Surveillance: Citi's Hollenhorst Weighs 2020 Risks

and a half percent growth year over year. That looks very strong for the U S conserner. We've seen that before. We strong job numbers, strong retail sales. It's got a sense of whether that will continue to push us in Andrew Holland Horst, he's the chief US economist for City. He joins us here on a Bloomberg Interactive broker studio. He just did a stint on Bloomberg Television. So we are working Andrew hard today. Andrew, thanks so much for

joining us. What is your thought for I mean, the consumer and the US economy seem to be kind of chugging along here. Yeah, I think it still continues to power ahead. I mean, we've had this really positive story around what's going on with jobs, what's going on with wages, that's supporting incomes and in turn supporting spending. So you know,

historically low unemployment rate. These are all the kind of elements that you need for a strong consumer economy that more concerned about what's going on in other places in the economy. But the consumer, if you just focus on

that very very strong, what can break the streak. So a few things that we were worried about in nineteen that you would still think about going into One is do you get a big correction in risk assets And we don't think that will happen, but if you were to get a big drop then we saw that at the end of eighteen going into twenty nineteen and consumers pulled back. So if we get a big drop in

equity markets, that's something that could slow down consumption. The other thing that could, of course, always change is the positives that we're talking about. If those jobs numbers start to slow down, and there was a time in looked like maybe they were now as we're going into actually looks like they're holding up quite well. Um. But so either this kind of pullback and sentiment among consumers that's something that we're watching, or do you just get a

fundamental slowing and job growth. So I listened to you on Bloomberg Television earlier today and you said that impeachment wasn't necessarily something that would upend the markets, but that the election rhetoric could. And I'm wondering, how does that play into this kind of healthy economy that we're seeing right now. Yeah, so these are the things that are much harder to kind of forecast or get your hands

around as an economist. Um. So, like I was saying, you have very different visions that are being presented for the U. S. Economy. Of Course that's something that investors have to take into account. Of course that's something that economists have to take into account. Um, it still looks like the modal outcome, the most likely outcome is that while the U. S. Economy kind of continues along on its current trajectory, which is this, you know, roughly two

percent growth. But I I think the point I was making and we continue to make, is that this will be an important theme in twenty twenty investors watching what's going on with both the politics between parties and within the parties. I'm trying to figure out what this really means for the economy. So, Andrew, one of the you know that one third of the economy that is manufacturing business investment that is weak. We've got the manufacturing sector

contracting now for several months in a row. Do we just kind of ignore that and because the consumer is still so strong, Yeah, so definitely don't ignore it. I think that is the key downside risk that we want to continue watching. UM some positive stories. They're one is it looks like and I think it's too early to say anything more than it looks like, but it looks like globally, maybe the weak manufacturing story is bottomed a

little bit. You see globally that data starting to turn over, and if that continues, UM, then that would be a positive dynamic for the US. Also, you have these idiosyncratic u S specific issues. You had an auto workers strike and you had the grounding of certain aircraft. If production picks up as we head into twenty twenty around those two store is that could be positive for manufacturing. But particularly on the airplane story, that keeps getting pushed further

and further out. So yeah, I don't even know how we Maybe I guess My question is, how do you kind of account for that of economist account for that, because I think about the supply chain for Boeing, it just kind of stretches coast to coast and you know, a whole host of industries. Yeah, it's it's definitely a macroeconomically significant issue. This is not you know, some small company's specific issue. It really matters for the US economy

UM and that supply chain is really important. So when you know, we're talking about a shutdown of production in January, UM, but then does the supply chain actually continue to produce? If the supply chain continues producing during that time, then you're not producing final completed aircraft, but you still are

keeping those workers employed in the supply chain. You're producing parts that ultimately go into those final aircraft, so that can kind of support demand while we wait for a full restarting of production, which should happen at some point. Something we talk a lot of about at this table is the impact of automation on jobs. Obviously, the manufacturing sector has seen a lot of this. It's floating into

a lot of other sectors. I cover the banks. We see thousands of job cuts around the world, partially in the name of automation. When you're thinking of automation, how do you factor this into your longer term outlook on what happens with jobs and what happens with growth, And so this matters so much, and you have to be careful because there have been many times in history when we've looked at technological advances and said, this is the

end of labor, this is the end of workers. There's gonna be no role for humans, um, And they're always has been. But what we need to be very careful about with this transition to more automation is that those opportunities are created for the existing workforce. So we know, as you were mentioning, there are certain industries where it's just not going to make sense for humans to be doing the jobs that they used to be doing in those industries. Um, But are we creating new opportunities? Are

we creating new engines of growth? So maybe maybe you don't. It's not clear yet. It's not clear yet that we are. And I think I think that that that is the kind of you know, difficulty of navigating this transition. So maybe you have less traditional manufacturing jobs, we should have more jobs around things like three d printing. Are we really seeing those jobs come through? Um, that's what we're looking for, and that will be an ultimately positive story

for the economy if we get there. So, Andrew, we've you know, the trade has been such a big, big issue for nineteen is kind of faded over the last couple of weeks a little bit least, you know, in terms of the news flow and the tweet flow. How do you kind of gauge the trade uncertainty into your economic forecast? For so any uncertainty, and in particular uncertainty around trade is something that's gonna tend to hold back investment. People are gonna want to wait, They're gonna want to

see what the actual outcome is. Um. That's true around trade, It's true around politics, Brexit, everything. Um. It does seem that, at least in a short term sense, we've had a decrease in uncertainty. So there's still massive uncertainty about where this story goes over the next five years, over the next ten years. But as you look out over the next six months, it seems like there are at least the contours of a Phase one deal that have been

agreed to. It looks like these agricultural exports are going to be restarted. UM. So all of that is short term positive and that should helped unleash some of the pent up investment that was waiting for some short term resolution of uncertainty. Now, do you have a long term resolution resolution of uncertainty where you can think about making plans for the next five years, the next ten years.

I think that's a lot less clear. Can I ask you also about the Federal Reserve, because I think you have a more balanced view than a lot of people who believe, yes, this is definitely quey and no, this is absolutely not. But can you explain to us how much is the is the FED propping up the economy more than people realize right now? So there is a very important sense in which the FED is important the supporting the economy, and that's that's largely through low interest rates.

And they've achieved low long term interest traits both through their bond purchase programs, which I would say, what they're doing right now, I would not call it QUI. I think many in the market will see it as qua when we come back to that in a second. UM. But low long term rates, which is partly these que programs, but partly just the fact that the Fed is held

rates relatively low. It looks like the top of this interest rate hiking cycle is going to be sub three percent, and we're thinking about staying around these levels or maybe in the future going down from these levels. So that's gonna keep rates low. That's going to support the economy. In terms of the specific program, at the end of the day, they're buying T bills that's a three month, six month liability of the U. S. Government that pays interest.

They take those T bills out of supply, and they add reserves, which are an overnight interest paying liability of the U. S. Government. So it's not clear that that's really doing much. Okay, so we're not gonna call it QUI at this moment. Andrew Holland Horse, thanks so much for joining us. Andrews the chief US economists for City. We appreciate them coming here to our Bloomberg Interactive Broker

studio giving us his thoughts for the economy. Again, as we just kind of take a look at the most recent data point, call it holiday retail sales pretty strong, suggesting once again that the consumer is pretty strong, which contends once again that the U S economy reigns on pretty fair footing. We continue to see really disturbing images coming from Hong Kong that the protests they're just so no signs of winding down. The persistence, I think, is it really amazing to a lot of us who are

watching these issues. You get the latest cheer. We welcome Karen Lee. She has Bloomberg News, a Greater China Government editor. She joins us on the phone. Uh, Karen, thanks so much for joining us. Give us the latest of what is happening in Hong Kong right now. Well, there are protests scheduled for tonight in an area called Satan, which has seen some of the more violent protester but the past six months, and then again over the weekend in

an area near the Chinese border. UM. And this is leading up to a major rally that's been planned for New Year's Day organized by the Civil Human Rights Plant, which is the organization that's home some of the biggest peaceful protests since these demonstrations against China's grips began in June. So we're going to be watching over the next few days to see what the turnouts like. UM, how big the classes between protesters and police, get if there are

classes at all, and to stands. We can draw a new signals from all of this, especially the turnout on January first, as to how much momentum this movement sustands going into So, Karen, just give us a sense an updated view of kind of what the protesters are really protesting for right now. It's been months and months and months.

What kind of change are they really looking for right now? Yeah, Well, their demands have shifted a lot over the past six months, and this of course began um as blowback against a really unpopular extradition law that would have allowed UM transfers to mainland China, and it morphed pretty quickly into this wider movement against Beijing script and protesters demands in that time.

It's since that time have changed. Right now, one of the biggest demands is not the biggest, is an independent inquiry into aggressive behavior by police and their conduct in

dispersing these protests. Going back to some of those images we were talking about with these big clouds of tear gas covering over these areas of Hong Kong where you never thought you would see tear gas over the city center, I'm going again, even on Christmas Eve, over a popular shopping area in front of the Peninsula Hotel, which is one of the most generated hotels here. UM. During this what has been a major shopping season for this economy

that still runs on tourism and resale. UM. So we're going to be looking at the new year really not only to see whether this sustains its momentum, but whether the demands shift again. UM, and what they shift to. You give us a sense of the tone here, because over the holiday hundreds were arrested. I'm looking at headlines. Now, how much is this really escalating? UM? You know, this has really become the new normal in a way for

this city, at least for parts of it. UM. And what we saw on Christmas Eve was not shocking to those of us who've been watching it for a while. UM. We've become quite used to seeing these kind of clashes scattered around town, especially in the area where they happened. UM. And we've seen more violence than we saw on Christmas Eve. And we've been seeing occasional live ammunition. UM. We've seen webberable expired from pretty close range. UM. College campuses turned

into it looked like battle ground. UM. So really the context for Christmas Eves importance was more that it happened on the holiday and that it happened in an area that nearest past um would have been full of tourists

and holiday shoppers. UM. In this year, it was a of a different picture, and I think for a lot of people that really serve to show what's happened to the city over the past year and the kind of impact that all of this has had on tourism and retail UM, so of which have taken a massive hit. So UM, we're going to We're going to see what happens now on New Year's Day. But really the Sidney bracing for a much bigger protests UM in the next few days. Well, that was what I was gonna ask. Next.

What can we expect on January one? UM, Well, this protest is being organized by the Similar Human Rights Front. It is the organization that has brought millions of people out onto the street UM at various points throughout all of this. They organized the huge marches earlier in the summer that really kicked this movement off and got it in the global headlines. UM. And they're still waiting for

a police permit to march UM. They don't have that yet, but even if they don't, we think that people will still probably come out and they'll protest illegally and there will be more arrest UM. So we're going to be looking to see what the turnout is and they they've they've generally get much figure furn out UM than other protests organized by other UM either opposition groups or or activists.

So UM, and this is going to happen on a day when before off here UM people might want to send a signal that they do you intend to fight into and if they want to do that, this is going to be a good day to do it. So it really will be UM a signal to us and what we might expect going into the new year in the first few months of the new year. Hey, Karen, thanks so much for joining us. We really appreciate that. On the spot reporting from Hong Kong, Karen Lye, Bloomberg

News Greater China Government Editor. Do you get a sense of kind of what we should be thinking about as we think about oil for Welcome Kevin book clear View Energy Partner's head of research. Kevin, thanks so much for joining us. So as we take a look at crude around the world. Is it fair to say this is just a clean proxy for what the market thinks is going to happen to global trade and trade tensions between

US and China. Well, they're surely related. But we're also in a seasonal second half of the year demands peak, So when you think about what you're coming up to in the first quarter and the second quarter, you're gonna have the seasonal troughs. Uh So this is as strong really as things could look right now, given those underlying seasonal demand pulls on the trade side. You know, the trade war, such as it is with China is far from over. It's probably about over, and we don't know

how long it's going to stay over. So there's still some looming uncertainty that could camp down industrial demand. That industrial demand is in the end crude demand. So we may not yet see a rebound into the into the first half of next year the same way we've seen it in markets in the equity market so far. Right out of our colleagues over at Markets Live believe that too much good news has already been priced into the oil markets and that that could lead to a significant correction.

Is that what you believe. Well, yeah, we do see you know a Brent range in the five handles, probably the fifty five. They're about sixty range for next year, which is below where we are now, and it's based on a number of things, including significant supply coming on stream in the Permian has a very long skid mark. You know, when we talk over and over again about shale correcting, it is not synthetic spare capacity. It is not like OPEC where they can turn it on and

turn it off inside of ninety days. We're talking about nine months before. Things usually respond to price, and the bullishness you're seen in price today is preserving production tomorrow. So that sets up some of the weakness we're talking about in tandem with the production outside of the US. So, Kevin, let's talk a little bit about OPEC or OPEC plus. Give us a sense of kind of how you think o Heck is behaving right now? Are are people cooperating? Um?

I think about Russia there, So give us a sense of just on the supply side, how is OPEQ and and OPEC plus kind of performing right now? You know, I think the optics still stay ahead of actuals in a lot of ways, the idea that the group is still together may be more reassuring to the bulls and the markets than the reality of things playing out. In excluding Russian condensate from the volume constraints essentially freed up barrels that Russia can bring to market, and liquids are

not perfectly interchangeable. But when we count barrels, we count all liquids, and so that doesn't necessarily read is bullish as the readout from the medium might have suggested. Going forward, the cohesion of the group really reflects the wiliness and ability of the Kingdom to keep doing the heavy lifting

which they have been doing. But when we look at the neutral zone coming downstream, uh that's you know, somewhere between three hundred and five thousand barrels per day coming up in the next six to nine months probably, and we're going to be looking at that pressuring crew to the downside unless the Kingdom does more work. Uh So what do we expect, Well, Kingdom's got invested interest and they're in it to win it right now. But in the end, if if it looks like there's too much

defection from other players, watch out below. The big oil story often was obviously a ROMCO right, and nobody would stop talking about it from everywhere, from everywhere in the world. Really, can you touch us a little bit about international demand for this i p O. Obviously it was a very weak moving forward, but can we expect a little bit more love from international investors? That's not really our area

of expertise. What we can't say with some some comfort is that the you know, the circumscribing the the i p O to non US nexus markets had it a lot more to do not with trying to get a good financial result for the Kingdom or to meet Prince Mohammed ben Selmon's two trillion dollar target, had a lot to do with the risk of sanctions and pressure here in the US under the Justice Against Sponsors of Terrorism Act and potentially under a Note Peck bill which would

allow the sanctions or trade UH sorry Sherman antitrust pressure against the producers group. So UH looking outside the US created a limited demand in its own way, looking outside Western markets for the same reason. Beyond that, you know, if they do a further offering, the secondary offering, UH, they might look broader, but not whilely overhang here in the US interdicts their easy access to markets like ours.

So Kevin, taking a look at the shale patch in the US, we hear a lot about, really in the last year plus about kind of the financial precarious the precarious financial position a lot of the operators there are we going to see in maybe some of the bigger energy players go in there and try to consolidate something that we're seeing in the permian um or how do you see that playing out. Consolidation is happening, but it's not happening with the apidity. I think that might be expected.

Some of this has to do with, again the lifeline that you get from a boost in prices here in four Q. Some of it also has to do with the questions about buyers and the assets. They may not want all the assets, and those sellers may not be willing to go to the rock bottom that clears the market just yet. The infusion of debt capital to to the players that needed the most being constrained is a catalyst for further sales, further consolidation, but at the right price.

Part of the problem with the vacillation in the market that we're seeing up or down does a lot to create uncertainty about whether or not there's going to be some bottom feeding happening. Speaking of boom bottom feeding, that's what I was going to ask, who are the buyers for all of these assets? We had Sam's ll here just a couple of months ago saying that he was looking at assets himself as the prices start to drop. Are there are other Sam's L's in the world that

are also looking You know, private equity has been pretty constrained. Yeah, so the class of buyer that I think you're going to get is shifting a little bit in character. It's true that you've seen a lot of private private equity sponsorship putting that capital for the last five or six years, and that's done a lot to sustain the boom and

the permian. Now, what I think you're going to get is capital discipline from the majors that are looking for opportunity as well as some of the investors who are going to have a different set of parameters around the returns that they want to get. That doesn't necessarily mean

that when you get an acquisition you get production. You might get acquisition consolidation and rationalization, and that flows the growth of the permian, which of course, is what the people who are putting the money into the region are hoping for. They want returns on capital because they want supply constrained to the highest performing, lowest cost basis assets. Kevin, let's just take a look at one of the things I just wanted to chat about real quickly is Venezuela.

We haven't talked about that in a while, but that, you know, is a kind of a wild card out there. How do you as you think about and supply coming onto the market? What is how are you discounting what's

going on in Venezuela from a supply perspective. Well, the biggest perturbation of the year from Venezuela was the loss of heavy supply to the market, and it really did a lot to close the light have spread and for refiners that were configured for high complexity to make use of those cheaper heavy crudes and make bigger margins, that was bad news. Finding alternative heavy hasn't gone so well because there's other sources of medium and heavy in the

world similarly constrained. So it's not like the market isn't eager for some Venezuelan to crude to come back on but the politics of the situation aren't going in that direction right now. If you think about the politics of the situation, Venezuela is in many ways of proxy for

Cuba in the in the Trump administration. For them, the idea that they could could sell Florida on being tough on on communism in Cuba by being tough on Venezuela has been pretty persuasive, and so the the idea that there's some sort of workout bargain or there's some sort of US brokered way that Venezuelan and Crewde comes back

to the market doesn't look so strong. The next leg down, though, seems also less likely because of what not involves is essentially going after Russia Rosneft, which is doing the big marketing and the essentially the bringing to market to the Venezuelan crude in place of markets being opened in the US and other Western destinations, and that is a mess. To go after rust is to go after the world, and that sanction probably doesn't happen anytime soon. Hey, Kevin,

thanks so much for joining us. We really appreciate your insights on the global energy market. Kevin book is clear View Energy Partner's head of research giving us his thoughts on the global crude market. We are talking big tech here again. Let's frame twenty nineteen. We came into the year thinking, boy, a lot of these big unicorn deals that we've been reading about, we're gonna come public. Everybody was gonna make money. Public shareholders, the private equity folks,

and the investment bankers. It was gonna be great. Turned out to be a little bit different. And I think one of the big takeaways for me as we think about the ubers and lifts and smile direction we works is that mismatch between private market valuations and public market valuations. It's greater than I've ever seen it in my career. One of the issues I want to and I want to get to this with David Kirkpatrick. He's Techomedy CEO and founder. He knows everything about technology, about a great

seminal book on Facebook back in the day. So David, my sense is again thinking about that mismatch between the private market and the public market. A lot of blames going to soft Bank and that, you know, a hundred billion dollar Vision fund that invested in a lot of these companies. You think that's a fair criticism of soft Bank. Well, thanks Paul Um. Yes, I do, in fact um, but it's not just a vision fund. It's SoftBank's own direct investing as well as the investment they did through their

Vision fund. And in many cases they really almost literally throw money at companies that they saw as such dramatic disruptors that they might alter entire industries. And I think we now can see they clearly didn't do enough analysis in many instances before they made those seemingly rash decisions. On the other hand, you know, the thing that has also characterized this recent period and still characterizes it is it's hard to get returns in a lot of places

where people used to expect them all. You know, stock markets have gone up great, but people like to have other ways of making money. And you know, one of the reasons why the whole Unicorn phenomenon and the SoftBank phenomenon phenomenon emerged the way they did is that large institutional investors have been looking for more dramatic ways to leverage large amounts of money, and that's a global phenomenon and SoftBank took advantage of that in a very canny way.

But I think in retrospect they blundered. So something interesting about the soft bank investment and we work still is that, if I'm not mistaken, SCIFIOUS has not yet approved it. That's the Committee of Foreign Investment in the United States that is supposed to be keeping out for these kinds of things. Wow. Well, you know, Ciffius, You've done a lot of reporting on this, Tonali, so you're an expert. But I I've been impressed actually by Scipius's role in

general during the Trump presidency. It has gotten much more actively engaged with this question of what is and is good, what is it is not good for the U s economy, UM. When it comes to a lot of these consumer tech companies. You know, CIFIUS generally has not spent tons of time on that. But yes, maybe maybe they will get involved

retroactively in some of these deals. But in reality where they're really getting superactive is around Huawei and other kinds of Chinese American deals UM and Russian investments in US companies UM. And they're going to be more and more involved. One of the things I think is going to be a trend for twenty in fact, is government in the US and globally is just getting more savvy about tech fine league, and I think that's going to change the

way markets behave. I think it's going to change how investors behave, and it's going to change the way we think about tech. David, That's exactly where I wanted to go. I wanted to get your perspective on this, given that you followed technology in the valley for such a long time. I think really historically, from my experience, the U S regulators have taken a generally a light touch to technology regulation.

Was of course, we've seen the European regulators, you know, going back to the Microsoft days, you know, taking a much heavier touch. But that seems to be changing. I'm not sure. We've seen a bunch of texts hauled in front of Congress this year. Do you think that's a blip or is that a trend that's emerging. Oh, totally a massive trend that began very clearly in twenty nineteen

and will continue. Because one of the other great great gigantic trends of not good necessarily, but gigantic trends of nineteen was the suspicions we all developed about giant tech platforms went to a whole new level of great gravity and concern on a global basis, and governments all over the world are really much more involved in scrutinizing particularly the largest global tech companies, all of which are American um and and those companies for the most part have

not really responded sufficiently to the concerns that the public and government have, so those concerns are only going to grow. So another thing about big tech. You know, Scott Galloway was really looking at Facebook, really critical of how big it's grown and its responsibility in terms of data and privacy and y you, Professor Scott Galloway, And now he's turned his sights to Twitter and whether CEO Jack Dorsey should be at CEO. David, I'm really curious about your

opinion here. Yeah, I'm I'm a I'm a fan of Scott Galloway in general, and I think he's done a really important service in the very close scrutiny he's given to the tech giants, even for the last three or four years. But I don't agree with him about Twitter. Twitter is a whole different kind of company really than than Facebook in particular, which it's compared to so often. It's it's really tiny in comparison, and it really it's

it's significance is very very different. I also think Jack Dorsey is a very different kind of leader than Mark Suckerberg, far more thoughtful, far more responsible in many ways. And you know, I don't really think that there's any reason why Jack Dorsey shouldn't be remain a CEO of Twitter if he wants to interesting the one I guess on the extreme, David, as we think about the growing regulatory overhang, if you will, of big U S Tech, And again I agree with you, that was a big, big theme

emerging in twenty nine. On the far extreme, we've even heard caused to break up big Tech. Do you think that's even on the menu at any point in the foreseeable future. Yeah, I think it is on the menu. I I have my reservations about it, both from a practical point of view and and even whether it's a good idea. And I kind of go back and forth

on that. It's certainly a massive trend. You know, President Canada, presidential candidate Elizabeth Warren, and even plenty of people inside the Trump administration and the President himself have occasionally made noises about that. So you know, I honestly think that the companies are really scared about it, and you when you look at their behavior visa v government, you should ask yourself, are they doing whatever they're doing because they don't want to be broken up? And I think many

things they've done recently are explained that way. So it's a it's a You know, when Elizabeth Warren talks about it, she talks about things like going back and peeling double click out of Google. You know that happens fifteen years ago. So I don't think that's pragmatic or or likely. But but the concerns about these platforms are so huge. You mentioned I wrote a book about Facebook and it was

generally positive quite a few years ago. The perceptions that I have the world has about what Facebook is doing and how it behaves and effectives has on society has changed so completely. You know, we have real cause to be worried about the power that a small number of companies that are basically making non transparent decisions about our lives are That that phenomenon is really worrisome and we're

going to see reactions against it continually going forward. Let's be honest, though, even with all these concerns that big keep getting bigger. Google looking to buy fit Bit. Are we going to see more deals in among the big tech companies, even in light of some of this um rhetoric from Elizabeth Warren and others. I do think we will. I mean partly because these companies are just so wealthy and they have so much cash um that you know, they they feel the mandate to grow. Look. Wall Street

is telling these companies keep growing. Their stocks are doing great almost without exception these giant companies in the last few months. So uh, that is what their fundamental priority remains. But they have to be super careful about their moves, and I think when they make acquisitions internally, they're going to evaluate them much more carefully for the perception that

they will create. UM. Google buying Fitbit, I think is you know, relatively innocuous from the standpoint of its policy implications. All these companies really want to get into the health care area, so that's one place you will see acquisitions, and I think health technology is actually going to be one of the great trends of the whole decade that we're entering into. David, thanks so much for joining us. I got a million other questions. I have for you,

but we'll catch up with you soon. David Kirkpatrick, tech Commy CEO and founder, talking to us about all things tech. 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