Surveillance: Commodities Surge With Currie

all witnessing, which is across the board commodities lift. Jeffrey de Graff of Renaissance emailed me yesterday and said, hey, stupid, look at the softs And I did that. I looked at wheat corn and the graph is right there up as well. Nobody's nailed this like Jeffrey currys at Goldman Sachs Global Head of Commodities Research, and just nailed this. Commodity lift. Jeff Curry, I want to go to your

microeconomics at Chicago. I want you to explain to our audience the constraint so supplied build that so many commodities have. These are tangible things and they are constrained on the supply side, where there's some serious in elasticities. Well, we have on the supply side. We like to call it the revenge of the old economy. We have not invested in old economy production capacity in some cases five to

ten years um. The reason why it returns in the new economy were so much better that capital dot redirected towards tech. Then you overlay E S G issues on this. These sectors are severely start to capital and you take oil. Capex, depending on where you are in the world, was down foty to sevent in the first half of last year. Tell us about the medals. I mean, I understand copper, and we're you know, John and I arguing about Jeff Curry. Let's stop the show. Do you quote London copper or

do you quote Chicago copper? London copper. Very good, there we go, John, So copper, we get coppers moving up. Tell us about the other medals where if price goes up, supply doesn't come on, does it. Well, it takes anywhere from five to ten years to bring on a new copper mine. It's the last of the old school commodities

that you still dig out of the ground. And that's where we have the real demand pushed because you have this green capex that's starting to begin to be Um, you know it's gonna be behind this energy transition story because we now have a blueprint for energy transition in the US, Europe and China now something we didn't have eight weeks ago. We believe the capex has spanned associated with this green capex is going to be somewhere around

sixteen trillion dollars over the next decade. Put that on par with China in the two thousand's China spit ten trillions. So in real times about the same, Jeff. We got to talk about the energy transition story in just a moment. Let's just stay on the metsos for a little bit. We have to talk about what's happened in the last ten years as well, and it started with joints that shift away from volume to value. The act of investment we've actually seen in the last decade off the back

of the top of the last supercycle. Jeff, How profound is that when you start to think about the dynamics from here on out? Well, I mean all these stories have the xact same story. You had, UM, very low prices over the last decade, very poor returns in the sector under investment, no demand. Now we're adding demand on top of no supply, and we're creating really tight market whether you're talking medals, energy, agriculture, And at the core of the demand story is where the stimulus is going.

Stimulus over the previous decade operated through the wealth channel and benefited higher income households. Today it's benefiting lower income households who spend more on commodities. So naturally we're seeing a much richer, more cyclical, commodity intensitive demand growth environment. Jeff, You've always drawn a distinction between all pace commodities and capex commodities and the ones that would do while in each environment, where are we now? Both are doing well.

And the reason why I say that is because at this point right now, we have capex going whether it is old economy in China to take urbanization from six up to we have new economy demand through the investment in five G networks, and then we have green economy demand. In terms of thinking about energy transition, you overly that on top of under investment, you end up with relatively

tight markets like we're seeing today. Well, Jeff, there is a distinction though, going back to the early two thousands, and we had the last commodity supercycle when it was driven by the boom out of China and it was all encompassing. This feels different, especially given the energy transition that you guys have been talking about, this idea of a transition to green energy. Where does oil fit in on this kind of equation? If the prices go up

too high, don't the oil producers just produce more? Well, let's first talk about what happens to oil demand. Somewhere around two you begin a slow the demand growth and it's not until after the demand growth actually tips over and starts to go negative. What that means over the next five years, the stimulus effect of all of this green spending actually amplifies oil demand. Now, let me ask

you this. If we know we have a blueprint for energy transition and US, Europe and China UM and the clock is ticking on oil, are you going to invest in long live oil production? The answers know, so, the only thing we're going to invest in a short cycle production in the US, Middle East and Russia. That's it. Everything else is too risky to make investments. So the hurdle rate to get investment in the sector substantially higher

than what it was historically. This is fascinating, this idea that because you're going to have so much infrastructure, you you will need that much more oil to sort of finance it, etcetera. Where do the other commodities, the soft commodities that we were talking about, fit into this, given the fact that they have more elasticity as Tom was talking about, Well, I think it goes back to the point where who has been infitting from the current stimulus

right now? It's lower income households. In fact, if you look at consumption by postcode in the US, and we can divided up by low income versus high income, you had turbo charged demand growth from low income households Darry January and of most but most of February, So you're seeing that filter through. That group consumes a lot more commodities than do the high income households, and that includes livestock,

which has a big poll on grains and softs. Jeff Kurry don't want you to get in trouble with Mr Solomon, but I want you to go outside your remit. You're Coinlleague Jonas over the decade has been absolutely brilliant about pushing back against the high inflation crew the so called inflation anistas. Do you see the inflation of your world folding over into Jana world or is it discreet? Well, when we think about the evidence for cost push inflation,

it just does not exist. It's always demand pull inflation. So the factors that are driving commodity prices um end up potentially creating some inflation risk. And I think, you know, even yonces at getting up into that two and a half percent range as we get into you know, April, in in in May, when the cops start to get relatively positive. So you know, I think the key issue

here is that you look at bond yields. Bond yields are below two percent, and so even if you get to two two and a half percent inflation, these portfolio managers that hold these bond positions have a problem. And so the demand to hedge commodity and heads that inflation risk through commodities is quite high. I think that's part of what you're seeing pushing these markets higher right now, is that hedging demand to deal with even inflation creeping

up into that two percent range. Jeff, we gotta finish up with some numbers and play the number game. Seventy five and Q three on w c I one are the big numbers you're looking for. Well, I think in terms of looking at demand, demand levels were much higher. Um you know in fourth quartering in the environment that what we thought, and we're drawing inventory. So the key issue is will that inventory draw began to slow down and we get in the third quarter and will we

see a supply response. But I have to emphasize that you're Sarreadi Arabia right now. You've already committed to keeping production off the market till April, and supply is extremely inelastic in the near term, which means, you know, the upside risk until we start to see that supply response is quite high. Jeff always a clinic and great to catch up, sir out of London. Support in London, Jeff carry Golmu, SAX, Global head of Commodities Research, appreciated Jeff.

In Washington, the government putting together at one point nine trillion dollar fiscal plan and many prominent economists on the left asking a simple question, is it too big? We asked those questions to White House National Economic Council Director Brian dece in our exclusive interview. We size this based on the needs that we see to get shots and people's arms, to get the schools reopened and get relief

to families and businesses out there. And as we look at this, we look at the estimates out there of not only the output gap, but also the amount of pain we see in the labor market. Ten million people out of work still in this economy. We think that this is appropriately sized and frankly, the right kind of economic prescription to what is a unique and really precarious moment in our economy. Let's start with where the opposition is coming from, where the questions are coming from, and

let me can talk about the economics. We're talking about Larry Summers, a former Democratic Treasury Secretary, Olivia Blanchard for me of the I m F and widely considered to be a dove. These are not exactly Republican cheerleaders that are raising the most the biggest questions of your administration right now. And Brian, I just want to get disappointed by that that that's where the questioning the opposition seems

to be coming from. Look, we're having this debate across the board, and we welcome the opportunity to explain the contours of our plan I think one of the things that unique about this economic crisis is that this is a unique crisis and a unique pandemic driven recession. And so we think about this, what what the economy needs from the perspective of more akin to a natural disaster than a typical recession. We need to surge resources and support.

And we've also seen over the past year an approach that says let's wait and see and and take incremental steps has not worked and has put us in a pretty deep hole. So we feel pretty confident on the economics that this is the right way to go to make the error in the direction of doing something that will definitively get our hands around this crisis and drive us to a stronger and more dermal recovery going forward. Have you spoke it to summers Old Blanche out in

the last month or so. So we're reaching out to economists and economic experts across the board, uh, including including the folks you are mentioning. We want to make sure that we're getting input from all sides that we're considering arguments, and I want to be very clear we take very seriously the risks, the economic risks that are out there. We spent a lot of time thinking about them, a

lot of time worrying about them. That's our job. But as we assess and balance those risks, we believe that the risks of further scarring in the labor market, the risk of further extending this economic pain outweigh the risks of doing too much, which is really the theory behind

what we're trying to get done here. You clearly believe the risks of a symmetric and Al'm blind raise that point in an up D pace a little bit earlier in the last week, I think, Brian, I think for the individuals that I mentioned before Summers blanche out, the risk that they're raising is an inflationary one. What gives you the conviction that that's not going to be an issue. Well, it's a risk that we're keeping our eye in, and

certainly it's it's something to consider. But if we look at the recent history over the last couple of decades, we've seen that the economy has the capability of running at stronger paces, and we think that the tools exist to manage those risks as we go forward. We can debate different ways of measuring the output gap, measuring the risks associated with this particular crisis. But if you sum it all together, we are at a very precarious and

unique moment of economic crisis. And that's why we feel pretty confident that we will be better off if we take these actions definitively. We put ourselves on a trajectory to growth, and then we work with the tools we have to manage any challenges that we face going forward. And many people in the administration of Big keen to stress that this is about aid, it's abound relief, it's

not about stimulus. And I think a question many people have had Brian, is how giving a check to an individual learned seventy five thousand dollars a year should still be considered AID relief and not stimulus. What makes that relief? What's that line between relief and stimulus? If I have a job and I earned seventy five thousand and you send me a fourteen hundred dollar check, why is that relief?

What is it relief from? Well, I think you need to look at the package in its entirety, and if you look at the combination of the direct payments that you're discussing, unemployment insurance extension, and then targeted support to the lowest income families with children and essential workers without

children in the aggregate. This is a very progressive, progressively designed package to provide aid principally to the bottom half of the income distribution, with the respect of the families that are out there that are middle class families that will be getting direct payments. A lot of those people are people who have lost jobs. Are one of the earners in the family has lost jobs. Others are people who are facing additional costs associated with working during a pandemic, childcare,

other other costs. And this provides a bridge. It provides support to get families and businesses through to the other side of this pandemic, and to do so in a way that we don't they don't have to take on additional risk or additional economic costs during the interim. Let's

talk about that bridge in a different way. There is another question as to whether this plan, given its size, removes the bridge from getting here to an infrastructure plan further down the road now, and I just wanted from your perspective, what are the constraints to further fiscal spending after this package is being delivered. It goes back to

the question you raised before. This is a relief plan that is designed to provide immediate support to try to bridge and get us on the other side of this pandemic.

I think that there is broad consensus and we've been hearing it over the last couple of weeks in the outreach and the engagement we've been doing from business communities, from labor, from members of Congress, from the Democratic and Republican side, that we face very significant divert maintenance, whether it's with our physical infrastructure, transportation infrastructure, energy infrastructures we're seeing play out in the past week in the events

in Texas and other wise and otherwise, those deferred maintenance challenges are real. They are impeding the competitiveness of our economy, particularly in a competitive global environment, as China and other countries are investing in their own infrastructure, and there's a very strong case for us to be increasing our investment, doing it in a way that will create more jobs,

better jobs, and increase the competitiveness our economy. That's a different economic objective, but one that should we are very focused on in the presence, very focused on. So just with that again, Brian, just to be clear on it, I'm just trying to understand what the constraints are in your mind to further fiscal spending, whether it's political space, whether it's fiscal space, whether it's inflation. What do you think the constraints are. Loosely, the perstring is even more

in the future. Well, I think we have a fiscal framework and the President has laid out where if we're making permanent investments, those investments should be offset, and he's laid out a range of different proposals for how to do that. That makes sense in terms of our long

term fiscal trajectory. If we're looking at temporary investments, particularly those that increase productivity UH and help put people back to work, improve the quality of jobs, those are investments that we need to take a hard look at UH at making right now, and in the current interest rate environment, we could feel confident that we could make consistent with a long term fiscally sustainable framework. So you've brought up

the current interest right environment. As the President spoke with Chairman Palatle, who will hear from a couple of times this week. Look, we're we're as an administration in staying in contistent contact with the economic officials around the illustration, and I'm not going to read out specific conversation the

Presidence has had. But we're we're in we're in continual contact, and we're a monitoring and assessing the markets as you would expect, Secretary Yell and leading our efforts and doing so, You've jumped back into the political seat very quickly, Brian, because that was a very political response to that question. So I'll ask it again. Forgive me for doing so. Has he spoken to Chairman Pals specifically as the President had that conversation with the head of the US Central Bank.

I'll give you a specific answer. I don't have any conversations from the President to read out, so there's no read out, there's no conversation. Don't you find that curious that we're putting through a massive one point nine trillion dollar plan that in the future would depend on where interest rates may or may not be in the future, and yet the President hasn't had a conversation with the

chairman of the Federal Reserve. Look Like, as I said myself, Secretary Yell and other senior administration officials are staying in consistent contact with our economic agencies. Uh, And that's what we'll continue to do. Okay, Well, I'm just wondering how you frame the relationship with the central Bank in the future. Is it different to what we've seen in the previous

all years, Brian? What will it look like like? I think we have an approach to economic policy right now that is about addressing the current economic crisis and our focus on the fiscal policy response that we need to put into place. That's our our overriding focus right now, and that's the reason why we're working to get the American Rescue Plan passed. A little bit of time catching up with the White House National Economic Council's director Briant des Right now, this is a joy to give us

perspective here at a perspective moment. Michael Kushmer joins us with Morgan Stanley, the pedigree to Princeton, London School of Economics and Columbia. But what's so important here is he's the rarest of rare commodities. He has enjoyed a seat at Morgan Stanley since time began. Michael Kushma, you walked in the door to enjoy the crash of seven. What was your crash of seven? Like? It was quite quite interesting?

I've only been working for several months, and my first thought was Austin first out that I was my career in Wall Street was going to end pretty pretty quickly. But that crisis ended very fast. It did, it got It was amazing, folks to see how the markets cleared him by December. It was a it was an afterthought. Michael Christimern I want to go right now to the changes in technology. John and Lisa have a bunch of fancy questions. We are in a time of digital social media,

the technology, the way of the messaging works. How do you handle a down draft now versus the way you handled it ten years ago or thirty four years ago. Uh, well, the whole, your whole, your whole day is longer. You've got more information, you've got more action and markets coming in London morning or an Asian hours, so you wake up in the morning in New York and things can

be already happening. We see more volatility in treasury market futures, sometimes overnight, leading the way into what happens in New York during the day. There's large scale demand for US dollar bonds on the coming out of Asia and lesser degree out of Europe. On a regular basis, affecting credit spreads, affecting the level of interest rates on the cross currency basis, of affects a lot of demand for for US dollar assets.

Was all sorts of things going on which links financial markets all over the world and relative value and opportunities to what's going on everywhere in the world, not just what's happening inside the United States borders. Well, here's an upgrade, Tom Kaine comes from Jonathan Golub and the team over at Credit suis raising his SP five hundred price target of forty three hundred from forty two hundred and citing

the hottest GDP growth in some thirty five years. Forty three hundred the new price target a credit swas and that goes to the double digit callub Ben Laylor, and I also mentioned John Ferroll the distinction of Credit Suite that they still like tech. I believe that's what Mr Glub is said over the left of being very constructive on big tech over the last twelve months when others

have started to shift rotate towards some other sectors. Just add to this, if you can, Michael, on the bond side of things, we've been talking about this how self limiting a move would be in the bond market if it started to infect risk assets sweat. Can you weigh in on that absolutely? You know. One of the interesting things which has happened over the last twelve months, So what had massive recovery in equity prices, Earnings from twelve

months ago today are probably up. Um. We've had a traumatic rise in commodity prices from last last winter to where we are where we are today, but many safe haven assets are still higher in price or lower yield with a guard to bonds, whether the US treasuries, where it's corporate bonds, high quality corporate bonds, whether it's UM, the yend, the Swiss frank currencies like that would typically

function as safe haven's. Well, right now we're talking about boom times, the commodity prices rising quite sharply the next twelve months, the fastest growth we seed in the United States in decades. We can see a situation where the US economy grows faster than the Chinese economy in two thousand twenty one, which I think no one would have believed was possible um a year or two ago or several years ago. So all these things are are changing the narrative of what's what's going on in the world,

and this boom conditions could could continue. What that means is at the levels of interest rates we thought were restrictive for the US economy may not be restrictive because there's so much fiscal policy coming, there's so much pent up spending coming down the pipe. We saw the savings respike higher again in the first in January of this year, meaning more money is available to be spent later this year.

So we're talking about a situation with the US economy, and we see forecast being raised continuously by various analysts on the street and elsewhere, six seven percent this year and then again four to five percent again next year,

which is unheard of in the past years. But there's a distinction here between higher rates crimping borrowing and crimping growth with one point three percent treasury yields one point four percent treasury yields probably won't do, and a reassessment of valuations that have gotten very high and specific sectors.

And that's why Michael Showell was talking about a less benign rotation beneath the surface within some of these equity indexes, where you actually see some pretty significant losses in the high flying stocks. How close are we to that just based on valuations relative value? With treasury yields going up well, the way the way we look at it is that US treasury yields of thing one of the few things which still are a lower yield than they were pre pandemic.

So one point three five tenure treasury is still lower than it was called in January, early February, mid February last year, what about one point five percent? Real heels are a lot lower today, is still than they were in September of last year. So the question is, if the economy is going to do so well, why are these yields so low. Shouldn't they be at least back

to where they were before? And this is kind of why I think the market is coming around to the idea that we didn't think yields could rise as much as they have, But they may rise more because they still look low relative to the imply growth forecasts we see in other assets, and the Fed may be happy with that. Might be they will be Michael Kushma Morgan Stanley see of Global fixed income how much to Dolga

joins us. He's with John Hopkins Center for Health Security has been wonderful and giving us a broader perspective on this pandemic. Dr Dolge of The Atlantic has written up so nicely that Johns Hopkins at work and they talk about the path to normal. The numbers are getting better. How do you perceive how the win of it, the way of it that we get back to normal. I think the first thing is really making sure that we never get in a position where hospitals go into crisis again.

And towards that is get vaccine into the arms of all the nursing home residents, all the vulnerable adults that live in the community, and that will will really change the perception because then you tame the virus. It's unable to kill at the rate that it's doing, and that's going to allow a lot more freedom to do things without worrying about passing this onto somebody that could get

very ill or you yourself getting ill. Then I think the next step is really getting cases to a or level by vaccinating the population, just really making this more like one of our respiratory viruses that we deal with every year. It's not going to go away, It's just gonna become much more manageable on deaths. If the horror was four thousand deaths per day, we're celebrating that we're under two thousand deaths per day. Maybe we get under

one thousand desper day nationally. That's a wonderful outcome. Is the virus still out there? Is even if we get vaccinated we get better, the numbers improve. Is the things still out there? Definitely. You have to remember that this is the seventh human coronavirus that's been discovered, and four of those coronavirus has caused our commonhold. This is going to become something like that. It's gonna be like our

fifth seasonal coronavirus, and we will still see cases. We will still see outbreaks, we will still see debts, but they will be nowhere near the levels that we saw during the height of this pandemic, or even now once we get our mulnerable populations vaccinated. Once it is defanged in and more like other respiratory vi but it's not going away. It's established itself in the human population. It's endemic. There's an animal host that we don't know, an intermediate

between bats and humans. We still don't know what that is. This is not an irradicable or an alimitable disease. Dr Adulga, I'm gonna say something that will make John Farrell fall office chair and perhaps Tom Keene as well, and be really optimistic about the potential here, especially as they come up with new advances for the vaccines. The FDA yesterday indicating that they would allow a fast track process to adapt the vaccines available to any new strains of coronavirus

as they come out. Are we getting close like securing the common cold or being able to vaccinate for a whole host of other coronaviruses that are out there. I definitely think that the technology that was used to make the COVID nineteen vaccine messenger are an air m rn A vaccine technology has really made it much a much easier process to make vaccines for targets that people hadn't pursued.

And I do think that we're going to probably see somebody go after those coronaviruses that cause our common cold. So it won't be all of our common colds, but a substantial proportion could be reachable with this new technology. With the fact now that we have human coronavirus vaccines, but remember the common cold is not just caused by coronavirus.

Is there a rhinoviruses, metneuma viruses, pair influenza viruses. It's a whole group of viruses which will which will still be around, so you will still likely still get the cold, which is probably less likely to get it from coronaviruses once we get more coronavirus vaccines. I gotta say, as you talk, it doesn't make me want to go and touch people again and hug them and go face to face with raises A question of how confident people will be once we do get a heart immunity of some

sort another. I know it's controversial and get out there, and it's a question of services and how much they can research. Can we go back to the life that we lived once or will life be just absolutely changed with people having a new awareness of health and spreading and an inability to control some of these viruses. I definitely think that after any kind of pandemic or infectious disease emergency, the population is going to change their perception

of risk and disease. We've lived pretty much in luxury in the United as in many of the developed worlds, where we don't worry about infectious diseases every time we step out the door interact with the other individuals. So there are going to be people who are still reticent to get back into it, that may still wear masks and face coverings when they're in crowded and congregated places on public transportation, even after the rules may may change.

So I do think that you're going to see people just much more attuned to the risk of respiratory viral infections after this, and that may take some time to dissipate, but many people will get back to what they were doing. They're already sort of getting back to what they were doing, but it's going to be a different population because we had five hundred thousand Americans die and the whole world

turned upside down by a by a virus. This was Lesia's version of Sunshine and Rainbows on a Tuesday morning. I'm ixparted to catch out these sam down Jones health kids. Thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and economics,

finance and astment and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg.