Why Morgan Stanley Is Revising Its GDP Outlook

Is she in Japan on her way? What's that? So? I think she just landed in Japan. We just spoke to Alex Moraless on TV. He's traveling with the Prime Minister. Tom. This is actually quite significant. She's gone to Japan in the hope of some kind of commitment for a free trade deal. Of course they can't actually sign anything, but if she comes back a failure, that's not gonna look very great. I mean, this is a massive Brexit theme.

Am I going to suggest? Mr Johnson? Boris Johnson's theme that we are going to become a trading empire again? And I agree it starts with Japan, doesn't it. Yeah? I don't. I don't know about the trading empire. Certainly in his mind and maybe a couple of people that voted for breaks it, that's certainly what they aim for. But if you think about it, Look, it's going to

be quite difficult to pull this thing off. I think negotiations with the EU lost it for almost a decade before they could actually, you know, be in these final stages of this free trade agreement. Okay, here's what we're gonna do. One question with YenS Nordvig on the business at hand, the dollar, and then we want to talk to him about global Wall Street dollar dynamics, the massive miscall of the summer strong dollar euro parity, all of it was reversed. Let's start with why why did everybody

get the strong dollar call wrong? Well, I think that the hope about what the administration could do was just two elevations. It's linked to Trump the election. The just think there's a part of that, and I think there was there's too much concern about the European political risk, right, So it was something that focused everybody minds around the French election, and they were worried about the downside risk. But in fact, now we have upside rice in terms

of politics and Europe. Maybe mccollan Mentel can actually get a deal together in coming months, so that would be a positive thing. Francine has led our coverage on mithid my fed How how do you pronounce the chase mythic method? Method? One another method you've lived in. You've gone from major firms Coleman, Saxon number to where you've got to shingle out. You're hugely successful talking to elites. There can only be so many Yen's nordvigs. What are the mere mortals of

research in intellectual content? What are the mere mortals do in the city and in New York? Well, so I can talk a little bit about what what we are trying to do, right, because you're it that if it's based on a single individual, then you can't scale a business that's just going to stop there, right, So you need to have some kind of infrastructure that gives you an edge. Right. So what we're trying to do is

we're trying to really build unique data. You need models that we can show to people and that gives them an edge. So that's what we're trying to scale the business. But I think you're right. If you are a pretty good analysis that sits in a bank or independent research into choosing pretty good is not going to cut it. You have to be among the very best to get paid specific before your research, and that's the competition that everybody is going to be in. Now. Yes, I can't

really make sense of it. So I understand these are very important rules to make everything more transparent. But then we speak to Danskin Bank and they say they're trying to figure out whether research on this need to charge for routine phone calls. Why do we not know yet? We're what August or twenty nine? This you know goes

in place January three. I think one major problem is that the banks setting prices now for their research, and you can see that they're coming down down, down, deut your bank without announcement the other day exactly, and they we don't know where the floor is. We don't know where regulators going to say, Okay, that price is just actually it doesn't match any any of the cost you having. It's just a fake price. So the regulators have to come out and give some guidance as to what pricing

they would would accept, and we just don't have that yet. Okay, do we have any idea of where that accepted prices? Because if you if you low ball it, right, if you say, well, I'm hardly going to pay anything at all, not only the regulators saying that's not good enough, but they could also do an investigation on it. Yeah. No,

So I think that's the core of a problem. That guidance has not been given and we're only a couple of months away from when they're supposed to come to into effect, and it's kind of paralyzing everybody because we just don't know how research is going to be a price. It's away from your world of foreign exchange. But in equities, Collins Rockwell Collins, the merger with ut X Collins, and

the Bloomberg has an analysts following it. From where you sit, are those days over well, I think you can already see it in the equity space that there are more and more players withdrawing from like traditional equity research, and therefore we have less analysts covering certain stocks, and we have also less stocks overall being covered. So in a way, this, this is the regulation is going to mean that there's

less information available to trade on. Okay, does that mean for example, that if you're a great you know, if you bring your research in house so you stop paying for it from others, that actually will give you the real advantage. How much is the financial landscape really going to change because you'll see the people that are really

good out of their own research actually making the trades. Yeah, I think I think you're seeing that that there's more and more by side firms that says, Okay, it's going to be too expensive, we have to do it internally. So there's certainly players that are doing it that way. They're doing it very quickly. I know you've got to go to a client call right now, but yes, this is critical. Have you seen any evidence that anyone's going

to quote unquote take foreign exchange coverage internally? So the foreign exchange market was special in that it's not about thousands of companies. Is like a couple of key crosses. So I think in general, the big currency traders in the world, they will have a mix of internal research and they also pay for the best they can get outside. They're still gonna send people to the New York Rangers, Montreal Canadians game all that rack. It's gonna still continue

against nord Vig. Thank you so much with Elexante data here and I'm an important call for those of you interested in the energy assets of a Beliger Golf of Mexico. This is, without question the interview of the day. Jacques Roussou is with clear view energy partners, but barely describes decades of work on the pipelines the refineries of our American energy infrastructure. Jack an open question first, our our

assets at risk? Do we thirty days from now, sixty days from now, ninety days from now, move on with Harvey as a memory. That's a difficult question to answer. I think one way to think about it is during Katrina, it took about three months for these refineries to get back up to a full production level. So that is one marker to think about. But you just never know. You mentioned uh earlier this morning when we spoke on television about the unique place of electricity to oil into

gas in the region. Explain that. Give us a Lehigh University exclamation. Exclamation of explanation, I'll get it out, explanation of how electricity folds into hydrocarbons. Sure, I think what you want to think about is refineries, pumping stations, for pipelines, chemical plants. Uh, there's a lot of electricity that powers the plants, and if that has gotten flooded and knocked out, you know, there can be a lengthy recovery time to

repair that. Alright, I'm looking at some of the refineries and there's a great function on the Bloomberg terminal for those that have one, Jack talk to me about what is more concerning. Is it refineries shutting or the pipeline being blocked off? Well, right now we're looking on the refinery side. If you think about the United States, about fifty percent of refining capacity is in the Gulf Coast,

of that in Louisiana, of that in Texas. From what we've seen now, there's been reported eighteen percent or so of US refining capacity is either down or working at restricted rates. So that is kind of the key thing to focus on right now because if those refineries stay down for an extended period of time, that is what the market is thinking with gasoline going up. How much does a hurricane actually impact the demands, not the supply side,

but the demand side of things. That's a great question, and I think you can see that in oil price because what we're seeing for w T I is that the United States is down roughly eight hundred thousand barrels per day of oil supply due to the hurricane. But oil demand to the hurricane is a bigger number because

that's the refining side of the equation. Is that we're seeing over three million barrels per day of refining capacity down and so that's cutting um the gasoline, which is the way the government calculates it in terms of products supplied, is what they call demand. I mean, flooding is not the only Flooding seems to be a jack the primary problem for refineries, right, but it's not the only one, sure, I mean you have a lot of Do you have ability to get oil? Do you have ability to access pipelines?

You know, there's there's definitely a lot of infrastructure issues that need to be worked out, and I think we will see this over the next few days. We will get reports from the different companies on the status um As I recall from the Trina days, you know, there was a lot of information flow once companies could actually get back into the assets. Brian Mound, Big Hill, West Heckberry and buy you Chuck Taw. That's where our strategic oil reserve. Is is our strategic oil reserve up to

its eyeballs and water this morning? Uh, that's a hard one to say. I mean, I think what you want to think about is do we need that oil? And um, you know that's not what this This hurricane has caused a shortage of oil. So we're we're not in a situation where we need oil, but it may get to the point where companies need to borrow some oil. And during Katrina, companies actually borrowed ten million barrels of oil and then actually returned it in the subsequent months. Many

more questions. Let's continue with a chuck or so were this with clear view energy partners, we are being smarter on hydrocarbons today, for instance the quart in London. I'm Tom keenan New York chacker. So with this with clear view energy partners, as we could continue to look at what has become a tropical storm. What is the the infrastructure need of our pipelines and refineries? Is it as ugly as our many bridges worn out across this nation? Oh,

I wouldn't say that. You know, these assets are taken care of very well. Obviously if they weren't there would be a lot more significant problems to that. So, um, it's just a matter of dealing with, um the flooding and figuring out what actually happened. I mean, are the new facilities we think of all the stereotypes of refineries built after World War Two that are being pieced together with duct tape. Is that's not the case down there,

is it? Well, there's not too many new refineries. Marathon Petroleum had built one near New Orleans a few years back, but most of them have been around for a while. Obviously, there's there's maintenance that occurs on routine bases. What is the things are that we understand or misunderstand about shale production from the U S. If you look at you know, the I guess the break even price, I'm hearing everything

from thirty to sixty. Yeah. Obviously we've seen a big move up in shale production, UM with the move up an oil price since the OPEQ announcement to start cutting production, and that is becoming a marginal supply out there. I mean, I think what you need to look at going forward in the back half of the year is that the world uses a lot more oil in the second half of the year, just seasonally, and this is opex big

chance to reduce inventories, supply and demands very close. So we have a lot of wild cards out there that could go either way, and we've got a new one with the hurricane because, as we're mentioning before, this is going to uh clip demand in the US some If you if you look at Libya's oil production right it's dropped I think by around three sixty one thousand barrels a day. That's thirty five percent of output lost month. How much does that help OPAQUE and it's struggled to

reduce this global glut. That's a great question, and Libya is one of the wild cards. You've got Libya, You've got Nigeria, You've got Venezuela. Iraq has not come close to to meeting their production cuts. So this is what OPEC needs, is they need a few of these countries to for their oil to move down UM to offset any sort of demand loss that we might get because of the hurricane. Jacque. One final question, is America energy independent? Oh?

On the way for sure, but there's still a significant amount of imported oil that we need every day to UM to keep the gasoline and keep our cars going. Very good, Jack on short nose, Thank you so much, jacqu Roussou with clear view energy partners, with great perspective, particularly of a troubled Gulf of Mexico coastline. And again all of our reports, folks, seriousness of the hurricane and no tropical Storm Harvey. The rescue efforts continue across much

of Houston and to the eastern clients. For our global audience, this is Houston and the Gulf of Mexico over to the Louisiana border on the way to New Orleans. Not to get to New Orleans, that would be a misstatement. So here's the theme, folks, with all the news slow that's going on, you know, the hunch like two weeks ago, as you know, we're gonna reset September. It's supposed to

be Labor Day, you know, five days after Labor Day. No, it's starting now with the amazing news flow that we've gotten, not only out of Washington and London, with the Prime Minister traveling to Japan, but now with Hurricane Harvey and all that, we need reset in one way to do that in a decade financial crisis is without exaggeration, I will say one of the five most important books of the last decade on what we do with surveillance, and

that is the Age of Oversupply. There was at some point forty seven books on my desk, and the world changed when Martin Wolf of the Ft said, shut up and read Dan Albert's Age of Oversupply. Dan, you've retired off of the royalties of Age of Oversupply, right, I just wish. I don't think I've earned back the advantage. When's the movie out? This is the is the is a movie come out? Here? Like Memorial Day two thousand twenty? Kit Harrington? What is what? Where'd you get the title?

What is the Age of Oversupply? Is very funny. The the original title was supposed to be managed Capitalism. It was basically looking back and saying, you know, we pursued free market strategies for thirty years and there needs to be a new look taken a capitalism. Everybody basically said to me, that's an really insidious title. Don't do that. The first chapter was called the Age of Oversupply, and the publisher came back to me and said, it's a great title for the book. That's what we did, right,

so so what is it being oversupplied? Oh? Well, the whole concept is that that the emergence of the post socialist states after beginning nineteen and thereafter h really created this massive oversupply of labor relative to aggregate demand globally uh. And that in turn created a huge, huge oversupply production and therefore capital excess. Capital UH defined as I guess

by Bernanke as the savings glatt. And then we came to understand it a little bit better, which you know, basically flowed back into markets seeking risk free returns in bonds and mortgage backed securities in such there any way, there's any number of ways to go with us. I'm going to go to the brain power of chapter eight, which is bad values. Why sticky wages and prices block a real recovery? Now, that can go either way, depression, advance, etcetera.

But when you wrote the Age of Oversupply, did you predict or think about the lack of wage growth we see right now? Well, wage growth, you know, really this is the big debate because we've had such an enormous expansion and service jobs relative to goods producing jobs. If you actually net it out, going back to the previous height two thousand and seven, we've only added net net about a million something in UH in goods producing jobs

or high wage high hours jobs, i should say. And the rest of it, for plus million has been low wage, low hour jobs, really crappy jobs. Um and and so all of that is a is a manifestation of the lack of demand for UH labor in all but the most high tech sectors of the economy. And and it's

it's all of this is a global phenomenon. You have to go back to what what happened, you know, in the age of oversupply, which is just this enormous amount of productive labor that is willing to work relatively and expensively. And you know, people have for years said, oh, the Chinese thing is over. It's it's now, you know, they're going to have to find cheaper labor somewhere else. But

China isn't over. Neither is India. And the reason for that is there urbanized population is still a fraction of its total population. China is still only about half urbanized, and now the rest of the people are not really part of the global economy UM and India is only about sixty urbanize I'm sorry urbanized. So you know, you have this mess of bench strength that can continue to add labor to the problem, which tamps down the value of labor in the developed world. But don how do

you fix it? Do you bring jobs American jobs abroad or you do you bring foreigners to America. I'm looking at a group great Bloomberg chart, right, and it's what you were talking about. So the difference between unfilled job openings and workers highed. There were six point one million unfilled job openings on June. I think that's, you know, the most since data was compiled in two thousands, and

it's a massive myth. The myth is that there are all these job openings, but their job openings at a wage. And that is the key to understand the old statistics. Uh, you don't have this massive unfilled inventory when you have a huge unemployed labor base that's going into jobs at low wages and low hours just to make ends meet. Um. These these jolt statistics are very grossly misleadings and unfortunately the federalize a lot on them. I will editorialize your

fencing anecdotally. Mr Alpert is correct. It is absolutely unreal disinterest people have in those skilled jobs at the wage offered. You know, you see it anecdotally every single day, Frenzy. Yeah. But what I'm asking done is how do you fix this? Right? So you're you're saying this is not true, but again you still have the the unemployment or the labor forces conundrum, let's call it that. So this is the big issue

going into the fall. Right, We're going to be talking about tax reform in the United States, the issue of whether or not the economic nationalist agenda is going to prevail or continue to prevail under I don't know if it ever prevailed, but I mean I'm going to prevail under under under the Trump administration. These big issues are all oriented at what he had promised in his campaign and what the American electorate apparently seems to to to want, or at least a good chunk of them, which is

better jobs. And the notion that trickle down tax reform is going to help, I think is highly specious. Uh. And of course when it comes to tariffs and other protectionist measures, I favor some measures because we can't go on like this forever in the United States. Uh. And and there are some very good things that we could

be doing. But at the end of the day, you have to ask yourself the quintessential question, which is can the private sector in the United States actually shift people back into more gainful, higher paying jobs when there is this massive exogenous labor force offshore um And at my conclusion, the conclusion that I reached in the book and my conclusion today, especially looking at the last ten years, is

it's very difficult. You have terrific power points. I'll steal any number of these charts folks, in of course take credit for them myself. But it does go back then to what can government policymakers do. Now you mentioned the FED earlier, and they're struggling against Nordvig talking about one uh one uh uh FED increase out to the end of next year. What does Dan Elpert demand from the legislative branch or from the executive office? Now, I mean,

is it just as simple as targeted investment tax credits? No, it's not. And and uh you know this, this gets down to the big debate. We have a huge number of people who found it politically expedient to use uh, the national debt as a whipping boy. We have and you look at the bond today. I don't I'm not looking at it on the screen in front of me.

But my recollections the ten years back down to two, one, three or something two, and you can tell that the relentless UH, lack of inflationary pressures and the the enormous demand for for bonds makes the government extremely cheap to finance. And so the government really needs to step in and and actually go back rebuild our infrastructure, spend trillions of dollars, and put people back to work and gainful jobs. Here we go back to infrastructure and the mystery of why

that can occur. Dan Olpert, is there a beach read on this book? Are you're doing, you know with a movie rights sold? Are you're doing an afterward where, you know, for the holiday purchase? One of the things is is I've done a lot of work recently with the Coalition for American Prosperity, which is UH trade group that that

is very focused on this issue. I've determined that you know, given the fact that people communicate today, including the President United States, through tweet tweet storms UH, and people are far more graphically oriented that I that I really devoted myself to writing more decks than reports. Very good. Dan olport Uh with us the Age of Oversupply. It's not dated. I really it is a book where every chapter will force you to think differently. That is, I can't say

enough about it. Daniel Alpert with us in the studios off the Age of Oversupply, and we will continue on where is the wage growth? Which in celebration of you know, you think about the five books of the crisis. The Age of Oversupply is clearly when Daniel output where this. Maybe there's like r Ryin Art and Rogue off and Uh Andrew Ross Sorkin is wonderful, too Big to Fail,

and there's other books this, that and the other. But The Age of Oversupply really deserves a second read if you've read it before, and if you haven't read it, you're missing something on some of the great changes. Dan Alpert. The most frightening chart for me and Francine and mostly for our children, Francy, our grandchildren. I'm sorry, is your debt expansion? It's three lines. We know corporate debts up, blah blah blah, government debts up. But I think a

lot of people don't realize where private debt is. It's becoming what Katlacoff of Boston Universe and he talks about, isn't it? Yeah? It is, I mean the the at this point we're back into a debt cycle. The real question is to what extent is debt being taken on because of optimism on the part of consumers? Uh? And to what extent is it just merely filling the gap between what they desire and what they earned? And uh.

You know, one of the one of the histories of the crisis or the bubble that preceded it, is that so much of g d P was being supported by people pulling debt out of their homes for the most part, but credit cards also counted. Uh and uh. And this this vicious cycle of continuing to um uh, continuing to to borrow in order to consume. That is that is re emerging. And we look back for instine on you know,

age of oversupply. A major shout out to the work of Jannatis who was younger then in his wonderful work on mortgage equity withdrawal at Goldben Sacks. That was path breaking well over ten years ago. Yes, and that that was amazing word done. Can you I don't know if how much you look at debt in the UK, but I imagine there's a trend in Western worlds that actually debt is becoming more and more sustainable. Unsustainable for the

younger generation. How will it affect their consumer behavior? Well, you know, the it's very very clear that we brought forward demand for housing, and housing is certainly one of the largest consumables in in any developed country. So we brought brought forward enormous demand. And we have left um, the young people with with two things. One is, uh, less expectations of intergenerational wealth transfer because so much of

wealth was eradicated during this crisis. Some has come back, but people, you know, the previous generation is going to live a long time, so they're not going to get the intergenerational wealth transfer except at the very very top of the pyramid. Um. You know that that I think people were counting on. There's been some really great work done on that over the last few years. Uh. And then secondly, of course, they are burdened by education expenses

in the form of continued student loans. I mean, one of the great horrors of the post post crisis period was watching the amount of student debt in the United States go up from four or five billion to one point two trillion in almost the blink of an eye. Um, that does not affect the UK as much as it does in the US, but it is it is certainly a factor in the Western world. We we have effectively eradicated UH and and put and put very highly educated

people into underproducing jobs as well. UH. You know, a huge amount of demand. We will there be less appetite to own homes and rent. Well. It's very interesting because we're seeing in the United States over the last six months sort of a peaking of the rental market, and a lot of that is due to overbuilding, and a lot of it is due to UH an enormous amount of or sale housing that has been built, specifically in

the condominium sector. These deals are starting to crash. Rents of decline in the high end over the last in in cities like New York over the last several months, and look like they are accelerating in that respect. Workouts are beginning. There's a good piece in the Wall Street Journal today on on condominium workouts. Um, this is going to trickle you. So you saw what happened in London

when when the London luxury market peaked um. These things are are effectively in disha of cheap money having flowed into enormous amounts of construction. Damn Francine commutes from Cornwall. Uh, the last chapter of your book in pursuit of pragmatism, where's the pragmatism forward? Well, to a certain extent, right, the Trump revolt was uh, sort of a proxy for you know, torches and in the street. Not to talk about what happened, but but you know people people really

getting out there and and and getting angry. They expressed themselves, I think unwisely in the way they did in the ballot box. But at the end of the day, the the key, the key issue is to is to service the very disgruntled people. We wait for round two. Dan Elpert with one of the classics of the last ten years, the age of oversupplyed with Westwood Capital the the my

message screen has been a fire with GDP analysis. We're honored to bring you in her working day, Allan Zentner of Morgan Stanley Ellen, you have been exceptionally prescient on a quieter economy. Is today a sea change or is it a nuance of upgrade of g d P? Ah, that's a good one, Tom. I don't get the sense that it's a sea change it. I think that it's been some time, uh that we haven't really been focused on just what's going on on the private investment side

of the economy. UM. And so what we did with today's data was if you look under the hood at just you know the fact that that not onally was consumer spending and business investment, the two sources of upside revision and biggest contributors to GDP in this in this report, um, they have been the source of upside revision all year UM.

And so if you look at just the private final domestic demand, right, think the economist fancy way of saying, let's take exports, let's take inventories out of it, and just look at what's going on domestically. It's been tracking on average over the past four quarters about two point nine. So you know, oftentimes that's that's what lost in the phrase that's pretty robust domestic economy. Eleanor Carl Ricka Donna

mentions the end of the corporate profits recession. That's dear to the I is of Megden to say at the London School of Economics can you say the corporate profit recession is over, and does that fold into boosted productivity which makes Cherry Yellin's job easier. Yeah, and if only that were her job for the next four years, we should all be so lucky. Uh. You know, I would say that that that I would concur and and uh, Mike Wilson, our chiefdeose equity strategist, certainly sees that the

profits recession uh is over. I mean, one thing that we've seen in the data is that labor costs, which is this typical later in the cycle, labor costs have risen to a point that you start to incentivize capex over labor and that's when corporates in the US turned back to investing growing their bottom line. And that's when

you can get the product into increase in productivity. And some of that is just simply cyclical where we are in the cycle, and we do see that that's underway, and absolutely it would make uh the chair's job easier if they want to continue along with gradual rate hikes, because rising productivity also means you can get a lift in wage growth without pressuring margins and pressuring profits, but raising the standards of living of of people in your economy,

and given what we've seen today, is it necessary Is it needed for the FED disse inflation moving higher to have the confidence that it will, you know, in the end, move higher or is this enough? Yeah? So that's um, that's the question of the day. Right Inflation is the only place where they are missing on their forecast. Growth is above potential and around their forecast. The unemployment rate is below where they think full employment is. Financial conditions

are easy. All of that for monetary policy theory, All of that is a powerful stew that that would tell you surely inflationary pressures will build some time over the outlook. And so they remain confident just as they marked market, there are marked where their inflation forecast. Every single month and another week of print comes out, you'll see that in their forecast beyond this year, they don't budge. They just still have full faith and confidence that we get

to that two percent inflation goal. So I think right now the bar is low enough for a December high that I do think if we just simply get a pick up off the bottom, and I don't think we've seen the worst yet for inflation this year. But if we just see a pick up off the bottom is

we go in to that Simmer meeting. I think that will be enough for them, but I think it's going to become increasingly difficult for them to fight for additional rate heights and less inflation really does cooperate next year, and how different or how important it is going to be that wage growth on Friday. So, uh, Friday's report, we expect another tick up in wage growth to two point six percent. It's been a pretty sluggish but slow

climb upward. Uh. You know, I think that I hate to say it, but I think that Hurricane Harvey, because we know it's not going to have a bearing on this employment sport, but will start to have a bearing on the data by the next employment report. I think that that will turn eyes away from this employment report because it's like, oh yeah, but that was before the disaster. Ellen Sner, thank you for joining us on Bloomberg Surveillance

this morning. Zenter's with Morgan Stanley and they're out with a more enthusiastic view here forward, and of course all that tying into FED coverage. 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. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio Ey