Surveillance: Covid Zero with Weinstein

Morgan Standing Investment Management. Brian, I want to start with the events, the unrest in China of it the weekend and walk me through how even the team of thinking about it this Monday morning, we think it's just part of the broader story of of more economic turmoil, uncertain teams slowdown, and at least so we hear you that it's certainly possible that the zero COVID ends early and that would would be a game changer, which just as

possible that the clampdown comes, uncertainty stays, supply line problems, you know, rebuild uh and it just causes more economic slowdown out there. So it's a tough one to figure out on admitted by minute basis, But for now, the zero COVID seems to be here, and it seems to be part of you look at yields, right, deals are

falling um, economic growth is slowing around the world. But Brian, on the flip side, either way, whether they keep COVID zero and it causes supply chain kinks to last for longer, or they release it and it causes demand to go up. Either way, it's inflationary now. It does seem so. Again if you look at if you if you look at where we price inflation to go to, back to the twos,

it's very optimistic. Right, There's many reasons to believe inflation will stay stickier, makes the Fed's job harder, makes the curve stay unbelievably flat and maybe get flatter. Um. Yes, we we would agree with that. It's hard to see inflation pressures easing off completely, though I do think the direction will travel. The next three or six months will be will be lower. But to that point, Brian, the

moving ten year yields has been notable. Long term yields have been bid dramatically over the past couple of weeks. This has been the one consensus trade and perhaps people getting ahead of the first half of next year and doing it all now has it gotten over its skis considering how long inflation could remain higher, how determined central banks around the world are to be restrictive for a sustained period of time. Maybe I've been impressed with how

far we've come. And we went from a period when tenure notes were four fifty where it felt like nobody would ever want duration again, and here we are at three seventy and we feel we feel okay. I think this is the stage where we got a little bit of weak economic data. You could have another leg to this rally called tenure notes. Get the curve really inverted? Mind's a hundred, maybe a little bit more um long term? Do I think we're having a big fixed income rally?

Knowing the income is great, you don't want to chase too much. But I do think you could have another leg here, given that data could get weaker. If you think we could get another leg lower in yew, does that made you think maybe the risk is ever done it here? Brian? I think so. I think that's the trade here. I think we all year we had duration leading risk assid's lower um. This rally, duration did better, but risk asses did well too. If we rally again

I think it's because risk comes off. We accept the fact that next year is not going to be easy, that that earnings could be worse than we think, that uncertainty is high, and that duration actually is still cheap relative to risk given what happened this year. I'm looking right now at hil bond spreads just to build on

what job I was talking about. They're the lowest going back to August, and we talk about the rally that we've seen is people pour into risk, even though the lower leg in yields that you talk about, Brian really has to do with weakness. Could we see a material pickup in default or is it just a positioning Is it just a technical widening and spreads that you're looking for. I think the defaults are coming. I don't know that we're going to see that into the next two or

three months. It takes a little bit longer, right. We haven't seen the impact of higher mortgage rates. We haven't seen people have to refinance you know, a lot of debt yet. So I think defaults are coming, but I think it's a bit more technical. I just think how you'll lose, how you'll look great with a nine return handle on it when you lower buying, you know, a good hundred basis points, two hundred paces points. The higher

quality assets just looked better. So I think the default stories out there, I think the oarning stories out there, but I think it's a bit more technical. In the next couple of months, the weaker growth risk is done too well. People have chased it um and we have to reset. You said defaults are coming, Brian, but this

is one big question mark. How much are we going to sort of a pretty high default cycle or is it really the consensus that you buy into as well, that it's gonna be a relatively low kind of level of default for a longer period of time. I think there lends people always jumped to is oh eight. I don't think that's the story here. I do think balance

sheets are okay. I do think there are you know, there are certainly buckets of consumers that are doing well or baskets of consumers that are doing well um And so I think we're gonna go back up and probably scare the market a bit, go higher than than than maybe average. But I don't think this is It may be a longer drawn out default cycle, but I don't think we have massive default spikes and armageddon. That that's not what woods in play here. I've gotta put you

on the spot for twenty three. Is your working assumption COVID zero in Shinaree Bryant. Such a good question. Um, my working assumption had been before the weekend. Yes, and I haven't maybe got enough information to to redo it. Uh. They definitely want to stick with it. I'm a little less certain now, but I'd still stick with yes. From White Stain of Morgan standy, thank you sir. As a white you're the only just some with the indoor shoes, which you mean you don't have shoes just for the gym,

just indoor shoes just for the gym. I run outside. Yeah, but if you were, let's say they were just for the gym, you'd wear them outside too. I take my shoes off when I come in. I'm one of those people anyway you make other people take their shoes off. No, I don't make other people take good That's good to know those people you don't like a lot to say about the Otherwise we might have an issue. Got a good friend who turned up to a party over the

last couple of weeks. Walding got to the door and he got the shoes off memo from the people at the party, and you know what he did, No, turned back around and left the party. But I would do the same thing. You take your shoes off when your part. Sure, but I don't force other people too. And I wouldn't either gotten with those people. But but but if you actually cared about it, and you had a close friend, they're not coming in the bedroom, are they again in

the living room? I don't know. I think it's a sign of respect. I usually take my shoes off. I would for them, I would offer exactly. I just wouldn't insist. I think it's strange. I think it's strange to insist. I also think it's strange if somebody doesn't take their shoes off, if it's clear that you know how much that we're gonna get on this, I think it's very odd to make guests type the shoes off. I think it's I agree, but I think it's odd for a guest to not see all the shoes at the front

door and automatically. This is why we go to Clara Ranked, the chief US economist that effects investments that she joins US now Laura great to catch up with you. It's a bizarre moment in this equity market because we seem to be pricing in a recovery to recession we haven't had yet, Laura, Can you run me through the potential for this downturn in America? Yeah? You know, markets are

so forward looking. I think they've really gotten over their skis in terms of seeing this reduction in the pace of Federate hikes and automatically assuming that there's light at the end of the tunnel and easing is really on the near term horizon. To me, I look at what's happening in the bond market and the very clear expectation or the probability of recession that the bond markets pricing in, and the fact that forward earnings estimates on the equity

side are higher for next year. When we have a recession, we usually get a d op in earnings of ten that's what we've had historically, So we're really seeing this divergence and recession expectations in the financial markets. Laura. You also think that it is potentially not right that inflation is going to fall so significantly next year. That is

completely not consensus. Can you explain, Yeah, so you know, I do think that inflation has seen its peak in June of this year, so I do expect inflation to fall, but I am an outlier in that. UM I don't think we're going to see inflation neatly fitting back into this two percent box anytime soon. I think we're going to need to differentiate between inflation coming down. You know, we see oil off so significantly this morning. Some of these base effects are going to drag headline inflation lower.

But there's a real difference between that and a world where inflation is reliably and persistently low. That is the backdrop again to which we've had the FED, you know, keep interest rates at the zero lower bound, cut interest rates aggressively over five basis points if the economy slows. I think we're in a world now where we can't just assume that we're going to mean revert back to the world you know what we've had for twenty years

before the pandemic. Look at what's happening in China right now. We need to really resist the urge that our quantitative models are telling us to mean revert. That to me is the biggest concern going into People would disagree Laura. They would say, well, we still have an older population, we still have a lot of doubt, we still have all of the ingredients of low inflation, and that in five years time, this fedual Reserve will be trying to get inflation up, not to get it down and keep

it at two percent. Why do you push back against that? You know, I think that what we're seeing right now, look at the tenuere treasury we have. If I if I had told you that we would have inflation of seven percent, a tenure treasury was still only three and three quarters. That is a world where demographic pressure is

keeping the tenure treasury lower. We have quantitative titan, we have the FED selling treasuries or at least not buying them, and we still and we have really really high inflation, and the tenure is still well below where inflation is. So I think it is a world where we're seeing demographic pressure UM applied to the long end. I just think that it's um. It's still a world where you know,

we're seeing look at food prices. I think the expectation that supply chain disruptions are going to magically evaporate is being disproven this morning. This is still um we're seeing the echo chamber of COVID disruption, and I think really the genies out of the bottle when it comes to inflation, durable goods price deflation is a necessary portion of seeing um US inflation at two percent, and we're just not

going to go back to that world. In Andrew Hollen host The City, published just months ago, he said the jobs numbers may serve to emphasize his hawk is focus on a tight labor market. He's talking about Chairman pou La. Do you think that's important too. I think this is critical. You know, wage growth of four percent is inherently inconsistent with inflation of two We have had a lot of different recessions where we see very little change in output

but a massive decline in employment. This time around, you could get the other story. You could get company is really actually holding onto labor. That's part of the demographic story, and I think it's a reason why wage inflation is going to be much stickier. On the decline. We've seen companies now have to continue to compete for workers, and I think that also is going to be a story for the wage numbers may become more important than CPI numbers.

Especially in the beginning of next year. Interesting up black rocket down like a feather. I think it was Patrick Harker if the Philadelphia Fed a number of weeks ago. Laura, thank you, Laura reun of FS Investments, And I'm well joined us now sending a fellow at the Atlantic Council and I'd love to start there. Just the latest move from this administration for chef on around the story in Venezuela, what are your thoughts on that we still too light

on detail for you to draw too many conclusions. You know, I do think that we're we're shorter on detail here in terms of the Chevron story. So, for example, is this oil oil that's already on the market just on the black market, or is production actually going to increase in Venezuela, in which he is that could be meaningful for the market, but probably is going to take quite a long time to actually get get going because their oil facilities have been an incredible disrepair. I mean, this

has been a very very long um problem for them. Um. The interesting thing though, is is say that, um, you know where they're looking for for oil producers that are

less bad. You know, there are a lot of less bad oil producers in the United States, UH, that have the ability to produce more, just they aren't producing more because they don't think that the atmosphere is conducive towards it, and also that they're facing a lot of headwinds from inflation and having trouble getting parts and getting labor and getting equipment, and costs are very high. But there are definitely things that Biden administration could do to encourage those

less bad oil producers in our own country. Oh and then why are oil prices so low? Is this something that completely is a demand side story that we're seeing play out or is it just the imagination of a demand side story that is yet to play out. So I do think that it's it is somewhat of an imagination of a demand side story, because you do have a situation where I think futures trading is impacting the prices now, and the the future of oil is very,

very hazy right now. What's interesting, though, is that the fact that prices are kind of low now could actually spur more European utilities to switch from natural gas to oil, and that could then later kind of send a bump into oil prices. So I think that just because we're seeing kind of a lull or a period of lower prices now, we shouldn't expect that that's necessarily going to continue.

There's always a tendency to think that what's happening now is what's going to happen for the rest of the winter. And I think that with what we've seen certainly in the past, with the incredible volatility here, is that we cannot underestimate the effect uh and we could see a very very quick rebound if if we're not careful and paying attention. On the big news over the weekend was the social interest in China, the possibility of perhaps a quicker exit to zero COVID on the heels of protests

around the nation. Do you view with the unrest that we're seeing over in China as being potentially a logical reason for oil prices to be lower or would you expect that to actually send oil prices higher because of what it might mean for zero COVID Exactly. So, I do think that um earlier in the week that China's COVID policies continued, lockdowns things like that definitely helped send oil prices lower. So if we we're talking about say the beginning of last week, And the question is what

do these protests actually mean. I'm not a China expert, but if you do look at China's history, the regime there has not been particularly responsive to protests. They also don't seem to really have a problem with lots of people dying in pursuit of their policies. So just the fact that there are protests in China, I think it means we should pay attention to it, but I wouldn't necessarily put my money on it having a widespread impact or a big change or shift in the Chinese regime's

policy U particularly quickly. You are an opaque expert, so let's build on some of that knowledge if we can. I'm interested in the working assumptions for next year's open looking at three where COVID zero is still implemented by the Chinese government, is that the working underlying assumption of that organization. That's a really good question, and I think

that they. I do think that if anyone is going to know first, it's probably going to be Saudi Arabia because they've got a very close relationship with China, with the Chinese government, They've got lots of oil investments there A Ramco has tons of refineries, They've got long term contracts for crude. And if anyone is going to have a sense of when China is going to need more crude oil, I do think it would be Saudi Arabia.

So if Saudi Arabia is sending signals that they don't think oil demand is going to increase very much over the course of the winter, then that could be an indication of China's COVID policy. And well, thank you of the Atlantic Council and the latest in the crude market from Venezuela to China. Done joins us now seeing the equity analyst that Webbush Securities don't want to stop with the Apple story and understand it from your perspective, do you see that as profit, revenue lost or just deferred

pushed out to the next quarter. Look, I mean it's been a gut punch in the most important quarter, the most important period for cooking cupputino going into howidays. I believe it is deferred and they ultimately demand right now is that stripping supply by about three to one? But I think really, look there the clock struck midnight. Finally, Apple is seeing, you know what, what's really the hurt in terms of production in China? We think it could

be sixty eight million units. So what does this mean in terms of Apple's share price, in terms of the earnings that they're going to see, even if it's deferred, What does that mean for the upcoming quarter? I think in the New York term, Streets factoring in that that you're quickly going to see misses on iPhone production as

well as what we're gonna see on deliveries. I think we should issue is that even going to Black Friday and we're seeing a five potentially shortages and Apple stores, if that continues to increase, depending what happens on production, then this could be some darker days ahead in terms of the coming weeks going into how it is, I

think right now Streets starting a factor that in. But let's just be clear, it's it's the Grinch that stole Christmas, you know, really for Apple, and it's been a frustrating time for Cook and Cupertina. This isn't a surprise though, Dan, I mean, this is ultimately Apple's China problem, that their dependents on China, both from a demand side as well as the supply side really ties their hands to policy

that's highly unpredictable. How much is there a push internally to move away from production in China to increase perhaps demand and production elsewhere. Yeah, and and in terms of what we've seen you with the last year and a half, Apple has been able to navigate basically better than any other company within China. The problem is is that now at the most important time, between the protests you're of COVID, what we're seeing a fox kind it's really been a

train wreck. I think for Apple now they could talk about diversifying, but realistically probably best keys they can move five sambers and production out of China about two So I think they're really handred tied here. And that's sort of the frustrating situation because they are ultimately the mercy of the zero COVID policy in China. Well down, let's build on that a little bit more on asked the question whether it's profit or revenue lost or just delay

defer to another quarter, think overwhelming. The response from bulls like you is that it's deferred, just delayed until the next quarter. But dan underlying that assumption is that these difficulties in production go away over the next three months. Down I've spent most of this morning asked in a question whether the working assumption is we get rid of COVID zero, whether we're stuck with it, And I can't get a definitive answer on that from anyone, And unsurprisingly

that's the case. So Dan, where does your confidence come from that the issues that this companies are experiencing this quarter are temporary and nature and won't just spill over into most of the next year. Look, it's a great question. I mean, like our view is that you know, ultimately, especially from a fox con perspective, they will be able to ramp production going into the next month or two, you know, and then ultimately this will start to be

more temporary. But to your point, it's an overhead and and it's really something they came to rouse for Apple at the worst time possible. And really, ultimately, right now, the street's going to assume it's temporary, transitionary. But ultimately, if this continues in two thousand twenty three, it would really sort of start to change the near term thesis. But that's the question you and I have explored a few times down. How would I know if I'm wrunk. You seem to have put a date on it there.

If it spills into three, is that fair? Is that your line? If this continues for another month or so, I'm gonna have to change my mind about where I see the stasis going. Yeah. If this continues for board is six weeks, but then it starts to impact two thousand twenty three, then even I from fifteen in terms of production, I think that's where it's sort of cascades further.

Right now, it's contained, you see that, even reflecting stock, But no doubt, I mean this is starting to turn into a nightmare in Elm Street for Apple in terms

of what we're seeing coming down in China. It's contained, and yet we have heard about Apple potentially giving discounts to certain businesses on the margins, doing things that they have not done before because demand has so had to supply and there's always been a willingness to spend a thousand dollars on a phone and people are lining up

around the block down. Is there a bigger problem for Apple that they're seeing both this issue on the supply side at the same time that demand is taking a hit in a way that perhaps they're starting to acknowledge on the edges. Yeah, man, the edges. You show that an iPhone four team plus, which is really outside of strike out in terms as an overall you know, deliveries. But if I look at iPhone Pro in terms of four team pro, it's three to one demand over supply.

That continues to be a robust. That's the frustrating thing for Apple, even despite economic storm clouds. Demand strong, they can't just can't produce it. And I think that's right now what they're trying to figure out. I think this is the key. I'll call it seven to tend ds ahead, especially what we see coming out of Fox can serious question. If you were hosting a holiday party, would you insist that people come over take their shoes off? That's that's

all we wanted to ever morning. Never. I believe I believe one should do that. It changes the whole dynamic. Once you say, asked someone to take their shoes off, are you setting a message to someone Dan, Look, I mean Staturday night, a good friendance to take our shoes off. It was awkward for about fifteen seconds and then it continued. I think it changes the dynamic that I was a wet first. They still mates after this. Are they watching? Maybe they are. Yeah, it's a good This is the

Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine AM for insight from the best in economics, finance, investment, 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 m