Surveillance: Debt is Creating Vulnerabilities, Adrian Says

US basketball team for supporting the Hong Kong protests. I want to bring in Bill later talk about this Milk in Institute Chief Economists. Bill. The examples of the last twenty four hours are massive, and they just underlined the fact that this tension is going nowhere, regardless of how the trade talks go this week, and regardless of who is in the White House. John, You're absolutely right the notion that there's a trade the spute has now spilled

over into a capital markets dispute. If we start interfering with global capital flows, that's really going to have massive implications for whether or not the global economy can pick up again, because the global market has become so integrated. The minute the US starts to play around with the notion that we might start to shave off the amount of support we give to the Chinese stocks, even even

though yes it's a real problem. We've always said the Chinese companies don't adhere to the same accounting standards that we've had in the for other US companies. But why bring it up now, and why bring up the blacklisting now? I think it's part of this kabuki dance where we throw everything we can on the table and see what the Chinese do to it. And of course the Chinese is gonna back off, and I think that dispute that kabuki is going to require the principles to get together

and we set the door on the board again. And that's gonna happen in November at the APEC meeting. I look Bill at uh all that's going on and the fact as it reacts within the market, what are the consequences of the market signaling breaking down the new loads. We're not there yet, but if we break down through that stress of late August, what does that signal? I think that the markets have become so confused with a degree of uncertainty, and now we're throwing even more uncertainty

onto the plate in terms of messing with global capital flows. Um, it may get to the point where investors are going to give up and we are going to have a real severe market crash, which will have real let's go to your expertise. Let's explain that in the partial differentials of imports and exports, Let's use the United States as the basis. Are we going to see diminished imports? I guess so, But what about our exports redounding on all

this market and geopolitical turmoil. Our exports depend upon world growth, and in particular it depends upon the supply uh change that have formed for Mexico and Canada. So the first priority that we have to do for policy is to get U S. M C A pass so that we can at least set the production side of the economy. Then the issue's demand. We know European economies are going into recession. We know China has slowed, and that's going

to hold back our exports. But look at the US domestic economy, it's only you know exports, was imports together are only about of the U. S. Economy, so it's still a small share. But the key, the real killer is going to be when capital flows start to get messed with, and if capital flows start to shut down, that will hurt you. To be clear, here, we haven't seen that, but these news flows. John Farrell mentions the NBA. Okay, I think that's tangential. Fine, but it's additive, isn't it.

Towards where these two warring partners, China and the United States Catherine Man's dysfunction begin to talk about capital flows as well. Actually it's not just acctive. I think it's multiplicative. In fact, we're talking about logarithmic and exponential type effects where we have huge don linearities. Trade is something that we can deal with because it's a small share of US GDP. Capital flows are not a small share of

US GDP. In fact, capital flows, the flows coming into the United States has what's hold at the US economy for all these years. We started messing with that and we will interfere with US growth link in Europe on this. Then, I was trained that our trade with Europe is far more substantial than the dynamics with emerging markets are developed markets? How do you fold in the European export import dynamics with this trade war with China? In Europe, the domestic

economy in Europe is very is very big. In fact, the EU together is about the same size of the United States. But the European trade has now become so dependent upon China demand that much of our our our our supply chain connections with Europe are all ultimately leading to the demand that's in China. And that's where the new, the new shape of trade has has affected the US.

You're just joining us this morning. Futures at negative twenty one, down, futures at negative one three, and the yield market moves substantially. We see the thirty year bond in three basis points two point zero two percent in the and you're at one again. Really quote something, John, But I'd like to wrap things up by having a conversation about an argument that people make on this program, which is that somehow China can wait out the president and hope that he

doesn't get a second term. The idea being that somehow there's this fluffy democrat wanning in the White House for the Chinese to deal with in a year's time. I just don't buy it. Last night I got hold of the The Trade Stance of Senator Warren. She published it back in July, and you go through that Trade Stance bill and you look at the details, and it's all about adhering to a certain set of standards, a certain set of standards that Senator Warren wants everyone who has

a trade deal with the United States to meet. And it's so onerous. Even the United States itself does not meet those standards and build The metrics might change with a Democratic president, but the outcome will be just the same. Wotes it. We will continue to have tension between China and the United States for as far as the eye

can see. Boy John. If Joe Biden gets thrown out and it becomes a concert between Warren and Trump, watch the needs run for a deal because they know they're going to get a much better deal out of Trump than they will have the Democratic extremist Warren position where you were. You know, health standards, medical standards, all sorts of standards will be put into the important the United States and China will have enormous barriers to trade. He

erected because of a Warren presidency. Bill. Great to catch up with you as always, Bill Lee Milkin Institute Chief Economists joining us from Washington. D C. Tobias Adrian joined US now i MS Monetary and Capital Markets Department director, formerly of the New York Federal Reserve. He also taught at Princeton University and and Why You to Buy Us Great to have you with us on the program. I want to reflect on a piece of research that you and the I m F put out last spring. Back

in April. In the United States, the ratio of corporate debt to GDP is at record high levels. In several European countries, banks are overloaded with government bombs. In China, bank profitability is declining and capital levels remain low at small and medium size lenders. To Bias, do we have a problem? Good morning, I'm very happy to be here. Well, what we have seen over the past couple of months that interest rates have come down, not just in the

US but globally. Today the stock of negative yielding debt globally is close to fifteen trillion dollars. And of course investors are reaching for yield, they want to reach nominal return targets, and that means that that is rising around the world, and that does create certain vulnerabilities. But to Bias, this comes at a time when GDP growth has what

a three handle for global GDP. What are you looking for next year, because many people are looking for a two handle, and I just wonder as the global growth picture de salarates, whether these vulnerable vulnerability as will look a how a lot worse. Well. Over recent months, we have certainly seen an increase in downside risks, and center banks around the world have reacted to this increase of

downside risks by aggressively moving monetary policy. There has been an easing of monetary policy in many countries around the world, including in the US where the Federal Reserve has eased. But we estimate that in countries with a GDP of sevent of global GDP, monetary policy has been east and that has taken away some of the downside risks to growth. What about the fiscal space there's out there. We spoke

to it our gaspar earlier this morning. Fold our salvation of fiscal space into how we will look at interest rates. Of course, with lower interest rates and interest rates that are expected to be lower for a long time, in principle, that does create some fiscal space. However, we do worry about many economies where that is already high. Well, you

were about the debt is already high. Is the US one of those economies in the US UM there are certainly some fiscal challenges, and we have urged the US many times in the past UM to address phisical challenges of the future. Tobios, thank you so much twice. Adrian with the International Monetary Fund this morning. Yeah, Azore is with us, and you need to know only one thing besides his services to the International Monetary Fund is director

of the Middle Eastern Central Asian Department. Is he has had a extraordinary public service to his Lebanon, his finance minister over a three year span. And we are honored uh that Mr Zurka join us now, dr Azor, I have to rip up the script. With the new turmoil politically of Turkey, of Syria and frankly of the adjacent nations of the Middle Eastern community, how will the Middle Eastern community respond to the politics in the new economic

tensions of this announcement by President Trump. Political tension has a toll on economy as well as also on the social situation. As you know, the large cohort of refugees are coming from Syria, impacting economies of Lebanon, Jordan and also casting a negative impact on trade and flow of

services and people between those countries. Therefore, the increasing intention is affecting continuy is of the region who in the last few years were not able to grow case in Lebanon or in children higher than two percent, let alone the humanitarian impact that this issue has on on both host community as well as also the refugees. Your your researchers centered on the gleaming buildings of I'm gonna call

it oil Middle East. But after the spring, there's an attempt to find a resurgence or new or nascent capitalism within the Middle East. Give us an update on the ability to find capitalism in the Middle East? Is it? Are there? There's signs of life there. Look, we are trying to help many of the countries of the region in order to build an economic model where growth is led by the private sector, where those economies can provide

the jobs for the young population. It's a region where on average six of the population is below thirty and jobs need to be created. Therefore, inclusive growth it's very important as priority for the region and only the private sector can help provide growth and this can be done through improving financial inclusion, helping startups and samese and also make the state more efficient but also more accountable. And this is why we are geting our effort effort internally

towards improving governance and helping countries fight corruption. How critical is Turkey within the mix in whether the projection of the I am of How does Turkey fit with all the challenges there? How do they fit into this attempt for a better Middle East? Look? Turkey, Saudi, Egypt, Iran are the largest economies that are affecting the Middle East, both politically and economically. Of course those are big markets. For example, Egypt is a market of hundred million population.

Saudi is the largest economy in the region, one of the G twenty countries. And Turkey has a lot of trade, um and investment in the region. And therefore, wherever can be done in all to improve UH and or reduced the better years for good self people will have to

mend disposed to impact on the region. Very good mrs or thank you so much doctors or as you how do or with the International Monetary Fund and update there in the Middle East, Sarah House with us doing strong economics at wells Fargo and distill the American economy, Sarah, We've just got to go to the basic call, which is it is it a two run rate or a one handle on it? Does wells Fargo think, well, actually dip to a run rate economy below two, Yes, we do.

So we're looking at growth over the next couple quarters to probably come in somewhere around one and a half percent, so that would be decidedly below the fat deustaments of puntial growth. And really this boils down to the weakness that we're seeing in terms of business investment as we see the trade war drag on and uncertainty continue to linger, and to some extent, some moderation in the consumer space too. I mean, I understand the fourth or fifth mandate of

the Federal Reserve system is to avoid trade wars. But Chairman polists speak about all of this today, what will you listen for? So I would listen for what he's looking at in terms of of what that redline is. So we've seen to some extent, I think Pal's had an easy bias over the past few months. But given that they've already cut twice, does he think that that

should be sufficient for now? Um? Given that policy does work with a lag wait to see if things play out later, or just given the data flow that we've seen recently where it looks like the economy is continuing to weaken, does he think more accommodation is necessary. Let's talk about the diets and we've just at Sarah PPI has just posted the biggest monthly drop in more than four years, and I'm trying to understand where the downward

pressure is coming from. Have we got a demand side problem? Sarah, Well, I think we have seen demand demand growth slow and so I think that's part of it. I mean, if you look at some of the details, part of the weakness was in that trade services components. So that's measured by margins. So I'm not surprising to see that margins are getting squeezed right now given some of the pressure from from tariffs right now, so businesses are are having

um to to reduce those margins. UM. We did see some strength in in the core services components, so it wasn't all UM completely weak. But I think bottom line is there's just still not a lot of inflationary pressure. UM. No sign that domestic producers are really taking much advantage or are are lined up to where they can they

can increase prices. And I would go one step further, Sah, no sign that the trade dispute between the Chinese and the United States has actually ended up with a broad a lift to price pressure in America in the way that some people thought it might. What do you think of that? Right? So, I mean we've seen if if you look at the n f I D survey this morning, I mean, plan stories, prices aren't going anywhere. If anything, we've seen them them come down over over the past

year or so. And I think that speaks to the fact that the demand picture is weakening, and so you still have a lot of hesitancy among businesses to pass on those those prices. Well within the parsing of that is the idea that we will import bring in a disinflationary tendency from global slowdown. I mean, frankly, this is a question I'll ask uh the new managing director of the I m F here in an hour and a

half or forty five minutes, whatever it is. But but Sarah, is that what this is about is we're importing the world's troubles. I think overall, when you when you look at where the weakness and the US economy is coming from. So we've seen manufacturing its certainly been even the weak spot. So to the extent that, um that that where you're seeing the slowdown is more tied to that base. Um. But you know, I think you do have some offsets.

So all the demand pictures just slowing. Of course, we're also having to deal with with the flip side of this trade war, which is the increased pressure from tarot. So um, it's not a clear cut picture. Sarah, Thank you so much. Sarah House wells Fargo. Hereafter is John you what what was that statistic? John? You had? I missed that the biggest monthly drop in four years. Trade risk, geo, political risk, I get the latest. We welcome our next guest,

Tom Petrie. Been covering the oil industry forever, I mean in a nice way. Petrie Partners Chairman joined us our Bloomberg Interactor Broker studio. So Tom, let's just start with the geopolitical backdrop for the energy complex. Just the news we've had over the last couple of days with Turkey and Syria. How do you frame your call on energy as it relates to the just ever dynamic geopolitical backdrop? It really is UH as as complex as I've ever seen.

We've got a situation involving Syria, the US withdrawal beginning to look just like the abandonment of Saigon, and as a historical president UH and denied by the by the President. But the fact the matter is, UH, it's in the perception, if it's in the minds of those who are dealing with the consequences of it, UH, they're the ones that probably have the best take on it. But we've also got other situations Libya. UH. What's going on in Libya

right now? The US is backing UH, the the the government in Tripoli, General hata Uh leading the rebels in the east, is being funded is being funded by basically by UH, the Saudis and in Egypt and others. And so we've got this really complex situation where at times we're on one side of the table. On an other times we were talking about our allies, and that combination UH just leaves us with a with a hopeless situation.

The good thing is I think that that because of a success of the Shale Revolution, when we get when we test below fifty on w T I, pretty powerful self correcting forces kick in. When we get above sixty five, just the opposite sixty five on its way to seventy, and we begin to curtail demand. And and so those are the fundamentals that against the backdrop of a Middle East challenge to deal with these uh is really uh, not unprecedented, but it's as high as I saw thirty

and forty years ago, right exactly. So when we talk about crude and just commodities in general, obviously supply demand, UM, it seems to me, not not being an energy expert like you, that the supply story has been a little bit in the background. It's been more about demand and people are concerned, I guess about global trade, trade uncertainties, trade tensions, and what does that mean for global growth. Has that been kind of the driver of maybe a

little bit lower oil prices. It has, uh, you know, I do think that the demand picture, it's the fear of future demand. Basically because of the availability of new supplies in North America from the shale revolution, the need has been there for for global demand growth to be on the order of one point three or more million barrels per day per year in growth UM. With the with what's going on right now, the fear is is that going to be a one point one? Is gonna

be a million barrels a day? Or is it gonna be nine? If it is, is that it's gonna be a pretty severe test for OPEC to be the balancing factor because they need UH, they need revenues to run their government in addition to maintaining their ability to supply oil. So give us a sense of how OPEC is right now. How unified are they? I guess it's plus Russia. Just give us a state of OPEC right now. Well, you

you put your finger right on it. There's Saudi Arabia and their strongest ally is not a member of OPACKERS Russia. The alignment of interests there began in two thousand and fourteen when UH, the then Deputy Crown Prince Mohammed bin Salman, was making um from the from April of that year to October almost monthly trips to Moscow. They formulated the idea, let's bend the supply curve in North America from the shale revolution, and for about eight to nine months they

were successful. They competed on for volumes, they competed on price, and we saw that the hundred dollar w t I was driven through seventy, which was their objective, but it went through it like a hot knife through butter and didn't bottom until it got down below thirty to six dollars and forty cents, by which time they realized, gee, we didn't quite mean to make that happen, and and uh,

now we've spent several years building it back up. But what what we clearly have now is a situation where, uh, if you know, tests below fifty don't really work for the shale revolution very well, and tests above to seventy don't work for global demand growth, and so I think we're in a zone there that's gonna work. Uh, given that, but it's still requires some real adjustments by the individual producers to make sure they're allocating capital to their very

best returns. So let's go to that. We'll move from the just looking at the commodity to some of the companies again suggesting maybe a fifty to sixty five range is a pretty decent range for for crude. How are the big oil companies Are they set up to maximize profits in that kind of range? Do you think the uh, well, first of all the major oil companies in North America, their presence in North America, they've been behind the curve on the shale revolution because of the pressures that are

developing here. They're getting a second kick at the can, a second chance to at least consider how they can move into UH this and have be a bigger part of their portfolio. That the major companies are generally in pretty good financial shape. They're not over levered, they have full integration, so they can turn the light sweet oil that is typical of the major place here in North America and especially in the US into valuable product UH gasoline, diesel,

and so on. So they're in they're in good shape UM and they and generally they're competitive in the marketplace because they pay a dividend, so they're outperforming for UH. The independence below that were who have been on the cutting edge of the shale revolution. Some are are pushing the limits on leverage and they've got to challenge ahead

for the next several years in all likelihood. And then those who are who have watched their balance sheet are still well positioned, but they're probably more competitors competing for the best plays, and that probably sets up conditions where we'll get some consolidation over the coming three to five years, and you think that will be in the context of maybe some of the bigger, more integrated companies coming and buying in some of the more independent companies are maybe

consolidation among the independents themselves. Yeah, okay, so it's interesting. So the is the expectation when you when you go out and talk to your clients into companies you cover that oil is fairly stable in this range, barring anything crazy which could happen with a tweet. Tomorrow's stables a

relative term. I mean, when you're when you're fluctuating between the prices that we've seen in the last twelve twelve months, where you're touched on seventy and you've been as low as forty nine, that's there's a fair amount of latility in that. But yes, it's now a fairly well defined range where we're gonna see the movement of oil over something short of that upper range and and maybe only

occasionally testing the lower range. So in that sense, it's it's a more normal behavior than we've had, say in two thousand fourteen. Tom Petrie, thank you so much for joining us from Petree Partners. He's a chairman there and joins us in our Bloomberg Inactor Broker studio, giving us

the thoughts on the crude business, energy infrastructure. Tom has been covering the industry for decades, well respected and certainly knows that knows are from the commodity perspective all the way down to the producer perspective as well, so appreciate him coming in. 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

Keen before the podcast. You can always catch us worldwide. I'm Bloomberg Radio