Surveillance: Phase One Chances Are Slim, Says NABE's Hunter

of the week. With that and maybe to migrate away from the politics at the moment, we are thrown to Queen Victoria Street to bring Alberto Gallo. He is with Algebras UH with Lisa Bramowitz and John Farrow in UH New York. Alberto, good morning to you. Let me start with an open question given the news flow, John just spoke about, how are you positioned in the year end? Are you in full Gallo vacation mode? Are you actually trying to find elf towards the end of the year

and in January? Good morning, Tom, Lisa, John, you get a closer Rundom make good morning. There you go. So the the market has moved from fears of um melt down, as Lisa was saying earlier in September and October to fear to two hopes of a meltop. The meltop has happened. Now we're in a fear of missing out mode. Investors

are afraid of missing the gains. Um. There is a consensus about an extension of the tariffs on the fifteenth, there is some consensus about a soft Brexit, and there's a lot of things that can go wrong, so we're more cautious. We've taken profits on things that we owned during the year, and we are looking at We're increasingly looking at things that could go wrong and areas of the market which are overvalued. UM. I think in the UK the market underestimates the execution risk of a soft

Brexit it even if the Tories win. And also the market underestimates a quick US China underestimates the difficulty of making a US China Phase one deal because also the Trump administration needs a Phase one deal to play negotiations throughout the next year to use it as a bait into election. I want to go to John with this great knowledge on the credit market versus the full faith in credit market. But alberta very simply, here are there

bubble characteristics in fixed income? Is someone suggest we see in equities because the central banks have imparted that huge urgency to put cash to work, we are investors in a manipulated market. So if you think about government bonds, definitely yields are two low real yields. Look at the UK, real yields are very negative. Inflation is a two and a half three percent. You know, yields are below one

percent for guilt. So there's there's hardly value in sovereigns, with a few exceptions like treasuries in the US, Canada, Australia areas where central banks can still cut um. At the other hand, at the other end of the spectrum, if you look at private debt loan funds clos, you have a similar picture. Actually, investors are trying to get away from mark to market and the size of private debt funds has doubled in the last one and a

half years. So where we operate is in the five to ten percent of the bond market, which is still training a positive yields um and we think there's value there, but you have to be very careful because many of the positive yielding bonds are could be zombies companies that have survived because of of an ear of low interest rates and some of them fall down. Quee is no longer lifting or boats. This year we had a crisis

in Argentina, crisis in Lebanon. You know, Thomas Cooke, very large UK retailer going into restructuring, many names in high yield in the US ending up upside down for the same Johnett destroyed my vacation to the Elgarith that I was scheduling for January. Well, let me tell you what Betta is going to have one hand of a vacation after Bonus sees and Alberta gallows Algebras macro credit fund.

Is that more than Alberta. That's a massive year in fixed income and more broadly credit is really really delivered on the year in both Europe and in the United States as well. The big question I'm here and again and again and again is whether you should trim some of your winners and rotate some cash into some of the losing areas of the market. What do you do, albert So after you've had the year that you've just had.

This year, a lot of the returns, especially in the first half were driven by duration in the market and by what you know, what you would call safe credit companies that are not two levered um, they're really junkie companies. The single bees and the triple sees haven't rallied until the last few weeks. Now we're seeing investors that were behind essentially reaching down the capital structure, down the rating quality to buy companies that are you know, over five

times levered. They don't have equity, uh sometimes they're privately owned, They have you know, flat or negative free cash flows, and these are you know, these are potentially zombies. So we are a bit more cautious when people reached down the barrel of the rating quality. UM, we really need a growth upside for these parts of the market to perform.

So we're cautious, UM, and we are trimming risk. We're still positive that we're going to potentially have you know, a year end rally, a January rally, but we are not seeing the cheapness that we saw a year ago. So we're a lot more cautious, and we have dry powder. With the political volatility of next year, we think there will be there will be better entry points. Yeah, I love the word zombies, by the way, zombie companies. It's

one of my favorite terms. I will say. There was a story of the Financial Times this morning about a number of big bond firms HIMCO among them c QS uh in Hafen Capital Management, all raising special opportunity funds that have structures like private equity funds to go into companies, buy up some of this distress debt that you were just talking about and actually work with the company's to restructure them. Do you see an opportunity there too? There

is an opportunity. But let's remember distressed funds are out of out of business mostly because there was no distressed in the last ten years because interest rates were very low. So we need some shocks to the market UH, and we'll probably have them next year to create these opportunities. For example, one shock could be US elections. If you see a lead by the Democrats, then some um, some sectors like energy or healthcare could be due for a

big disruption. Similarly in the UK, depending on who wins elections UH this week. So there is a lot of sectors which are still you know, running an old business model. They have survived because of low interest rates and as soon as the economy shakes up, these companies need to restructure their debt, so there is there's an opportunity there

over time. We need a catalyst to make this happen. Alberta, this has been wonderful and as John mention is, just just you know what we know with you, with your excellence. It's not once in a lifetime, but that's superb. Superb performance is sure far outdistancing so much what we see in fixed income and certainly in the hedge fun world. Mr Gallo is with Algebras too many people. The outlook at the moment is still finally balanced. The US consumers

still very resilient see paint rolls last Friday. The global outlooks still just a little bit soft. You can see the Chinese export data. That storyteld pretty clearly over the weekend. Overall, we haven't totally shaken off these trade jitters. Tuesday's bond market action a real reminder of that. To weighing on the look on the remainder of the year. Into police to say that joining us from New York on the phone is Cathy Judge, Child Swap, Chief Fixed incomes strategist.

Good morning to Kathy. Good morning, John. What are your talent clients going into year end as the happy talk about is already in full swing. Yeah. Our outlook is that there's some room for raiths to move up as we get into and that's assuming we do get some sort of a trade deal, even if it's just to kick the can down the road kind of thing where we don't impose increase in in tariffs as a next week or this week, I guess with the decision would have to be made um and then you know, we're

setting a pretty resilient economy. Maybe a little bit of an uptick in inflation expectation, so we could see the ten year yield getting up to about two and a quarter next year. Why how I mean, in other words, is it going to be inflation? Is it going to be really yields? What's this going to be driving the increase? Um? We think it would be a little bit of inflation expectation picking up that the strength and the labor market

is exceeding expectations. We have very very low inflation expectations now if you look at the five year five year forward rate, it's well below two percent. Just a little bit of a pop there could get us up to two percent plus in the tenure. Again, we're not looking for a huge rising yields. We're just looking for a return to a recapture of some of the decline in yields that we saw last year. So what did you

make a Friday's price sanction? We had to blow out payrolls report in America, Cathy, and yield it's on a ten year ended the end of the day higher by a couple of basis points at that to me is not a market that's thinking about a better or comedy translating into high yields. You know, that's absolutely true. Um. I think it's muted by the fact that we still have the ongoing trade conflict going on and nobody really

wants to take a position ahead of that. Um. And we also have even though you know, the job's report was strong, the wage gains were still pretty moderate. So there's not this inflation expectation building up from a tight labor market, and there's no prospect that the Fed's going to change policy anytime soon. Kathy, can you give a narrative to is what we saw in the bond market. The incredible rally and duration really due to decreasing expectations of growth and inflation, or is this all due to

increasing stimulus from central banks? And I'm wondering. You see the FED expanding its balance sheet by more than three billion dollars, in the ECB continuing to buy bonds. Yeah, you know, I think that certainly both factors worked on the market, but I think the ample liquidity and the easing from central banks was the major driver. I mean, we had huge cuts from the FED, We've had huge

cuts from other central banks. We've had increased liquidity, and then on top of that, you have the narrative that the economy was, the global economy was really much softer than people believe coming into the year. I think when you look back at where we started last year, where we were a year ago in the fourth quarter, things are very much different today than they were then. So we have a lot of room for raids to come down.

So let's look forward to this week, and we have the FED, We've got the e c B. We've got perhaps a little bit more foresight into what their plans are for if they just stay put. I'm talking about the FED mainly here. Is that going to be enough to keep driving the fixed income rally without let's say, some positive upside surprise due to trade agreements, I think you're not going to see the kind of duration rally

that we saw this here. I mean, it's almost impossible to get a peaked a trough move of a hundred basis points or so unless we're going into a global recession. And I don't think we're going into recession. So I think that being on hold allows, you know, returns to be positive, but more in line with coupon income than with some big gains and duration or a lot more

spread tightening from here. So we have a positive outlook for next year in terms of total return, but mostly driven by coupon income, not the factors that drove the market in. Kathy want to wrap up with a question that note out. We'll be asking all of our guests through this week as we count you down to December fift in that trade deadline, big line in the sand,

what are your Talan clients about it? Yeah, um, well, you know, we think the most likely outcome is either a delay of additional tariffs and more talk or some sort of you know, phase one light agreement. Um, simply because it's in everybody's best interest for that to happen. But you know this is this is probably the most unpredictable policy factor right now in the US. Cathy Jones going to catch up your charge to our Chief Fixed Incomes.

Trying to just one of the best guests we could possibly get on this program to break down the all market. Jeff Curry joining us in New York, Goldman sax International, Global Head of Commodities Research. Good morning to Jeff. Before we get into the commodity market, I just want to get my hands around this December fifteen trade deadline and what you guys are sounding clients at the moment about it. How are you characterizing gays a line of the sand, Is it a firm deadline? Just how much risk is

around that date? Well, in terms of thinking about our space, you know that the impact is relatively limited. It really impacts the agriculture markets to the most extensive extent. You know, there's a lot of noise right now whether or not this is going to lead to improvement in soy demand. But I think the key point there is that you have structural issues going on in the trade war is exacerbating these structural issues. It's not so much the cause.

Let's take, for example, let's say if they were to increase the demand for soybeans, Asian swine flu has taken out the demand because there's no more hogs who actually

consume the soybeans. That's more of a structural problem. Um. You look across the commodity space, it's much more structural issues that are plaguing in which and and sort of embedded in that question is a supplied demand dynamic, right, And that's a demand on side a question where in other words, if you get it amping up of the of the trade wars that potentially lowers demand, is that the right side of the equation to be looking at in terms of oil prices or should we be looking

more at the supply side? Much more at the supply side. And what we're seeing is a substantial drop off in cap X. And again I'm gonna argue that that's much more structural than being driven by the trade boards. Sail prayers are biggest sail players in particular, you look at the rig counts in the US, they've been in a steady decline since December of last year. UM, and that reflects one is that these companies still have structural problems,

poor returns, too much debt. But also you think about the trade boards ascerbated, and the other big factor that's coming into play is E s G investing. UM. You know, we estimate that in trillion dollars of assets under management will integrate E s G strategies into the portfolio. What's the two lowest hanging fruit fossil fuels and medals in mining? How can foss of fuels be within E s G. They've tried to manage the social message. How do they actually manage a strategic plan to be E s G

sensitive five or ten years from now. Well, you look at the UM, the big oils and Europe, they've basically reinvented themselves as big energy, incorporating renewables, power and other more sustainable energy sources. Bio Fuels are added into that mix UM. So they're doing that in a way to be able to attract that capital back into the sector. But when you look at the shale players in particular, UM, they don't have that kind of optionality. I'm not gonna

blame it all on E s G shale players. You know, too much leverage, bad returns, and you know, not a great future. Jeff. You know you taught micro economics in Chicago, which is an a mental hunter and also really rigorous as well. Give us the rigorous single point microeconomics of the oil price that Saudia Arabia needs. What's their best

oil price right now? Well, in terms of thinking about what they can control and what they can't control, they can control the shape of the forward curve, they cannot control the price level. And the agreement they came to on Friday really exemplified that understanding, because what they did is they did a much deeper but um sharper um shorter term cut, which is telling you that they're going to deal with that near term surplus. They even went as far as to create a threat to any cheater,

so it's best successful. But the third and most important aspect of that cut is they didn't offer an extension and they didn't talk about the future. Oil is a spot asset. It's not an anticipatory asset like financial markets, so having a focus on forward guidance is really not necessary.

Focusing on cleaning up the front end is really important, and that's what they did, which increases the backwardation, and we raised our price target to sixty three dollars a barrel on Brent from UM sixty really driven by that backwarda let's talk about that threat from the Sound East. Woke us through that threat, Jeff, And what do you think that threat is credible? Well, when you look at who was cheating, it was Iraq, Russia, UM, Nigeria and Kurdistan.

And what we've seen so far for the month of November, both Iraq and Russia have got their numbers back down in line with with with their quotas. But I think it's also a broader threat to the rest of the peripheral of OPEC that hey, they do have the capacity and they're willing to do it UM as we go forward, and that their ability UM to manage the front end because they've actually been the leaders in terms of cutting back on the front end. You know, they're running four

hundred thousand barrels a day below their quota UM. So I think, you know, in terms of the outlook going forward, because it's not a long term commitment here, it's like, hey, let's balance these near term surpluses, it becomes much more easy to create a credible threat. You live and breathe this market. I don't so just naively, I'll say, from my perspective from the outside looking again, I was surprised paced about the absence of a conversation around Saudi a

Ramco in Vienna, Austria at the OPEQ matsing. Can you really draw a distinction between a Saudi Arabia that joins opex plus to manage an oil price and a Saudi Arabia that needs to manage the price of its crown jewels listed in react? Yes, look at what oil equities

have done since two thousand and fifteen. Do you actually do you realize oil equities on a level basis are lower today than what they were in the troughs of fifteen and sixteen oil prices you know, sixty three the oil prices twenty six then UM and you know I tell this to our equity analyst. Does the oil price really matter? Yeah? It does in a long term sense. And I think this goes back to my point. What did the OPEC plus members do UM this last on Friday?

They separated that long term view from the short term view. UM. Oil price is a spot asset. Equities are an anticipatory asset. What they did on Friday. Was not going to change those expectations on forward oil prices. However, it could rebalance the market and help near term cash flows go. I absolutely agree you need to disconnected to and if the markets aren't a testament to the fact that oil price can do what it wants and the and you know,

the equities can do. Another thing I can point out equities do not have an arbitrage condition oil prices do. There are arbitrage to the real supply and demand today, equities can do whatever they want based upon expectations. That's a whole different discussion. So Jeff, you were just saying that Brent, uh, you're expecting it to go to sixty three dollars. It's currently fifty six dollars and fifty seven cents. Where do you see w T I go And it's

fifty eight dollars and cents right now. I'm almost right on where it's trading right now, basically. But that's not the story in oil. The story in oil is the shape of the forward curve. It's the returns where you um, you know, we expect to see returns and being long oil with this thing trading flat over the rest of the year. One thing, one thing that I want to follow up on. When you say that you're expecting CAPEX to decline over in the shale patch, I'm wondering, do

you expect the fate of those companies to improve. We've seen the bankruptcies really increas east. Do you think that would just continue or do you think that we're starting to see a bottom. Well, I think when you look at what has to happen in that sector, you need to see consolidation. UM. I like to point out the top five oil companies in the US UM they represent the market cap, but only a third of the production.

The other fifty companies that represent the other um of the market cap is where all the growth is and it's uneconomic. UM. So what likely has to happen is you have to consolidate those companies. I like to point out when people make the point about the CEO confidence numbers me and down, it's because there's too many old company ceo s versus the very few new company CEOs, and a lot of consolidation needs to happen on the old cop It's my birthday and Jeff Curry goes to

the old CEOs of the old companies as well. Jeff very quickly here on gold Golden Sex talking about a lift. When do we see a lift on gold Well, we argue it's going to be real steady across the course of I think one of the biggest factors driving our bullish few you is the D dollarization. We're seeing that across the central banks, particularly the emerging market central banks. They're physically buying goal. We expect seven fifty tons of physical goal buying in UM and that's going to be

driven by D dollarization. Jeff, super smart, always great to get your insight. Jeff carry their Goldman SAX International, Global head of Commodities Research. A FETE decision this Wednesday, and ECB decision coming up on Thursday, and a big trade deadline coming up on Sunday as well. On in between all of that, sprinkled in between, we get some decent amount and he canot be data in America, including US retail sales Lisa coming up in this Friday. Yeah, with

a lot of data. The question is how should traders position ahead of that. Constance Hunter joining us now KEPMG chief economist and NAB President Constance I'm wondering right now the market's really ratcheting back expectations of even a rate cut, which has been pretty basically a given before we got better jobs data, as well as a slew of other things. What do you think the Fed's really going to be

signaling as far as the rate expectations this Wednesday? I mean, I think it's going to be more of the same. And I think one of the things that they have stuck to throughout UM the entire period where they have been hiking rates and certainly since J. Powell became president,

is this idea of symmetry. And I think this means that it is possible the feds reaction function UM and their tolerance for UM growth where we have inflation above the two percent target is higher than probably market participants expect. And so when we see a job's data like this, UH, people tend to anchor to that and say, well, now they're not going to cut in. I'm not so sure

that that's the case. One month's job data does not a trend me and so while that was extremely encouraging UM, I think we need to wait and see what happens over the next several months. But you know, it's it's really UM I think people anchored to the most recent data and that's what we're seeing in the market. Okay, So if if that means that you do expect another rate cut in what's the threshold? What's the tipping point for the FED to have an additional cut here after

a series of strong data. It's not just the retail sales, it's home sales, it's a number of other things too well. So I think one of the main reasons that they cut was weakness abroad seeping into the U. S. Economy.

Of course, the US dollar and dollar funding is the primary engine for for liquidity globally, and so by cutting rates, the FED not only improved liquidity conditions at home, they improve liquidity conditions globally, and of course that had a feed through will So I think it depends not just what's happening here, but how the feed through of the global economy is going to impact the U S economy.

What drives a path from one point seven one point eight subpart negative two percent below two percent g D p out to something decent call it two point five? What's the thing that gets us there? Is an investment? Is it n X? Is it consumption? So I don't

think that anybody is forecasting negative two percent. So if we look at this most recent survey, the very weakest forecast we have is zero point one percent for the whole of And when we work with our models and shock them, it's very hard to get it to have two quarters of negative growth. And it's really we're talking about point nine or point five. So again it's really important people not anchor to the global financial crisis and and think about where we are now. And you brought

up then humor. The consumer is extremely healthy, especially compared to the previous recession. And I think that the pain points are around um corporate investment and productivity because the consumer has been the backbone of the expansion and what what is lacking and what we need to maintain future growth is to increase product Well, this is important in folks, I Misspokes, didn't mean negative to perciment below two small difference,

because it's this is really important. Does productivity lead growth or does better growth lead to better productivity? Ah, you have asked the most important questions yet well, and it's and both are correct, right. So when we have better growth, we see more investment. More investment tends to lead to future productivity. But if there were some nice, neat formula that we could all just plug into our policy toolbox and voila, we bake a productivity cake, then Japan would

have already done this right. Um, But but it's not so straightforward, and it is an existential question in a way. Um. But they do feedback onto each other, so obviously, more productivity allows us to get more growth, and more growth encourages firms to make more investment, which usually leads to more productivity down the road. Constance, I've got to wrap things up by asking you the tedious, boring question that will be asked of you through the week December fift

trick deadline. What on earth are you telling your clients? I just have never thought that they're going to make a breakthrough, and it's very possible they have this so called Phase one deal which papers over a lot of the issues, but I think the chances are pretty slim. Constance, ANSA always got a cash over your KPMG chief economists there joining us on the latest in the US economy. 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