Surveillance: U.S. Energy Secretary Granholm

fantastic guest joining us from Washington. Now. I'm pleased to say the former governor of Michigan, the current Secretary of Energy here in the United States, Jennifer Granham, joins us right now. Secretary, thank you very much for joining us this morning. I'm about to commit an interview sin so

forgive me. I'm gonna start really really narrow on the oil reserves in the spr they're gonna be released as part of the pay for I didn't see in the White House release, And forgive me if you've done it subsequently, how much you're looking to raise from that? What is the number? Yeah, there's there wasn't a number in there, probably strategically because some of this still has to be negotiated. But no, that it's not selling off all of the

strategic petroleum reserves. It is really it will be a limited sale to be able to meet the goal, which is too I mean, the president's goal was he did not want any of these paid force as you know, to raise taxes on those earning over under four hundred thousand. He didn't want to see UH tax on electric vehicles or gas tax. So this is one of several elements that were used as a paid for and again it's

a limited sale. Sexty Groundhub. It was interesting that the Republicans put out a document circulated by Republican law micer Is that had the number six billion dollars in there the amount of money that they would raise from the set of emergency all reserves. As you say, of course, not the entirety a pultion off them. Is that number wrong. I'm not saying it's wrong. I'm just saying that that is.

You know, this is a framework that was announced. Everything is set in stone, and it may you know, it may move a bit, but the bottom line is it is a limited sale. Secretary grind Home, how far does

this deal get toward moving to an electric future? I'm talking about vehicles in particular, given the fact that there isn't necessarily provisions for taxes on gas, higher taxes on gas, and the provision for electric vehicle charging stations is just seven and a half billion dollars versus the call for a hundred and seventy four billion dollars of Biden originally

had for electric vehicle initiatives. Yeah, I mean part of that one and seventy four was a big part of it was the point of sale tax uh, you know, incentives, point of sale incentives for the purchase of electric vehicles so that they are at the same level of as

internal combustion vehicles. And that's something that the President will still fight for in the second part of the two step dance that is being done, Um, the first part being the bipartisan part and the second part being reckon insciliation, which I'm sure your viewers know is the is the budget reconciliation process, and that in that part he's going to fight for a lot of the climate related measures that he put forth in the American Jobs Plan, as

well as the measures in the American Families Plan, which involves you know, preschool, it involves two years of free community college, it involves the care economy. So this first step important, uh, and important I'll say this in terms of electrifying the futures, that we have a strong transmission grid. And you you saw that there was seventy four billion dollars UH in the power sector. Good chunk of that for expanding the capacity. The resiliency of the transmission grid

hugely important for electrifying. Secretary, are you disappointed by the fact that there wasn't more momentum behind some of these initiatives that would push the United States further toward some of the clean energy goals. I'm I'm not surprised that this first package, this first framework doesn't include a lot of that, because there have there's you know, it's been um difficult to get a lot of tax incentives behind clean energy from the Republicans, but there's a lot of

Republicans who are benefiting from it as well. And so in the second package, as the President mentioned yesterday, he's going to continue to fight for those climate measures, including a clean energy standards. So the bottom line is this is just one step, but we gotta take the second step as well to get the President's full agenda through some of the items as well that we're looking at. And I hearkened back on some of my Muni days, uh,

Miss Secretary about fixing bridges. I mean, of course we talked about the electrification of buses, but it's more than that. It's updating the airports, it's fixing waterways, it's it's beyond just the size and scope of an electrification. Are those two though, enough of a green energy for you? Well, it's certainly. I mean, this is and historic investment in water.

So what they're gonna do is make sure that every home in America has pipes that are safe to drink from, so that there's not lead in the pipes and so children are not poison every home, that every home in America has access to high speed internet. It's in a historic investment in rail, it's an historic investment in transit, as you suggest, and of course it's an historic investment

in the transmission grid. So all of those pieces are very important for America's future, and frankly, all of them are pieces that the public, whether they're Democrats are Republicans, overwhelmingly support because who you know, who cares whether you're a Democrat or Republican. You want to have water that's safe to drink. Can we also just talk quickly about the grid. What you can do from a national level. We're coming off of Texas that we just saw. I'm

from California. The power goes out in the summer every afternoon. You have to unplug your appliances. You try to go to dinner and they say, we're out of power. Too bad. What can we do on a national level to make sure that we are shifting to being more climate friendly

but also maintaining reliability really important question. So what we need to do is to add capacity to the transmission to grid grid to bring the clean energy that's being generated in the states that have a lot of wind and solar to the places that have load centers which are using a lot of electricity. We have to make sure that we do what the Department of Energy is doing, which is investing in the research that allows for expanded significant storage movement on energy storage so that we can

use these clean energy assets. Seven. But the President also wants to see an investment, for example, in keeping the nuclear plants that we have online open, or investment in next generation nuclear which is baseload clean power, investment in geo thermal which is baseload clean power, investment, investments in hydro power, which is baseload clean power. All of at

has to happen. Not all of that was included in this first piece, but um, we're going to fight to make sure that all of that is included in the second bit of legislation that we hope will arrive at the President's desk this summer. We're speaking with Jennifer Grandholme, U S Secretary of Energy and Secretary Grandholme, there's a question about the shale producers here. Even as we try

to talk about a transition to clean energy. Shell producers have been behind a huge surge and economic activity for the United States, a huge concept of US oil independence. And now we've seen shale production fall up substantially during the pandemic and not really come back as much, no longer thought of as the swing producers. How important is it in your view to get that production back up and running at the capacity that it has versus the discipline that we're hearing out of the CEO is from

a lot of these companies. Well, I think this is a really important question because the world, as you know, is moving to clean electricity, clean power, and and um natural gas an important baseload fuel has some problems with clean I mean, it is cleaner than coals, certainly, but it has methane emissions, which is a very potent greenhouse gas.

It's got it's got CEO two emissions. What's so, what's interesting is in the framework that was announced yesterday there are demonstration significant amount of money for demonstration projects in what is known as carbon capture and sequestration which could be used to to decarbonize the fossil fuel sector. And that to me is another very important technological step and

step that helps our climate goals UH. And and it's technology that can be used here but also helped around the world to decarbonize and everybody get to the goal that all these countries have signed onto, which is at the Paris Agreement, that we get to that zero carbon emissions by I think that will help. Those kind of technologies will help for this UH, for the oil gas sector, the gas sector in particular, to be able to ramp up production but in a way that is clean. Government

just quickly just around on this interview. What's the future. What's the role of the SPR in this administration? It's a it's an emergency stockpile essentially in the in case of in case we have obviously it was something that was that was generated in particularly important during like the the oil embargo and you know the OPEC crisis. We have this, We have this as an important, important measure in case there is UM shortages, in case we need to have it, and so we're going to keep it.

And in fact it's in it's underneath the Department of Energy and we're putting it uh into a section of the Department of Energy that responds to emergencies. So what is it being used to rice money if there's an emergency every year? I'm telling this is not new. This is not a new understand that you can do get a release, but to raise money to pay for an intrastructure plan. That feels honestly, every year Congress uses it for some to pay for something or another that may

not be related to the reserve itself. So the reserve will be will be solid. We've got lots in the reserve, it will continue to be UM. It will continue to be there for the purposes for which it was intended. But it also has this mechanism that it's being Some of it gets sold off every year for other reasons that Congress wants to fund and this is one of those occasions. Apparently, Secretary Fantastic to catch up. Secretary of Energy, Jennifer granhow, thank you. Let's continue this thing. We can

do that with Republican Congressman French Hill of Arkansas. Congressman fantastic to get you on the program with us. Can we just start with the infrastructure plan just briefly. If you make looking at these numbers, you would think that'd be a big reaction here in the bond market, and

we don't have one. So I want to understand from your perspective what you've heard in the last twenty four hours, what you think can actually be passed down on Capitol Hill in d C. I think the moderate Democrats and the Republicans in the Senate have been sort of thrown under the transit bus by their proposed compromise because immediately upon reaching a constructive bipartisan agreement with the President, Nancy Pelosi and Chuck Schumer said, well, we won't support this

at all until we raise taxes on working people in business and pass our Green New Deal and other American family priorities through budget reconciliation. So, once again, I think President Joe Biden is a prisoner of the left wing of the Democratic Party here in Washington. So just quickly, Congressman, just to jump back in what was agreed yesterday, dead

on arrival already. Well, the House Republicans proposed a four d billion dollar service transportation bill with a pilot program to have a vehicle's taxed on miles as opposed to the gas tax, which I think is a constructive approach. House Democrats are going to move a bill next week that's basically the Green New Deal priorities of about five and seventy billion, So it's not dead on arrival, but I wouldn't say that it's being acclaimed on both sides

of the aisle and that it's not done remotely yet. Congressman, what would you be okay with when it comes to reconciliation in tandem with his bipartisan deal, Well, we need targeted spending and we need to get back to spending priorities instead of proposing to spend six trillion dollars and increase the size of the federal government way up over our gross domestic economy. We need to not raise taxes on workers and on businesses as we try to come out of the pandemic and get people back to work.

So at least it's really a subject of not only the amount of money, but the target and the priorities, and that remains to be seen with the Democrats will propose in the Senate and propose in the House. So, Congressman, if there are no tax hikes attached to this or to minimus ones, ones that are more palatable to you, you would be willing to support a multi trillion dollar package, or at least not push back and vote on the bipartisan bill and allow the reconciliation to go forward. I

don't think that's the way it's gonna go. Lest I think you're gonna try to have an infrastructure vote, but Nancy Pelosi and Chuck Schumer are not going to bring that infrastructure compromise approach to a vote until they get a vote on their reconciliation packed, which is a multi trillion dollar package with tax increases. That's what the Democrats in the House and the Democrats in the Senate are

demanding of Chuck Schumer and of Nancy Pelosi. So I think it's premature to say, well, what does the final package look like? Does this sort of two route approach is that the way to be going well normally, No I thought, what job my Joe Mansion thought he was doing with Susan Collins and others was coming up with a way to get a bipartisan infrastructure package which with as much paying pay for from previously appropriated funding as possible, and get that passed in a clean way on a

bipartisan basis in both Houses of Congress. And clearly yesterday uh Nan to Pelosi and Chuck Schumer through a wrench in that plan. Senator or Congressman, I should say, you're also ranking member as we see here on the National Security,

International Development, and Monetary Policy Subcommittee. When we think about the grid as being a national security issue, are we doing enough to really meet both requirements making the grid reliable, transitioning perhaps two more of a green energy friendly but it has to be protected as well from a national security perspective. Is there enough in this bill to do all of those well, that's been an ongoing priority on

a Bick Parson basis in Congress. And we have two of the power control powering sharing a company's headquartered in Little Rock, Arkansas and mad District Southwest Power Pool and MISO, and in both instances they have a Reliability Transfer Authority for power across this country that includes a strong cyber protection and grid resiliency initiative, and I've met with those

companies and many utilities on it. So the private sector works on this every single day, and where the government can make strategic investments, I think you'd find bipartisan support. As to the amount, that's not something I can comment on today because I haven't studied their proposal, and we will make sure to ask you as well. Another question, because we're coming off of a bank conversation that we

just had. Of course, the bank's coming out and passing, of course all of those stress tests, can you confirm that you don't see systemic risk, that the banks passing those stress tests are indeed a positive thing, returning that capital to shareholders. I think the bank's financial strength through the pandemic has been one of the bright spots that gives us the strength for the economy to know that we can get people back to work and have GDP

grow between six and eight percent this year. So I think that Flying Colors pass of the stress tests indicates our economy is open and ready for business, and I look forward to the results of that by moral more Americans getting back to a full time job. Congressman, just before I let you go, I just want to finish on that the usefulness of stress test if we never allow the banks to face stress again, and the Federal Reserve is cleaning seemingly pretty intent on never allowing that

to happen. Last year fantastic example of that. The banks didn't get into the stress and maybe that's a good thing. I don't know, but I want you to tell me what's the value of a stress test if this Federal Reserve is how bent on these banks never facing stress again. Well, I don't agree with zero interest rates that the Fed has proposed, and I don't think they should continue at

the rate of a twenty billion dollars a month. Those benefit uh the economy and the short run during the pandemic, but it's time, with an eight percent projected growth rate to move away from that. But they have a primary obligation to regulate our banks and make sure they have

the capital to operate a safe and sound environment. And that's what's been done, and it's been a big change from the O eight oh nine crisis, and that's why you saw so many street firms convert to a commercial bank charter so it could build the capital and the resiliency necessary if there was an economic downturn. Congressman, always smile, always shop, and it's going to catch up, sir, come back soon, Republican Congressman French Hill of Arkansas, Thank you, sir.

Perfect guests, the man himself might mayor wilst Fargo Securities US Large Camp Bank Research Managing director Joy just now to discuss Michael. Let's start here. After the closed Monday, we could get some big capital return plans. What are the numbers that you're looking for, sir? Well, wow, this was the FED stress test, and it used to be the Super Bowl banking and now it's like a preseason game. It was. It was boring, but you know what, boring

is beautiful for banks. The FED through the kitchen sink at the banks with the stress test. The banks passed with blind colors. As you mentioned, Monday at four thirty pm, we expect a flurry of press releases that announces increases and divid it ends and buy backs, and we ultimately expect capital return to double versus the prior year and that should lead to a and all in yields. That the dividend yield plus buy backs, that's better than what

it is for even junk bots. So there's a lot of value with banks and we think that will draw in new investors, quants, dived in funds, given in growth funds to Ultimately, what this means is redemption for the banks. Remember during the pandemic, banks were going to fail, they were going to cut the dividends. Now you have dividend increases and a bevy of banks with buy back increases

after Monday. So this is very good news for banks and I would say thank you regulators after the global pral work and now banks and their investors should be able to reap the benefits. So, Mike, why are we not saying more of a reaction in markets. You know, people have been skeptical about banks the past year. As you know, we upgraded a few of the large banks in the middle of the crisis. They didn't trust the resiliency of the banks, right they It was kind of

the memories from the global financial crisis. It was still front and center and it's like, okay, if something goes wrong, banks are going to get hurt, and that was the farthest from the truth. If anything, you know, the more of the risk that's been outside of the banking industry. So just like there's been skepticism too much over the past year, there's still skepticism. But connect the dots. I mean, banks past the FED stress test Monday at four thirty pm,

you get the announcements, then you get the increases. Hold on a second, I'm sorry. I don't think I hear from a lot of people that they're worried about some sort of systemic risk from the banks. I hear the fact that the field curve is flattening if this has been priced in. I mean, are you saying that it's not that the people are still worried about systemic risk. No, I think that's past. That's what happened in the last

six to twelve months. But now people are like, oh, we don't really we know the dividends are coming, but we don't really care that much. But I think they should care because if you look at the the dividend yield adjusted for buybacks should be about eight percent compared to the tenure yield of under two percent. That gap is one of the widest in history. Where can you get an eight percent yield globally? And in fact that's

three bases points above the junk bond yield. So I think people are just cynical and skeptical about the sustainability of banks cap returns, the sustainability of earnings. At least you raise a great point. The flatter yield curve is on people's minds. But look what just happened last week. The Fed said now it's likely to have two increases in the Fed funds rate in three and banks benefit twice as much from increases in short term rates as

they do from increases in long term rates. Mike, you're famous for your calls coming on the program and saying banks aren't financials, Banks are just tech companies. Despite all of the buy backs and dividends, are they investing enough to keep up with big tech? Well, the largest banks certainly are. I mean, some of the best fintech players on the planet are Bank of America and JP Morgan. You have tens of millions of customers, and this is

going from digital interactions to digital relationships. They're not just touching customers through one point, but through multiple points, and they continue to invest and they continue to gain customers. And both Bank America, which is our number one pick, and JP Morgan grew deposits over the past year equal to the sixth largest bank, and that was organic growth and a lot of that is aided through digital banking. And Mike gotta run apologize for my colleague Lisa Brownwitz

joking Lisa las Fagger Securities US Large Camp Bank Research, Moneatil. Right, let's hit this stanks and right now we're torsting. Slock Cobler, Global Management, Chief Economy is tosting, just pouring through the days of this morning the recent economy dactors. Well, what's your take, sir? So there are two very important components here. Of course, the first thing to watch this inflation core PC inflation was exactly as the consensus expected three point four.

So that means, of course that we do see inflation higher and that is just confirming what we saw. Remember, we've got the CPI numbers already, so that means that we already knowing that this month was indeed a very elevated level of inflation. The second thing is what Lesa just mentioned, this shift away from goods to services to what extent that we're seeing people go back on airplanes,

they at hotels, go to restaurants. The service part of the economy needs to come back, and that is exactly what we're seeing in the data and what we've been seeing a lot of the high frequency indicators. More people are flying on airplanes, more people are going to restaurants, more people are staying at hotels. So the trend is shifting from goods being a key driver to now moving towards services being a key driver. So those are the two main components of the board here. Let's talk about

how we capture some of those trends. Just run a clinic for us, a short one if you can, for people who tune in every now and again to a show like this and here terms like c p I, p P A p p I rather p C, A core deflator, deflator, what are all these things to usten? So what the key is you're really here is to monitor what the FED is watching. And the FAITH has very clearly said that they monitor core inflation and specifically

the core PC inflation indicator, which just came out. And why do they monitor core inflation and what does core inflation mean? Well, normally we measure inflation including everything, also including very volatile components such as food and energy. But the FED has the logic which makes a lot of sense to say, well, we don't want to monitor and good monitor positive according to very volatile indicators. So let's just then look at those parts of inflation that are

reatively stable. That's also something about where the economy is going. And core inflation, meaning excluding the most volatile components mean food and energy, does represent a very good picture of where is the economy at the moment. And that indicator at the moment is significantly above the FENS inflation target of two. And that's why this debate about now that we are so much higher than defeats inflation target of two. Is that something that temporary? Is that something that's permanent?

And that is the discussion that we're having in markets, mainly, what are the reasons that one could believe why this could be a more permanent problem And towarden, a lot of people have dismissed some of these traditional metrics of inflation just simply because the composition has changed so much during the pandemic. Services such a big component of some of these inflation metrics completely fell out of bed simply because people were not allowed to go out and do stuff.

Now we're seeing it come back online. How significant is it for you that in this most recent data we saw a disappointment in terms of services spending that that isn't coming back perhaps as quickly as some people have previously expected. Yeah, this is very important I think about it. CPI or inflation is measured as the basket of consumption that we all have every month. So if my consumption changes during the pandemic, I don't fly a dolost that hopes us, I don't go to restaurants, of course, I

will spend less money on those components. And those components are mainly services. So that's why during the pandemic people spend a lot more money on goods and much less

on services. That's changing now, So that's why I'm from a basket perspective, And exactly as you're pointing out, it becomes relevant to monitor whether are we seeing prices go up of airline tickets, of hotels, of restaurants, which is exactly what we've seen in the inflation data, and that's what has been lifting the level of inflation to this much higher level. Relative to where the FATS target is.

So that's why over the next sevel months we need to monitor very carefully whether the services component, in other words, the reopening parts of the economy continue to see high inflation, which is what J. Paul earlier this week also was pointing to. So he's saying this is all temporary, but there are some reasons to worry that this might be more permanent. Commodity prices if I type CRP go on my Bloomberg screen, as the commodity price is still very elevated.

I also look at the label market being still very tight, and of course also the supply chain problems. If you look at the regional FAT surveys also show a lot of consistent problems with supply chain. So there are some reasons to believe that this is not just going to be a few months and then inflation comes down. So that's why the discussion in particular rates is all about this issue a long time. Is this inflation problem going

to persist? We're speaking with towards and Slack Apollo Global Management, chief economist. You came to this by side firm from the south side firm of Deutsche Bank, where you rule over the economics team for a long time, and now you actually have to put this into implementation and help them direct their strategy. And I'm wondering, given the details that we're getting out here, is your view that the market is right, that it is risk on low rates

in perpetuity because the signs of longer term inflation. I hear what you're saying on commodity standpoint, but when it comes to the deployment of some of the cash that people have in savings account, there hasn't been a sign of some some sort of massive rush that can outweigh some of the higher prices that might keep people from spending too much for too long. Yeah. From an investor perspective, I mean, it's very clear at the moment. The level of long rates is very low, the level of short

rates is very low. The credit spreads across the board i g. High yield loans are very very tight. Stocks are basically at all time highs. So with that backgroup, it does become very important to think about if there is an inflation risk, if there's a higher likelihood that this cloud that we're seeing on the horizon, if it does start raining over the next several months, then investors

should be more prepared for that event. In other words, I would think about the investment outlook at the moment as is there a chance that the FEN might begin to turn even more hawk is that just turned slightly more hawkis last week. But if they begin to send small HAWKUS signals that we do see more upside risk to inflation, if we do see more upside risk in markets to the feed adjusting their message, then that would have some negative applications for credit spreads for equities, and

they might also have negative inplications for the dollar. So the short answer to your question leaves that turning this into investment advice and thinking about what implications are. There are good reasons to be very cautious here in terms of the artook, at least as long as this cloud is hanging out there and the fear of inflation still is so pronounced. In a few months time, we will know if it did start to rain, if we did

see inflation. But for now, there's still good reasons to be worried about the inflation potentiity being a bigger problem than they would to fit is appreciating at the moment, Can you square from more then towards in given that there's a labor problem, not a skills problem, why we have record nine point three million job openings and no one wants to fill them. Yeah, this is of course a very important discussion in terms of the labor market.

There are more job openings than there are unemployed people. I mean, think about that. That tells you that, by definition, we have a skills mismatch. The job openings uh requiring skills that the labor market, the individuals who are unemployed in the labor market don't necessarily have. And that can not only be a skills match in terms of education and background, it could also be a mismatch in terms of geographical skills that people live in the different zip

code ready to where the jobs are. And a very important aspect of this is also that it could also be that the job openings have been in manufacturing, which is the good sector, whereas a lot of the layol during the pandemic was in the service sector again airlines, hotels, restaurants. So we're seeing nice hiring and also nice job openings in the service sector again in the airline, hotels and restaurant at Leasian hospitality. More generally, but we're also seeing

very significant job openings and manufacturing. So is this mismatch in the labor market to a question, tell you that it's very important that we need to see a lot of the job openings be filled, and that's why you're seeing wages go up. I mean, think about in the full service restaurants have seen wages in the last three full months go up by a full dollar for fifteen and a half dollars an hour to six and a

half dollars an hour. That's not coming down again. The best estimate here is probably that we will see wages stay at a more elevated level, and if you will, from a market respective, see wages probably continue to go up. So that's why the label market, that's not just the temporary issue. It has a very persistent risk to this inflation album. Yeah, are we paying attention to the fact that once you raise wages, it's hard to cut them, so they're not necessarily transitory. It is a ratchet effect.

Once you have jack wages up, then it is very difficult. Almost never see in any country around the world way just begin to go down. Even during recessions. It is very rare to see wayes begin to move lower. So that's why also when you think about the year year in fact, it sticks if you will, now that the twelve month window moves forward and the level of wages is now at this higher level, and it's not going to go down. If anything, it might even go further up.

So that's why the wage inflation issue is a very important issue when we think about what might be having And that doesn't mean necessarily that that was belower to selling prices. It could also be the companies basically begin to see squeezed margins. But if that's the case, that's also another risk for credit and equities because lower march,

you think about the PE ratio. If the E and the PE ratio starts to go down, that begins to also bring some risk to the P And that's why valuations in equities and credit as long as you're have an inflation problem on inflation risk does look fairly vulnerable. They toast them. It's gonna hear from you as always always shop Thank you, sir, toasting Slark Apollo Global Management Chief Economists. This is the Bloomberg Surveillance Podcast. Thanks for listening.

Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg