Surveillance: Energy Policy with Malpass (Podcast)

He's President of the World Bank and with his work at bear Stearns over the years, a student of detail and at the World Bank, which is surrounded by experts much like the United Nations on food, Mr mal Pass has the services of John Baff's he's out of Greece and out of the United States PhD from Maryland and John Bass. David mal Pass is exquisite on this linkage of energy to food, od ser fertilizer and fertilizers, something we're not talking enough about. The World Bank is focused

on this linkage. Hi, Tim, that's right, and we have a lot of experts as you as you mentioned, and the linkage is pretty tight. The world is going through these two major shifts, one on interest rates and bond yields that you talk a lot about it, and it it effects currency values. Uh. And then on on energy, it's reducing that dependence on Russia, which is a huge shift for the world and has I think several more innings

to go to really get it right. Nuclear and natural gas probably are parts of the solution in the long run. But right now Europe is drawing in natural gas from around the world, which leaves these shortages of fertilizer and food elsewhere. Does the World Bank of any form of dialogue or new dialogue with Russia and Mr Putin, No, Uh, that's not what we're doing. We're very involved. Yesterday I met with the Prime Minister of Moldova right here in this room. Uh and uh. We talked about the the

major shift going on in Moldovan energy. The electricity grid is being shift shifted, the natural gas sources are being shifted away from Russia. UH. And that's that's where the world is heading right now. As we talk about where the world is right now, and we talk about the prospect of natural gas flows to Europe being cut off if North Room one does not in fact resume operations come Thursday, we have to keep in mind that also happens against the backdrop of record temperatures in the UK

with forty degrees celsius just lagged. Climate a very real issue here, and as we talk about investing in some of these more traditional fossil fuel type sources for energy, does that not risk setting us further behind in the long term on climate issues which we know affect lower income countries more dramatically than others. The the natural gas is cleaner than other fossil fuels, and nuclear is cleaner,

is very clean from a carbon dioxide standpoint. I think the world has to has to really prioritize where it's going with regard to the climate change issues. One of the things we're finding in our diagnostics that we're putting out that are that are very significant country by country is the things that they can do to protect themselves and to be more efficient in their development practices. It's

integrating climate and development that I think is the way forward. Okay, so investing in development, Let's talk about what else you think is is vital here. What kind of debt relief efforts do we need to see right now? This is a major of major importance for the world because interest rates are going up. The debt was already to to burdensome, and now the countries are losing our currency, experiencing currency depreciation which causes inflation, and they also have a loss

of international reserves. The debt reduction efforts have really been stalled for some years. We know that there are countries that have unsustainable debt. There's not really a process to reduce that debt. We saw that at the G twenty just completed last week. No forward progress. I'm hopeful that Zambia may be able to get UHBT debt relief in

the next few days. There was just a creditors meeting yesterday, so that gives some sign of hope that it has to be put into practice with actual reduction of debt, massive reduction of debt for some of the poorest developing countries. Otherwise the poverty rate goes up and the instability that you're seeing in these countries worsens. David, you've touched on

the most important point. The biggest killer is poverty. Do you think the West needs a bit of a reality check about the speed at which you can move away

from fossil fuels given the concerns that you have. I think there has to be a prioritization of energy policies in the in the West that that includes uh, massive increases in production of less carbon intensive energy sources that may lead the world to nuclear into natural gas, because you know, natural gas has the added benefit of producing fertilizer. It's the source of crop yields that is so important for poverty reduction and malnutrition, and so we have to

have a direction on that. Right now, Europe is buying up the global sources of natural gas, and uh importantly, the world is shifting back to coal and even to fuel oil. Every day I meet with global leaders whose countries are either selling cold to Europe or themselves shifting back to more carbon intensive energy sources in order to try to keep the electricity grids running. So it's a very practical effort by the world to this major shift

in energy and in interest rates that's underway. David wonderful to get your thoughts at an important time photical level economy. David mouth pass that a World Bank President Ander seats in this July My head is spinning. Give us the keel of your strategy right now? What is the thing keeping you on a straight and narrow path into Q three in Q four great, well, it's it's great to be here with you. I think a key message is patients,

you know we're in a bear market. We are going through the different cycles and parts of a bear market, but this is a process that still has further to play out. And I think the market has made good progress on the inflation front, and we started to see inflation break evens come down. I think the market is clearly getting more comfortable with the long term inflation story.

I think we've done made good progress in pricing in more from the FED, but there's still a gross slow down ahead of us, and we still think that not enough of that is in the price and not enough of that is reflected in earnings expectations. So you know, there's been good progress. Valuations have adjusted, sentiment is more negative.

Both those things are good, but I think we want to see more signs that were closer to that trough and growth and that we've seen more resetting in earnings expectations. You touched on the answer to this question just there at the end their Andrew build on it. You said, we're in a bear market. How do you know when we're not in a bear market, and when you get to that point, is it often too light? Yeah, it's

it's a fair point. I think if we think about, you know, dynamics of this bear market, there's obviously the scale of the drawdown that qualifies. There's the nature of the market leadership, which is very defensive. You know, there's the fact that you know, we've seen uh, certain conditions that often go along with bear markets, policy tightening, curve, inversion, declining, p M. I s. All those elements are there. But but you're right, you know, by the time the economic

data really turns, usually it's it's too late. So you know, in terms of things that we're looking for, I think, you know p M is being below fifty is usually a better indication that the market is closer to that growth trough. I think we'd like to see more signs that analysts are cutting numbers more aggressively, which is usually a sign that again sentiment on the analyst side is

getting a lot more cautious. Signs that individual investors are getting more negative on the market again, I think would be a good sign that you're closer to that trough, and you know, we're making progress on that front. But I think not quite there yet, Andrew looking for that relative a performance on the way down and hopefully some absolute positive returns to you. Guys have focused on defensive now, Andrew. Some people might hear defensives and they start to gravitate

towards some of the tech names. Andrew want you to really define what you mean my defensive and why you want to stay there still, So we've been thinking about defensives in the traditional utilities, staples, healthcare baskets and those those have become more expensive sectors. They've rerated um or relatively re rate in a pretty significant way, which again

is never great. I mean, I think it's a sign of how difficult this market is that the places to hide or the traditional places to hide have become more expensive, which makes it more difficult to hide in them. But you know, we're still overweight utilities and healthcare. We still think the market will gravitate and pay an increasing premium for those sectors is as growth risks continue to abound. We think also that the market is is under positioned

in those areas still. And you know, those are areas where we were least worried about growth slowing down utilities because we think the demand is relatively non cyclical healthcare because I think that's a sector that could actually benefit as demand shifts from goods to services and the economy healthcare is very exposed to a lot of services type

of spending as things renormalized. So you know, that's currently still where where our US equity strategy team is overweight, where we think investors can still find out performance, but it clearly has become uh more expensive as the as the market is declined. Okay, Andrew, So that's what you're buying in equities. What else people have been buying over the course of the year so far as commodities and the dollar? How close are we to the peak of

those traits? So we think the dollar can still rise further. We think the d X Y will move up to around one twelve by by the third quarters. So that's a relatively sharp near term move that that our foreign

exchange team is expecting. And that's on the back of the fact that we think the FED is much more likely to meet or beat implied rate expectations than the e c B, where we think weak growth will ultimately raise the risk that the ECB won't be able to hike as much as the market expects that the Bank of England won't be able to hike as much as the market expects. And on commodities, I think it remains

a story of energy versus metals. On the energy side, we still think further gains are are possible, especially against the forward curve which is implying large price declines. We are forecasting higher energy prices into the third quarter. I think the metals case remains much more challenging, where a lot more of that is driven by uncertain Chinese demand. But for oil prices, we think they're moving higher over the next three months. And did you just cite d

x y one swave? Yes, wow, Andre, that is a monster move. Andry sheets there of mortgage Stanley. As you know, we protect the copyright of all of our guests. It's something sacred here at Bloomberg Surveillance. It is their meal ticket. That's how I'm read to send pays for air conditioning. She's chief Oil Analysts and Energy Aspects and her research

is absolutely exquisite. She walks through in her latest note why she is structurally an oil bull and reading my head spinning up up up we go, down down, down we go. Why do you suggest at some point oil gets a bid and moves higher. Well, that's kind of why I say there's a difference between tactical instructor Right like right now liquid these thing people are away on

holiday machines. There's more machines and humans, and we can continue to kind of trade in this very technical band um going up five dollars in a day, going down ten dollars in another day. No, no problems with structurally, this is a market defined by under investment. We just haven't been investing enough for eight years now, right This isn't because of Russia, This isn't because of COVID. It has been going on for a long time, so that

doesn't change overnight. And right now, even above hundred dollars, there isn't really an incentive to increase investment, and I think that's why we remain structurally bullish this space. What do you think that means for gasoline prices with the average price below four fifty in the United States, now rates are thirty five day slide, what do you make of that? I mean, look right now, again, these have been driven by recessionary fears, and I still think in

the short term prices can correct lower. Once again, that doesn't change the fact that overall refining capacity is extremely tight. Remember, gasoline does have seasonality in its favor. We are going to come out of the peak summer driving season and we do do foresee a much weaker winter gasoline pricing, but then next summer we're going to have again very similar high prices. Right whereas diesel is the one to

watch out for. That's really been the tightness in the market, and again with the European embargo kicking in early next year for products, Russia exports a lot of diesel, about six barrels per day to Europe. That's where the real tightness is going to be much more than gasoline. Well, Emrina, we know that the prices of the plump have dogged President Biden for some time. He is trying to take whatever measure he can to get those down in a

sustainable way. Hence the trip to the Middle East. In the visit at Saudi Arabia, the Biden administration seemed optimistic that we were going to see Sardi the U a E start to pump more tap into that access capacity. What do you actually expect OPEC plus to do come August three, we are expecting them to increase production gradually. Um. I mean, look, in theory, the deal ends in December, so they shouldn't be changing anything after they've unwound all

the cuts, which was for August. Right now, that doesn't mean that all pepplasts are just going to sit on their hands, because not increasing production for four months would massively overtightened this already tight market. So the market is we are we're all expecting them to continue adding in small increments, just like they have been over the last four months of the year as well. But I reckon

the Biden administration will take that as a win. They'll probably spend that as a win and say, look, it's because of the trip to the Mid least, whereas the reality is that that was always going to happen. And I want you to describe just briefly, what would happen in Europe if north Stream one doesn't come back online this Thursday. What does the situation look like? Where does Germany get his energy from? Just walk us all through it. So look on our balances, we're actually not been expecting

them to come back next week. I know that's obviously the focus in the market. Um, we have been building a scenario where it takes a lot longer to come back. We do think if Russia is actually playing logically and economically, they will have to bring not three one back by the end of October. Otherwise they will have to shut down fields domestically. That might lead to more long term damage for their gas field So that's yet to be serious.

Of course, if they choose to go down a political route, then that's very different, but they still have until October to make that mind up. EMA. This is critical because the non sophisticates like me sort of go, well, if Russia doesn't sell the Europe, they can sell to other people in the China, etcetera, etcetera. If they have to play with north Stream too is John is an expert on can they move the hydro carbons over to other countries or not. See you could do that for oil,

you can't do it for gas. Gas and Russia particularly very very distinct. The gas that comes to Europe simply cannot be redirected to the East. It will take years to build new pipelines to redirect the flows. And that's where this becomes a real, real struggle for both sides right, And to John's point that Europe, I mean, you've already seen Germany come out putting measures to cut down consumption, nationalize some of the utility companies. This is just the start.

Things are going to get materially worse for Europe when it comes to its power situation. I'm racing. You've got to the heart of it in your assumption. Do you assume the Vladimir Putin is still a rational economic actor for now? Yes, I mean that's look, let's let's put it this way. Um, we are saying that should North Stream one not come back by October, then we will

very clearly know that he is not. But our base case still is that it does come back, but with a very very high probability and risk that you know, it could get delayed further and probably just not come back, because again that's where the swing factor really comes in, that you know, what's what's the signal that he's trying

to send. But even if it is end August, sorry, end October, for Europe, I mean, given the heat wave that's going on right now, the call on gas is very very high, and then we just will not be building into the winter. I think that is. I mean, I cannot stress how important that is and how much upside there is two gas prices. One of the things we're seeing right now with gas so high, we're getting oil back into the power mix as a result of this. What a tough situation. I'm ready to send thank you

of energy aspects there. Russ Coastreet joins us now to talk about equities and bonds, portfolio manager for the black Rock Global Adocation Fund. Russ, you have been conservative through a bunch of this year. Do you have not been constructive on the equity market? Has any of that changed in the last month, John, You know, I think the short answer is not really. Uh. We're still in environment where you have the same headwinds we've had for most

of the year. You've got tightening liquidity, which has been a huge head wind, particularly for the growth sector. You've got a slowing economy. Uh, these have not gone away. What I would say is that valuations already a much more reasonable place than they were twelve months ago. Globally, you've seen multiples of compressed around thirty. They're down about in Europe, so I think we're close to go bottom. I think the markets in the process of making the bottom.

But all of the conditions that led to the volatility, unfortunately, they have not gone away yet. Russ Julian Emmanuel Over whatever course I s, I gives me the first look with eleven percent of SPX earnings in, he's got a nice, nice inflation revenue lift. But critically he's modeling out earnings at four point eight percent growth. That's not bad. You know, I know things are down, but it is the pendulum just overestimating the gloom. Well, it's a it's a great question.

I think you hit on what really is the big issue going forward? You know, again I've spoke about evaluations, and that's been all of the losses here today, all of the loss in the SMP, it's all been about that been multiple compression. But your point, what really is the issue going forward now is how much is the economy going to slow? How much is nominal GDP GONN slow and what does that mean for earnings? Earnings so

far through the second quarter don't look bad. The real question is that we continue to see the is a result of FED tightening the economy slows in Q three and Q four or those earnings estimates in the back half of the year realistic, and this is why I think the market is struggling to break out of this range. Okay, so if equities are struggling to break out of a range, if you are not yet seeing the signal that we've actually reached a bottom. How much do you like treasuries?

Hear us, Well, the short answers really don't. We're still underweight, but we we disliked in less than we did a year ago. You you've already chopped a lot of wood. We've seen that real rate on the long and the curve have actually gone back to where they were in

the post GFC environment. I still think you might have more pressure as the FED continues the tighten, but you're starting to get better really yields, and I say, really, well, we're starting to The opportunity is in the credit markets, in the US investment grade, in U S high yield, where the spreads of wide and considerably and if we're going to be in an environment we're equity is gonna

be chopping over the next several months. One of the things you can do in your portfolio is you can add carrot, you can add income, and right now that's an ass a class, we're starting to see better value. Are you making an assumption the RUSS about how sticky inflation might be through the next several years, not just

this year. Well, we're certainly assuming it's going to be, you know, difficult for inflation to get back to the two post GFC norm anytime soon, which means that at some point up while the Fed may have to slow down, we're not envisioned in the world where you're gonna go back to this very easy environment of low interest rates UEE, which obviously was this huge tailwind for financial assets to

the better part of the decade. Russels to catch out RUSS constrict that of black Rock West closely, of course, with refredris Well. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the

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