Surveillance: Energy Crisis in Texas

cases of blizzard with massive hardship. We tried to go out and find the guy qualified, and yes, that would be the Railroad Commission of Texas Commissioner Jim Right. But not for the reasons that you think. Jim Right grew up west of Corpus Christie. He's a legitimate guy who knows about the animals of Texas, the rodeo bull riding at all. He has a visceral knowledge, Jim, what people are putting up with right now. Jim, we want to talk to you about the electric grid and the rest

of it, the energy markets. But I've got to ask you this morning. You're living it tell us what the ranchers are doing across the southern Midwest. Well, I'll tell you from being a rancher myself. We've been out repairing pipes, so we make sure that we have water and energy uh uh to our livestock and water to our homes. Is there a risk here or with modern technology, is

it going to be different than eight nine? I don't see it being much different right now from those times you know, pipes, pipes seem to break whenever it gets cold, and you still have to go out and fix those. Well, Jim, given the fact that extreme temperature may become something more normal or perhaps more regularly occurring, and going forward, what do you expect to be necessary to fortify the electricity grid as we know it? You know, I think that we're going to have to take a stronger look at

uh who's allowed priority on our grid system. Right now, we're saying that the renewable energy has that priority, which is discouraging our are reliable energy source, which seems to be more natural gas fossil fuel related from coming in and building the plants needed to pick up this power demand in time times like these. Wait, but I just

really want to clarify this ship. Are you saying that the problem here lies with the wind turbines, some of the renewable energies and not with some of the pipelines and freezing and other issues there is that what you're saying, Well, yeah, in a certain way, you know, I think that as we here in Texas has said that renewable energy has priority on our grid. We've discouraged the people coming in and building car plants that run off of natural gas, which is more of a reliable source than than has

every and knows when and uh the sun is. So I think that what we're experiencing today is the fact that we just don't have enough plants to keep up with our demand during times like these. What does the Railroad Commission of Texas need to do to dovetail a boom economy and the capitalism of Texas with the constraints the limits that you face ecologically. Yeah, I think that, uh, one of those big things is more on along the lines of educating people on the benefits of fossil fuel

and the benefits of our renewable energy. You know, both both have places here in Texas. I think that we need to make sure that we are smart enough to make those coexisting along alongside one another, but while still keeping a focus on improving our environment. You know, when I look at the environment, I look at that in

two ways. It's not only what mankind's impact is our planet Earth, but it's also are the impact caused by the debt that we're accumulating trying to trying to continue to protect what mankind's uh impact we seem to think

we have on on on Earth. You know, we we've had some large issues here in Texas with flaring and and I think it's important that we in Texas start developing more of a market for our natural gas so that that that continues to be a good, reliable source and did not create any type of impact on as far as the missions is concerned. Jim right, you've got a crisis right now in this weather. The crisis was your stunning victory a year ago within this important position

for the state of Texas. How did you pull that off? How did a rancher from basically west of Corpus Christie pull off the victory you pulled off? And how can you provide that lesson is leadership to move Texas forward? Now? I think It shows that people in Texas are are looking at people that are putting in office today to be more of a leader with a business mind. You know, I've been in business pretty much all of my life with my own companies and work closely in the all

and gas industry and all energy sectors. And the people that are out out in that sector and seemed to dominate what we have here in Texas, especially in the rural areas, and they know what that means to our economy. And I think that that is that's the key to success, is people that know boots on the ground and how to get issues resolved. Jim, it's fantastic to have you us on the program with us. Please come back soon, stay close, and we wish to stay well. Jim, right there,

the Texas Railroad Commissioner. I look at the Swiss twenty year yield is sort of a keel of the boat of Europe. John, it's about ready to move to a positive statistic once more. It's been a negative twenty year yield in Switzerland and it's come up like a moon shot. I know Allen knows as well. I would go to bunds as well. Tom bundyil to moving with treasury old as well, let's bring it down and Rusky in Deutsche Bank chief International strategist, and and let's just start right

there that line. The bottom line, the only reason to be barished is there is no reason to be barished. What's your takeaway, Alan Well, I think the main cautionary note to the bullish equity view is really that there's

good reasons to be bearish in terms of bonds. I think the fixed income story revolves around the reflation that we're going on, but also the risks are very much tilted towards access reflation um And I'm not necessarily saying we're talking about inflation per se, because inflation is very much a lagging indicator, lags growth by about eighteen months.

But in terms of growth and the potential for overheating from fiscal policy, which is flat on into if we get anything close to the one point nine trillion from Biden money supply growth which is the highest ever. Financial conditions is easy as we've ever had. There's something for everybody. I think in terms of inflation. You know, I look Ellen it this move that we've had in the idea that we've given up worried about inflation moving up. We

have been wrong, wrong, wrong, wrong. I mean you've been doing this for four or five, six decades, Alan, I mean we have been wrong on inflation moving higher. Why won't we be wrong again? We might be wrong again, And you know, it's it's it's a it's a tough core. I think we know where all the risks currently lie. As I mentioned earlier, you know, the lags along, so we want to know whether we're right or wrong for

a long period of time. But you know, when you're think in terms of the things that are disinflationary, part of it just relates to the calculation. The cyclical elements will be inflationary, but we have lots of things which are not cyclical, things like medical care, things like education. A lot of the services don't necessarily respond to higher growth, so we might not see it in the statistics, but the cyclic or elements will almost certainly show some uptick.

Allen is the reflectionary trade dependent on central banks remaining this accommodative forever. I don't think so. Look, I think the you know, the FED clearly doesn't want to take away the punch bowl in terms of their flexible average inflation targeting regime. You know, if they true to that, they're not going to be hiking rates for this year. They're not gonna be hiking rates next year, probably only hike in three So you know, I think in that sense,

they're not huge amount of risks. I think the bigger issues what the market does and what the bond market does. So the market is going to tighten for the FED to some extent, and I think that's going to constrain some of the boolliants that we're seeing in risky assets. Well, and let's talk about the energy story as well, because Crew, it's been absolutely flying even before this deepening energy crisis

in the United States of America. I've had a lot of people in the last couple of months talking about at the start of another commodity supercycle. Alan, does that reson it with you? I don't know about a supercycle, but I like oil and our oil guys, you know, clearly behind that call in terms of you know, favorable

oil trades. The good news there is that unlike a lot of other markets which are being preemptive of thinking forward, and it can price things forward aggressively at least the storage costs and oil tend to mean that you don't price quite far ahead, and I think that helps one in terms of thinking that oil can go higher in the future. And now that's what's interesting I think is if you look at the curve today, the backwardation we

see in the forward's curve is quite extraordinary. So, you know, I think that also hints that you can sort of pick up I think deck W T I around fifty five. That still seems like a decent bed. Allen, you do such good work on the history at all times. What is this like? Is there a compare and contrast to

a previous moment or time that you can grab on here? Honestly, uh, you mentioned four or five decades, not quite five or six decades, close to the four decades of work, And I've never seen anything like this at all in terms of um, you know, the the ease of policy I mentioned earlier, you know, the fiscal stimulus outside wartime, extraordinary money supply growth like we've never seen before. Every indicator with in financial conditions, equities, credit spreads, the exchange rate,

all are extraordinarily easy. Now we have come often in a particular shock at one of the you know, really the sharpest shock I've ever seen in terms of the virus. But equally, when we get the vaccine, we should be rebounding in the other directions. So you've got policy compounding that rebound. So, um, you know, we really haven't seen anything like this before, and we probably are going to

see GDP growth rates. Um. You know, our baseline without at the one point nine trillion Biden physical stimulus, just maybe something like a one trillion of physical package is six percent plus GDP growth. We're looking at a eight percent type number if we get the full physical package

that Biden is promising. Alana. This is exactly why what you're talking about to tie this all together, this is exactly why people are saying that the old models of what a bubble is, of what overheated is don't count because this is a new era of central bank stimulus. It is a new era of reflation with respect to fiscal stimulus. Do you agree to the old models not work anymore and we can't count on them to ring the alarm bell saying there is too much froth from

the system. I think we struggle to come up with accurate pricing and appropriate frameworks when interest rates is zero but as interest rates normalized, and if they normalize at the back end of the curve, and I think they'll start to reevaluate in terms of, you know, what appropriate p ratios are for a given bond healed, and I think that will lead to, you know, some rethinking in

terms of fair valuations. But absolutely, if policy is this easy, we don't really know, you know, how to appropriately value things. And we're making a bet and making considerations that relates to whether we will see inflation eighteen months hence or not. Really, that's, to me is the macro question of the day. Alan, great to catch up, sir, and I'm Ruskin at Deutsche Bank. Thank you. Right now we're gonna switch back to what

is a monthly visit and a required visit. Gideon Roses with the Council on Foreign her Relations are distinguished fellow and Guides of Foreign Affairs. Just a superb job of resurrecting the magazine into immediacy. And the immediacy is the decline and fall? Can America ever lead again? And you're now at Gideon, were a chapter of fragmented power? How

fragmented are we? We are humpty dumpty, and we are just beginning to put this slightly back together with crazy glue and hoping that it doesn't fall down again before the glue sets getting and can give a sense of the import of having a global leader right now as we still have a pandemic very much in the forefront, with mutating strains and the idea that this is here

to stay. Well. The pandemic emphasized that there was a real world out there that bites back, and that government is not just a game that Americans play with each other, and that politics isn't just a rhetorical blood sport. There are consequences, there are policies. Most people used to think the government is supposed to do something to protect the people from external dangers, internal dangers, and advance their interests.

And when the government really didn't do anything about the pandemic, at least in the short term, uh, it seemed to fundamentally challenge that entire notion. And the world looked on and said, you guys aren't just supposed to be the government of the United States. You're supposed to be de

facto running the world as well. And when the world just basically was left to go to its own devices like Lord of the flies under pressure, everybody went to their own national interests, and essentially the world started to fragment, and the order and the team that the United States had been leading for several decades ever since the end of World War two, fifth fully haltingly in different ways,

started to break up or stagnate. And the question now is, Okay, there's a captain who's back in, you know, Dennis Robbins come back from Las Vegas and his partying, and now the bulls are ready to play, and something's actually gonna happen. What's gonna happen? The world is watching to see if the United States can regain its consciousness as a mature,

responsible government, both domestically and internationally. And so far they don't necessarily like every single policy, and you're never gonna find every single policy because a lot of different players in the world. But so far, people are breathing a sigh of relief that some of the craziness seems to be over getting less phone in this fold in this conversation to the vaccine rollout, do you think the vaccine rollout of the last site three months or so is

bringing countries further together or pushing them further apart. Uh. Well, I would say right now it's pushing them further apart, because everyone's sort of vying to get the vaccines, and it's a sort of crawling over each other to try and get the vaccine on the line. So it's a

bigger type beg of the neighbor time situation. But over time, as the vaccines actually kick in, as we start getting something approaching her immunity down the road, as things as the cooperate, as the circumstances in which cooperation can take hold, after everybody is a little bit less scared, then you have a government in charge now in the United States that may be in a role to play the sort of calm uh team leader bringing people back together after

the crisis. We're still in the depths of the crisis obviously, and everybody is still completely freaked, and everybody is still racing to try and get an immediate advantage. But as things get better over the course of one the opportunities to focus on the upside rather than just getting out of the media crisis and the down and and escaping the immediate downsides might become more apparent. And I think that and the payoffs and the Biden administration will start

to come more apparent. Help me, here were the agenda of the president. The president is going to do a road trip I assumed to Europe to you know, regreet the allies, etcetera, meet the queen or whatever. And then there has to be some kind of Asia swing. Is Beijing on the itinerary? You know the details of that? Uh? Certainly the China relationship. The Biden administration understands it needs to rebuild its alliances first, because the United States does

not play international politics as an individual. It plays as a team leader. The Bush administrator, the Trump administration failed to recognize that, and the rest of the team was going, what's going on? Since you have been the leader of a global alliance that has essentially run the entire world, what are you talking about this only America thing. The Biden administration, recognizing that it is team leader first and foremost, has made mending its relations with its core allies the

first agenda item. But dealing with China and the U. S. China relationship will clearly be the single greatest challenge over the course not just of the Biden administration for American farm policy, but for at least the next decade and maybe the next generation or two of American farm policy. And so the question is can the United States and China manage their relationship which is clearly somewhat conflictual but

does not need to go to war? Can they manage it that and keep it within tracks and on rails? Getting no, what's great to catch up. Appreciate your time this morning, sir. Thank you getting roads there of CFR. Mandy zero joining us now on this market from Credit Space, the chief equity derivative strategist. This market is grinding higher, up another twenty one on the SNP and we've got one on the US ten year Manny, just want me three.

You're thinking right now that relationship between the direction of ten year yields and what happens with the broad directorting market. Yeah, hey, hey, John um So. I think we've gotten a lot of questions around inflation from investors in recent weeks, given the movements and break events, and the point that I make here that it's important differentiate like what we're talking about when it comes to INFLATIONIP, are we talking about a

temporary overshoot of inflation this year due to reopening? Due to all this you know demand that everyone's talking about, or are we talking about a sustained increase sustained runaway inflationhip? Right? I think the FED really cares about ladder. I think it doesn't really care about the former, and I had not heard anyone makes a real credible case for the latter.

And I think in this case, when it comes to inflation, it actually helps that Powell is not a trained economist or doesn't have a formal economics training like yelling or burnanky, because he's less weathered to economic theory that says, you know, as unemployment comes down, inflation must rise. Right. I think he's booking at the empirical data which shows him that inflation is nowhere to be found in the developed world

of last twenty years. And as such, you know, the SEID can be much more focused on its unemployment mandate without lowering about inflation. So what does that mean for markets? I think it's going to be very very patient this year. I think, you know, even if we get a big core CPC overshoot at some point this year due to reopening,

you know, sets able to stay very patient. And that's positive for equities and positives for a lot of rotation trades that we've already started to see that I think ex for the room to run man help merror mortals here on a Tuesday morning with the Greeks. You're the derivatives said your credit sueez and the idea that you're moving up. You're in play. But there are signposts where enough is enough. One of the signals where you say

in the derivative market, enough is enough. Look, I think people are rightly worried about I guess you know, you know, the speed of the rally, how substainable it is, whether people, you know, investors are too completion. So what I can say is, at least on the derivatives market, positioning at the index level is still very cautious. And I say this, you know, with VIC still relatively elevated, even though markets

making all time high. And I say particularly if you look at you know, the demand for protection as index level, that is still very very ROBUSTO measures, skew measures of tail risk in the SMP. You know, it's still near the highs that we've seen over the past year. So at least in the index market is slow as that we've seen, We're still seeing a lot of demands will protection.

A lot of downtime had just been put on, So I don't see that kind of euphoria that um, you know in the index level that you know, I do a single stock level, which is a totally different story. But I would say at the index level, positioning is still, you know, fairly cautious. Mandy, let's talk single stock, let's talk game stop and those hearings that Congress is going

to be having later this week. What's your sense in terms of whether there is something improper that occurred with the derivatives trading that you saw that you think they will hone in on and perhaps target. Look, I think takeaway here that this is much bigger than just one particular stock or you know, one particular segment. The bigger impact from you know, the retail trading that we've seen is that across broad swath of the market, we're seeing

a complete repricing of upside risk. So you know, the game stop, the A m c s, you know, those are tiny, right, but within the SMP top one hundred large cap stock, thirty percent are now trading with inverted skew, which is just a technical term saying that the upside calls are now trading at a premium to be at the money calls. That is very, very unusual. To put that percentage in perspective, over the last ten years, that

percentage historically has averages out six percent. Right, So now we're thirty percent of the names trade with inverted skew when traditionally has been up six percent. I think that's the legacy, that's the impact from the retail option trading. Where notice the retail consumer piece, it's typically buyers of

upside call options. And that's how we're seeing It's upside call with the higher across you know, not just small caps, not just the highly you know, shorter names, but we're seeing it, you know, with the large cap tech names, with the financials, with the energy across broad industries and inspectors. So, Mandy, we got thirty seconds with you, so forgive me for pushing you on the time. You are much smarter than put this into very simple terms for our audience this

morning that might not be familiar with these things. Yield up, the equity market is up, and the VIX is up this morning. Why just in very simple terms, why is volatility up with the move was seeing high so I would say, you know, the VIX is not just a measure of motility. It also incorporates demand for putting calls. All else equals, we're seeing more demands for obstacle that could drive the VIC higher. That is one way in which the VIX can go higher as the market is

going higher. It's driven by demands for this called Mandy. Thank you. I appreciate that Mandy say that of credits waste. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen on Apple Podcasts, sound Cloud, Bloomberg dot com, or wherever you get your podcasts. You can also listen worldwide on Bloomberg Radio or watch us on Bloomberg Television.