Welcome to the Bloomberg surveillance podcast. I'm tom keen along with Jonathan Ferrell and lisa Abramowitz daily, we bring you insight from the best and economics, finance, investment and international relations find Bloomberg surveillance on apple podcast, SoundCloud Bloomberg dot com. And of course on the Bloomberg terminal, we come to you today with a lot of humility, john Farrell lease Abramowitz and I know that oil is
the toughest commodity to call. There's all sorts of academic research that shows that yesterday we had an Edward morse of Citi group with a huge political economic standpoint on hydrocarbons and today as acute Francisco blanch joins us, head of global commodities and derivatives research at Bank of America Francisco, you were the, The first one out that I knew model $100 a barrel.
You made global headlines with it, you were right up we went and then down we can came on, I'm going to say a dearth of demand Christopher Owen was just on the technical analyst and says the spot market for oil is behaving differently than the futures market for oil explain in Greek what that means. Well, uh, you want me to use uh Vegas and uh, and uh, deltas in, in, in the process to maybe
not let me just say it in plain english. Uh, we have um, essentially very low speculative interest, essentially all the, all the macro players have been selling oil on the back of uh, on the back of recession fears some of the comments that you were just making before we went on the oil segment. Also, we've seen a dearth of liquidity liquidity is falling
very quickly in the forward markets. And, and then I think, I think beyond that, the physical market has been actually relatively uh, more supported, although that's changing a bit too because it turns out that the Russian supply disruption we were expecting on the back of the EU sanctions hasn't really come through as expected. And, and, and maybe we won't be losing as much raw after all long ago and far away, lisa Abramowitz put two kids through school speculating on oil when it went
down under zero. There was that huge shock of 18 months ago, two years ago we kid her that she had two barrels of oil in her living room on delivery. Are we going to get the same spring here, did we have a possibility of seeing 70 west texas intermediate become 95 or 100 west texas intermediate and a cup of coffee? I'm afraid so. I think we have a very springy, I think you use the Great War, their spring oil market. Um, because inventories remain quite low, uh, spare capacity is tight.
And if if you look at at the three key drivers of oil prices heading into 2023 there are clearly, uh, in my view, whatever happens to opec plus Russia, uh, whatever happens to china reopening and the third one being the Fed pivot. Um, And, and the way I think about each one of those is, uh, if you look at our 2023 numbers all the demand growth that we forecast for next year is coming from emerging markets with China being 50% of that and India being about 20%. So we need emerging
markets to come back strong and it's still early. It's still unclear how China is gonna make a comeback. Um And and it may be a different comeback than the one that we saw in the U. S. And in europe particularly if if the reopening is one of fits and starts. Um partly because I think the chinese population has not really been much exposed to Covid. We talked about the post covid world in in in europe and the U. S. But really
china hasn't had Covid broadly disseminated yet. To the extent that we've seen it in in most other countries in the world. And that's number one. Number two is really Russia. Opec how does that play out, how much oil do we lose from Russia? And how much oil does Opec plus actually take out of the market. And then the third one really being the opec the Fed tightening policy and which at the moment we have O. E. C. D.
Economies essentially growing zero next year. But of course if the Fed uh if us Fed fund rates go to 6% 7% that could become negative pretty quickly here. And that's another big uncertainty and probably oil prices have been falling in recent days. So how much
do you think that they could rise? I know that you have a target of perhaps $100 for W. T. I. And $94 for Brent. How do we get there given all of what you talk about given that we already are seeing some fits and starts with respect to a china reopening and it hasn't really caused the price to go up that much.
Um Well so so um again I think I think the micro pictures is pretty gloomy here. Um And and that's part of the recent prices have come down but but I think it's a bit of a different environment to to prior Pullbacks in oil prices first. We think there's there's a put uh that will be triggered. I mean Opec just had their meeting on sunday decided to roll over the cuts. Um But remember the cuts, announced cuts were two million barrels a day. Nobody expected Opec to implement
the two million barrels a cut. They could actually go and do that. They will actually implement a deeper cut. Um And also we're going to see W. T. I. Uh price is entering the range at which the U. S. Government will start filling or refilling rather in the strategic Petroleum Reserve. Remember the number that was put out by the White House was $72 a barrel on W. T. I. So we're getting close to the point where we might
see those triggers providing support to prices here. So it's a bit of a different to the environment, to the to the 2020 world where where prices just created. Can
you elaborate on that? Because this has been one of the big question marks if the U. S. Has said $72 a barrel was the time they start buying and one of the big drivers of the decline in oil prices has been the release of the Strategic Petroleum Reserve. How much is that going to cause prices to rise? Are we almost there yet? Where this administration ought to start buying based on what they've said and that will actually drive prices much higher perhaps in the short
term? Well um again I'm just going by what the White House communique was a couple months ago. They are um they're saying they're gonna be buying oil as as soon as we get below the 72 hour threshold and the balance could change pretty dramatically here. We could see an extra half a million barrels a day of demand from uh from the U. S. Strategic Petroleum Reserve. Remember that you need to probably put in 100 and 5200 million back back in store. That's again that that takes a whole
year of buying half a million barrels a day. Right? I mean a simple math there. Right. So um so you could see a pretty meaningful swinging imbalances in that regard. You can also see heading into 2023 china, reopening picking
up momentum. Um even even if the 1st 234 months could be a little patchy And and then of course I think the sanctions on on Russian petroleum products which kick in on February five are certainly a much bigger deal than the sanctions on Russian crude, which have turned out to be a lot to do about nothing really.
What do you make, you mentioned the Jinping meeting in Saudi Arabia? Well, how does that affect the dynamic of the oil picture? Just given the sense that there seems to be an ongoing and public display of increased closeness
there? Well, I I think that's only a natural development of uh the bilateral trade relationship between Saudi Arabia and china, which has changed dramatically since the advent of us shale. Remember the U. S. Is now a net exporter of energy. We've argued the U. S. Is going to be energy independent for the last 10 years. But now we're arguing the U. S. Is going to be energy dominant. So in some ways the U. S. Is a competitor to
Saudi Arabia and the energy space. Um, and I think I think in that rig The trade with between Rigid and Beijing has really picked up pretty dramatically. So so that that I think it's just a natural change of commercial relationships Maria from Brussels emails in and Francisco make the kick from 12 yards out. He's in Madrid. He probably had a tough day yesterday. That was just brutal yesterday. Some of the worst penalty Francisco's in Madrid and I'm sure the city must be
blooming Francisco. Do you want to weigh in on that? Yeah, it's not, it wasn't happy, I wasn't happy day yesterday, I have to say. Um, you know, the team just kept passing the ball without really the spanish team without really scoring. So it was all disappointing. Um, and yeah, it moves a little gloomy here. You can see the background. The sun hasn't come out yet a couple more days. Does Moynahan know you're in Madrid. I mean he's talking about expense control, Francisco. How did
this happen? You causing trouble? I'm causing trouble. This is great. It's like pharaoh and Qatar just run Francis, you
don't have to try.
I think, look, I mean we have an office. Here we have. There we go. We have an office. It was an empty office when I got here. The one I got So I don't think it's, I'm actually beefing up expenses here. Right, right there was going, thank you Francisco. Wonderful, thank you very much Francisco blanch their bank for America. It is a jumbo, some would say almost in kuwait here what we're talking about here. All the backs and forth. Someone that needs to distill, this is with Northwestern mutual
wealth management Brent shooter joins us now. The chief investment officer Brent, did you take your outlook for 2023 from 55 pages down to 12 I mean are you, are you going short and sweet here or your right in war in peace here on what we're gonna see next year? Right? I think we're more in the short and sweet type and trying to be understandable and makes sense And and to me, I think you know, we're switching from
right now inflation fears to recession fears. I hear the word recession quite a bit and this is what we thought would happen. So if you think about it, inflation fears drove us lower till october 12th, That was the day before core CPI I topped and so I think what you're seeing now is the commentary that the Fed has done too much. You're seeing
it in the bond market. The bond market is telling you that inflation is a thing of the past and that the Fed has done too much and that's what I think likely drives trading for the next few months where you see the recession fears come out once we see that inflation does not survive a recession and that the Fed will pause when they actually see jobs being lost, that you can move higher in in a more sustained pace. We agree that inflation coming down is what's called a
highly stochastic. It's pointy folks, it goes up up doom and gloom and then it comes down rapidly as it did twice after 1947 and other times as well. How does the allocation or outlook of your investment recommendations change if inflation only comes down to 4% and not to the proverbial 2%. Yeah. I mean I think that's what most people are saying right now, largely because the new york fed U. I. G. Underlying inflation gauge shows 4% inflation as being kind of
a more persistent part of it. And so you know, I I just don't think that we stay at 4%. I think it does pull back. I don't think we're going below two. I don't think we're going back to the last decade that we had, where we persistently worried about deflation. Um That to me was not, you know, inflation wasn't a relic of the past, that was how we were positioned then, but we are certainly positioned more
for it coming down in the next few quarters. For example, we we actually upped our allocate or increase our duration towards fixed income in the middle of october because the barclays aggregate was yielding 5% versus 1 75 at the start of the year bonds now provide real value. They provide a hedge against downturns and equities caused by recession and that's where we've kind of focused on the bond side, on the equity side? We're still in things that are cheaper. That has been what
has worked this year. That has been what I think will continue to work next year. And so we own the S. And P. 600 it trades at 13 times next year's earnings that have already been marked down by 14 15% mark them down 10 more percent or 10 more. We still are at 15 times and so on. Things like that. And I dare say international developed is becoming more attractive because I think the dollar will fall next year. So do I hear 60 40 going into 2023 60 40 was never dead. It's not that it
needed commodities that we had those. Uh and now I think it's actually going to be a much better place going forward. I mean equities have done the heavy lifting lifting for the last 10 years. Now bonds offer some value. And so certainly they will be a way that holds up to 60 40 as we push forward into 2023. So that's a big change, isn't it, coming into 22 Remember that 60 40 is dead, It's over and 60 40 let's be clear this year, brutal.
It was devastated, brutal. And how much do people buy that 6040 is back, especially after the brutality that we just saw.
Well that's the question, how perceptive or other people about the thing that you see, how receptive are they towards what you're saying? I I always like to hope to be a little bit contrarian in nature because I found that usually the right place to be. And so you know, I do think people are worried just because the 60 40 hasn't worked and that narrative has been that it's dead. I think most people think of the 60 40 unfortunately just large
cap growth and investment grade bonds. I think you need to have things like commodities and there's something that we've owned because we didn't think inflation was dead, um something like small cap, something like international stocks, which is no one wants to own those just because they haven't done well. But if I look back at economic cycles post 1980 every single economic cycle had different leadership. The S and P and F. Alternated. I'm not suggesting
that it has to be. But I think as you push forward, you're in a different type of environment where inflation will be above 2% where there will be different worries where there'll be shortages on different sides of the economy. And I think that's going to drive us forward. And I think 60 42 look historically going back to 1926 we've only had four years where the bond market was negative when the stock market was
negative, we're
all addicted by high inflation, which I don't think we're gonna have next year,
Right? You mentioned commodities and let's end there because we've been talking about the divergence between energy stocks and other commodity equities that are doing very well and then you're looking at a crude price. That's the lowest, going back to December of 2021. What gives there, can you have conviction to continue buying energy equities in the face of prices that are dropping in the crude space,
There will still be companies that make money within the crewed space. I think you just need to focus on picking the right ones. Certainly the easier money has been made in energy. Um that's been the sector that has done well over the past few years because no one wanted to own it now. You have more people wanting to own it.
And so I don't think that it's all negative, but I certainly think the easy money has been made as you look forward and certainly the price of oil is still something that is going to be highly variable based upon what is happening the economy. I think right now it reflects the reality that we are moving more towards
a recession. Um Certainly I think the good news is we've had rolling recessions over the past year, just like we had a rolling recovery and I think that helps take the starch out of any recession as we push forward, as does the state of the U. S. Consumer, which is still in good shape money after the fact, isn't it? Tom they never tell me ahead of time. It's going to be easy money
looking ahead a year ahead. I think the best you can do, john it's a really important insight and the best you can do is try to gauge consensus and it's not going against consensus when consensus is sort of kind of like it's when there's a massive consensus bet and the question is, are we there now of Northwestern mutual wealth management at the end? It's great to catch up. Lorena or itchy joins us now us economist at T. Rowe Price. We're gonna thank you. Thank you so much
for being with us. My head is spinning over what the actual view of the american economy is not the guesstimate out six months. Where are we right now? What's your working figure for some form of inflation adjusted GDP Q four?
That's a great question. Everybody's confused because we're getting such mixed messages from the data. Is the labor market accelerating even though the Fed has been hiking at such a fast pace. What's going on with growth and consumer spending? I would say in Q. Four of this year, the U. S. Economy is shaping up to expand at a healthy pace probably 2 to 3% after being a
adjusted from inflation. And once again, what's pulling through the U. S. Economy is the consumer consumer spending data, both on services and goods for the beginning of Q four were pretty solid for services as well as good. So yeah, we're in a good spot right now but I think more deceleration is to come next year. Unfortunately
the outlooks of the sell side are this year. I've truly never seen the chaos a cacophony is out there. What are you advising portfolio managers at T Rowe price you guys invented on the buy side of fractious debate. This is folks, I'm gonna say 40 if not 50 years ago. Are they listening to you? And if they are, what's the line for them of how to be invested given this chaos?
So how do we navigate these crosscurrents that we're facing in 2023? I would say that the main thing is we expect interest rates to continue increasing. That means there's gonna be yield in those fixed and fixed-income portfolios that we manage. However, as we look at the question of whether do we add risk or do we not at risk next year? The outlook for employment growth and consumption growth slowing into 2023 means that we're tentatively more conservative when we're positioning
ourselves with respect to risk. We were talking with Jim Bianco of Bianco research a bit ago and he was saying there still is this feeling of transitory baked into people's expectations. It's just been pushed out that basically there will be an immaculate disinflationary force that will come into play at the end of next year and allow the downturn to not be as severe as some people feared. Do you adhere to that kind of idea. Well, I think lots of questions for the second half
of next year. First of all I do think the Fed will get some help from the transitory question when it comes to inflation and we're gonna start seeing that concretely in core goods inflation in the first half of next year. So I think that will be a factor
helping the outlook for next year. However, when it comes to the question of a recession, I do notice as well that lots of commentators are saying just because we don't the imbalances right now that this is if we do have a recession is going to be a shallow one, I don't think I necessarily agree with that. I think once recessionary processes take place and and start to get into motion things breaking the economy that we don't necessarily
anticipate this is what happens in every recession. The other factor that I think ways against the U. S. Economy next year is that monetary policy has been tightening at a very very fast pace compared to the last 2030 years. And the other one is that is facing a very adverse global environment of growth in china slowing growth in europe slowing contraction expected actually in europe for the first half of this year. So the
external environment is not that favorable. And then domestically we have very tight monetary policy as well given the headwinds, why do you think the Fed is still going to get to 5%. Well I think the headwinds are more based for the
second half of the year. And I think the Fed is so focused on realized inflation and the trend of three month moving annualized average of core inflation that I think it will need to continue hiking and delivering on those hikes that have been already priced in the market,
bolena. Sebastian page emails in. I'm kidding. But for Sebastian page who's expert diversification is wonderful book out on allocation in realities folks. A colleague of Lorena's at T Rowe price, Lorena, one of the great things lisa and I see is O E C D views grim. I. M F views grim is now this is a loaded question is now the time to buy international Andy em equities. That's simple.
So this is the most anticipated recession in history. Is that what you're saying? So has all the bad news been priced in and is it time to dip into those more risky assets? I think we're still on the fence about them because of the question that we just discussed that once we get into a recession, things can break unexpectedly. So I think we're still being a little bit more cautious in our portfolio. Will be able to tell you more. I
think this is a very fair answer. You know, we make jokes about people on the fence but I think there's a huge body of people right now on the fence about go long am go along international burnt once burned twice, three times four times on and on and on. There's a lot of people on the fence
especially we hear about the debt GDP that Damien Sasser record highs, which is going to be a pervasive concern for a longer period of time. Lorena, when you look at what's going to happen next year, how much confidence do you have that the that the inflation is going to come down enough to support this expectation that we see over at HSBC for example that the 10 year is going to get down to 2.5% because of that long term reversion back to what we used to know.
I think there are some tailwinds for inflation next year. So Chair Powell very helpfully split this into three pillars in his speech at brookings last week. I think the first pillar of Kohler goods is coming down significantly next year. We still have the effect of the dollar appreciation, feeding into core goods with a lag. I think we have those rising inventory levels and slowing consumer demand for consumer spending on goods and the improvement in supply chains as well as transportation.
I also look at private sector rental prices. They do feed into the rent components of C. P. I with a lag and I think they're telling me that around the second quarter of next year we look at significant progress there as well. But I think on average, even if inflation remains sticky in the other services components, on average is going to be trending down in a sustained basis.
But we shouldn't extrapolate this into the the Fed is going to cultivate significantly immediately as we hit a rough patch in the U. S. Economy just real quick before we let you go, where have all the missing workers gone? This is something that jay Powell has been talking
about.
We this is a great question and we did a deep dive across our fixed income division here to look into some of the factors that are keeping labor supply so depressed the ones that really stood out to us is the interaction. First of of demographics and Covid, we knew that we had a demographic had went to uh, labor supply. And then Covid made people retire even sooner than they would have otherwise.
We also have a big big hole in our labor supply from the lack of migrant workers, uh immigration Visa processing collapsed in 2020 and 2021. We estimate about 1.5 to 2 million workers are missing from this. And then we have other, more structural long term factors that are keeping depressed prime age workers, especially male workers. So, lots of demographic, lots of structural factors. Keeping labor supply low. Can monetary policy do anything about this?
We don't think so. So they just have to bring down demand for labor.
Very good. Thank you so much Ballerina with this with T Rowe price. Let's go to Washington now and figure out what happens not in Atlanta after George about what happens in the white marble of Capitol Hill. Henrietta trays joins Economic Policy director with veda partners in serious capital Hill cred, how does your world change now? What does the gridlock look like in 2023?
Well, helpfully for the democrats, they are locked and loaded in the Senate. They've got their 51 seats. They can hold committee hearings, they can confirm whoever they need to. Um it's going to smooth passage and honestly lift the fog of the last couple of weeks that has sort of settled over D. C. As everybody on the Democratic side and the republican side wait for the outcome of last night's election. So that decisive win should clear us up on a
lot of really niche issues. Things like whether the Boeing jets will be certified whether the Durbin amendment on Visa and Mastercard will be approved. Whether we can't get a pipeline permitting bill through the government funding package, there's hopefully going to be a lot of movement.
So maybe the power changes for joe Manchin cinema of Arizona. And that on the republican side where McCarthy is not even sure he's going to be speaker. Are there joe Manchin like people or a cadre within the house republicans that can block what McCarthy and the Republican leadership want to do.
Yes, absolutely. I mean there's a four vote margin and I would say that in order to be functional for the big tent, that is the Republican party. Over on the House side, kevin McCarthy or whomever the next speaker is really needed 20 or even 25 30 extra votes in the sort of middle of the road camp. Now you have a very fractured Republican conference in the House. I think it'll be really difficult and fascinating to watch
the january 3rd election for speaker. And then again, as we get into college july or even september at the latest, the debt ceiling fight. It could very well be that whoever the speaker is in the beginning half of the year is not the speaker in the back half of the year based on what they've got coming. We started this conversation talking about the iphone and the TSMC production outfit they're building over
in phoenix. We haven't talked about who's going to staff up some of the production that were on shoring or near shoring. How much are you seeing that continue to percolate in discussions in Washington with some real policy of how to bring more people back to the labor force and train them for some very highly specified roles. It's funny you mentioned that I was just at a lunch with a guy that you guys speak with all the time, tourists and slack and
Apollo and we were talking about exactly that. How are we getting get immigration to tick up so we can get everything from those high tech jobs down to the farm workers in. Um, and there is a couple of separate bills that are pending right now. I do not have any kind of high odds that they'll be approved before the end of this year. I think the split in the House and Senate is just too severe and to get anything on immigration done even helpful stuff.
So to that end, I sort of look to Mexico, there's been a lot of talk from, for instance, the Commerce Secretary about how you can get a really helpful supply chain build out on, you know, testing these products or packaging, these products from Mexico, which
to be near shoring or friend shoring. So I think to look look for a lot of that, a lot of optimism on that front, I don't know that there will be an immigration deal that brings in a whole host of workers that were obviously gonna need for those new production facilities in Arizona and elsewhere. Well, and these are the two issues that I've been looking at the
labor market. Everyone's saying it's so tight in the United States and then we're building out these factories and wondering, okay, well who's going to come in and work for them. And the second point has been gasoline prices that have been coming down dramatically. And this has been one of the key mark hallmarks of president biden's past couple of months in terms of the spr releases and we're seeing now crude prices almost down to that threshold where they
said they would start buying and rebuilding their inventories. When did they pull the trigger? How much are you hearing conversations about that in D. C. Um I think there's a lot of mixed bag on the oil and gas front. Um one of the areas that I've spent a bunch of time recently is the idea of that windfall profits tax out in California that we're monitoring very closely. I do think that there will be efforts to replenish the spr, especially after after we've
depleted it for the last however many months now. Um, so I do think that there is a lot of encouragement for that and that would be done at the administration level. So hopefully you don't need Congress to win In on that. But certainly you see a more proactive house and Senate members writing a lot more letters trying to advise the president trying to advise the Fed on
what they should do from here on out. And it's really gonna be up to the agencies up to the executive branch because Congress is not going to get anything done after call it December 23 to be generous
Henrietta are incumbents more entrenched as we move forward.
I think incumbents are definitely entrenched and what we have here is a unique situation where so many of the House republicans are relative freshmen. They all come in since 2016 when president trump first one. Last time I checked, I think it was like 75% of the House Republican conference is all new since 2016. So technically they're incumbents, but that's a pretty um Kuki said
of incumbency environments or experiences that they've had. So I would expect for incumbents to sort of stick with what they know caucus pretty hard, especially on the Democratic side where kim jeffries is gonna try to, you know, figure out how his caucus works. But the Republican conference is so fractured. Incumbency means sort of a different thing on that. On that level. You're gonna get uh that that freshman That since 2016 class, that acts a lot differently than the old guys
never born in Washington. She says best value in the shortest time. You know, I think maybe value, but it's just I learned so much there. This is the Bloomberg surveillance podcast. Thanks for listening, join us live weekdays from 7 to 10 a.m. East on Bloomberg radio and on Bloomberg television each day from 6 to 9 a.m. 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 keen and this is Bloomberg