Surveillance: Oil Prices Boost Consumer Spending, Swonk Says

to stay. Great to have me with what a rapid move we've had, incruded, a huge move from north to seventy five dollars to fifty two in a matter of weeks, not months. Steve, Tom and I was saying that when things move this quick, other things break. What breaks, No, I think you can see that's indeed the fact that cross market volatility, there's an impact here asset classes. Correlation between volatile moves, you know, tends to be a bit contagious. UM,

you can see it with a bit of credit. As you mentioned earlier, Um, the high yield sector in the United States is fi UM energy related. At this point, that's still you know, a much higher share than in the equity market. But broadly speaking, when you take a look at um rising credit spreads, it's going to have some impact on how much of a hurdle you think about the great hurdle will need to be in terms

of equities. UM. So there's just a lot of this kind of rapid movement again by itself creates a bit of concern in markets. UM. Ultimately, you know the question, as you just said earlier, is any of its fundamental? I think a good deal of it is is politics and policy. Uh. But when you move away from all of that, you'll settle down eventually. So how do you

position for two thousand nineteen? I mean, take a blended city group of proach, you get to bias leftan equities at more on oil, your other great cheen Catherine Man and others. I mean, how do you position and set

up for two thousand? Well, for US, UM, it'll have a lot to do with I think Barbels uh and the sense that for our private bank client portfolios, you know, we still have a one percent underweight and global fixed income, but we have a very large overweight and US short term fixed income high quality benchmark to essentially the short end that is controlled by the FED, which has moved up a great deal, the flattening of the yield curve.

Higher quality products, some lower quality products, but bear very much. The front end of the yield curve is a large overweight. Now there's still portfolio room when you have, you know, incredibly low yields across most of the developed world. There is some room to take some risk uh in many

international equities. But we have moved up in quality. For example, we've taken down small cap US to to an underweight for the first time in this cycle, and we still think that we will have before this is all over, a recovery on growth expectations. We don't think two thousand nineteen marks a down year for the US or the rest of the world, but it's one where we're going to play it a bit more cautious. This laid into

a fit tightening cycle. Well, let's pick out Germany as one country, one country that's actually posted quarterly contraction for the economy. Steve, do you see that as temporary, something is short term and something we bounced back at off I do very much. And look, I think a particular quarterly down move in one ear a zone country does

not tell me that we're back into the soup again. Um. I think that there are other larger issues, uh, the death, sustainability in Italy, how Brexit will work out between the continent and uh the UK, these sorts of issues, you know, But a bit of a production weakness uh in Germany over one quarterly period is not going to sort of revise our our whole view of the region. Steve, the market smelling something in Europe and it doesn't smell good.

You're a dollar you're really soft once again today. Buttons receiving a bit through much of this year. I mean the gentleman Tenia yeld is going to finish south of where it started the year. That's not a market that smells a rebound, is it. Well, it's one where the ECB again is further along to not helping where it's

been a huge assist along the way. We came into the year with forecasts for years on growth, talking about boom, and it's been a terrible, terrible adjustment right uh to get us to where we are now, which is growth in the region as a whole um is right around trend and that's where I think the exaggerations comm into play.

That there are particular policy concerns that you have to be worried about with the region, But that's not a reason for us to say we want to take a look at the highest quality European companies and say, well, let's throw them out. Steve, how do you respond to consensus which is a single digit consensus wrapped around some level of gloom, some level of doom? I mean, does that set us up once again for double digit returns

surpri eyes in November of two thousand nineteen. Well, look, I do think that it is very interesting that the possibilities like we have seen right in early two thousand seventeen, you know, we're going to be in deep, deep trouble. The dollar is going to go through the roof, and then suddenly you find things go the other way. We have been building up a good deal of pessimism. Evaluation across world equity markets is down about fifteen percent this year.

That's rising earnings and pessimism. Um. Yet, I don't want to at this point in the cycle when we're talking about you know, rate hike nine coming up, and I don't care if you know some news stops the FED from hiking as much as people think, you know, we still have to deal with that news that when we're this deep into a tightening cycle, we still want higher quality portfolios. But I think that the performance of markets again,

we could be setting up very much for a contrarian rebound. Well, Steve Whiting, thank you so much for setting us up, and again we'll get a lot more into this with

a view forward in two thousand nine. Team after what appears to be a single digital for Lucky two thousand eighteen, John Levy with this here very quickly here as we look at Amazon h Q two and he is the one to speak to John Leving out of Richmond and with a real nod of commercial real estate, John, I want to go over tech zone benefits or you know, just a simple taxation of these transaction a grizzled pro

like you. Does that pay off for the city, Does it pay off for the company, or does it payoff for both? Well, it certainly pays off of the company, because they're getting huge benefits depending on where they're located. Interestingly, Tommy and Long Island City, they're getting paid approximately sixties some thousand dollars per job in the Crystal City or the Virginia location, it's a third of that, only twenty two thousand. And if you're in Nashville, you're virtually not

paying at all. It's less than five thousand. So tremendous number of jobs coming twenty five thousand to Long Island, Virginia, in another five thousand to Nashville. Um. So it certainly pays off for for the company. UM and I think, go ahead, let's it do it a commercial real estate just in the time we have today. I want you to speak to commercial real estate developers in Brooklyn or Crystal City. Do they win? Yeah, they do, especially in

Crystal City. Crystal City has been a desert. There's really been nothing going on for ten or fifteen years, and now all of a sudden that just the flurry of activity, apartments, offices people that want to be close to Amazon. Interestingly, in Long Island City, Uh, there the facility is located in what's called a qualified opportunity zone. So there are a lot of tax incentives for people that want to put money in the area and defer taxes. So so um. Interestingly,

not in not in Virginia and not in Nashville. But there are a lot of federal tax benefits for people that invest in their backyard. John, My kitchen yesterday was a qualified opportunity zone. It was silarette. I witnessed that down in flame. I got some stuffing for sale. By the way, time, I too remember Durgin Park and the road beef that came off on both sides of the plate. It was so big, that's true, it was Did they

swear at your mother too? I don't remember that part, but I do remember it being exactly as you described, kind of a scruffy area, to say the least at that time. How do I follow this? Do you know what? I love blind Bug Radio so much because we never have these moments on Blinmbug TV. Well we should. I think that we should do that, you know what. I remember Duck and Pop too, and I think it was France season. You know, I can't remember what it was, but you know, we get one more from John, one

more from me. John, have seen the store closures, if we've seen the kitchen things from some of these retailers, because I don't think we have no. I don't think it's over at all yet, John, But but what we're transitioning to, and I think this is pretty clear, We're going from shopping that's a necessity to shopping that's an experience. And you know in the old days, you went out because you wanted, you needed to buy something. Uh. Now

you don't do that at least I don't. You know, you order on Amazon, you ordered through any number of other channels. And so landlords and and retailers are having to come up with more experiences. For example, in your backyard, um, there was the Rose Mansion, which was a pop up and it allowed you to drink and talk about rose. Now you have something called candy Topia again, an interactive exhibition that talks about a variety of candies. So I

think landlords are trying to be more creative. Uh, retailers are trying to be more creative. If and it's not just let's go out, it's let's go out and do something different. Let's go out to an experience. One of the big places that we've heard about is a bar where they have a hatchet throwing. I mean, who knew, but this is this is hot. People want to do something different. Are we do that at surveillance every morning,

That's what we do with our three men. We have hatchet throwing no better time to speak to Diane Swanky can be on the fed it and be in the American economy, or Diana can be on the gifts that keeps on giving, which I think is lower oil prices. Is that right? It is certainly do in the holiday season. It's one of the things we think will give an extra boost to consumer spending during this holiday season, and it also is giving an extra boots to discussionary spending

as well. Consumers are finally going back and buying clothing again. That's really strange. They've been living in gym clothes for a long time, but men and women are buying clothing, but also spending at restaurants, although it's weakened on a month a month basis in recent months, it's almost eight percent from a year ago at full service restaurants, double digit. We've never seen these kinds of games. Then, how does Grant Thornton process the fact where energy independent were energy dominant?

It cuts differently than it did in the seventies or eighties. Folks, this with fifty one zero one on oil. I mean, there is a part of America that needs a higher oil price, right absolutely, And one of the things we've seen already is whenever oil prices softened a bit, and they softened a lot, as you've already noted, they've plummeted. That really takes away the only investment we've really seen

in the US economy. We've seen very little investment in US economy except in the oil sector, in the innovations in the oil sector. The investment we've seen the oil sector, it's been one of the backbones of the U s economy in recent years. It was absent in the third quarter, and now you're going to see a lot less of it in the fourth quarter as well. And it's one of the things we saw a reset in oil investment in early as well. Twenty years ago, there was only

one answer to the following question. Twenty years later, there's a much bigger debate. Is lower crude good or bad for the American economy. You're absolutely right, Jonathan, and a net um it still is good. Lower true crisis because we employ some few people in the oil industry, but it shows up in our GDP numbers and it shows up much more mixed, and the spillover effects of oil production go beyond the people who work directly in the oil industry. So it is a much more difficult thing.

But at the end of the day, we're still a consumer driven economy and so it still mets us out to the benefit. But boy do they feel it in Dallas. And so your point down whether big capex spend has been has been in this industry, and this administration wants this country, this economy to get a lot more capex, a lot more investment. It's got to be this industry that drives it ran exactly, and that's one that we'd like to see it much more broad based. We haven't

seen it as broad based. The other big complaint I'm getting from a lot of clients in the oil patch tariffs. The tariffs hit the steel that they import because they only have suppliers they imported mostly from Canada. A tax. Now, Diane, what is your working number for g d P. Let's go twelve months, two thousand nineteen for two thousand nineteen, about two and a quarter percent. Much depends on whether or not we get in a full blown trade war.

I am worried about the next recession. As you know, timing it is really difficult to do of never forecaft a recession, and I am Now this came up over cocktails last night because Diane, I failed, it's stuffing. I'm so it's stuffing today. But we we washed it down with some cocktails and the failure of and what you got that right, thank you, Drysack. And what came up Diane was you don't see a recession coming. I mean, that's the historical study, right, you don't see it, but

you can see the ingredients of a recession. And what do I worry about when I look for the ingredients of a recession The risk of a policy miss step. That's gone up a lot on a multiple fronts. One, the Fed could raise rates too rapidly or too high at some point in time. By the end of this year, we'll see in one year's time a doubling of short term interest rates by the Federal Reserve. They're still at low levels, but that's a major shift in interest expense

on a lot of short term corporate debt. The debt record highs. That's going to reprice over the next year. So that's one thing we watched. Another thing is trade. You could have a major missed up on trade that not the triffs alone cause a recession, but the collateral damage to the second largest economy in the world, China, not like Japan. It's got tentacles in every other economy out there. So we got to data check. I mean,

we're correlated in here. We got oil flat out, plunging ten year yield coming in finally in two solid basis points, we're gonna get a three or three handle in a moment. We're getting a little bit of Friday correlation, aren't we? Yeah, we are. And Bright Evans of Rhode ivers wild and does it make sense? And inflation expectations a hit when spot crude rolls over, when crude futures roll out of the way they have done. It is really amazing, is

how correlated inflation expectations are to oil. It always has been, it always will be. What really matters is over the longer haul, what happens to core inflection, because that's what we converge to now, Dane, So thank you so much. This is great. We've got oil, and we've got a wonderful guest with us right now. Christian Mayleek is out of the hugely prestigious Imperial College Chemical engineering program, and it knows the visceral nature of the oil market like

I few do. He joins us now of course with JP Morgan Kazanov in London right now, Christian, I know, I know you look at Brent crude as a global oil price. Here in New York, we're focused on the dynamics of West Texas intermediate fifty one fifty handle earlier. Is there is there a symbolism to West Texas going through fifty dollars with a forty nine for barrel print? Does that matter? Tom? A great question, very kind words.

I think to sort of to say, to say from from the outstep, you know, as a house Japreen Morgan has been bearish for the best by of the eighteen months. So we've been calling for fifty to sixty barrel for some time now, and we sort of stuck to our guns. And the main reasons of answering your question, Tom is we've looked at the cost curtain a lot of depths, and every time you look at the marginal cost to produce oil is somewhere between forty and sixty dollars about Brent.

In fact, every time you talk to a major or you look at the premium, they're getting more efficient to produce oil and Therefore, when you think about the risk premium, the question I think some of us were asking is should have ever been a eighty five? When? When? When? When the cost of the cost to produce oil is somewhere around fifty, your cost curve shows a Russia challenge. We've heard earlier, Penmen. I heard earlier that Mr Putin, maybe we'll meet with the Crown Prince or other worthies

of G twenty, maybe even before that. How does rush to fit into the supplied calculus right now? Well, it's a good question, and when we look at what we we we did this work called the break Even Championship as a global study looking at break evens not just on the costcar but also country break even, open bake and fiscal um. And so it was almost like sort of, let's let's think about this massive costcar with everybody on it, not just the projects and Russians. Study were very interesting Russia,

Russia's break even summer between forty and fifteen. In fact, what was quite controversial when we published this back in March because we said that the Saudi fiscal break even and Saudi open fiscal break even is now somewhere between fifteen seventy. So when you triangulate the Saudi fiscal break even alongside the Russia break even, what's really interesting is that you know, for Russia, at least their pain thresholds far higher. They can cope with all with with a

five handle. I don't think they're loving it, but they can absolutely cope with that, which then sort of puts the ball back in Saudi's court and opec as to

whether they can actually manage that kind of break even. Yes, And when we think about the epic meeting in June, I think what what we sort of people missed in terms of the production hike was that they were feelings far more comfortable with oil in the sty seventy range or in fifty sixty range because they've managed to fix their economies take those break evens down a lot more

than when they cut in twenty six. Did you remember their break evens are north of ninety across the border, our investors prepared for new oil and new energy coming on market, And I'm thinking about the recent find and discovery in the Gulf of Mexico about two hundred miles south of New Orleans by Chevron that is scheduled to come online. Plus, you've had recent comments from the head of Petro Brass saying that the firm is going to

focus on exploration and production. Yeah, it's absolutely right. I mean it's interesting that, you know, when when you think about the concerns around a supply crunch, I mean, one of the things that we kept our doing for why all would be capped around fifty six dollars is that it's you know, the short term mirage with limited supplies

has once again be pushed out the picture. And you mean you make you know, the fact that we have big oil now sort of moving in so to speak, into shale is something which, as you point out, is going to massively accelerate production in the TERMUN the questions for how long. I mean, a lot of people are arguing for a rollover in share production at some point in the mid twenties, and I think there is a

risk around that. But in the short medium term you have a scaling up of the termun and when you have the big oil or the super majors moving in, they've got the infrastructure, the balance sheet, the scale and the technology to really scale this. The outlook meaningfully higher. Yeah, is there is there sweat at Vienna December six. I mean, is it just another you know, photo opportunity for a bunch of oil ministers or can something actually get down

around the tensions of this price. Yeah, no, it's absolutely right. And I think I think what the market is doing is putting OPEC feed on the fire. Um. And when we've discussed OPEC and we we we published a known a few weeks ago arguing that OPEC would kick the can down the road. And I think with this moving oil, it's sort of a bit circular. Right when all moves low, you start to think OPEC has to act. I think that the base cases that OPEC will cut We disagree.

In fact, our call is that OPEC will um sign a deal that's a weak deal. Um. If there is some sort of paper restriction on production for next year, it's likely to be with several caveats. So if close expecting OPEC to do a sort of massive you turn on the summer where they did a U turn in itself, it's unlikely. I think they like the newfound mark is share, They've recognized permius here to stay. I don't think we'll

quite give up. You know, it's not likely we get a sort of November fourteen repeat, but it's going to be one of the weakest deal see signed into wonderful briefing. Thank you so much, Christian Mayor. Like with JP Morgan Kazanov out of London on E M E. A Oil Now, as we had Joe Felban earlier, his colleague in crime, Dana Telsey, joins as Telsey Advisory Group Dana open question. You walk into Macy's on a day like this, what

is a grizzled pro like? You look at? What do you observe or what do you study when you go into a Macy's on a Black Friday. When I go into Macy's and I was there last night for a couple of hours after they open, I'm looking at what's the traffic like, what is the rate of the promotions like? And where are the crowds? And I could tell you where the crowds were last night. It's called out in New York. It was all about boots. Those ug boots are basically what people were buying. And it was about

sweaters and it was about gloves. That's what the key with where the traffic was Can they change price on those items? Is there an elasticity where they can adapt to the weather too. Of sustained profit, I think there is to degree. But keep in mind a lot of these promotions have been planned months in advance for this day, and you're not just looking at the single retailer, but you're looking at the competitive environment around you. It's how you how you coordinated with the brands in order to

move product given such a given such an important day. Dana, can you speak to the issue of inventory? Are stores lean with their inventory this season? Stores are in a good inventory position. I would say, don't forget. Some of them brought in goods a little bit early in advance of what could be some expected tariffs coming up. But they are definitely in a good position. They're not over inventoried.

Their priced for goods to move, and if they run out, then they have demand to in other items or other brands that could fill that demand. Doesn't seem like there's any excess inventory in any big ways, and having the cold weather helps the other categories toys given Toys or US is no longer here, and Toys or US sales occurred in the fourth order. Everyone is out there looking to grab market share, and toys who's gonna win and who's gonna lose. Who's the store or the retailer that

has the most at stake this season. I mean, when you think about the retailers overall we have, the discounter should certainly get a good share the private labels that Target has invested in, the omni channel initiatives that Walmart has, And frankly, the strength that's been nice to see is the momentum that Coles has. Coles is really whether it is any active categories and toys, they really reinvented themselves. Dana,

We've had fun today with the geography of Boston. We say good morning one or six ONEFM Boston on the names of another time and place. And as I've said many times before, Miss Telsey lived this at Bergdorf Goodman. But Jordan marsh phileens PIM was mentioning a number of the investing company, Michael Barr Crowley's of Detroit, and on and on, Dana, are we ready for another consolidation in

bricks and mortar? You till I think we are. I think overall, it certainly takes time to close stores this year. You obviously have fears and you're gonna have toys r us. I think we're going to continue to see companies, whether it's Gap or whether it's l brands with Victoria's Secret, who basically each articulated that they're relooking at their physical store space, at the Gap brand and at Victoria's Secret, reloking at everything. I think we're gonna see companies reinvent themselves.

Department stores may have been a little bit ahead of the curve in embracing omni channel, and now you're seeing specialty come next. You see tom It's not all bad, it's just transformation. What does omni channel. It means that you can have money pulled out of your pocket in any way shape you definitely stopping everywhere any time that there's never the word closed is never an option. Okay, I'll go. It's different than the old Jordan Marsh where

they actually had, you know, store hours. David Mike Mike Allen over the ext Yours has a statistic of the day which is thirty seven percent of shopping is done on smartphones. Really, it's a huge numbers. Smartphones and mobile are definitely growing in the transaction on mobile and frankly, having screens that can have that are bigger with its visibility helps and I think you are seeing definitely more shopping on smart phones done and more conversion being done.

What does that mean for bricks and water? I mean, I'm in Barney's on Madison and i want something in some other place and I'm on my I'm literally on my smartphone and Barney's buying it, you know, named the store, right. I think overall what it means is the fact that now you can even have digital orders fulfilled in stores. You may buy it online and pick it up in the store. And look at some of the retailers out there.

Coles gave the numbers that they're going to fill fill five million units in November that are picked up in store and five million in December. When companies have when retailers have consumers come in the store to pick something up, guess what they're doing. They're buying something else. Also, that can attach around to the average transaction. Well, when Tom goes shopping in a store right now, is he going to be paying full price? Today? You're gonna be paying

a discount. Today is the day when almost every brand, in every company, there's something you can get a deal on. And you know what, You're gonna buy the two words of the season to remember the gifts of the season. It's about smart and it's about cozy. It's about smart because whether it's smart speakers, smart home devices, wireless earbuds. And it's about cozy because pajamas, bluffy, fluffy blankets. So

at Burgdorf to Charlotte. Charlotte simone pollypop, two tone, first slip through scarf which looks like something out of the fifties, and two dollars. That's cozy. That's what they call cozy. As long as it keeps too warm. It's about being cozy. Okay, Dana Telsey, you have a cozy state, stay warm. Dana tells you you go from store to store. Dana Telsey iconic with the tell Us the advisory Crup Holiday you too, Dama, Thank you so much as well. 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio