Surveillance: Fuel Rationing with Blanch (Podcast)

living out front. First was Francisco Blanche and I remember the day a number of quarters ago where he shocked the world over a hundred dollars of barrel. He's provided real intellectual leadership on trying to figure out where the next galon of gas is going to be. Price. Francisco, thank you for joining this morning. I want to go to the heart of your note, Francisco. You've got to buy us upward in price, and you are looking at the price responsiveness, the price elasticity of demand. Are we

going to see demand destruction? Is oil moves up or is it in elastic Uh? Look, Tomman, high prices always fix high prices, so we are certainly going to see some demand destruction. One of the challenges and You may remember this from back back in the eight when we're talking about the issues, is that as prices go up, governments tend to use fuel subsidies as a tool to keep people happy. So we are seeing a curtailment of

fuel taxes across much of Europe. We've also seen some U S States doing the same thing, Mexico, many emerging markets. So as prices go up, government strive to reduce that elasticity, and they all let prices work very much, and therefore you end up getting bigger movements on the wholesale market, which is kind of what we've seen so far. Um So that's being a big issue. And the other big issue, obviously is that we we have, as I like to say, the Mother Russia full supply shooks. Uh is just a

very very big shot. Francisco, I gotta go here because Brian moynihan and Davos was exceptionally positive and the resiliency of the American consumer. Do you care about the price elasticity and demand destruction as gasoline goes to seven dollars a gallon? I do care, But but I will say that if you look across the world, and this is probably one of the One of our most popular piece of work, which is the energy share of GDP across

the world, is actually quite high. We're almost back to the run revolutional levels for the entire planet in terms of the amount of income that we're spending our energy. I'm talking about quantities of oil, gas, and coal multiplied by the price and divided by a nominal GDP. But in the US you have a twist, and the twist this that you haven't had the global gas and power prices that we've seen in Europe, that we've seen in Asia. So the US is something during record high not your

gas or power prices. And I know Henry hops up, but at the end of the day, the US not facing the same kind of energy prices in aggregate that the rest of the world's suffering from. So I think the US is a lot less exposed. Plus also remember um the dollar is very very strong, so that means America's has been insulated also more so than other countries um that are facing this incredibly a strong dollar and

strong commodity prices. And perhaps the third fact here is that the US is energy independent on its past to become energy dominant, which which in my mind also shields the US from the vagaries of global energy prices. So so I think, yes, we're gonna see recessions, but the question is where and when, And the US is probably, in my mind at the bottom of the list in the countries that we've impacted by this skyrocketing energy prices,

so forsas because there's a lot to impact there. I want to just first get your sense of how close we are to a full blown, as you call it, nine style oil crisis. We're not dot far. I mean, I think we've seen the global gas empower crisis already. Uh in the past twelve months. It started with thermal coal in China. I remember, the most expensive energy commodity ain't oil. It's really been a thermal coal and natural gas. We are at four hundred dollars a ton a thermal coal.

That's twice the level of what we saw back in the financial crisis, you know eight when oil went to a hundred and forty seven doors of barrow. We again four hundred dollars in town. That's about hundred dollars barrel of oil equivalent. Uh So oil at a hundred and ten hundred and fifteen ain't expensive. When calls almost the same price level. Um. The natural gas has also been at record levels in Europe. We've seen nearly five hundred dollars a barrel of natural gas prices about eighty bucks

and mmbtu at the highest back in March. So so that's where the real issue is. Oil is is yet not in crisis. It could go into a crisis, and I think I think that's the real problem here with with the way that sanctions may be implemented, how much Russians supply do we end up lossing and how how can that impact the supply man balances here. That's what

I'm worried about. Francisco, ID love some real time analysis from you on the headlines we're getting from opaque class delicates indicating that they could be discussing an addition of six hundred thous and barrels a day against the scheduled four hundred and thirty thousand. Also some indication they might decide today on July and August hikes. Francisco, I'll tell you what the market is doing off the back of this, it's a raising losses cruised down about six tenths of

one percent. W T I back to would fourteen fifty. What's your read on those kind of headlines, Well, my reader is that opec opic class collectively does not want to be blamed for oil prices skyrocketing here on the back of the European silections on Russia. So we're trying to increase production and litigate the upper price pressures. But remember one of the biggest challenge of the opencasts in this market is that it doesn't have a spare refining capacity.

Russia has not all of the world's second largest crude oil exporter, it's also the second largest refined patrolling product exporter, and of the diesel that goes into the ICE contract, into the GASOW contract, the most important diesel contract in the world ICE gas oil is actually Russian. So you're taking a lot of supply out of out of a

very tight market. And and and unfortunately, when you don't have the refining capacity available in Europe's sanction both crude and controlling products, um, there's not that much that Ope can do. They can try to keep a little on crude oil, but that's not necessarily going to help the price of diesel. The price of gasoline, which is sualtamately

what people buy at the top. Well, Francisco, just to found a word from you then on that celpic ope can't do anything seemingly to influence the price of things that the gascon into what you just said because of revigning capacity. Where does it leave the administration here in the United States? As the president, according to our reporting, gears up from mating with the Crown Prince. What can the president do here in America? Well, look, I mean, I think I think we continue to do what we've seen,

release a little bit of SPR. The SPR has some barrels of the trolley product available which are are being being released into the market. I think I think the challenges, honestly is that that we are we are tied on every front. Commercial inventories are very low as our government

inventories because we're growing up quickly. So I think I think perhaps, you know, we should be started thinking about demand rationing measures, maybe stop subsidizing fuels, but more importantly, maybe think about limiting speed on highways and doing things. Actually do you think, Francisco, and that's where this could go in this country? Demand Rahan, Well, maybe maybe not in the US, maybe having enough to pass in the US,

but crowly other parts of the world. I think we're gonna have to end up seeing some demand Rasian ng um, Yeah, tectic. So I think we're going into demand rationing on the back of the smashers against Russian. Well, Francisco great to catch up along. The conversation needs to be had. Francisco of Bank America truly to celebrate for Bloomberg surveillance. And we do this, of course with miss Sandberg out the door it Facebook. I refused, David to call it meta.

David Kirkpatrick joins us live in our studios here in New York. And you were with me the day of the Facebook I p O with Paul Kadrowski, and you had truly one of the greatest calls in the history of surveillance. Everybody was in a complete lather about this future of this clown out of a dorm room in Harvard, and you said, would everybody calm down? I wrote the Facebook effect, and this kid will make it. And they've done very well. They've done on balance, you can hardly

play say they haven't done beautifully. What a hundred and twelve billion in revenue last year or something like that. Page one fifty nine, the Facebook Effect, the CEO. How did they meet? How did Zuckerberg choose Sandberg or did she choose herself? No, I don't think she did choose herself. And thank you for having me, Tom. They met at a party that and Rosenswade was hosting UH out of Silicon Valley. He was at Yeahoo at the time. UM and Zuckerberg pulled her aside and and it was sort

of like riveted. She was riveted by that. And then Um Roger mcnabie, ironically, who has become a massive Facebook critic, really helped broker their relationship because he was a long time friend of Cheryl's and advised Mark that she would be a really great person to do it and interesting

and helped convince her that she should consider it seriously. David, you know, I was a big fan of the hiring of Cheryl Sandberg because you know, I viewed Facebook at its basis just simply an advertising company, and they didn't really have a big time advertising person there, someone who could sit down with the likes of Coca Cola and Procter and Gamble. Cheryl certainly could. And given all that, and we've got a hundred and twenty billion dollars of revenue,

so I mean, she certainly did her job extraordinarily. Well what's her legacy, Well, her legacy is an extraordinary advertising business which she built from really literally almost nothing to become the clear number two to Google as the dominant

advertising player in the world. Uh at e. Extraordinary profitability, I mean more profitability per dollar of revenue during most of its history than Google, so you know, and she also built that business largely too, So you know, she is kind of the primary architect of the advertising based

business model of the Internet. You could even go that far and that, but that is a mixed legacy because, let's face it, as Roger McNamee, who I just mentioned, would be the first to tell you it, ad based internet is intrinsically a dangerous medium because of the tendency of platforms to want to put anything into it that generates page views and eyeballs, and that has in turn led to extraordinary disinformation flows uh anti democratic behavior, hate speech,

which is all hypnotic to the user and keeps them engaged since turning you know, clicking, clicking, clicking. But in the end, so that's a it's a really in and yang story with Caryl Sandberg. So I guess one of the questions I think we're all gonna be asking for many years is what is her responsibility in that aspect of the growth of Facebook visa VI Mark Zuckerberg, who one could argue, not just as the controlling shareholder, he is the autocrat of this book. I love calling him

the autocrat of Facebook because it absolutely is true. I think that's where it's harder to say, because even though there have been some reports, including in the book, uh the Ugly truth that came out last year, that she really did try to push back against some of Suckerberg's decisions regarding speech and how Facebook ought to be governed,

you know, she really clearly didn't do enough. She also really has a tendency if whenever she's in public, to sound ridiculously Pollyanna ish and not to acknowledge, not to acknowledge any potential problems, which is really, I think magic, because if she had been more honest with the public, at least people might have forgiven the company a little bit. But we we cannot forgive them because they have caused

serious harm to society. Your bookends with Zuckerberg bedazzled at the end of a driveway, almost in shock over the initial Facebook a month that. Okay, but now, what what kind of CEO does Mr Zuckerberg? Does he have a gray hair yet? I don't know? Okay, what kind of CEO does he need? Well? Does he need? You mean

instead of himself? You think he should hire somebody else he can do it, needs somebody to run the I am worried that he with Saryl leaving, he has nobody really to push back exactly, so she's pushed back ineffectively. It would be my guess. But the fact is he is an autocrat with all power who has bad judgment. He's a brilliant engineer, a brilliant product strategist, but he doesn't understand how to consider the impact of his company

in society nearly enough. And he needs somebody who really, You know, when they hired Nick Clegg, before that, I used to say, I wrote a past one. I wrote it, No, Nick Clegg is not going to be the CEO one or CEO. But I argued in a piece before that happened that they should hire Barack Obama. The scale of Facebook's challenge is so huge, and their role in society and every country in the world is so massive, they need the most sophisticated political, sociological, you know, humane judgment,

because that's a chairman. They don't have that. That's a that's a chairman position. It could be, but every time anybody on the board starts to push back against Zuckerberg, he clears them off the board. Where have you been? How come you haven't been into tuck to us? Well, you haven't asked me man pandemic. I was when do we get a new book out? Not to Facebook effect, but the world, the Elon effect. No, I'm not writing that. If you talking about when do we get a new book?

I don't, don't don't don't, don't, don't pressure me. I got a company to run. I run Techonomy. I'm really enjoying that. And how's that doing coming out of the pandemic? Seriously, Well, we're actually, you know, we're really working hard on climate. That's our big issue now, climate tech. And we had a Techonomy Climate conference in March in Mountain View, which was extraordinarily successful. We just had two Techonomy climate events in Davos last week. And I feel like this is

the issue that I have to work on. So I honestly care about that more than Facebook's crime flying around. The tech guys flying around in their golf streams care about the energy crisis. They climate you got, They pretend to, but they don't care. Anybody who flies in a gulf stream doesn't care about the climate. I think that. I hate to say it, but I wouldn't be surprised at that. And they're lined up like forty two. I counted forty

two golf streams, including the surveilance golf stream. Of course, no, Francene, okay, okay, you didn't have your own though, No, no, we share it, and they would let me upgrade to the four. I've got the three. It's little I can't stand. I feel guilty when I fly across the Atlantic from Oh, stop stop with this shame. This is stuff of flying. I don't feel that guilty not to do it. But the reality is we have to reconsider our behavior. Society has

to reconsider. It's the bad newses around the time. David Kirkpatrick, thank you so much. Reader's book Folks is dated, but fresh is all go out. Kathy Jones joins us now she fixed and comes strategist at the Swap Center for Financial Research Kathy once Sweeny on a German tenure this morning. For all this talk of peak inflation, peak, heel t state side on the other side of the Atlantic. Can you make that cool yet? Yeah, I don't think we're quite there, just because Europe has been lagging the US

in terms of this cycle. But I don't think they're far behind either. You know, we're starting to see that catchup. We're starting to see the market building the expectation for a tighter policy in Europe. So I think they're lagging us by don't think you're quite there yet, Cathy. The yields that we see are are complete mystery at the third quarter, how what does your top end look like? How far up do you frame yields could go to?

So when we're looking at the short end, you know, we're still looking at the FED tightening UH fifty basis points the next two meetings and probably then switching to about the quarter point increases in the fall UH and we see them topping out, you know, probably in that two and three quarters area. We're a little bit under sort of the consensus and what's built into the market. When we look out to the tenure, our expectation is the upper end is that three to three in a

quarter area. You know, as we get into a tightening cycle, yields converge across the current. We're already seeing a little bit of inversion from fives to tens. So we think three to three quarters the upper end of what we're going to see. Kathy, we're talking this morning about the two sided argument within each of these houses at banks and beyond of whether we're too gloomy or whether we're

too optimistic. And the data is coming out strong, does this mean that the FED has to go much harder that Basically, yes, you could take that three and three to quarter percent ten ure yield, but the path to get there is one paved by a FED that essentially has to end this cycle, has to create a downturn. Yeah, it certainly is the way that, Um, you know they're talking right now and have to take them seriously. It's pretty much across the board, from Daily to Bullard, you're

hearing the need for tighter policy. And I think that this this cycle reminds me of the early eighties. Um, you know Tom might remember this, but you know you had high inflation, relatively healthy economy, and the idea was just to really get that inflation down, and Vulcar at the time came in and just jacked up rates until we tipped into recession. We had too back to back very sharp recessions. So that's kind of the risk I

think if the FED go is really hard here. But that certainly sounds like the intention that they have, Kathy, how achievable at least forecasts over the Federal Reserve unemployment at three point five percent this year, three point five percent next year, three point six percent the year after that. How a chief bull is that. I'd say that aspirational um.

It would be surprising to me if you could have the kind of monetary policy we're getting with higher rates and QT along with the global tightening cycle, and still keep unemployment here at three and a half. Do you think they should rename the Summary of Economic Projections Federal Reserve aspirations? I think so. You know, they're never going to forecast failure, right, so they have to they have to forecast, you know, what they hope happens. Kathy, Thank you.

Kathy Jones had a swap sense for financial research joining us right now, Megan Green, Global chief Economist, are Cruel Institute and Senior Fellow, Harvard County School, and very importantly DIRR. Green is the idea here of using the Queen's English. And you do that, Megan with the word awkward, You say, are awkward response to inflation on a global basis is really interesting? How awkward is the fellow Reserve and Chairman

Powell right now? Well, the Fed's in a tough spot, right you know, we're facing indicators suggesting that growth is really slowing. At the same time, inflation is way too high by the FED standards, by everyone's standards, and so the FED is stuck knowing that a lot of the drivers of inflation are our supply side and that the FED can't really do much about it. So the Fed's having to high grates uh and will high grates to neutral very quickly, which is around two and a half percent.

There's a ways to go before the end of the year. And then I think the Fed's really stuck. They're gonna pause, recognize that, you know, another two hundred basis points and heights is a lot for the economy to orb in a short period of time, and see where the data is. So I think it's absolute consensus that the FED they'll just go straight to neutral and then I think they're gonna wait and see as the rest of us will

have to do as well. I have to say, in all of my conversations with investors, there's been a real shift in focus away from just talking about inflation to just talking about growth. Over the past two weeks. The concerns about a recession are are really intense among investors, and actually I think premature. I don't think we're going into recession in the next twelve months. It's the twelve months after that that I'm worried about. Mike, and we

sent the same thing Overwhelmeny. The focuses on some of the output dates, So what did you make of them for manufacturing yesterday? Because not exactly in line with what we've seen from some of the regional FED indicators. Yeah, and this is happening. I had an investor sort of ranted me yesterday that all the data is contradictory and they don't know what to what signal to read out of the noise, and I think we're all feeling that way.

But I think the I s M data was fairly positive. Actually, it surprised me on the upside and suggest that we're not carvening towards the recession. Look, you know, the consumer accounts for seventy of our growth in the US, and consumer balance sheets are looking pretty healthy inaggregate. Of course, the bottom quartile by income doesn't look that great. They've burned through their cash buffer. But the rest of Americans

have a big cash cushion. Companies also have a huge cash cash position built up, So even as rates go up and earning, the risk is all on the downside. It's gonna take a while to burn through all of that cash before we really start to see individuals and companies retrench and and that is what drives us into recession. And it's also worth pointing out with the job stated coming up on Friday, we've eleven and a half million unfilled jobs take up, and unemployment is the best indicator

of a recession. I just don't see unemployment taking up significantly anytime soon, given how many unfilled jobs there are. MiG and given all of this, why won't the FED be more aggressive than people think? Why do they? Why will they potentially be more patient and high rates enough?

And then pause? Uh, you know, I think that the fed knows that their history in terms of engineering a soft landing is pretty poor, and in the past, every time they have actually engineered a soft landing, unemployment was actually much higher when they started. So it's much more likely that unemployment will take up this time around, just given that it's around three and a half percent. It's it's near historic blows um as opposed to in the

past where unemployment was already higher. They don't want to cause a recession, and that's why they're fine going to neutral. That's just taking their foot off the gas pedal of it. But once they get to neutral and I have to get into actual significant tightening, I think they're going to be a lot more cautious. Of the Crawl Institute Megan sank Cute. 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 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,