Surveillance: Nuclear Sub Deal With Yergin & Stavridis

odd quiet. Margie, the quiet to me signals something. We have the artificiality of negative yields, we have some new definition of the zero bound. We've got Japan and true gridlock and fixed income linked together. This odd economics to the quiet within the bond market. Well, on the one hand, you have really all the central banks for many decades now pushing down towards the zero interest rates and very

much wanting to keep them there. And on the other hand, you have inflation suddenly appearing for the first time in you know, really over a decade, and it seems undeniable, and it seems as if it's becoming more widespread. So it's a lull before the storm before the FED in particular needs to act and do something. Well, the Fed's gonna need to act into something. Are you predicting they are. There's a lot of people out there, let's go with the ancient term inflation east just saying we will see

price down yield up. Are you managing for that outcome only in the sense that in my fixed income holdings I've gravitated over the last couple of years actually to better quality, because they won't be as badly impacted if we have a move up in treasury rates, Margie, is the quiet because there really is nothing going on? Or is it simply because right now the bond purchases are overwhelming, Uh, market reactions, market pricing that would normally take place. Well, yes,

we have the FED meeting. We also have the quiet before the the the budget resolution to raise a DETLOPT. That's a real hurdle. Nothing is going to happen before then. And most people, I think are now expecting the Fed to do something in the way of tapering. And it's interesting. We all know they're going to do it, so it

should all be priced in the marketplace. But when they begin to do something, it'll be interesting to see if the market has a surprise after all, I guess, Margaret, what I'm trying to ask is, what is the direct effect on markets of the one and twenty billion dollar monthly bond purchases by the Federal Reserve? Is there a direct price reaction in the market as a response fromness that will change directly, not from signaling, but directly when

they start to reduce that amount. Well, I think if they reduce the amount of mortgage purchases, that would be the most important factor, because I think the FEDS actions are basically just toovering up all the mortgage to purities has kept mortgage rates, maybe even artificially low. So if they stopped buying as many mortgages, would that cause the rate the mortgage rate financing for homeowners to actually go

up again. That would not be what the Fed would want to see, but they may not have a choice. So that's what I'm thinking would be something that I'm going to watch and how the banks react to if they reduce the mortgage purchases, Markie. One thing that we've been talking about this week, and it's incredibly exciting week for price action, has been the incredible divergence in the potential views for the economic outlook going forward, and how

that's one aspect. John Keiser, piagnist, tell you tell him where that is and then tell him where the prices are. It's sort of unclear. How do you sort of game out this dramatic uncertainty in economic outlooks going forward when it comes to a market call, Well, it looks as if the market itself, the economy is very very solid grounds. Uh,

it looks as if all sectors are really moving. The only problem is um higher prices, fore inputs and shortage of labor, and those aren't really bad problems to have. And uh, corporations aren't over levered, consumers aren't over levered. So it looks like the economists in great shape and should be able to take the market higher. It's just a question of how does it react to when the Fed begins to tippy too and do something for tapering. Margie we had on Anahan and Wills Fargo the other day.

I don't know if you read her literature. She's just brilliant yell physics and just really gets it done. I was the thunderstruck by the concision of the Wells Fargo equity team on modeling together an earnings call with multiple compression to optimism now in relative optimism out year if anybody can look out that far, do you share that confidence of concision that we see off your equity desk Um, I don't know if I have the confidence, but I also believe that I think that we should see price

earnings ratios stay the same or get compressed even though earnings are rising up. So that would leave the market still able to move ahead for those companies that have sustainable earnings. So I think that says the market should move up even if it's more modest, and we've had over the last year and more widespread, not just a handful of stocks lately. They've driven the market over the last six months. Is Microsoft and went off or do you see continued use of cash or share buy back

over and above options? Uh? Companies I think have way more cash and they can deploy. And it depends a little bit on what kind of attacks bill will that change their behavior whether they pay dividends, buy back stock, or make acquisitions. So again we have to see how they react, but they have lots of cash to do whatever they want. Margie, when you came on the show earlier, you said that we have seen the death of the credit cycle as we know it based on the response

that we have seen from policymakers. And I do wonder if that's the case, why not just invest in the absolute riskiest debt securities and then make a call. And some of these interest rate sensitive stocks like Microsoft, thinking that they will be supported by these low yield policies for the foreseeable future. Well, I think the risk is parts of the market are priced with a very good

little premium for anything to go wrong. Um, if there's a hiccup in the economy or too much inflation or the fit over reacts, that's a sector that will be impacted. We've had a tremendous amount of financing from the bottom tier, particularly say in the loan market, private equity market. Those are the weak parts. Plus emerging markets always my candidate for when markets start to crumble, can you play e M now? I mean, which way do you play em?

You mentioned the crumble word. We don't talk crumble on Friday market, but go ahead. Well, I think there's a more reason to be cautious. We've seen China's grows and decelerate. We've seen some cracks in the financial system with a large real estate developing firm, look as if it's going to mean some kind of restructuring, and that's really negative for all emerging markets, I think. And so I think that that's an area that I'm still a little cautious out.

There hasn't been much risk premium. I think the US still looks like the best place we should have the growth. Also, Continental Europe doesn't look bad. They should have two or three percent in rol growth. So that's not bad. Markie, great to catch up with you. It always is Markey Pittow. The West Franco West Management senior portfolio manager Andrew Slim and joined us now more can stand the investment management senior portfolio manager Andrew number one question the equity market

that I hear. Can we get a second run of those cyclicals going into New year? Andrew? Can we? I think? So. I think we're seeing the mirror image of the spring, which was, you know, everyone thought rates were going to two percent, the economy was strong, and the bond market rolled over, cyclicals rolled over, energy prices rolled over, and now all the and then the economic data this summer validated that. And now We're seeing weak economic data, but rates are starting to go up a curve and started

re steeping. The semis are breaking out to the upside. So I think the financial markets are telling the reverse of this spring, which is re acceleration in the fourth quarter. So the answer that your question is yes, help me out. You know, I've seen more collective gloom andrew in the last six, seven, eight days, and I've seen in ages. Give me the measure on the slim and wall of

worry right now, where's the where's the needle this morning? Well, I I am watching the bond market, and I still say last time I was on your show, I'll be wrong if rates go back to one percent. But I'm noticing despite this economic data, yields are slowly creeping creeping higher there north of one thirty, and energy prices slowly creeping higher. So that's that's That's tells me that my fourth quarter of thesis is not wrong. But I will be wrong if this all rolls over. So that's what

I'm That's what I'm worried about. And can we actually get any economic signal from bond markets that are so distorted or distorted is perhaps the fair word influenced by central bank buying not only in the United States but also overseas, no question, no question. Look, I think the bond you know, look right where rates are. Stocks actually should be higher in my opinion on a valuation basis.

But I think the stock market gets the gig that the Fed's been buying bonds and rates are artificially low. So I think actually the market is pricing in higher rates uh than this. And just to be clear, if rates go off, I'm not so sure it's great for the capweighted SMP, which benefits from this low rate environment, given the fact that's full of you know, these long dated growth stocks. So Andrew, hey, you think we can

get another run of these cyclicals? You think, Treasury you're just starting to inflect time we might have seen the bottom. That's what you suggest in this morning. Many people think, though, Andrew, that we need a catalyst similar to the one we got in early November last year when we got that efficacy data for the vaccines. Do you think we need that kind of of kindily going into year end to

get that second run? Well, I think that you're going to see the economic data re accelerate off the third quarter of that kind of the view of of analysts. I think that you're going to get a very good earning season. I don't see any companies pre and uced and you know, you were talking about supply constraints. But you know, I just was at an industrial conference and heard a lot of industrial companies say their backlogs are very strong into next year, and they're very confident about

their earnings outlook. So I think, you know, stronger economic data, stronger retail sales, maybe the COVID variant comes down a bit um and you've got your You've got the makings of a of a good fourth quarter. Thank Q four step up Andrew is such a good point. T K. Michael Farolio over at JP Morgan came out yesterday morning, Dan great to Q three upgrade to Q four. They're looking for this step up Q three Q four into next year. So glad you mentioned this. I'm sorry. There's

forty seven flavors of opinions out there. I'm watching what corporations are doing. Canadian National off Canadian Pacific just out. They say they've got ambitious value creation. That's the pixie dust. I'm seeing company or company Andrew wrap it up for us speak to them. This re acceleration, this re acceleration

into next year is that we're looking for. Yes, And I think the opportunity set is not in the S and P. It's in all those stocks that are below the largest companies that really are off off their highs because they're more cyclically exposed. I think emerging markets off of high I would play those areas versus the market

the SMP capway interesting. Andrew, thank you, Andrew Slimmon Morgan Stanley Investment Management, Senior portfolio Manager, Daniel Jrgen Congratulations with I s And of course I can't say enough about the new map. You know, I want to rip up the script and I want you to comment, as you did in the new map on the entrepreneurial global reach of Elon Musk. I am blown away by SpaceX and the idea of putting four civilians up there. How does a guy like you from the prize to the new

new map frame Elon Musk? I think, thank you, Tom, I think he uh. Obviously, Ranks is one of the greatest kind of technocratic technocratic entrepreneurs because so much of this is about pushing the technology and doing two things SpaceX and the Tesla, and both of them are you know. Tesla of course, is really transformed the automobile industry. The whole shift towards electric vehicles and putting space opening the ear of space tourism is amazing. It's a you know, market,

more market driven than uh th classics. So uh, he's he's a a unique figure. Does the gloom crew that's out there, Daniel, that you fought against for decades, does the gloom crew misjudge the commanding heights of modern technology? Well, I think they tend to underestimate how things how rapidly things can change. I mean they percolate along out of sight for ten or fifteen years while people work on things, and then suddenly it becomes apparent. I mean, whether I mean,

just to take energy, shale was twenty years in the making. Uh, it took about forty years for solar to really come down and cost and but when it happens, it really brings big changes. And that's uh, some of what we're seeing today. Well, Daniel, talking about shale, there's a question of whether the death of shale or peak shale has been overstated. In the aftermath of the pandemic a lot of people saying that that was what we have been seeing in terms of the lack of getting oil production

back online. Do you think that perhaps people have under underestimated quickly it could get brought back. Well, this is an example of where you see how markets and companies adapt because we really have seen a stabilization of shale. It's growing again. Remember the US is still the largest producer of oil and gas in the world. Uh, the nature of the industry has changed, and there's what I call a second shale revolution, which is about returning cash

to investors. And so you're not seeing this. You know, prices where they are today. This was a few years ago you would have seen the brillion rigs really going up in number. But now there's kind of modulation and in general around the world, a kind of caution about rushing into new investment. But at a time when you're seeing strong demand. Uh, either at the end of this year or early next year, we'll see world oil demand higher than it was in So how does this undermine

this whole pledge to get to net zero. Well, I think that I mean the pledges to net zero. That's one of the themes in the in the epilogue new part of the New Map, the ambracive net zero carbon by Some are trying to push it to Some say if you try too hard, you're gonna have a macro economic shock, a serious macro economic shop. I think the direction is clear. How you get there? Uh in a

world that's still fossil fuels. Uh, the roadmap isn't clear and the answers will really be not rhetoric, not power points, but they'll come from technology. All not mince words about it, folks. The appendix to the New Map is the read of the Weekend by the book. You can read the book in the next week, but this weekend read the appendix is Daniel Jurgen gets out front on the South China. See as you do, Professor Jurgen, you go back in

our history. You lectured at the War College. You cited Mayhan. The idea of sea power is a projection. How does submarines project in the South China? See this is right in the heart of the whole issue, the nuclear submarines for Australia. This is about the contest for the South China sea is in an open waterway or is a Chinese territory? And the Chinese used that phrase yesterday they talked about a Cold war mentality. Uh, this is you know, you're kind of seen there's a in many ways Biden

has broken with Trump, but not on China policy. And indeed he's trying to mobilize, you know, a consortium of countries. And then these nuclear submarines are exactly about the question of free passes through the South China Sea and the fact of this kind of growing polarization between China, which you've seen in technology, you see it in trade, and you certainly see it militarily US complicated down the negotiations on trying to get to a greener place globally, a

conversation China needs to be part of. Absolutely, after all, China's thirty percent of admissions. And Uh, at the end of the Biden administration, of the Obama administration, he and g came to a meeting of minds and the Chinese have adopted this from Nezerio Carbon and I'll tell you that's reverberating throughout China in terms of what's on the topic for people. But the Chinese have said, you cannot compartmentalize this. The US is saying we can compartmentalize it

from all the other issues. And we've seen recently the Chinese said no, no, We've had a deal with the other questions as well, So I don't think it can be separated from everything else that's happening right now. Listen, this is like the Miss America pageant, except for doing it with Daniel Jorgan. I'm going to announce my Book of the Year next week. I've already hit adata, so let's have Miss America come out one last time on last year's book of your Dan Jurgen, the New Map,

my book of the Year last year. It is absolutely a tour to force. From the prize to commanding I request and onto the must read the summation of where we are right now and again the appendix on the South China see as Dan Jurgan goes all. Robert D. Kaplan, Professor Jrgan, thank you so much, seeing Davos. This is without question our interview of the month on what we're

seeing in the South China Sea. Because of time, we're gonna cut right to the chase with James Tevitis, his Book of My Summer two thousand thirty four, when you and Ackerman wrote your fantastic book on the Fears and Instabilities of two thousand thirty four. Admiral Stevidis, did you understand submarines would be part of two thousand thirty four or two thousand twenty one? They are part of both tom as you fully know and appreciate, and in particular

nuclear submarines important to understand the difference here. A diesel submarine is like a hybrid car. It's kind of uh. It runs on a battery some of the time, but a lot of the time that has to run. And it's like the duck boats that go across the Charles River. Continue you got it, you got it. And so the

nuclear submarines are just the coin of the realm. There we would say about infantry the queen of the battlefield, not as feminine, but rather queen is in a chess piece that can go anywhere, do anything, stander water forever in its utterly lethal explained to me the alliance here developing in the South China Sea out ten years and out to two thousand thirty four. If I'm a Chinese, it is to me it is multiple players with multiple silent things going at thirty one hour through the water.

It is and it is because China claims the South China see a vast body of water tom It's half the size of the continental United States. They claim it essentially as territorial waters. It's a preposterous claim. It's been debunked on your international law and in the courts, but they continue to claim it. They build artificial islands. They

want control of those waters. They're full of hydrocarbons. Therefore, US, Great Britain, France, Germany, Australia, many other nations are challenging these claims as they should, and operating extensively in what they all consider to be international waters. Admiral, give us a sense of you know, you know, I think most I probably speak from most folks where you know, you know, obviously just awed by the nuclear submarine fleet, but I don't really know much about it, in part because you

just don't see them. But we know how important they are. What is China's capability in terms of submarine warfare. It's much smaller than that of the United States, particularly on the nuclear side. So US has sixty eight nuclear submarines called. Fourteen of them are ballistic missiles that shoot our intercontinental ballistic missiles that triedent and fifty four are attack submarines.

What we're talking about Australia starting to operate. China only has twelve nuclear submarines, six ballistic and six attack boats. They have lots and lots of diesels for co skill protection, but in terms of nuclear they're a fraction of the United States. So this deal with Australia. Why do you think we pursued this deal with Australia. Is this suggesting that we're trying to, um, you know, kind of diversify some of the responsibility for that part of the world

to some other nations. It does, um, let's face it, we are always stronger together. We're always better working with allies, partners and friends, and the more capability, particularly our treaty allies have. In other words, Australian United States are sworn to go to each other's defense in combat. Australia, by the way, has been with us in every war we have fought since they became a nation. So it's always to our advantage to see them with the top end

and kit. And that's what's happening here. James Trevillus, I want to take you out of Hollywood with Sean Connery staring gruffly out of the periscope or all we know World War two, A guy named rick Over with a child eldhood is out of the movies, goes out to Pearl Harbor to salvage the US California. After Pearl Harbor goes through World War two and he lands in Oakridge, Tennessee.

I should point out with my father it was like twenty years old at the time, and um, you know I I look, James te Vitas at what rick Over did You've got rick Over Boat one? You've got the new Virginia Class. Rick Over explained to our audience worldwide. The biggest misperception we have of Virginia Class submarines. Um, I think we misperceived the amount of ordinance, of the amount of torpedoes and vertical launch Tomahawk missiles they can carry.

I think most folks think these are small ships somehow just kind of sneaking around under the water. These are the same size as a big Hardley Burke destroyer. That these are ten thousand ton vessels that us happened to be under the water. So I think in this perception is that these boats, uh don't carry a lot of firepower. They can attack the land, they can attack other submarines, they can attack shipping. They are highly capable offensive. I

got like ay questions. Paul sweeneen has got twelve questions, So I'll give you one question. To sell your book. You need to sell some more units before look for the movie guys. Fourth of July two thousand, two thousand thirty four. The Chinese respond to the Americans a number of times, and there's a you know the plot. There's some Indians involved, is well, Amalstavidas? How do the Chinese respond to the announcement in Events of the week? Um?

They are deeply distressed and angered and um. This is part of how nations can sleep walk into a war by misperceiving what the other side is doing. So this only, unfortunately lends credence to the cautionary tale, a novel of the next World War. He doesn't need pr he could just sell himself. James de Visas, thank you so much, author of two thousand thirty four. And can I note that Elliott Ackerman, who co wrote this thing. Mr Vidas has without question my essay of the moment in Foreign

Affairs magazine. It is heartbreach This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI 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