Surveillance: Housing Market with Feroli (Podcast)

Friday evening. It comes out about seven pm. Did you talk about going beneath headline analysis? And that's the JP Morgan team. Even algebraic functions, Michael, Algebraic functions Friday night at eight pm is a highlight of my Friday evening. What do here algebraic functions say about the American housing market? Units are Graham Price hasn't moved, so housing clearly is

suffering a little bit from higher mortgage rates. And we saw that again with the new home sales that Mike just mentioned, as well as almost every housing point we got last week, and we would expect that to continue for the next several months, just given the lags between when mortgage rates go up and when home sales come down, that said, we're coming off you know, white hot levels, and uh so we're basically I think, getting a little

bit back more into balance. And it's likely to be the case that inventories with even with housing home sales coming off, inventories will likely remain pretty lane and home prices.

We don't see home prices declining certainly, so hopefully getting a little bit more into balance, cooling off, but but not in not two thousand six by our means, Michael, this question pains me to ask, but are people getting too gloomy as they start to price in some sort of slow down that allows the FED to be patient. So the Fed, I think we'll continue moving after obviously we're gonna get the June July fifty paces point moves.

And I think to the point you discussed earlier, look, Chair Powell is an outcome based guy, and he wants to actually see inflation and activity slow down. So while housing maybe a leading indicator for the economy, I think Powell will actually want to see things slow before he actually pulls off of the rate hikes. So I do think that maybe we've gone a little bit. Maybe we're thinking that fed's going to be too too gentle here

with the economy. But they really had their work cut out for them, and so I don't see them pausing after after July. What are you looking for, Michael, is a sign that truly we are seeing some sort of slow down with respect to inflation at a time when we're hearing from everyone here that the consumer is still very strong. Yeah, I think you'd really want to see the labor markets soften more materially than we have seen. Uh. Again, we don't. We don't want to see a lot of unemployment.

But the jobless claims numbers that we just mentioned the can suggest we're still in a very hot waiver market. So you would like to see next week not only job grows slow, but you know, perhaps vacancies come down. Uh, And we'd like to see that happen, you know, in a in a smooth kind of linear fashion. Generally that doesn't it's not the case, but that would be the ideal scenario if we have a nice slow wing and

jock growth. One of the key sentences I've heard your Michael Faroli is central banks that really don't have reaction functions right now, they're making it up as they go, is you and Bruce Kasman and your team piece together Tomorrow's note, Do you have a mathematical structure or a geometric structure of where we're heading or as you are you as blind as the Central bank? Look. I think it's clear that the FED is not operating and has not been operating by anything close to a tailor rule

or any other type of formula reaction to functions. So I think that makes you know, gauging central banks here a little bit tricky. But that's been the case for a couple of years, where you know, you can do your implied tailor roll and doesn't look anything like what the FETE has been doing. So that's just the fact we're living with. What what is the fact we're living with? Just Lisa mentions to just watch the consumer is at

the heart of the matter. So the consumer matters. I think the consumer will follow where the labor market goes. And that's why I really exercize the labor market. And you know, we can talk all about excess saving and all that, but it's really labor income that's driving consumer spending here, Michael, that's Jamie Diamond online. Three. Pick up the phone, say Hi to Mr diamond Forest, Michael Faroli at JP Morgan, Jeffrey You is just brilliant with B

and Y Mellen and jeff You. You say they're wrong. All the people doubting plas a chord and dollar intervention are wrong. You mentioned the giant Frankel of Harvard and you say we need to start to think of about a plaza accord of two thousand twenty three. Why is the dour too strong? Well, the donar is too strong in terms of valuations, but the US needs to figure this out on its own accord. The dollar itself from the Fed is not really going to matter in terms

of financial conditions. You look at the four pillars of financial conditions, rates, exchange rates, spreads, equity market FFX by a long way ranks last, and also what does Japan need? What does Europe need? Europe finally they're changing their tone. You know, they need a stronger euro to bring down inflation, but they need to realize this actually strengthens consumer sentiment as well, and they're purchasing power. So this is a

very different environment compared to several decades ago. We need to think about not a new plaza or louver anything like that, but what each country needs for themselves. So that's the difference between now and three decades. Let's find common ground between David focas Landa over the small German Bank and Ian Bremer out with this new book, The Power cris in Every Nation for Itself. Jeff, you, how do you have coordination if you're not kempt down in

the lobby of the Plaza in New York. Well, you know right now you have enough communication between the central bankers and we've had that in the last fifteen years or so, like the swap lines, and you're during the crisis, and you're during the panda, during the pandemic. But it's

kind of backward looking. There's coordination when it comes to firefighting, responding to crises, and look at how the sanctions were brought in after the war started, But you know, where is the coordination up ahead in an era of deglobalization. That's the philosophical question we need to ask. If you're talking about deglobalization, then why bother coordinate isn't deglobalization by definition every central bank for itself? So philosophically, where do

they spands right now? Where the government stand that needs to be harmonization. If not, then we can forget about

picking up the phone. Okay, so Jeffrey, if we don't get that harmonization and we stay where we are, which is and maybe perhaps deglobalization, but a regionalization partnerships, how do you see the euro reacting at a time when people are downgrading some of their growth expectations for world growth and we're starting to see, I don't know, the Euro get a little bit of a bounce from that.

So I think Eurozone policymakers and to their credit, the ECB starting to realize this a strong currency need not be a bad thing. You know, there are more things to an economy than a trade surplus. Let's get away from this eighth century merk Untiless way of thinking. No, it's harder for Asia and Euro to dislodge. But if you have stronger purchasing power, that can actually help offset some of the inflation losses and too real income as well.

So they need to state a stronger euro at this point and you're is still going to be undervalued, like even five big figures from here, right, So that is good for the Eurozone households. It can lift their demand in real terms, that's good for the Euro, So they need to actually cross that hill. They're not there yet, but finally they are starting to shift, so I think the Euro will find a new range of higher range. But still even with a higher range, right now, it's

still going to be very, very much under valued. We're talking about fluctuations that are miniscule at least for this week. But the big elephant the room at Davos has really been China. Jeffrey, and how we deal with the fact that the slowdown that we're seeing from shutdowns probably are not going to end any time soon. How do you map that out into a currency call, into a growth call at a time when it seems as though that is going to remain the policy at least for the

remainder of the year. Well, what's fascinating is if we look at our eye flow custody data, our clients are starting to buy CNY, They're starting to buy Chinese equities, and after an unbroken run of let's say three or four quarters of selling gentle buying in Chinese government bonds as well, So it looks like the globe markets they're so underweight China right then they're not actually taking a

growth view. I highly doubt that because of the lockdown still happening, but maybe they're just starting to find some value on a total return basis with Chinese equities, Chinese bonds and also the currency you know where it is. But to translate that from a rerating, you know, from a growth view, I want to go away China again. The window is narrowing on Afraider. So we need more stimulus,

more government driven stimulus and demand lift right now. But yesterday's Premier League comments um he said basically the too local governments. You need to fend for yourself, you know right now, the very limited resources. That's tough, Darr You let's turn to your virology expert expertise, which is of China ends on lockdown? What happens to the Greater Pacific RIM one day it's going to be over? Then? What right?

Then we are going to have not only in an Asia but probably a global context the mother of all services stimuluses. And we're talking about not just lockdowns ending, but also borders reopening in China. There's no time frame for that, but look at how Thailand, Indonesia, Malaysia, Ascian countries dependent on Chinese tourists Davos, you know, Tom going to the what shops in Davos? You know, are they complaining about lack of Chinese tourists buying what those patech leaps? Right?

So when they return that two hundred billion dollars services deficit China runs with the rest of the world, that is going to be such a big stimulus, something we can all look forward to. But right now, again no timeline. Do you think, Jeff, that we're seeing right now people bake in an appropriate slowdown and we take a look at the global economy or do you think that there's more to come to be priced into risk ASD's and

frankly even to yield. So on a quality of basis, I think we need to differentiate what is a slowdown versus so basically soft versus hard landing. I think people are still baking in a soft landing right now. But if the Fed terms restrictive and we still think the market is actually not appreciating the risk of that enough. We're talking FED funds right going to three and a half to four that kind of level, then a hard landing that I think the market is probably taking a

bit too lightly, right now. So we're not saying as it's over yet by any stretch. And the markets are appreciating a great slow down. They're just not ready to bake in a harder landing. So I think that's where some further repricing is needed, be in the short term evaluations, adjustments,

waiting readjustments. You know, we're seeing a bit of a rest bounse, but I think the Fed will have the final world on not Jeff you brilliant, extremely important note, really pushing against the forget about the Plaza re chord consensus. Mr you with b and why melantoday we get to rip up the script to do that. With em Rita send chief Oil Analystic Energy aspects truly excellent and the

microeconomics of what Brent crude will do. Em Rita in your academic studies to windfall profit taxes work, No, especially not at a time when you're asking all it produces to all it's a race production right, because there is a bit of a supply crunch. So no, the answer is no. I go back em Rita to Lyndon Baines Johnson and the idea of an investment tax credit. Now Suonak is going to fold in here. If you invest, you don't pay as much tax. What kind of investment

program spurs oil production? The problem right now is that you know, we do need investment for sure, and into your question what kind of investment spurs oil production, you're talking about investment in the North Sea um and that is not overnight. You are going to still look for you need to first and foremost find the oil. But again you can. I mean there are small fields that can still be extracted, and you can get some tie back projects which are pretty quick, so say within a year,

you could get oil out. But these are small volumes. You're talking about maybe forty barrels per day rather than hundreds of thousands of barrels per day, which is what we need, if anything, we probably need in the millions of barrels per day. For that, you need a sustained investment program. And you know, particularly the UK not see is a declining asset. No Way, on the other hand, actually has much better prospects, so it's not that lucrative

to necessarily invest. But having said that, there are still assets which oil majors of here could extract oil from. And if the tax incentive is right, I think the world needs that oil, and they would be more than keen to develop that, except of course that there are E s G pressures on them as well, So that is always going to be their tension whether shareholder doesn't necessarily want them to invest in oil and gas regardless

of the tax structure and readA. How much is this an issue of getting the oil out of the ground and how much is this an issue of refining it that people can use it to power their cars and their homes. Well, it's a great question because we've got shortages in both right now. Of course, we're not investing enough in the upstream. That's been a trend for the last eight years. In fact, on our database, we've not invested much more than four billion dollars each year for

the last pretty much eight years. And since last year, China changed his policy around refining and product exports, and we've closed about three million barrels per day of refineries in the West, mostly in the West UM, so we are very short of refining capall city. We have a few refineries starting up in the next couple of years and even back off of this year, but not nearly enough to meet demands. So we are constrained on both sides, but right here, right now, I'd say we are more

constrained on refineries. Um, so the oil you and I would consume, that's more constrained than actually the crude oil side of things, which in itself is a challenge with opex spe capacity load. I mean, all of this comes together in a taxic brew, if you will, that only raises costs for consumers and continues to do so despite

wobbles in the actual crude market. How much I understand that perhaps they're not going to see oil companies produced more as a result of the tax it's being proposed in the United Kingdom, However, how much does it just give cash to be able to offset the costs for people who are going to only see those costs climb. The challenge is going to be how are you going

to make this a global um solution? Right? Because oil markets are global, and I think part of the problem politicians in the West have is that the always trying to come up with local solutions. Even the US is talking about potentially limiting diesel exports. That's just not going to work because ultimately both crude and product markets are very,

very global. So we have to acknowledge that oil and gas demount continue to grow very, very sharply, particularly in Asia, and even you know right now China is not even growing. So imagine when China does come out of its zero COVID policy, the impact it's going to have um and we need to therefore facilitate enough investment across the board, not just an oil and gas, but also in renewables to meet that energy demand. Otherwise, like you say, there is only going to be one thing that the cost

goes up. It is pretty simple, demand and supply. I'm reading an unfair question, and this goes back to and the experience of the United States and a quote windfall profit tax, which many people would suggest with just a flat and excise tex over the already elevated text as they were already paying because they were making more money. And read to say, if the United States affects a British equivalent in a win for profits tax, what does that do to a gallon of gas? Well, I'll say

this much. I think at least producers we speak to in the US have said the administration has considered it and probably probably still is. You will see US shail production fall because again, what's the incentive Much like in the UK, what's the incentive in the US to continue producing if you're just going to be taxed? And if

that happens, then crew prices go up even further. Refining was already constrained, so you know, gasline prices are already high, and of course it's going to make matters worse, but the crew price will definitely rise. I'm read twenty seconds. Whereas gas prices, where are they going to go in the United States through the remainder of this year? Um,

we think it's going to continue to go higher. You've got Memorial Day driving season and it's starting up, and yes, inflation is high, but this is the first time in a couple of years where there are no restrictions and people are going to be driving and flying as well. So both gasoline and jet fer prices will continue to rise. And we're just saying thank you so much for joining us with energy aspects. Our last section in Davos and

the cars. As we know we can't afford anything in Davos to buy a rent, we might as well talk to Jonathan Miller or Jonathan Miller joins as president and CEO of Miller, Samuel To tell us when the housing is gonna crack in America, John Miller, you would suggest we're starting to see an EBB. Is that because people can't afford the rent, they can't afford the mortgages. Yeah, I think we're approaching a peak. One of the I think rising mortgage rates are probably one of the best

things that is happening to housing. In many ways, low mortgage rates are making housing less affordable because it has a blow a rated supply, whether in the rental market or the or the purchase market. We're seeing I cover about forty different housing markets across the US, and the rate the market share of bidding wares right now is anywhere from twenty five to sev of all closed sales activity. That is not a sustainable condition. We need more inventory.

Tell us about the mortgage rate right now. Are the people that did short term mortgages at lower, lower, lower rates? Are they already in trouble given that we now have higher and higher rates, So it clearly places more pressure on them. Given how much prices have gone up over the last year, we're looking at, you know, depending on the metric around UH this next year two more like nine and probably three to four percent the following year, even with the rate hikes. Um. All this is because

there is limited supply. There's a firm underpinning. Uh. You know, there's this isn't financial engineering exercise that we had during the bubble. Credit conditions are still tighter than you know, historic norms and uh and actually that's a that's really driving pushing some people into the rental market, which is making it even less affordable. Jonathan, how much is this a story of private investors and investment firms buying up a lot of the single family homes and removing a

lot of supply. I think that certainly it's a factor, uh, you know, and it becomes more apparent when you're already in a situation right now where inventory is about a third is one third of what it should be for a normal, stable market. But I also think it's overhyped as a contributing factor. I think the bottom line is that rates have been too low for too long. Um.

And you know, you have to think of inventory. Is this living, breathing organism that takes time to recover, and it has it hasn't had a chance, and that's causing price growth that's just you know, likes that we've never seen. And Jonathan, this is the distinction as people talk about five plus percent mortgage rates and the idea that the actual number of sales is slowing, the prices still are going up. When do we see prices peaked, Jonathan? And

how high do mortgage rates have to go? So I I think that pricing isn't gonna So I think it's more about the rate of growth that we're seeing. You know, we've been seeing in the last year a rocket ship basically straight up. I think we're going to see a moderation. Uh. You know, look, affordability is followen by half since the end of the year. Mortgage rates are up two. I mean that's a that's a rapid sudden change, uh, and

that's gonna slow down transactions. What's interesting is before the rape growth, sales are already falling, but it was because inventory had collapsed and was restraining sales activity. Now it's a combination of both. Jonathan Miller too short of visit. Thank you so much for joining this morning with Miller. Samuel.

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, and this is Bloomberg h