Surveillance: Oil At Inflection Point, Morse Says

to James Affy of Aberdeen Standard Investments. James helped me understand that it is the home to mega cap tech Apple, Amazon, Microsoft, surging this year and back at all time highs for all three of those stocks. Why would you tilt away from that story towards the rest of the world. Yeah,

good morning, John. I mean if you had done so, for whatever reason, then then obviously you would under performed significantly, because globally equities have you had nowhere near the performance that we've seen from some of these megacaptech names that you've just described there. And that's not just in the you know, immediate pre and a media post COVID period. That is something which has been going on for some time. I mean the Eurostocks Index is not far from the

same level it was at in the late nineties. When you compare that to the performance of the US indices, that the divergence is stark. So if you are a value investor and you look at things like price to earnings or price to sales, and you look at tech names and say, I just can't justify own in these names with such multiples, then obviously you've missed out to this point. It is essentially a leap of faith. There is no possible way that you can do a calculation

to justify the valuation of those big tech names. You are merely investing in a narrative, in a belief that they are able to turn what are either dominant market positions currently or emerging market positions currently. In this in the case of a name like Teslaw, you believe they can convert that into you know, the winner takes all and become a true global monopoly. And again you can't

prove that that is merely a leap of faith. I agree, James, if there's different companies involved in these great roth stacks. But what I find fascinating is what will be the action of the value laggers. Do you just assume we get one big combination, one big roll up of all these companies generating low single digit revenue growth, and that

good cash flows well. For the way that the market has evolved in time in recent years, certainly it doesn't lend itself to that idea where there has been a movement away from truly active bottom up stock picking investment towards a factor investing, towards set to investing, towards passive investing in all its form, and towards more sort of price dominated strategies like like momentums and and such like.

And that does have the tendency to lump together similar companies through various dimensions into one um, you know, analogous group, and that really does presumably look attractive then to people who are doing fundamental research and looking at the company's bottom up. But you're you're wrong until until the masses start to see the same things that you are, and that can take a lot longer than than most investors are patients can last. So it's a very tricky. It's

a very tricky situation. I think in that environment, to be a value investor, to be a bottom up stock picker, you have to be very long term, and you have to accept that you may look wrong for a period of time, and you also have to accept that markets are not being moved around on a daily basis by people who are doing the same type of analysis that you are. You sound scope tical, James, and you're not alone. A lot of people are very skeptical of this rally.

Yet it continues, and it continues on the heels of very cheap money as well as governments around the world pumping cash into their economies to try to keep things afloat. Or your is your negativity being translated into a barish view on US equities, on risk assets or is it just sort of a displeasure at the moment, at this uncomfortable moment that we're in. It's probably both, Lisa, to

be honesty, I'm definitely skeptical. Again, I think without being so broad brush and just saying hey, big tech, you know tech, tech, tech, tech, and you just say the word tech a lot on and that that counts as as an investment thesis. You know, I would look within the tech group and say, there's quite a big difference between what Amazon is doing and what and how Amazon is able to manage its business through an economic cycle

versus Facebook. And there is also probably quite a big difference between Amazon and its ability to not just survive, but probably thrive in the post cove in a world versus an auto manufacturer like Tesla. I just think that the challenges that these businesses face are dramatically different and that doesn't seem to be being reflected in stock prices, which again I think is is part of this psychological driver of equity returns that that's dominating at the moment.

I don't think it's it's necessarily to do with analysis, but it's very much to do with psychology. Does that make me bearish, Yes, it does. I truly believe that. You know, my role as an investor is to is to invest based on the fundamental research that I do, that we do, and when things are expensive relative to our understanding of what's going on in reality, then it then it behooves us to to reflect that in our

portfolio positioning. And you know, again, I'm just looking at some of these big tech names, looking at the change in price of Tesla. I'm going to pick on Tesla, but just looking at the change in price just in five days, I can't possibly think that the outlook for that company selling all tones of questionable quality in recent years has changed so dramatically in such a short space of time, and that would make me want to lean

in the opposite direction. James, I'd love to think that the investor committee meeting Aberdeen Standard is a little bit more sophisticated than you are, screaming tech multiple times around

the table for several hours. A narrative that has built up over the last several days is that tiled away from the United States, not because a style, not because the composition of the indices, but because people believe that the economic recovery that's being engineered in places like Europe, places like China is more dependable, reliable than what we're seeing play out here in the United States, which is

becoming increasingly more uncertain over the last several weeks. What do you make of that argument, James, Yeah, I think it's a really interesting one. John, I'm you know, my before I'd even started to look into this, I was skeptical immediately for for really the main reason being that when the U s sneezes, the world catches a cold, and the recent history has made that view. I think

stronger rather than weaker. The US is the only large major economy which permanently runs the current account deficit, therefore is a source of demand globally. China has been a source of demand globally also, but that's that demand is secondary to demand elsewhere predominantly, at least it has been through history. The Chinese consumer is not yet there, consumption maybe fifty of GDP in China, whereas it's closer to

in the US. So to me, it's very difficult for the global economy to really be firing on all cylinders without the US, so first and foremost, I think that makes me skeptical. I think the other issue really is that what we're seeing at the moment is the sugar high. It doesn't really tell us anything about what the medium

term trajectory for economies is. With Europe, you run into the same issues which have bedogged that region since the late nineties when they've decided to form this monetary union. And that is to say that it is it is incomplete. There are structural rigidities, There are divergences across the YS economies, and that does make it very difficult to generate sufficient demand to get those economies up to capacity and start to generate what wage and price pressures in a way

which would suggest an economy really motoring forward. So I think it's interesting. I would also throw the currency in there. The currency is a bit of a problem again, it's a current account surplus region. It's more sensitive to the currency than than potentially the US is. And so if investors run too fast, too far, that can actually get in the way of the recovery, so that that will be want to watch as well, James Effete, appreciate your

time this morning. You want to get from Aberdeen Standard Investments on one of the debates of the moment, Tom King, which is the rest of award versus the United States. But it's a different debate. Now there's a belief, how by somehow, by many, not by me, that maybe because the United States might be the source of instability for the global economy, given what we're seeing play out in many states in America right now, that your money, your capital is better out swear in regions like Europe and

in places like China. Isaac Wilkansky out of Ohio Wesleyan has a beautiful Midwest field for the policy of all these Congress people, all these Senate people as well. He joins us down from compass research, Isaac, I love within your detailed note, how you gross up to one point five trillion. So we're talking one trillion, Isaac Boltanski is talking one point five trillion. Does that tell me the

eventual bill is going to be two trillion dollars? It tells you it's going to be higher than a trillion, And it tells you that this Congress is more willing than any Congress before it to spend money. And the reality is, deficit hawks are an endangered species on Capitol Hill. And so when we know that there's going to be a legislative vehicle, which we know there will be a Phase four vehicle, it will become law before the conventions. So investors should expect it to become law by early August.

That vehicle was moving and everyone is going to try to hang their ornament on the Christmas tree, and tom when that happens, the price tad gets bigger. And so I'm telling my folks a trillion and a half is a fair assumption. At this point in time, Isaac, nobody is worried about a deepening deficit in the United States, as you said, whether they be Republicans, whether they be Democrats, Which brings us to the election in November, people saying that perhaps if Joe Biden wins, it won't mark much

of a change to policy. We might not get that increase in taxes, and you'll get a doubling down on some sort of infrastructure spending leading to a market neutral or even market positive event. Can you pass through your thinking there? Yeah, So when I talk to my clients about what a blue wave scenario looks like, I think it's easy just to bucket the issues into legislative and administrative.

On the legislative front, we will have a torrent of proposals, everything from the Green New Deal to Medicare for all. But you have to look at the votes and the reality is if Democrats win the Senate, they will have a very slim majority, and within that majority are red state centrist Democrats like Mansion to Me Cinema. So you have that three the co work there, who I think will really dictate terms in the Senate and make it much more difficult, if not impossible, we'll get some of

these priorities through. So I think that ultimately you would see a tax bill by the end of next year in a blue sweep, but it wouldn't be as onerous as the Biden campaign has proposed. I think the corporate rate would be three to four points higher, but it

wouldn't be nearly as expansive as the campaign is. As outlined, Isaac, A lot of people agree with you, and we're seeing an increasing number of notes that say something similar that if we do get a Biden win as well as Democratic sweep, it wouldn't be that negative from markets, I'm wondering how much people are factoring a potential anti trust, a regulatory push to break up companies, particularly big tech, as they get bigger and bigger. So this is I

think this is the most important point. While we don't need to fear the legislative agenda nearly as much, we must be as investors cognizant of the administrative agenda, especially as the administrative state has grown materially in recent decades.

And so I think that the easiest way to think about this is to say, where has the proverbial pendulum swung the most under the Trump administration, and we should expect it to swing back the other direction with similar force and here we're talking about energy, the environment, and healthcare. Most notably the second tier is financial services UM and so sorry, no, it's great. I mean I'm worried about

the Cleveland Indians getting renamed in the Washington Redskins. There's all these other diversions Isaac away from actual policy prescription. Come on, you're from Ohio. You know what's an election year and all that matters forward is the election. Over as John Farrell mentioned earlier, overlay the election. Now on the next six weeks of fiscal stimulus, how does that election ballet filter into getting to year one point five trillion.

Politicians aren't good at taking things away in any year, especially not an election year when they're running for something. And so with that motivation, lawmakers are going to return to town and they are going to stroke a big check aimed at unemployment insurance, another's round of recovery rebates, and anywhere from five hundred to seven hundred fifty billion

dollars for states and local municipalities. There will be a big, big fiscal package coming out of PC by early August, in part because there is an election in November and lawmakers are realizing that reopening is not synonymous with recovery, and so there's going to be another slug of fiscal assistance coming. Isaac. Fantastic work as a wise and appreciate your time this morning, I said Boltanski that of compass point, let's get started right now. We're gonna focus on the dollar.

We have. We've really been remissing on that over the last number of days. Let's catch up quickly. Jordan Rochester with us. He writes exceptionally acute notes for Numura, usually about you know, Sterling. There was a point where Jordan was Brexit this Brexit, that Brexit, Brexit, Brexit Brexit. But right now he's really focused on this great mystery of two thousand nineteen, which was a resiliency of the dollar. Jordan Rochester, Can the dollar finally give way? And we can? Yes,

it can. I mean I was a dollar ball for kuhit a long time towards the end of twenty into this year, and it was a few factors driving at the US performer story. And when it comes to the big dollar, you can talk about so many different topics to express a view, but really Tom it boils down to do you think the US growth will outperform the rest of the world. That's it. If you know those that simple variable, that that differential, you know where the

dollars going to go. And what's quite different about this crisis is we've had an extra ordinary response from Europe compared to the last crisis before a decade ago, and also the policies they've used as well, So these sort of job retention schemes which are much more widespread in the Euro Area and the UK compared to the US.

It should mean that when we do reopen, which we are, we have a snap back where you have everybody back at at work to some degree at least, and it's much faster as well, where in the US there's going to be a bit more of a sluggish recovery as the market's going to do the job instead, and so

you just see people having to look for jobs. And yes, there will be an improvement in the jobs market as the economy reopened, but at the same time, it won't be that snap back that's merely full employment that the governments in the Euro Area have tried to construct here. So for that reason alone, we've got a much more optimistic outlook for the Euro Area this year into next, and then that's before I talk about all the other things going on, such as the sort of second wave

risks in the US. The lockdown has taken place right now and the risks to that, and then there's the U S election as well. Before I get into all of that, plants. That's why I think things are. US growth underperformed the Euro area and as a result, the dollar weekend. It's Jordan's Sometimes it is really simple. Show me where global risk appetite is and I'll show you that our action of the dollar. But you're asking me

to imagine something a little bit different. It's a world where the US stumbles and risk appetite remains elevated elsewhere. Is that really a world you can imagine? It's possible, John, I know it's not normal. We're used to whenever the US sneezes, the world get to cough. Well, in this circumstance, it's possible that the US still grows, John, but it doesn't grow as facts as everywhere else. So that's the scenario we're talking about. So there will be abound back

in American growth. There's not be too pessimistic. The point we're making is it will the speed less than how to where and then okay, let's talk a little bit about the other factors driving this. So, because you've got rising cases in the US, it's pretty clear from the data, it's common sense to rising cases leads to less economic activity as folks are just worried about going to the restaurant,

going to the bar. We're already seeing that play out in the mobility statistics for certain states and certain areas, even in this early stage of that sort of revived second wave, sort of rolling wave stories in the US. So you're going to have in this quarter in the

US struggling with COVID nineteen cases. And then when we get to the August period, we'll be talking about Joe Biden vice presidential pick, We'll be talking about higher taxes in the US, and as a result, you'll have the market pricing a less optimistic view on US assets versus the rest of the world. Well, Jordan, show me where to push through that dollar weakness in a world where no one wants a stronger currency. Yes, that's good point. Well,

you're seeing it play out already. You've seeing some Chinese remombi strengths this week. You're seeing euros start to go higher, and I think the way policymakers at central banks will square the circle is it's okay, John, if your currency appreciates for good reasons. In the past, we've had episodes where we were dealing with deflation risks in the Eurozone that we had a strong currency. I'm thinking back to seventeen and so that was when it was a pretty

tricky issue for the e TB. But I've think policymakers globally will be happy if they're able to successfully reopen their economies without COVID nineteen picking up too strongly successfully reopened them about too much damage to the labor market. I think the current is gonna be laughing on their mind as if they can get those two things done

with a good success rate. Jordan, one of the bull cases that you mentioned for the Eurozone was their supplemental income to people who had lost their jobs or lost work as a result of the coronavirus. And yet you have economists from a number of places saying this is only going to perpetuate zombie jobs and zombie companies and will lead to a lack of productivity in the region and a slower recovery going forward, especially because some of these programs may not be reupt and if they are,

it will cause a huge deficit in the region. What's your counter argument to that? I guess I mean there's some points that are definitely valid. If you're propping up a job that does no longer exist, then that needs to set some come to an end. Well that the question is how many jobs no longer exists anymore? We

don't know. And the other point is those workers who are currently on that job retention scheme, they're not getting that full salary, they're getting a portion of that, and they also they want to go to work too, so while they're in this furlough period, they might be looking for jobs elsewhere. So what it's doing is it's providing that social cursed suffer in the meantime to allow those workers to find the new jobs at a sort of pace that's better for them, rather than rushing into things.

So my counsel ivance day is it's never going to be forever. And the second point is as long as the governments don't try to pay it back quickly, the recovery should be okay. What do I mean by that? As long as we avoid austerity in the same way we saw in two thousand and ten and eleven, things should be better to the Eurozone benefit, the global growth better for the UK as long as governments don't follow that sort of old Playbork from two thousand and ten,

the recovery should remain. In fact, Jodan right, should a quick question here away from euro dollar what is the best way to express dollar weakness? Which pair works well? We're looking at sort of risk on proxies, so we have the likes of uh sort of long or kiwi

long er. Again. I would usually talk about how we should see that the dollar block out performing this global growth rather such as a dollar but emerging markets might be the better play here, such as what's going on the China got the ball Chinese exuties this week, and our guys in China are saying, don't argue against it. That's saying, essentially what we wanted to see in China is actually much more fiscal steamless in the pipeline and as a result, don't fight the ball rally that was

seeing in China. Tom JOHNA Rochester, always great to catch up with you joining us from Nomora right now. We could have a two hour conversation with our next guest, Edward Morris, joins us from City Group, of person known globally for just incredibly pressing global macro views on hydrocarbons and yes on commodities in general. But today we have to rip up the script. We have Ed Morris with us of City Group, and what it must be about

is what Mr Buffett did yesterday. And there is upstream maybe that's the world of Ed Morris, And there's downstream where Lisa fills the homer age too full of the latest flavor of gasoline. And then there's that thing Ed Morris midstream where Mr Buffett Daly yesterday looking at pipelines of dominion tell us about the midstream value play that's out there? Are there many more dominions to be played by the big money there there are. I mean, we

were in a distressed environment at the moment. You can't overexaggerate that. Uh. And we're looking forward. And as you look forward to the American production of oil and gas is going to grow UM. And as it grows, those who have the capacity to move it from wherever it's produced to wherever it's needed are going to get a throughput boost UM. And that throughput boost you know, will increase the value of those stream properties, depending of course

on where they are. But yes, it's was a savvy play. Do you think all right is a savvy play on the pipeline industry or on the natural gas universe, which has been particularly beaten up. Uh, the natural gas has been beaten up in a different way from the oil side. They're both opportunities. Um. We had another thing that happened yesterday, namely a court deciding that the Dakota Access pipeline had to be shut on August five, UM, and that could

create another opportunity for another condiment stream play. Uh. If you can't get it out by pipe from Dakota, you have to get it out somehow, and rail is the next best things. Uh, there are there are other other dislocations in the country other than the one that's on the East coast, and the east coast problem is in part of a problem related to the southeast, in particular, where natural gas is no longer seen as the incremental um choice of fuels for for the, for the, for the,

for the for the electricity industry. So the power sector is looking at kind of stagnant growth on the end use side and in that stagnant growth, there's increase in renewables, and the increase in new renewables will come at the expense of natural gas. That's kind of un increment, But there's plenty of flow that's going to go through in the meantime. And Tom was sort of the conversation aptly talking about the difference between upstream and midstream and downstream.

Notwithstanding his discussion of my hummer usage, I will say there is a question about whether Warren Buffett's play, not only with this particular purchase, but also the occidental equity investment that he made earlier this year, is a bet that the so often fossil fuels has gone too far, too fast. Do you think that that view holds merriage, that we can see further upside in the entire fossil fuel complex, given how beaten up it has gotten this year, Yes,

we think so. And if you if you look at the data, uh, you know, the the biggest drop has been in the upstream side. Drilling activity has collapsed from over six d eighty oil directed ricks at the beginning of the year to under two hundred right now. Uh. PRAT crews have collapsed from the three hundred level too, well under a hundred UM and we think that's the bottom. So I think if you look back to July, from September and even more from next January, we'll see that

we're probably at the bottom right now. Uh, And that given where prices are and where we expect them to go, we're going to see a pickup of of drilling activity and the pickup of completion activity. And uh, that will be the case in both the oil and gas. On the gas side, the pickup is gonna be very priced driven. In our judgment, we saw prices getting out of the Dallas seventy range for gas into above a dollar eighty

very quickly. That's because of somewhere weather. As we project where the gas market is now in terms of supply and demand and think about where it will be next year. With thinking prices are going to be kind of from their second quarter average probably double by the second quarter of next year. So we are, we think at an inflection point, UM and maybe buying assets at the distress level um is is a wise move. UM. It depends on you know what you're looking at in terms of

transactional analysis. But uh, you know, we think they'll be consolidation ahead, and that consolidation is probably gonna lag by another sixt eight months, but it'll certainly very likely to be on the horizon by the first quarter next year, and very quickly. Here a final question, if there is an inflection on point that means of price in flex as well, not out one year, but out two, three, four years, where do you see brent crude a settling

at Is it substantially higher? Sure? I mean, if you let's look at the very short to medium term horizon and beyond the medium term horizon. So if we just look at where the curtailments and capital spending have been, where we expect US production to splyde to Canadian production to splyde two as the global economy recovers, we're looking at h at Brent at fifty h and above by the end of the year and sixty by the end. How durable that will be? Is? Is it? Very open question?

If you look at the economics of pure economics of of drilling activity in the world as a whole, U the world ought to be able to sustain not much more than forty five to fift dollars about brent related on a on a long term sustainable basis, because at that price level, the world can produce an awful lot of oil out of shale, out of deep water, out of oil sat let alone, out of conventional But as we get over you know this particular short term crunch, we think Brent goes to sixty by the end of

next year. Interesting, Ed Morris, Thank you so much. Edward Morris' City group, of course, how did their commodities research? Most time we are particularly on what Mr Buffett wrought yesterday. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.