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This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Criminal and the Bloomberg Business App. There are strikes across land. There is kaiser on the West Coast.
They're nurses and others, radiologists, I believe in others. There are auto workers in Detroit and Sundry others. Within this labor report an important time to speak to the acting Labor Secretary. Here is John Ferroh.
Joining us now from Washington is JUDYSU, the acting US Secretary of Labor. Judys wonderfully catch up with you. A hot labor market report at a time where the unions seem to have a lot of leverage. So let's go straight there. What's your latest read on the UAW negotiations.
Well, the parties are at the table. They continue to negotiate. The President has made very clear something I believe in too, that when there are record corporate profits, there should be record contracts for working people. And that's what workers are fighting for. So the negotiations continue and I believe that the parties will get there.
Are you getting access to both parties to have negotiated settlement?
Yeah, we're talking to both parties.
I mean again, the collective bargaining process is about the parties themselves coming together, working through their issues, finding common ground and win win solutions. We support that in every way that we can, and we are continuing to talk to the parties in that particular situation.
What have you heard recently about current demands from UAW. We understand that wage de balands have come down from forty closer to thirty is that you'll read on things.
I mean, and the negotiation is always about movement on both sides at this point. You know, I think it's always hard to know exactly where something will land. I think as long as they're talking to each other, that is positive, and that is what is happening.
You're sensing the gap is closing, the spread is narrowed.
I'll say it this way. You know, I've seen this a lot.
I think that the parties always seem like they're far apart until they're not. So that does require it always requires movement, and I think the continued engagement is a positive thing, and it's part of the reflection of President Biden and this administration's commitment to workers getting their fair share in an economy that is doing really well.
We also have haalthcast strikes as well. I understand you've met leadership from both sides. Jenny, How different is that particular strike? What do you think is going on there?
I mean, every strike has its unique issues, right every you know, the industries are different, the specific demands are different.
But I think at the bottom line is that we are.
Seeing a resurgence in worker power in support for unions in the economy and for working people demanding their fair share, saying you know enough of the disparities between what frontline workers make and what CEOs make, making sure that there is an opportunity for workers to.
Improve their working conditions and live stable lives.
Is this is not just an accident in a Biden Harris administration. It is very much a deliberate part of how we think a strong economy and a strong country.
Works, Madam Secretary, as you rightly said, we are seeing a shift back in bargaining power towards labor after decades where it went the other way. That's being reflected in the spike higher in number of days of strikes throughout the economy. Should we expect that number to go even higher?
I think it also reflects really a record contract results. Right, So we've seen from the ports on the West Coast to the teamsters and ups, really results that demonstrate workers getting more in wages and being forced over time, dealing with other specific issues within certain industries or automation and the like, addressing conditions like heat and other kinds of health and safety issues. So I think those are are the big results, and some of them we're talking about.
You know, we don't talk about them as much, but there are you know, graduate workers who have gone on strike for brief.
Periods and gotten contracts that they want.
So I don't know what the average number of days is, but I do know that workers.
Coming to the table, being able to have the right to.
Demand their fair share is something that has been positive for workers and is very much part of the strong economy that we've been talking about.
And the jobs report reflects this, and yet.
We have not seen that in the numbers on earnings. So is it just a lag effect. Are we going to see it going forward, or is that something else going on in the economy that's offsetting those gains that you talked about for workers.
Yeah, so earnings are up a bit.
You know, we definitely especially see that among lower wage workers.
Which is part of this idea that you know, the.
President has said, We're going to build an economy that leaves no one behind, that starts by looking at who's been left behind in the past.
And to the extent that those lower wage.
Workers are seeing average gains that are growing and also that are higher than inflation, means that workers have more money in their pockets more to spend in their local economies. That's also partly fueling the other effects of the jobs report, which is more job growth in leision, hospitality, for example.
All of these taken together, along with a historically low unemployment rate still under four percent for over a year and a half, the longest stretch of the nineteen sixties, all signs of this economy is a place you know, yeah, is doing well because of good economic policies and workers having a seat at the table.
Let's talk about those policies. There is something really peculiar going on at the moment. If you think about what's happening in the picket line. They have serious concerns about the ev transition and their participation in it. A transition that you are subsidizing. Something really odd from my perspective, and I'd love some clarity from you on it. Why is the government offering rich people credits to buy expensive cars.
A couple of things.
There is widespread support in the country for tax credits that will help to bring manufacturing jobs to the United States. That's part of what we're trying to do. The other is that we do have a climate crisis. Right We saw record heat across the entire country.
Without a doubt.
Can I just jump in without a doubt? I totally agree with you, But I just think we're conflating solving a climate crisis with driving really heavy SUVs that run on electricity. Those two things part of the same story, because I don't get it. If I'm driving an electrified f one point fifty, am I really safe in the planet?
Right?
Well, so we could probably have a conversation out about personal choices relating to cars.
I do think as a policy matter, the.
More that we can invest in industries, in manufacturing, including in transportation, that transitions us to a place where we're not you know, we're not continue to pollute the planet.
Right.
We have a method by which we can both bring down emissions.
And also create good jobs. And the President has always said this solve your climate crisis. When he looks at that, it's also about creating good jobs, and good union jobs in communities that need them the most.
And we are really focused on making sure that that transition does not leave workers behind, and that what's good for the climate can be good for.
Workers as well.
Jenny appreciate the update. Jenny Say, Acting US Secretary of life.
This is our interview of this bond carnage. There's no question about it. I've said for years at out of Brown University, the gentleman from Chicago is our definitive financial economist. And that's saying something at Boost School with Lars Hanson, Austin Golesby, and Raga Rogen Darkening at the door. He's a former Fed governor on this job. Today, we're going to rip up the script with Randall Krasner. I am so honored you are here with us today. Randy, I'm
going to go from a nolttle real rate analysis. Let's go back to first principles. I never framed a two point five zero ten year real yield. Why does the real yield matter? And how will that new high real yield change our listeners and viewers' lives?
This, ultimately, it is the inflation adjusted rate. It's the real rate you said that matters for thinking about what investments firms are going to be willing to make, because if prices are going up, then they can and input prices are going up, that's one thing. But if you adjust for the inflation, so you take out that that changes in cost and changes and prices on both sides.
You've got the real yield, and if that's going up very significantly, that means that firms are going to be less willing to invest, are they less willing to hire. We've also started to see real wages grow, which is great for workers, but that's probably at some point going to mean a little bit less demand. Obviously not right now.
Well, that's where I wanted to go.
What's your reaction as a former FED governor to this report that is not only a massive upside surprise almost twice as much as what the expectation was, but also with an upside revision to the prior month. What would you if you were still in the FED do with this?
So I think look at two pieces.
One obviously the incredible strength of the labor market continuing to be there. But the silver lining is that we didn't see a lot of kickup in wages. So I'd wanted to get into that a little bit more detail, because that's really ultimately what is going to affect costs and what's going to drive drive inflation. Maybe I was being too harsh and saying there'd be a hardish landing. Maybe we've got something that's perfect goldilocks. I find it hard to believe it's possible after being at the FED
during the global financial crisis. I never say never about anything, but we've never seen something so perfectly goldilocks before. But if you can have a strong labor market but not have real wage growth being too high, that would be ideal for the fit.
One thing that I'm seeing is the underemployment rate coming in a little bit seven percent from seven point one percent. It goes to the prea misra question, which would lead to a higher neutral rate longer term. If we get an increase in productivity, if we see some sort of just general growth that means a higher inflation, higher growth kind of era. Are you hearing anything, seeing anything in this data that suggests that has a greater likelihood than you previously thought imaginable.
Well, not the data today, but we have been seeing some pretty good numbers related to productivity growth, and ultimately that's what we want to see. Higher productivity growth is great for economic growth and great for real wage increases for workers. Now, whether that's just sort of a one off thing, it's going to take a lot more data to figure that out.
Tell me at the bus School is you people own the high ground on the analysis of our finance and they say one emotional thing commercial real estate. The fact is, in the carnage that we're in right now, thirty year bond, we're going to have a normal American failure of restructuring, failure of businesses. New fresh money will come in and you know, at a lower distress price than that. Will we just survive this event or can there be lasting damage here like there was an seven eight nine?
So I think we really need to rethink the business model of how this is financed because a lot of small and medium sized banks have a lot of exposure in this area. You know, the chickens are going to come home to roost because interest rates are a lot higher, so refinancing rates will be higher. There are a lot fewer people going into the office, so a lot of the commercial real estate values are going down. And I think a lot of the small and medium sized banks
are going to be stepping away from this. So the question is going to be who will be financing this going forward. The big banks don't seem to have any appetite to do that. Maybe it'll be new players like private credit coming in, but that's very new. We will have to see.
Kind of the matter is that Professor Krasner is for the fossils like me, the collective memory of our of Continental Illinois out of nowhere. What are the shadows right now that you see of a Continental Illinois of portfolio insurance in eighty seven, the leverage of ninety eight. What's the Krasner's shadow right now you're most focused on.
So I do think trying to understand what's going on with commercial real estate, how that's going to affect well medium sized banks is very important. And then also looking through well, trying to look through into the areas we don't know about. This gets back to what we were talking about before, into the non bank financial sector. So we've got a lot of data about banks, but just as I was describing, there a lot of non banks who are doing traditional bank functions. We don't have as
much insight into that. So that's something that we know, we don't know, and we have to find out a lot more information.
It's another one hour conversation with Professor Krasner will do that at another time. We are honored your with us today for all of us at Bloomberg. Thank you so much, Randall Krasner of the Boost School Chicago. We're also honored the Jeffrey Rosenberg dart and the door he was just looking at his Bloomberg terminal. Jeff Rosenberg, let's take this all in nonfarm payrolls. They have the number your four
hundred and fifty five thousand with revision. Take that shock into your shock of working at Blackrock this week in fixed income, how do you dovetail the two?
Well, you know, I think I'm gonna talk about something that we usually don't talk about on a payroll Friday, and that's third quarter earnings, which begin to kick off. And what this payroll report really, I think starts to reconcile is a disconnect that we've been hearing between kind of the bond market consensus soft landing, inflation, slowing labor markets, and at the same time a very positive corporate profits
margins holding up. And here's the problem with that those two stories is that how do you get the slowing in labor how do you get layoffs if corporations are doing just fine with pass through and with margins. And so the reconciliation of those two inconsistencies is on display right now this is a much stronger labor market. Clearly, that's what we see in the report today.
Across the board.
And so the challenge is, and what you were relating to with Randy Krasner, is that this is an environment where rates are going to have to stay higher for longer, potentially even go higher.
And the longer that.
Occurs, the more those cracks and that vulnerability has time to eventually show up. But this is really telling you something that the equity markets have been telling you. That it's good for corporations, good profit margins, good earnings, isn't a good story for labor market normalization and for the inflations.
Jeff Rozenberg, mister Fink's office called me this morning as us coming in and they said, don't ask Jeff Rozenberg anything about inside baseball Blackrock. I will not, but I will ask you about the functioning of our fixed income market off this shock report. Are there instabilities visible outside of Blackrock that you see? Can we get transactions done as we get ever higher yields?
You know, it's been a remarkably orderly move higher in terms of market functioning, agreed in terms of liquidity. I think the issue that you again just went through with Randy about where are the cracks, where are the vulnerabilities?
Randy highlighted, you know, the change in intermediation.
The financial system is much more disintermediated today and in different ways that we haven't seen before. And so the story and the history is that as you have these shocks in terms of interest rates.
There are vulnerabilities.
The challenge is this time will be different in terms of where those vulnerabilities show up, and that will be surprising. I think the key here is that coming off of over a decade of zero interest rates, we established a lot of expectation for the persistence of low interest rates. And yes, there's a lot of liquidity still left over private credit dry powder. The issue isn't the liquidity, it's now the cost of that liquidity and whether or not you can afford.
Those much higher interest rates.
I think the thing to be aware of, however, is that in the private credit market environment, you don't have the same kind of liquidity triggers that you have in
the banking sector. You mentioned Continental Illinois. You don't have deposit runs, so you have a lot more flexibility to extend the time period, a lot more flexibility to limit any kind of spillover chakrisk, So it functions in a different way, but it doesn't mean that there isn't still eventually the cost to be paid for a much higher interest rate environment.
Jeff Rosenberg of Blackrock, I am curious from your vantage point, why you would buy bonds here if you see this kind of strength in the labor market persisting.
Well, I think when you say why would you buy bonds, I think one of the key things about the fixeding of markets is there's a very different level of opportunities opportunity set across the yield curve. So the front end of the yield curve is really pricing in a lot of the forward path the movement today basically pricing in now one hundred percent of the final increase in interest rates.
You know, if inflation and the kind of one silver lining in today's report is average hourly earnings, you know, if that picture still maintains and the Fed can hold rates at high levels, but it doesn't necessarily have to go further. That's already in the price And when you look at the back end of the curve, yes there's more vulnerability. Yes, we still think there's more term premium
steepening to go. But you're starting now just finally to get to levels where you're getting back to normal, and that movement from abnormal to normal.
Is very painful.
But where you're getting closer, and that's interest rates, that approximate nominal GDP, that's the history of where the long term interest rates should be, and you're getting closer to that. You may overshoot and you may have more term premium risk because of the deficits and QT. So we're a little bit cautious on the back end, but why would
you buy bombs? You may not want to buy like thirty year bonds, But the front end of the curve is really starting to get to levels that are much more attractive for two.
Thousand and seven and on. This is one of the historic days we've had on Bloomberg Surveillance. We welcome all of you commercial free here through the hour. Michael McKee with us, Jeffrey Rosenberg of Blackrock.
Jeff Rosenberg of black Rock. From your vantage point, is this the one hedge that has worked in this period of turmoil by the dollar.
Yeah, it's been pretty much rate driven, and I think as you're highlighting this morning that rate move is reflective of the I'm sorry, the move and the dollar is reflective of that rate move. I want to go back to what Mike McKee was just saying in terms of the FED, and I think that is what you're seeing
in terms of pricing in the last hike. And I think also as well, they will recognize that the market is doing a lot of the work for them and we're going to get the tightening and financial conditions, and they were hoping to avoid an easing.
Of financial conditions, which is what they've gotten here.
So I think that helps to kind of move us off of the FED tightening path. The real issue in terms of the bond market pricing into next year is we've priced out about half after the FMC half of the cuts that were priced into next year. And I think that's the next move that you can start to see is really pricing out the cuts as you get more of this higher restrictive for longer kind of perspective.
And we did see that thirty year treasure yield across that five percent marked as briefly but flirting once again with that level. Jeff, how much is this a sustainable rate? You said, pricing out cuts going beyond twenty twenty four. Is it sustainable economically and from a risk acid perspective.
Well, A lot of that depends on this projection in terms of the inflation trajectory. Right, So the reason for the cuts priced in, one of the reasons for the cuts priced in by the bond market is the expectation that interest, sorry, inflation starts to fall and the Fed wants to cut rates. So that you were talking about it earlier, Tom not having meal rates go up as inflation goes down.
So is it sustainable, yes, but a.
Lot of that's going to go And Mike McKee, you hit it on the head next week in the CPI report, it is very strong jobs report. A big component of the inflation expectations declining is that core services x housing, which is really related to the jobs market. So good news here so far as ahg averagile earnings not taking up. As long as you see that inflation trajectory go down, then I think you can get that pricing the second half of next year.
Jeff Rosenberg, I want to cut to the chase. I've got a multi standard deviation moveing price in a blended bond index like the Bloomberg total return index from the peak of the market in January in twenty twenty one. How do you frame out, Jeff Rosenberg, that institutions, retail and retired America will somehow get back to the pricing of the Great Moderation. You must be looking that in.
YU, Yeah, and I'm not sure Tom.
The framing is that we're getting back to the pricing of the Great Moderation. And I think that's part of the adjustment here, is that you may not have that bond market that you were used to in terms of an upwardly sloped yield curve, falling interest rates, a high positive total return, and most importantly.
A reliable ballast to your stocks.
It's a very different bond market, and this is the transition period. I think investors have to really recognize that, and so the opportunities are really changing how you hold your bonds in your portfolio.
It's much more in the front end. It's much more.
About flight to quality. Insurance is no longer the thirty year. It's the front end of the curve. It's a steepening when you have a crisis, because you've got that rate possibility priced back into the curve. So a lot of changes in thinking about how we build portfolios.
Jeff Rosenberg, thank you so much for taking the time on a day that truly is historic.
As Tom was saying, and Rita sent remembers a long time ago, she looks at the geology of the permium basin in his experanda, we're not going to do securities analysis here.
We'll say that for another conversation on this important sixty billion dollars potential transaction. And Rita cent of energy aspects as well. And Rita, the stereotype of America from Lubbock pass Midland to Odessa onto New Mexico is nineteen twenty four. There's oil in them our hills and we went out and find it. That's the stereotype. The movies James Dean and all forget about it. What's the new stereotype? Why does Exxon want to span more oil from Lubbock to New Mexico.
I mean, look, you can see that from USHL production as you guys were just talking about. Production has been rising close to thirteen million barrels per day today and it is still projected to continue rising. I think what we have seen, however, the last decade was very much about quantity over quality, right, everybody, every CEO was incentivized to grow production and not to return money to shareholders. And that's changed dramatically. And what you are seeing today
is very much like slower growth consolidated growth. And we've seen an enormous amount of M and A activity. Companies want to take over adjacent acreage and they are getting more efficient and the number of amenitings. We put out this piece a few months ago identifying eighty companies that could be taken over. Fifteen of that's already happened. And one of the very interesting things from you're seeing that is if say a company acquires another company, they.
Are not continuing to run those rigs.
One plus one rigs is basically now becoming one point two, like they are getting rid of the poor rigs. And that's one of the big reasons why US production growth has slowed.
We'll talk about the synergy memo's starting to come out of our City Group with a lead memo this morning. We'll do that later. Emory just said, I look at this and it's number two and number four, and of course we harken back to accidental well taking out ginormous and wonderful and a darko. Okay, fine, are we consolidating the industry and do a doopoly a triapoly? Are we taking the independence out?
No? No, the independence are still there, But what we are taking out are tons and tons of the mom and pop shops effectively very very tiny producers private equity owned assets as well. What you are going to have is a much more efficient shale patch that actually produces good quality and at a cost where shareholders are happy.
Like I was saying, last ten years, they just grew production and nobody returned any money to anybody, which is fine in a zero interest rate environment, but that's not fine when interest rates are five and a half or five six percent, depending on which part of the curve of your room.
I Meanda, how much is this deal also fueled by this idea that people are realizing that fossil fuels aren't going away so quickly, and that, if anything, they're going to be needed at all times, even during the transition to different types of energy.
I mean, I hope that is the realization. I just got back from a wouldhab this morning. I was there for Adipek, and I think in the region it's very much the main focus saying that, look, yes we need to decarbonize, and something we've talked about right on the show that let's talk about decarbonizing hydrocarbons, let's not talk about not having fossil fuels at all, because if economic growth continues, population growth continues, what will happen is energy
demand will grow. Those are like the basic truths. And if energy demand is going to grow, we're going to need all forms of energy because we're not even investing enough and renewables, let alone in fossil fuelds to meet current energy demand. Right, and that's the realization. Hopefully that syncing in in the West as well the East gets it. It's much more for America and Europe to come around to that.
Meanwhile, we are looking at oil prices that have been on a wild ride. We saw them climbing. We were talking about one hundred dollars a barrel, and suddenly we saw the biggest to climb this week, going back to March.
Do you view this as.
Too far, too fast, the way the Barclays does, or do you see this as something fundamental, especially a light of we're seeing in cooper and other commodities tracking this type of decline.
No, I don't think this is fundamentals. It has really been positioning driven. Open interest in options markets have been very high.
The macro backdrop.
You know, you've had treasury treasuries rise consistently for a while now. Oil had decoupled, but it's definitely come back under a kind of the macro scrutiny, purely on a fundamental basis. Look at the back radiation. Look at the front month versus the second and third month that is extremely steep still. Whether it be Wti, whether it be Brent, whether it be Dubai, it's telling you that the physical
fundamentals are absolutely fine. You get flash outs like this, and you know you don't get five dollars ten dollar moves on fundamentals that tends to be positioning or geopolitical driven. Right, we'll get through this, and once we rebase, we will continue to move back higher again. But you'll always get like you'll never go up in a straight line.
You don't know.
When I was in the studio with you guys, I was saying that as well. Right, you get some consolidation and volatility and then then we'll go up again.
I'm very quickly here going back to Adam Siminski and Paul saying, you Deutsche Bank a million years ago. There's the amortus sense spreadsheet Excel spreadsheet of demand, which is the single line item of demand, flexibility or movement that matters in the November of this year, Which geography, which kind of oil signals to you where demand's heading.
I would say if right now it's going to be the US, because that's where all the macro worries are that are we slowing down significantly?
Is it a collapse?
I completely don't buy the gasoline demand print that came out of the EIA this week. But that's what we'd be focusing on on the US gasoline US diesel story. The rest of the world's okay, we know where it's headed. Is the US where the uncertainty is.
If a paper it just called that line m rates, what do you mean you don't buy it?
I don't buy it because you don't get that, okay. Very simply, you can look at how much ethanol is being used in gasoline. You can back out gasoline demand from the ethanol usage that still says it's close to ten million barrels per day. The weekly EI in numbers are all over the place. They've never been too reliable and oftenly definitely not reliable. I won't pay too much attention.
Friday morning inorganic chemistry without meta.
Said, I'm ready to appreciate it. Just quickly. I've got about thirty seconds. Triple digit recruit by Halloween. What's the call now?
I want to stick It's a better call now now that we are at eighty five rather than when it was at ninety five, So.
I have to stick to that.
Okay, okay, we'll speak to you around Halloween. I'm ready to thank you appreciate it.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg