiny R advantage today I think it's plus three plus four or something like that. But either way, there aren't going to be massive swings in the in the House and in the Senate. What it looks like is that the progressive left and you know, with people like Graham Plattner and the gentleman in Michigan
who's running, are taking over. But really in doing that or seeding the center to people like Susan Collins. Also, that's also not good for Democrats. So you know, I'd urge everybody to take a breath on the narrative.
What does that imply for policy that maybe people are underpricing.
I think what it implies for policies a couple of things. One is that if there's a continued Republican Washington, all are Washington, then you know, legislation can continue as well as regulation. I think what markets are pricing in today is that majority in at least one house goes away.
But even in that scenario, regulation continues. But if there's an all our Washington, then you should consider that animal spirits will continue to be up because there will continue to be optimism about the possibility of Trump continuing to stoke the economy and kind of bring it back to a position of greater dynamism than there was before.
Terry Quick final question, can you believe it's been ten years since please clap at Jeff Bush in New Hampshire?
Ten years.
I'm so glad you brought that up, And just because it's great and you know, then we can also throw a lot of the Biden ones in, though you know, the quality of mercy is not strained and the quality of politicians are clearly going down.
This is the Bloombergs Events podcast, bringing you the best in markets, economics, antio 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.