Moniz Says "Mistake" to Underestimate N. Korea

what could be a significant shift in China's purchases of treasuries. Kylie, you've heard the news. Walk me through what you think is the significance the message that comes from these Chinese officials. Well, a good morning. I think that we need to know a lot more about what's actually going on. The notion that the Chinese would actually sell treasuries seems to me to be extremely implausible. Uh, you know, to sell treasuries that have to buy something else, and that would involve

currency transaction. And I don't think they're prepared to be seen as intervening in the currency markets. If they're just going to be buying less of them, Well, they have been buying less of them, although there has been a bit of renaissance recently, but that would mean that they're not taking in more dollars on their foreign trade surpluses, that they're taking in more euros perhaps, and they're they're buying more an exchange counterpart to the cash and flows.

But it doesn't necessarily mean a catastrophic sell of treasuries at all. I think that we just have to get some more information. But probably they're just going to buy a little bit less moving forward rather than liquidate their holdings. But it's not clear whether this recommendation is actually materialized into action either cows so we should probably think about that as well. But if you take a step back, last year they took the opportunity as their currency strengthened

to build up their effects reserves. Is there a message that we can take away from this about how comfortable they might be with the current level of the Chinese You are well. I I think that there's been and overt changed since President Gee's speech in Davos last year, in which he pitched China as the new champion of globalization.

To keep the the yuan strong and to make it even stronger so that people would have confidence in holding it is very clearly a competition developing between China and the United States to be the leader of globalization, the leader of free trade. And I think that a strong currency is part of china strategy. They're managing it. They can do it. Carl Weinberg with us out of our studios in London, which is a good and beautiful UH thing. Bloomberg Surmanance this morning brought you by U s c

F invest In. What's real Visit us c F Investments dot com. That's U s c F Investments dot com. We thank them for their UH support. Carl. There has been a grand shift. It occurred yesterday with a shock of a president to Davos. My phrase for the year is make Davos Davos again. Is a president could have succeeded that if he's going to go there without Mike Allen over to Xios calls a carrot and stick approach from one of his sources. Is the carrot and the

stick going to be felt up Happy Valley? Well, you know, Tom, I'd like to think that the president's handlers are sending him over there to try to repair US relations and to try to reverse some of the damage that has been done in those relations over the last year. For me, the highlight of last year's Davos was President Gee's speech, the one I just referred to, in which he proposed that China would promote globalization if the U. S wouldn't think.

This is a chance for the President to explain to everybody what US policy is, and I'm hoping that his his statement will be that the U. S. Believes in trade, it just wants to level the trading field. And that's a much more digestible proposition. That is not a multilateral tone. He isn't I mean if he if he Waltz is over there with Peter Navarro and Wilbur Ross. It's not a Davos friendly tone, is it. Well, it's not a

Vos friendly crowd. But remember the President will be scripted and that Navarro will only be one of the voices that will will draft that script. There are other voices out there, particularly over at the state side, that is concerned about Europe, for example, pivoting its primary relations away from the Atlantic Alliance to the stronger tie with China.

And I think that there are concerns in other parts of his advice pool about the damage that could be done long term to the US by being more isolated. Tom Kane, this is not the morning to talk about the World Economic Forum, not with the moves we've had in the bond market of the last Maybe the link you think Trump going to Davos is the news of the morning. I think it's a huge, huge deal for washing.

I think the fragility of the bond market is absolutely front and center, and that's the significant story this morning. Carl walked me up about walk me through about how francile you think the situation and treasuries might be. Well, I mean there are there are very explosive headlines and doom and gloom for by various people about the bottom market. But you know, the bottom line is that most of the time when the Fed hikes rates, and it's hiking

rates because it fears inflation, bondy yields go up. Because the base the primary base for for bondy yields, the Fed rates are going up, and because inflation expectations are going up. So this is not really news. This is maybe a startling movement on a single day, but you really have to expect that if history is not going to reverse itself. Five out of six times we've seen the bottom market rise with the FED tightening, and this is I think shaping up to be one of those times.

Just another day in paradise, John, I just took a quick look at one of my technical studies and I don't even get sweaty until two sixty. We had a guest on this morning, Jonathan Krinsky in MK. I'm looking for two sixty three. Two sixty four is key technical resistance on a higher yield. As you look at the bond market, Carl, the situation for many people has been term premium has been incredibly low and faint. It's being negative.

What's going to be the catalyst to get term premium up, which would mean to sustain move higher in treasury year it's going forward? Yeah, So I think that, you know, risk and supply are one element in there. You know, we just had a tax bill passed with a trillion and a half dollars of new borrowing for the next decade, possibly more, possibly less, but something on that order of magnitude.

We have infrastructure spending coming, so we have I think some uncertainty about some nervousness perhaps about having to deal with that. We do have expectations for higher inflation coming out there, and while it's a slow burn inflation indicators, wages in particular, are starting to accelerate a little bit visibly. So the elements are in place for that term premium to normalize and maybe even overshoot to the higher side.

You can't be sure of that, but certainly this is not a time to be looking for lower term premium

for lower bodylds. I certainly agree with that statement. Just the question whether it's going to be a panic or not, and I have no reason to think it will well call at this stage when you put all the moving parts together, the prospect of a bigger deficit in the United States for America, the prospect of China stepping back, the reality of an unline of the federal reserves balance sheet, and rights going higher as well, that's fertile grind for

repricing of treasuries, isn't it. Well, yes, but you know, almost all of those things you mentioned, except for the China announcement, have been in the market for a while, so you think about what's new and what's going to change the expectations, and I don't believe the China statement is enough to uh, to to really create a panicky market situation in and of itself. We've known about the FED for a while. We've known about the FED unwinding

its balance sheet. We've known about inflation, We've known about growth and wages in the unemployment rate and all that. So I think that in terms of news this morning, China and the margin could make a difference. But again we don't even have enough details to fully assess what that means. At this moment, we don't care. But what is clear is that we're seeing a repricing of the last couple of weeks. You're seeing a lot more people reach to hedge their exposure potentially to a higher inflation

rate through this year. Does that make sense to you? Well, yes, and you know, my due diligence and saying you know, uh and saying everything is that yes, we should expect higher bond yields. No, I have no basis to exp back the panic in bond in bonds to occur in the short term. Technicians may have a reason for the market to sell off, and that's independent of what the economics says. When the technicals and the economics call for the same thing, you do tend to get more powerful moves.

But the economics of the matter are actually pretty tranquil. High frequency economics founder the reality check on on some franchile some fragility, just some fragility coming through in the bond market. It is a joy to speak with Jeffrey Curry of Golden Sex ahead of their commodities research. He writes acutely detailed notes on the dynamics of supplying demand. Jeff Curry, you are trumpeting the return of backward backwardation. That is a mouthful. What is backwardation and why should

we care? It's a condition and a come oddity market where the spot price sits above the forward price, and it's a condition that's usually representative of market that is very short. I like to think of an example. Let's take oxygen. You have to have it today because if you don't have it today, you're dead. You don't care about tomorrow. So oxygen would be a perfectly backrodated market. And so we think about a contango markets where spot

prices sit below forward prices. That's what these markets look like throughout most of the period over the last ten years since that since the crisis. So the fact that we have oil now shifting into a solid backgrodation zinc invtive backgrodation. It's an indication that supply chains around the world for both metals and oil are starting to get very, very tight. So backwardation is an indication a premium for

prompt deliberty spot prices above forward prices. How much is it Jeff about shale coming online as this crewed price guys U Uh. That's a very important component of this is that when we think about the forward outlook for energy, I don't think anybody out there is going to argue we're running out of oil on a longer term basis because there's so much supply. And what we saw with the rally this week in prices is that producers came in and sold the back into that forward curve, which

then reinforces this whole concept of agrodation. And the thing about is what the backwardation is that, particularly even if OPEC tries to ramp up production or you have the shale, it's just gonna put more selling pressure on the back end, while the strong global economic backdrop that we have right now is going to put upward pressure on the front

end of the curve. Reinforcing the bagardation. I'm gonna go back to Tom's question of why is this important is because an investor can buy oil at a discount on the forward curve and then hold it up and it rolls up to expiration, and sell it at a premium. So the oil price does not need to move. All you do is you roll the front end of the curve. And I want to emphasize commodities are yielding assets, and that's that shape of the forward curve that gives the yield.

And for the first time and quite sometime, we're now in a positive yield, which allows the investor to hold oil without having to pay the cost of carrey. So this is a very important development for investors. Jeff, this is the market dynamic. Let's talk about the economic bankdrop fundamentally and the commodity complex in its entirety. China. A lot of news coming through from China today. A conversation this morning here on Bloomberg about Chinese officials wary of

purchasing more treasuries. From here. As you look at the effects dynamics in China, what does it mean ultimately for how you view the commodity trade. Well, I think the big, biggest and most important component of what's going on in China really is the supply side policy that they've implemented more recently, in the sense that they're trying to deal

with two problems in China. One is the pollution problem, so the anti pollution, but the other is that they have, you know, a debt problem and some of the key industries, and those key industries in which they have the debt problem happened to be in your core commodity sectors like steel, iron, ore, aluminum, and as a result, like hutting back capacity, not only they take pollution out of the system, but they also increase the prices of these commodities, which reduces the number

of non performing loans on the bank's bouncy. So that's a really important component. And if you go back to the currency question, because these are the commodities that they export, not import um. When we think about you know, a weakening currency in terms of UM, any type of you know, retaliation type of dynamic here that you end up with

a more competitive environment to push these commodities out. So there, you know, there's a lot of connections here between these, but I think the primary one really is a supply side policy, Jeff, at the moment of the last few years, for that matter, you've always joined a distinction between what

you see in China's campex commodities and ompex commodities. How much that story developed of the last few quarters for you when when we look at the the broader demand for commodities right now is that there's something I've never seen before. We use the term global synchronous growth from a g graphic perspective, and we're seeing that right now.

But what makes this even more different than two thousand and four was last time we saw a real strong global synchronous growth, is that it's synchronous across the commodity complex, across medals, across the barrel of oil. I've never seen this. It's the the comprehensive nature of this demand growth is Okay, well, I'm looking at the copper chart. I'll get it out on Twitter for Bloomberg Radio. You've gotta first look at it. But I mean, as copper, something that we're Jeff Curry

can call bottom to the commodity bear marketing. Coppers had a great movement by no means is broken out through you know two thousand five, two thousand six highs Well, I think when you think about you know, the old saying, you know, the copper has a PhD in economics, I'm a firm believer the only differences instead of being Harvard

now it's some Shanghai University UM. And in terms of looking at the health of the global economy, you know, the one thing is, you know, shorting base metals in the midst of an economic engine is a very dangerous proposition. And so I think, you know, even though our target is seventy seven thousand fifty right now in the markets trading around, I think all the risk or to the upside right now and I could easily see UM copper

pushing up and testing new highs. Maybe ten thousand we saw in two thousand eleven may be difficult, but the highs of oh six and oh eight I think are very very much of risk to the upside quickly. Or Jeff Crey, do I get Brent Crew to seventy a barrel? Um, I'm not. I haven't looked at my screen in the last five minutes. It may already be there. It shows you reminded us. Yeah, I would argue that oil is going to have a much more difficult time um getting

upside pressure unlike copper. And the reason for this is the long term oil supply story is oversupplied, so you have producers are going to go sell that back in every time you go to the metals has a long term supply story that's bullish. Means both the up back in and the front end of medals can go up with just why we prefer price perspective by the medals. Great briefing, Jeffrey Curry, GOLBN Sex, thank you so much.

Real effort there from Frankford is all you may know nationwide that there is with the worship of a football player in the New England region one T. Brady, or maybe it's Lawrence Bird of basketball fame of a time ago, Bobby, you are leaping across to St. Louis Blues goal. The same can be said of academics out of Fall River, Massachusetts in Boston College. He has held court in science at the Massachusetts of Institute of Technology, where it's been

known that he fly fishes on the Charles River. He's a former Secretary of Energy. Earnest Money's professor. Money's wonderful to have you back with us. UM. I would suggest we have wandered into an anti science, anti math moment in Washington. Do we need to reverse it or do we need to get used to it and live with it? Well, I think the issue of addressing the whole range policy issues based on facts. I mean, there's science, but there's

also facts and analysis. UH, scientifically based is absolutely critical. Otherwise we're just we'll just be lurching, uh from one side of the room to the other side of the room, if you like. UH. In terms of in terms of how we put our policies together, and frankly, I think that this UH is creating tremendous problems UH in terms of the underpinnings of our global strength, which is the set of alliances and institutions that this country spent seventy

years building. UH. If we are viewed as unreliable, as as not uh not moving forward on the basis of facts and analysis and science, UH, that's going to shake confidence in those institutions and and undercut again our our enginet, national strength, and in our our our ability to lead. The kids that come into the Massachusetts Institute of Technology

are all top shelf. They wander with great arrogance through physics one, physics to physics three, and then there's a great divider course number eight point zero four, quantum physics one. What's it like making the leap to pretend to be like Professor Moneies. Well, first of all, I should say that the students, no matter what their majors are, are required to take UH to take physics here, UH and UH.

They are not required to take quantum physics unless they are in physics or one of the engineering disciplines that calls for it. But it certainly is. UH. It's a it's a mind stretching experience to you to uh to at the end of the second year to to start looking at quantum physics. But I think the arrogance you referred to uh is is gone by that time. Frankly,

you beat it out of them. I bring this up, folks, because I just spoke to a wonderful student out of a major state university who got through college with no science and only one marginal math course. And I just think the death of this is is a hugely important Let's move on to important. If I could just add on, I think it's it's that that's a disservice. I believe to those students that she knew that. Yeah, she was

more than aware that she had been cheated. We are not cheated by your expertise when we see North and South Korea get together, and this does come down to the physics of UH, nuclear science. Do you have a legitimate belief that North Korea has the monies physics to attack someone and do harm. Well, first of all, we have to say that it's a fact that they have had a remarkable trajectory in developing their nuclear weapons and

developing their their missile capabilities. Now, UH, it's maybe, and I believe actually it is likely that they did have some assistance in in both arenas. But one cannot take it away from them that they have They've trained their their scientists to a large extent internally, UH and UH,

and they've had they've moved rather rather quickly. In fact, I think that we have underestimated that consistently, UH, in the sense that we prefer to call a nuclear test in North Korea a provocation as opposed to what I believe it really is a a systematic step along a longer trajectory, UH, to to make nuclew weapons uh, and and with a strong commitment to it. So so I think we we we make a mistake if we if

we underestimate their their capabilities. UH. I know my my colleague, UH sig Hecker, who used to be the director of the Los Alamos National Laboratory, UH, an expert in in the weapons arena. Uh, he visited North Korea many times and and already uh seven years ago he told me, just in fact recently again how stunted he was to see a enrichment plant. Uh. That was extraordinarily modern, all the modern technologies. And so you know, we have to take we have to take this threat for for what

it is. We all have our benchmarks along the way. And for those of us more fossil nature, there's Ted Taylor's the Curve of binding Energy that John mcfeebook, or there's something as myth making is doctor Strange Love from four. Do they have the rocketry? Do they have the telemetry? Do they have the ignition systems within their physics to make the toy work if they launch it at us? So they clearly have the rockets, they have demonstrated that.

But when you start getting into telemetry, etcetera. Etcetera. I think you put your finger on what we have as far as I can see at least, and of course

I no longer have access to all the information. But from what we can see, uh, they certainly have a long way to go in terms of getting the entire system together to deliver a nuclear weapon over intercontinental distances, because they're telemetry and including meaning making all of the physical measurements, uh, to understand how the how the system works and survives. I've seen no evidence of that. But when I say, can I say a long time? I actually, Uh,

it depends what what the time scale is here. I think we have to assume that we're only talking about a couple of years of dedicated effort for the entire system to be to be brought together. Whether that happens, I don't know, but I think it's the planning basis that we need to use as we think about how to address the North Korean situation. Each administration is different,

your sector of energy for President Obama. But if each administration is different, do you have confidence that the General's General of Master, General Maddis, General Kelly and others are are moving forward our defense against this physics? Well? First of all, UH Secretary Secretary Maddis UH formerly General Madness UH McMaster and and and also the Secretary of State Tillerson.

I think they have all stated explicitly that they understand UH the very very bad options that a military intervention would represent. UM, mainly because it's hard to see how a major altercation UH would not lead to tremendous destruction not only of North Korea, but of our allies, our own military personnel, their families UH in South Korea and Japan. So Number one is we really need to have a discussion.

I believe that discussion needs to be broadened from what it has been because, frankly, this may sound strange, but I think the discussion has been too much focused on uclear weapons UH in North Korea as opposed to the broader security context UH in that region, and that includes, of course South Korea, Japan, and China. UH, and I think we need to end and it includes frankly, the future military profile of the United States in that region.

And until we bring all those issues together UH informed by the ground truth in terms of what North Korean capabilities are and what the capabilities of our allies are, UH, we're not gonna We're not going to get there. Look, I think the d nuclearization of the peninsula remains the right goal, but we have to understand that that's going to be a long term goal. It's not going to happen quickly. It's a step by step process, UH that we need to we need to commit to over probably

over over a few decades. Secretary Monies, thank you so much. He's a former Secretary of Energy and of course at the Massachusetts UH Institute of Technologies in charge of making freshmen use a slide rule for the first three weeks in m I T. Thank you so much. We welcome Bloomberg Television Bloomberg Radio worldwide with William Gross of Janice Henderson. Bill, thank you so much for being with us on short notice today. Let me get right to the granularity of

the moment. What have you done in your Janice unconstrained fund as we've moved rapidly from to forty to two fifty and soon a print of two point six zero. Well, good morning, Tom. We've gone short bonds, not just treasures, but short guilts and short boons. UH left the j

GB market alone. But you know it appears it's a treasury phenomena and treasury directed based upon your Bloomberg report this morning with China being disaffected with the U S treasuries and your report a day or two ago about j g B s and they're changing quantitative easing policies, but nonetheless, um, you know, it appears a negative type

of posture for bonds. I've also gone rather negative on high yield bonds and credit spreads because you know, as yields rise UH, you know, zombie like corporations pay higher yields, and their UH spreads are compressed and their cover is compressed. And so this is not a favorable element for high yield bonds or sovereign bonds. And it's not a favorable

element this morning, at least for the dollar. You worked for years, and you built for years a small shop that had enough mass where the Chinese worried about the Pacific Investment Management Company. Give us your experience of what China is doing at the margin with their treasury obligations. Well, they certainly haven't been building treasures, and you know, recent evidence of the last few months suggest that they've been liquidating treasuries. Um. You know, supposedly an effort to more

diversify their portfolio perhaps. Uh. In any case, uh, you know, the liquidation of treasuries as opposed to the accumulation of treasuries by China over the past few years is certainly a negative. And you know, one of the things mentioned several days ago by your reporters has to do with quantitative easing, to the extent that the Japanese uh, you know, are less easy in terms of their purchases of j g vs, to the extent that the ECB at some

point later this year pulls back. You know, we've got a worldwide situation in which central banks in total and in the FED that's actually reducing their portfolio. In which the world central banks in total are not adding to their portfolio like to have in the past. There's been fourteen trillion dollars worth of bonds bought by central banks in the past four or five years. That appears to be um close to an end bill gross. Given your negative view on high yield and sovereign debt and so on,

So where should investors go for yield right now? Well that that's a good question, because you know, a dramatic rise in yields and I'm not suggesting that you know, I've I've suggested that once we broke the tot barrier on the tenure under peers that we have, which is a long term trend line over twenty five years, that you know, the increase is likely to be mild. I think tenure treasuries, you know, could approach two point seven two point eight percent by the end of two thousand

and eighteen. And what does that mean. That means another two or three points loss and it basically wipes out all income for the year. It's not a bear market per se, but it's certainly not a bullmark. And you know, to be technical, bear markets bottomed in two thousand and twelve and June of two thousand and sixteen five and

so we're a hundred basis points plus higher. UM. That could be defined as a bear market, but I think more legitimately because bonds you know, for those years did still three or four percent based upon you know, high yield total returns that um, you know, the bear market that I'm talking about is a mild one, but it includes you know, negative prices for high yield bonds. So

where again do you go and get that yield? Well, an investor that has been used to carry, that has been used to risk assets, and I'm talking about stocks to you know, everything in this barrel is basically the same and connected like the thigh bone and the hip bone. And so where do you go, Well, cash is the first place. You know, I've talked about janice, unconstrained being negative or negative duration or short bonds, and so that's one area to do. Today should be a fabulous day

for unconstrained. Yesterday it was as well, and so there's a way to make money on the other side of the river. So to what is the positioning of the street right now? I mean we talk about convexity, which is a jargon phrase folks were where people cover their trades and go, oh mg, Bill Gross is right, and they get out, what is the bet that you see within the institutional market now on bonds? I think it's

significant to them. I think it's significant not just in terms of bonds, but in terms of spreads and what we call and what I've referred to as carry. You know that it's about a wonderful period of times sin is bonds have come down carry total return, you know, put it all together. In the world the investment world

is happy. Um, you know, now at this point, you know, it appears that the market and that institutions are over levered carry and so anything that's carry dominant and the you know, let's face at risk assets and the bonds and UM currencies in many cases are carry dominant, then they could be at risk. Now I'm not again, this is not armageddon for me. It's a mild increase, but it basically signifies that, um, you know, the bull bond market for five years is over and that we should

look forward to periods of low total returns. I mean, I think this is so important, Bill Gross the idea here of the leverage involved within the institutional markets and the idea of what those reaction functions will be, and any of us with a collective memory of remember that, are we setting ourselves up for that August of shock that we felt? Well? I I don't think so, tom uh. If for only one reason, Um, you know, Mario drag in,

whatever it takes, has not been dismissed. Okay, he may be tightening over a period of time, but it's not been dismissed. And so central banks are still in their central banks where the you know, the primary um, the primary giver of carry for the past five or six years.

They save the system, they popped up economies. And so as long as central banks are in there, not tightening significantly, not withdrawing QWY significantly over a short period of time, than I think carry can still survive and the leverage inherent and carry, while threatened in terms of mildly negative returns, probably doesn't produce a design. The Bloomberg Barclay's Total Return

Index can show a more quiescent market. We don't see that in the ten year yield with a two point three price rollover in the last so, say since Thanksgiving or so are we at a point where bond market dynamics in price declines changes the dialogue for the central banks, and particularly for Chairman Powell, Well, it might, you know.

I think central banks and certainly the Fed is is geared towards low volatility containing market declines, especially in the stock market and UM to the extent that a tenure treasury threatens that. And I don't think it does. Let's let's be clear, or let me be clear. I don't think it does. You know. UM, then central banks, as I suggested with drug, are are not done with this, and so um, I would expect tom volatility as evidenced by the VIX and volatility as evidenced by the move

index and bonds to to basically increase. That doesn't mean that we're not going to have higher volatility over short periods of time like you just suggested. But I don't think we're headed for investment armageddon, all right, So we're not headed to investment ar mcgeddon. Bill grows. How many people have asked you about bitcoin in the last week or so? Lots of people, and especially my donut girl that I stopped by at five during the morning every day. Not only did she ask me, I asked her and

she told me that she didn't vested in bitcoins. And so you know, that's sort of like the shoeshine boy in the thirties or the taxi driver. Um. You know, perhaps that's a sign I am a believer in blockchain technology. I don't know how it applies to a price on bitcoin, but nonetheless, uh yeah, it's all it's all around the public in the street. Bill, I got a problem. You're Warren Buffett's eighties seven years old, and he looks good

today when he's making his board changes at Berkeley. Do you think Warren Buffett's chowing down the donuts every morning like Bill Gross? Well, maybe the cherry cox and hot dogs. I don't know whether it has diet cherry coke or a regular cherry coke. In any case, it's good for him. He's a he's in his mid eighties and he's he's still rolling, and that's what I would hope to do to um. He came out this morning and talked about about bitcoin and suggested at some point he would buy

puts over a longer term basis. I'm more optimistic than that. I think bitcoin and cryptocurrencies have a picture, you know, if only because the world is beginning to suspect global currency. Okay, we gotta leave it there, Bill Gross, thank you so much with Jannis Henderson this important day with China moving the bond markets. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio