'Bloomberg Surveillance Simulcast' Full Show 01/27/2023
When we look at what's happening with the consumer, which is the backbone of the U.S. economy, we are seeing a clear loss of momentum. Further deterioration, the labor market, we're starting to obviously get a flavor of that.
The danger is we have to go higher and rates and it lasts for longer than what the Fed is even looking for. We don't think they're going to cut by the end of this year. We do think early, 24, 24. It's going to be a recession, but a mild recession. So it's a hard landing. This is Bloomberg Surveillance with Tom
Keene, Jonathan Ferro and Lisa Abramowicz. Good morning, everyone. Jonathan Ferro in London. Lisa Abramowicz and Tom Keene on a Friday. It's set for the weekend and a Fed meeting coming up next week. We welcome all of you here on economics, finance, investment on John Farrell's tax bill, the United Kingdom. We'll get to him quickly here.
In a moment, the chancellor of the exchequer speaking at our Bloomberg offices in London, Joel Weber. So you're saying that John is responsible for some of the proposals out there? This is going to be curious to see, especially how much he's going to get some of the support behind him after the trauma that we saw earlier last year. Emily Chang reporting on it for Bloomberg News.
I love this idea. A catalyst for prosperity. I think that's a post Brooks's true approach Brexit angle. We'll talk to Anna Edwards about this. Here in this half hour after conversation with the chancellor, I'm going to look at the data here. And I don't want to make Covid other than what is this week.
There's the surprise for the bears. Equities up all week is the keyword. Let's tie the two ideas together. What Jeremy Hunt had to say, the chancellor of the exchequer over in the United Kingdom and what we're seeing in markets, it is money out of the US and everywhere else.
It is to Europe. It is to emerging markets. We saw nearly record flows to the emerging markets, to Europe. How much can that continue, given this really has been the pain trade for the past decade? Is it something that could be sustained? I want to get to John fairly very quickly with his important guest, Mr. Oppenheimer of Goldman Sachs, which runs through the data before the brief, at least to me. The headline item, the VIX under 19 Dani Burger. The headline item for me is start with
weakness and with some gains. And that's been really the theme of the week that even if you do see potentially negative news, the market can rise above it by the end of the day, given the rally that we saw yesterday at three point five, four percent of the 10 year yield to Stearns gives me nothing real yield 1 point to 1 percent as well. Downward churning, maybe dollar a little bit weaker here. We got to go to sterling 123 75 before a sterling brief on a Friday morning yesterday after the bell, it was all about intel and earnings that came out that were highly disappointing for a lot of people. Those shares are down today, the earnings. Yes. And just to sort of push it forward today, we get Chevron, an American Express before the bell. But this is all just the lead up to
Apple, Amazon and Apple, better Google, which all come out Thursday next week regarding the real economy. This week, we're getting the tech economy next week. And this really is going to be key in determining the path for the index going forward.
830 AM is the data dump that we've all been waiting for, U.S. personal income spending and core E core PCI. Keep focusing on that. How much do you see it decelerate? Yesterday came in pretty much in line with the quarterly look how much kids actually decelerate and give the Fed some reason to follow with the Bank of Canada does dead and really give a little bit of a dovish Chilton at 10:00 a.m.. University of Michigan sentiment survey. What's good news and what's bad news if it inflicts upward? Is that good or is that basically signaling that perhaps the economy isn't in such dire straits as people are expecting to get the soft landing? I'm curious to see how people interpret how the market responds to a survey that has been inflicting negative for a while.
He was in London and was seen in the quarters with the Chancellor of the Exchequer, Ashton and Wickham, a Bloomberg News report. The Chancellor of the Exchequer, Jeremy Hunt, dismissed calls for tax cuts, warning the John Farrell must pay his fair share. Joining us now from our offices in London, John, Philip.
John, your accent is changed this week. It's worse than normal. Just to be clear, I am in Tom for the 10th time and that's why I pay taxes as well. I want to clear that up. And for the second point I'll make Tom, the chancellor is only here to warm up the safe for Peter Oppenheimer. CAC Sachs going to the chief global equity strategist. Peter knows that anyway. Peter, you're a popular man. Share and good afternoon, sir.
Your slash. Good morning. I guess European equities, that's what it's all about. It's conference season when you go around doing these conferences. Did they buy the hype in Europe after hearing it for the 10th time in the last 10 years? Very slowly. People are warming up to it and it's been a long time coming. I know that. But performance attracts investors and
we've seen a 30 per cent rebound in the European markets since October. These in dollar terms, and that is starting to energize a bit of interest in the region and it reflects the big shift we've seen towards value, again, something we haven't seen now for more than a decade. So clearly we've priced that recession. We've priced in stock, NASH stagnation
and investors a focus. The difference between the two. I get all that. But now we need to talk about the difference between stagnation and real recovery and expansion, and that's been a theme for us this week. When do we start to focus on the fact that there is no growth in Europe? It's just an absence of a recession. And what we've seen so far is a bit of a squeeze and relief rally and perhaps nothing else. Well, I think we need to put it in context here. We think that the global economy is in a
relatively good shape and we expect to see a soft landing in the US. But we also now expect to see a relatively soft landing in Europe. The food and gas prices have helped the pick up in China as well.
But the absence of recession, as you say, doesn't mean we're yet into a strong recovery cycle. And I think the rebound that we've seen in risk assets in the last couple of months is overstating the potential from here at the index level. We've got flat returns in the US this year, slightly positive returns in Europe. So we prefer Europe. We think most of the action is going to be below the surface of the index. Let's talk about those opportunities.
Banks have ripped into Europe. They're up about 50 percent from the July lows. I picked out a minor because I know you like some of those names as well. Rio since October is up something like 40 percent. These are huge monster moves and credit to you guys because you got on board this bank's trading Europe at a time where I was sitting there thinking, you've got to be kidding me.
We're gonna get rate hikes from the ECB. It's going to crush the economy. And peripheral spreads are going to blow out all over again. Why has that trade worked and why do you think it will continue to work? Well, I think there are three things. First of all, the recession that people feared 6 months ago is not happening. There was a point where the market was
pricing in quite a big downturn in the European economy. The expectations there are adjusting pretty quickly. We actually have point six percent GDP growth across the eurozone this year.
So the economy's growing, not shrinking. That helps a lot. Second of all, with the rise in interest rates we're seeing is material given where we've been, where they came from. Remember, you know, just a year and a half ago, 25 percent of all government debt in the world had a negative yield. Now that doesn't exist. European rates were negative. Now they're positive. The leverage to that in terms of net
interest margins is the real game changer. And bear in mind that corporate balance sheets are reasonably healthy. So loan losses and the risk of a big downturn hitting banks is just evaporating. And the third factor is they were just really cheap and they remain pretty cheap. They're cheaper now. Yeah. You look at the multiple relative to the market than they were even during the sovereign debt crisis. We started this conversation by you
talking about how challenged the index level is. We've talked about that a lot in Europe. The absence of tech in Europe as a big weighting in the overall index was seen as a weakness for a long, long time. Is that a strength this year? Because I'm looking at the year to date performance of some of these tech names. Lisa, we're just going through them. Those tech names in the US, despite everyone saying it's game over, they're flying. Yeah. Today is the absence of big tech in the index in Europe a weakness or a strength? Structurally, it's a weakness because there is going to be more growth in the tech sector is going to remain the most important driver of growth. I think for the next decade,
the constituents are likely to change over time. That's always been true of technology in the past. You'll get new innovations which will generate higher returns. And so I think it is a problem in a way that Europe doesn't have many big tech names. But of course, the recent rally we've seen in tech is partly because of this rally, again, in bond yields, interest rates coming down because of fears of inflation moderating.
And that's helped the longer duration parts of the market. I think really the whole concept of being in growth or value, which is really driving the markets over the last decade, is not really the story anymore. I think you need to have a much more eclectic mix, including deep value areas like commodities and banks, but also companies that can sustain stable margins and earnings. And some of that will be in the tech sector as well. Europe does have many of these, maybe
not specifically in technology, but our group of what we call that were known as the 10 Real, which you've talked about before, super sized companies in Europe, which mainly in areas like consumer staples, luxury healthcare and some technology. These companies are about a quarter of the index and they're still growing because they're generating stable margins and very strong cash flows. And I think they'll continue to do well. I've got time for one more. It's interesting to me that the market always seems to dictate the stories we talk about price shapes, sentiment. You know that. And the headlines often come about from
where the market is on any given week. And clearly, we've rallied yesterday in Europe. And Kelly, we've rallied over the last couple of months and clearly was priced out of recession. And clearly off the back of that, the conversation and the tone of the conversation has changed. Being here in London this week, you
can't escape the fact there is still a. War in Europe. And for many reasons, based on what's happened over the last month or so, there are reasons to sit here and say that war has the real potential of escalating again. I understand we've escaped what could have been a much, much more brutal winter on the continent. I'm just wondering, Dani Burger, this sound I'm going to have this conversation with I'm read a Senate energy aspects in about 40 minutes. How long before we start worrying about next winter in Europe and what is actually happening in Ukraine? I think you make a very good point.
Part of the optimism that we've been seeing priced in is based on the collapse in gas prices. That reflects really two things a very mild winter, which we can assume will be repeated next year and also a very weak Chinese economy that allowed and enabled European governments to to to find other sources of gas supplies. And as China recovers and Europe needs to re stock its gas supplies at probably higher prices, that issue will come back. And that's a game where we're slightly more temperate in our optimism about the pace of the recovery at the index level over the course of this year, not just in Europe, but across sectors overall.
Peter, this was great. We're gonna make it up to Manchester this evening to watch Arsenal match things that happened and put your guard team, T.K., trying to make it happen for us. It's amazing, Tom, how easy it is to get tickets over at Manchester City. Still, the RTS have you know what they nicknamed that stadium, Tom? They actually had the empty hat. Still, it's that easy to get tickets. So they'll show up to this. Why does no one show up to see that
magnificent team? I'm serious. I mean, I'll let I'll let Mazzetti fans speak for themselves. But I can tell you, Tom, last weekend when I tried to watch Arsenal versus Man United, it almost impossible to get a ticket this week looking at Man City versus Arsenal. Very straightforward. Very simple.
Well, it's a very it's a great country. You've got a train ride there. Two hours and three minutes, John. That does not happen in America. John Farah with the wonderful Peter Oppenheimer in London.
An important interview coming up with Emery to CERN. We're going to parse the program right now. And Lisa Abramowicz and I are going to go all engineering tack. Lisa Intel for failure. Apple 813 bionic success.
That's really what this is about. That big tech is not monolithic. You're seeing real divergence. And Intel really highlights that, especially with even other chip makers doing OK this morning.
It's gonna be interesting. J.P. Morgan, their price target and Intel along with a lot of others. Thirty two dollars down to 28. Stay with us from London. From New York, this is Bloomberg. Coming up, Anna Edwards. Keeping you up today with news from around the world with the first word.
I'm Lisa Mateo. Bloomberg's learned that Vladimir Putin is planning a new offensive in Ukraine. The Russian president is also preparing his country for a conflict with the U.S. and its allies that he expects the last four years. The Kremlin wants to show its forces can
regain the initiative. After months of losing ground, it's hoping to force Ukraine and its backers to agree to some kind of truce. The International Monetary Fund is considering an aid package for Ukraine worth as much as 16 billion dollars. Bloomberg's learn there are still a number of conditions, including endorsement from the Group of Seven Nations. Ukraine's government would also need to commit to a series of policies. Well, we're sorry that Japan and the Netherlands will join the U.S. in limiting China's access to
semiconductor machinery. The alliance is aimed at undercutting Beijing's ambitions to build its own chip capabilities. U.S., Dutch and Japanese officials are set to conclude talks as soon as today. A new survey of economists says the European Central Bank will go for two interest rate hikes of 50 basis points on its way to a May peak then, according to the survey. The deposit rate will be held at three
point two five percent for about a year. Economists expect a struggling economy will eventually lead the ECB to cut rates and more losses for ages. Richest man. The sell off of go to Madonna's corporate empire accelerated on Friday are racing more than 50 billion dollars of market value in less than two sessions.
The fallout from a report by Hindenburg Research has investors keeping a close eye on the 2.5 billion dollar share sale by Adani Enterprises, Adani Group disputes and Berg's allegations of corporate malpractice. Global news 24 hours a day on air and on Bloomberg Quicktake. I'm Lisa Mateo. This is Bloomberg. The first thing we have to do is the prime minister's plan to halve inflation that is going to require patience and discipline when we are able to. No one wants to cut taxes more than I
do. But we have to recognize this is the priority for business as well as consumers right now. He is the chancellor of the exchequer of the United Kingdom. His name is Jeremy Hunt, and particularly for a working America.
How do you know him? He is the gentleman that made the best Olympics in ages work. He is the guy who did the London Olympics. He is expert in organization. Also expert and organization. Always at London is our Anna Edwards.
He joins me and Lisa Abramowitz in New York. And let me just start with a basic view from 60000 feet with your coverage of Downing Street, with your coverage of the Bank of England. You're truly expert at this. How is the Brexit thing going? Is the chancellor happy with the experiment of Brexit years down the road? Well, he was not one of the people he voted for. Good morning, Tom and Lisa. He was one of the voices that warned against it. He's turned his view around, as many in the ruling Conservative Party have done.
He was talking about the virtues of it, the freedoms, and there was one. Getting rid of some rules around insurance means a whole pot of money in the private sector that will be able to be invested in green technology. So that's a sort of kick for the things that Brexit allows the UK to do. But on the other side of the ledger, there were plenty of voices saying hang on, investments is below G7 levels. There were plenty of headwinds against the UK economy and some of those can be attributed to Brexit investments is one of them. The CBO says that the economy is 5
percent smaller than it would have been had we not seen Brexit. So maybe the jury's still out on that one. Well, the jury's still out there, you know, I know when I come to London, I go deep into the West Coast, Heathrow, I go way north.
You know, up by Euston and the rest of it and all that. I don't get into the rest of the United Kingdom. How is the chancellor in his party doing outside of London, across all of the United Kingdom? Well, we have a nifty little phrase for all of that here in the U.K.. This is levelling off. This was introduced by this government, this phrase. And it basically means trying to rebalance the economy from the heavyweight. That is the SE, the place that you frequent, Tom, when you visit London and it set and its surroundings.
Try and rebalance some of those growth opportunities around the country. And frankly, based on Bloomberg analysis, the government is not living up to its own commitments around levelling out. They set out a number of criteria that they wanted to measure themselves on. And of course, the pandemic and a whole load of other things got in the way. So that one is still a work in progress, trying to bring opportunity to other parts of the country. And how cohesive is Jeremy Hunt's
message at a time when they really don't have the money, they can't necessarily raise taxes. You're not going to cut taxes. But fiscally, there's a lot of constraint there. And they're facing off with Europe and the U.S. They're pumping money into tech that are pumping money into segments of their economy that they think will grow a lot. Yeah, certainly a real shift in the
geopolitics surrounding the U.K. right now. So the U.K. is now outside the European Union. So it's not at the table when the Europeans have those conversations about mobilizing 400 billion euros worth of 300 billion euros worth of money to take on the Inflation Reduction Act in the US.
The Americans mobilizing, as you know, 400 billion dollars worth of funds. So in amongst all of that, what does the U.K. do? The U.K.
doesn't have that kind of firepower. His answer is that businesses don't just want subsidies. Subsidies are not the answer. They're concerned about the IRS, as you call it.
And he thinks that other things will attract business to the U.K.. That's his pitch. Do you get the sense that things are more stable, that we're not going to see a redux of what happened last year? They definitely have done a lot to try and turn the page on that one.
I mean, I think that there are still limits on the maneuverability of the budget. For example, that's coming up in March that we'll still have hangovers of what happened in September, October. That mini budget really mocking the UK ounces as something that people had not expected on the international stage from an investment perspective. So there's still that legacy that they still have to deal with and that still ties the hands of a government that is facing strike action and would perhaps like to spend a little bit more on people's salaries, but that they have limited room to maneuver right now. And I'm fascinated by the relationship. And this is after, you know, my distant view of the tumult of of a prime minister. May, Prime Minister Johnson, prime minister trust what a sense of chaos. And yet we would look at the city is
just moving forward effortlessly. What is the relationship of this chancellor of the exchequer with London's Wall Street? Well, I mentioned the freeing up of the money post Brexit. That's only insurance company balance sheets. This is called Solvency 2, if you look for in the literature. And if you remove the UK from the solvency two regulations, the argument is there's a lot money to a lot of money to invest in private sector activities such as greening the economy. And the UK is Wall Street, as you put it, likes that quite a lot. So they like that stuff.
There's always some tension around passport thing and the post Brexit reforms in the city not getting what it wanted out of the the the aftermath of the Brexit conversation. But we have been through leader after leader and there has been plenty of turmoil. And yet somehow the city manages to keep his head. One final question, if I could. And that is, what is the opposition doing, John? Fear was explained to me four times over a beverage of my choice, the British election cycle. I still don't get it. But does Labour have a dramatically
different chancellor of the exchequer view or is there a solid middle ground, maybe like there were in the Blair Brown days? Well, that's an interesting question. I mean, we are 20, 24 is when we get the next election, and the important thing to note is the massive gap between the two parties in the polling. So post the mini budget, post the chaos of the aftermath, the downfall of the Boris Johnson administration, the Labour Party, the opposition has opened up a massive polling, the 20 percentage points at some of some junctures. That is huge. That's not very common in British politics. So that is something that everyone is looking to. And it's the fact that we don't have an election this year.
Perhaps that means we're not going to see any of the tax cuts. And that was Jeremy Hunt's message today. But we wouldn't necessarily rule them out before we get to an election in 2024. Anna Edwards in London in conversation with the chancellor of the Exchequer, his remarks at Queen Victoria Street headquarters today. Anna, thank you so much for that
leadership. And look for that out on Bloomberg Digital as well. We spend so much time on the clear and present danger. John trembling the Manchester. Oh, yeah. There's markets out there and was a stagger into the weekend. Lisa, how are you setting up for weekend
reading and into a Fed meeting week? Has this rally gone too far? Has the optimism gone too far? Have we already priced in all of the gains that people expected for the rest of the year and how we know and honestly, how much can we see this feeling the Fed's going to pull back from some of the rate hikes that previously were expected, given some of the momentum that we keep seeing in a lot of the underlying pain? I agree. And what's fascinating to me and it can be any different chart. Equities, bonds, currencies, commodities, everything sort of up as a general statement and resistance as the technical people would say. And the answer is, what's the breakout? What's the catalyst to leap up? And the one Incitec come up with is I've got too many people sitting on my left modelling out 3 percent inflation.
And I find that just we're not there yet and they're saying we're gonna get there. And some people being even more aggressive saying we're gonna get down at 2 percent by the end of this year. Next year. Next week. The tech earnings are going to be really key not only with what they're seeing on the ground, the bifurcation. We talked about intel, for example, on
one side and Apple on the other. They're doing very different pictures, even though Taiwan Semiconductor manufacturing, they're doing OK. They're doing better than good with Intel still flat on its back. So a real bifurcated picture here. How much does tech give us a sense of
what's got coming up and their ongoing dependence on China? A lot of people writing on Apple sort of as the bellwether next week. I guess it's got be it's the biggest stock in the solar system, or at least the focus. I know Jim Suva over at Citigroup paints a constructive picture, but also Mr. Suva and others. There's complete mystery of the flows of apple with apples, China. Nobody really knows how much they cannot extricate themselves from this nation. I mean, again, we have a lot of public officials, whether it's in the U.S.,
whether it's in Germany, making noise about, you know, creating a bigger fissure between the US, between the West and China. It's not happening when you take a look at these companies that are dependent on China and you're seeing that really double down, especially with the reopening of China and the potential consumer spending that I'm going to go back and curse in this day of a generational shift at Toyota in Japan under UN betting, not betting on the Pacific Rim is a hazardous process, certainly. Haslinda Amin. OK, so far I can understand Apple continuing with the China discussion, even though many others don't features a negative dynamic to call a churn to the market. The headline The VIX under 19.
It is some form of bull market. George Burry coming up, his chief investment strategist at all spring. Stay with us on a Friday. This is Bloomberg Surveillance. Good morning. Bloomberg Surveillance Good morning, everyone.
Lisa Abramowicz Tom Keene in New York, John Ferro with an accent change in London. Do you agree with me? Like I usually I can't understand like one out of five words and you know, we're down to one out of four words. OK. Come on. You understand him? He's perfectly understandable to anyone. He's sort of more universally understandable than I am. But I will say that it's really hard to go somewhere and not start to adapt to adapt to language a little bit.
I mean, honestly, I mean, it's easy to make fun, but it actually it's hard. You know, you reflect what other people are saying. I'm just saying I don't have a life, so I don't go anywhere.
So I don't know what that's like. But I know when you were in Fargo of the Dakotas, your accent changed. Oh, yeah. Well, John Farrell, Amrita Sen coming up on oil.
And I'm going to get your attention. A day to check. Brent crude. Eighty nine dollars a barrel. The first thing I checked this morning was a 90 print were not there yet. But this is a backdrop. This week is a lift, to say the least, in oil. Lisa, I'm sorry. A gallon of gas, however you want to frame it all of a sudden.
It's a February topic. I'm so glad you brought this up. Gasoline, three dollars and 50 cents on average nationwide, still pretty low, but the low at the end of last year was just three dollars. So it's just marginally creeping up pretty steadily at a time when a lot of people expected this to bleed into the consumer spending appetite.
Read on the screen, it really hasn't rebounded. But every day this week we get rid of the screen and then boom, up we go with some form of bid. The VIX eighteen point eighty seven yields giving me some discussion, three point five, six percent of the 10 year yield, four point to two percent higher yields. Ohno But don't want to make too much of it.
Who does make too much of it is George BOERI. He's chief investment strategist at Offspring Global Investments. It's really he could join us this morning. Do you have to rewrite your strategy on January 20, whatever, versus what you wrote on December 28? Morning, John. Good morning. Lee said it's great to be on the show once again now. Not at all, John.
In fact, much of our strategy was written back in November in anticipation of a January print. So as a strategist, I'm pretty happy of that thought of where we are, at least cyclically where the market sell. And we did expect that kind of a better start to the year. But the central message from us is that provide investors, it's still a pretty good environment. You know, Gloria, growth is coming down.
It's slowly coming down. Still pretty good. But I mean, inflation is coming down. And as we'll see next week, you know, the Fed is still very much in tightening mode. This is the polar opposite of where we were 12 months ago. And for bond investors, generally, a pretty good thing. And you pointed the 10 year tenure has been dropping or read a half percent and we're likely to be there for a while. George, help me.
John Tucker and I used to do a wonderful thing in the radio studio of the opening of his for a 1 K on envelope and Tucker for me the other day. It's become a two a one K due to bond losses. What does all spring and the representation of the Wells Fargo family across this nation. What do you advise? Is this a strategy for people like John Tucker that have been blown up last year in bonds? They need to recover, but they don't want to buy Apple Computer. How do you recover in the George Burry space? Well, bonds can do what they're supposed to do today. And if you look at where bond yields are, where we got to last year. The downside, obviously, of a meaningful
repricing is your mark to market has gone down. The buying yields, the income that you can earn has gone up substantially. But bonds can basically do what they're supposed to do. Number one, generate income. Number two, provide you with a buffer
against future volatility. And number three, we do think bonds ability to provide diversification. It's coming back. That extra income, that higher coupon, it will provide some buffer against, you know, sort of correlations as we move forward. So you're not going to earn it back in one year, but you will earn it back and making sure that you're positioned appropriately on the curve so that you can compound your returns as you move through time when we look at yields. You know, we can build portfolios anywhere. Average yield somewhere between four and as high as 8 percent.
That's actually a relatively attractive opportunity for bonds. There's good cash flow generation there. And importantly, there is the potential for some capital risk, capital appreciation. What we don't really have that penciled in all that much for this year, a little bit in duration. So we think prices can go up a little bit. As I mentioned before, that the 10 years right around three and a half percent, we think it's going to be there for most of this year. Leases talked quite a bit about credit
spreads. We've seen them rally actually year to date. We're probably going to give a little bit of that back. But what we tell bond investors, 80, 90 percent a year return comes from Kerry. It comes from income.
That's what a bond is supposed to do, is generate a very predictable, very precise and very manageable stream of cash flow. If you're using bonds to do that, even the ones you bought last year, they're still doing that. The price drops. Well, they're still generating the income that they were supposed to do when you bought them. Basically, this is a way of saying they're supposed to be boring. They should have been boring last year.
They should be boring this year, but they're getting back to it and they can provide that kind of benefit to a portfolio. How much of a liability is the fact they've been anything but boring? The incredible down market, the bear market in bonds last year led by your area. The safest aspects of the credit markets. And then this year they're behaving like
equities does is bring in tourist flows and create more volatility just sort of inherently for the asset class for a longer period of time. There's a big rotation going on in the market, Lisa, and that's a really good point. You know, bond investors, we brought a lot of tourist investors into the asset class as bond yields came down structurally over several years. What you're seeing is a very big
rotation in terms of demand, retail demand. We have seen a little bit of a pop early in the year. But where you see the biggest, the biggest form of demand is coming from the institutional side. These are pensions, their endowments, their insurance companies, their large institutional investors who buy bonds with very specific liabilities that they're trying to match against.
This is where we see the greatest amount of demand. The other is just sort of globally, whereas the man coming from we've historically, or at least over the last several years, tremendous demand from overseas that's pulling back as the dollar sort of weakens in here a little bit. But we're seeing a nice uptick from domestic for the domestic investors. If you look at the pension industry, you know, sort of funded plans are as high as they've ever been. So that sort of rotation from equities into bonds is a structural move that we're likely to see throughout the course of this year. So let's put some numbers on this, George.
Last year, investment grade corporate bonds in the U.S. lost 16 percent, all in return. So this year, could they gain 16 percent? It's unlikely. I think the realistic sort of returns for, say, an investment grade bond over the course of the year. We would sort of penciling
conservatively sort of made to maybe high single digits. So if you could claw back half that loss, that's a good there's a good probability that that happens. 16 percent would be a massive recession, major drop in yields and bond yields for corporates coming down as well.
That's not our central case. George, I don't mean on a pension basis or a CFA level 3 basis, but to our listeners and viewers, I believe we've had a great moderation. We've had a massive medical issue in Covid in pandemic and ginormous swings in what inflation will do. Have you adjusted a casual actuarial assumption that all of us need to assume? Do we need to save more because our total return over the next 10 or 20 all spring years is going to be lower? We think structurally, but her returns. More broadly are going to be lower and it's as deep as inflation has gone up, as you pointed out. We think inflation will stay higher structurally than what we saw over the last decade. On top of that, Fed policy has moved up.
It means it really means that, you know, sort of the cost of capital is going to stay structurally higher. And that will keep sort of overarching returns lower perhaps than they've been. That goes back to the story about bonds. Why are you buying them? What can they do for you? If you're compounding your portfolio, it's a 4 to 8 percent a year. That's a very desirable sort of return level with relatively limited volatility. Our ball shop was last year. That volatility should come down as we move forward and that will help your bond portfolio both be accretive to your overall wealth, help grow your wealth portfolio. Then also, as I mentioned, that buffer against other things we think comes back in vogue as we go through this year and into next year. I'm so glad you went there because the
volatility aspect is where I wanted to go. And Tom was asking me what the reading was over the weekend that I wanted to do. It was very much about how we got a little bit too far and gotten too complacent with this idea that we're not going to get volatility again in benchmark rates. How much are you watching the roll off in the balance sheet for the Federal Reserve and the potential that they go beyond what the market is expecting? Try to shock the market into perhaps a bit more of a tighter financial condition. And if this actually disrupts the thesis
of a lack of volatility. Well, I think it means that vol again, it's going to come it's been coming off the peak. So we had an extremely volatile year last year. Hasn't all markets kind of reprice their structural higher inflation environment as that sort of that shock value of that experience comes down, volume comes down with it. So if the Fed is going to moderate its pace of rate hikes, that's a good thing from a vol perspective.
We know that there's Kuti happening in the background, so that will add some vol. So vol will remain elevated. It will just not be at extreme levels like we've seen. That means risk premiums, broadly speaking, have rallied, but they're not going to rally back to those extremely tight levels that we saw. Again, it all goes back to that increased sort of risk premium that's built into the market. As an investor, you can take advantage of that. Our view is that the economy is slowing,
but more importantly, there's a massive rotation happening within the within the economy. Elation is not universally a bad thing. Many companies we just saw in nominal growth last quarter up 9 percent. I mean, that's that's a it's a pretty punchy economy.
There are there are benefit beneficiaries to that type of environment. As a bond investor, I can take advantage of the volatility, rotate my portfolio to focus on the winners based bottom up analysis and really, really sort of capture that yield as we go forward. George, thank you so much. George BOERI of Austria, always and forward, particularly in the bigger picture towards retirement.
And you know, I'm sorry. Yes. You know, I'm never going to retire. They got the surveillance cactus casket out back. But but, Lisa, there's the chancellor of
the exchequer before speaking with Anna Edwards and he cuts to the social policy. Mr. BOERI was just talking about on retirees and the pandemic. He says to retirees, get back to work. Quote, I say Britain needs you and we're going to see that in America, too, is like, let's go pandemic over. And anybody with grey hair and a bow tie can't retire.
Well, it goes this structurally longer inflationary push that goes beyond just pandemic spending, because if people are retiring, if people are pulling out of the workforce, well, then you've got a labor shortage and you're seeing that across the board. And so how much is that keep inflation sustained? You know, that I saw I saw this story at the terminal this morning that people work for central banks. The Fed and the ECB are complaining that they're not getting wage increases in line with inflation. So even the central bank workers are saying, hey, well, we disagree just as part of the issue. Yeah, and that's part of it. There's a there's a whole actuarial
assumption that nobody thinks about this till they're 42. So you're years away from worrying about retirement. But the bottom line is we underplay this in the financial media. George Bush is limited at all spring. This is a huge deal.
I mean, as the chancellor says, get back to work. And if you don't, I'll retire. Then all those central bank workers will say, wait a second, everyone else is getting wage increases. I want to get them to e-mail from London. John says, Really? OK.
Thank you, John. John Farrell. Coming up on oil with them, Rita Sands. Stay with us here. Red and green in the screen. The VIX eighteen point eighty six. Keeping you up to date with news from around the world with the first word. I'm Lisa Mateo. The U.K.
Chancellor of the Exchequer, Jeremy Hunt, dismissed calls for tax cuts. In an exclusive interview with Bloomberg TV, Hunt said that sound money must also come first. He was asked about so-called green subsidies. Well, we think that if we're going to have the transition to net zero, we should benefit from free and open trade between all the countries that share that ambition. But I don't think subsidy is necessarily the best way. I think what people want is creativity, innovation, ideas, a climate, a regulatory structure that encourages and also puts the U.K.
as a hub for high growth, high tech industries and innovation. Well, it's been almost a year into an invasion that Vladimir Putin figured it would be over within weeks. Now, Bloomberg's learned that the Russian president is planning a new offensive in Ukraine.
He's also bracing his country for a conflict he expects to take years. The Kremlin wants to show its forces can regain the initiative after months of losing ground. The idea is to force Ukraine to agree to some kind of truce. Goldman Sachs warns that the next sanctions on Russian oil are likely to be more disruptive.
The new penalties take effect next month. Among other things, they'll impact diesel fuel. Russian diesel exports account for 15 percent of global flows. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts and more than 120 countries. I'm Lisa Matteo. This is Bloomberg.
Refinery capacity is down about 8 percent relative to where it usually is this time here. And that's putting some of that squeeze on gas prices, perhaps more exporting of refined product from China and other exports could help in that regard. But you do have to look at the refinery situation to understand the near term movements in the gas price, which still, by the way, is down about a buck 40 since its peak last summer.
Jared Bernstein, there were the were the White House. Very important, the really same voice on financial matters there on hydrocarbons. And right now, Lisa. A large hydrocarbon company reports Mr. Wirth Fortress Worth Chevron. After saying that they're going to pay
back 75 billion ISE, the shares today reporting fourth quarter earnings are below expectations, adjusted earnings per share in the fourth quarter for dollars 9 cents versus four dollars and 27 cents. You do see a move marginally lower, 42 a 40 basis points lower in less than a half of a percent after yesterday's nearly 5 percent gain. So perhaps this is a story of share buybacks and dividends exceeding any sort of slight disappointment at a time when fossil fuel is very much in the forefront. I want to compare and contrast your upstream downstream. We're going to get to a scene with John Fair in a moment. But upstream is the romance of going across the horizon and going out and finding the marginal barrel, 5.5 billion
large. And you compare that with downstream, which is like getting into your tank oil, one point two billion. That gives you the big oil balance between upstream and downstream.
But it's also really a kind of complicates the message for the White House because the White House got really angry with Chevron. Remember that yesterday, saying how can you invest in share buybacks? You should be investing more in production. And if they come out with disappointing earnings, perhaps they could say, look, you know, we're doing what we think is right with the market and, you know, bugger off the production. Well, OK, if we could see them radio the production part of it, I guess. I mean, you know, take the money and run it into production. Why don't you do that? But there's a whole green issue, ESG issue.
And there's also just the issue of like, is it just going to be a pure share buyback the last 10 years, Chevron, nine point six percent return per year. John Farrell, he's always upstream and downstream. The River Thames moving from football match to football for him, I believe is upstream. Lisa. OK. In West Ham for him is here and West Ham
is downstream. I get that right, John. I guess just about if you meant West London versus East London, I think that's what you meant. Tom, I guess I'm trying to make a career out of translating what I think you mean. Tom Keene. Thank you. I'm going to send the co-founder and head of Research Energy Aspects alongside me in London and racing right to catch up with you. Thanks. It's fantastic to see you in person.
Some just went through the Chevron numbers with Lisa. Seventy five billion dollar buyback announced in the last couple of days, I think across a handful of firms. Two hundred billion dollars in profits last year. It's not bad.
Can you tell me whether those CapEx decisions have changed and are they going to change any time soon? No, the answer is no, I think. And, you know, Scott Sheffield said this as well, too, and through even. I mean, regardless of where oil prices are, these companies are not particularly keen on investing. And dare I say, I don't think we can fault them because investors don't want them to invest. Investors want them to be focused on ESG metrics. Even with energy prices where they have been.
And that's exactly what they are doing, giving back to their giving back pretty much to shareholders. And whatever investment they can do is in green energy. Well, let's talk about where energy prices have been. We had triple digit credit with China
locked down. If the U.S. goes into recession, can we still have triple digit growth? I think so. I really believe this is Asia's. Yeah, with China reopening. Demand was down over one point five million barrels per day just because of Blake from China, right? Yes. We grew by over 2 million barrels per
day last year. But when China opens up, all of Asia is going to go with it. In terms of the effects we're going to see with travel, with exports, I think that is going to be more than enough to offset U.S. recession. We already have U.S. recession in our numbers.
One question we explored earlier this week was the commodity intensive nice if this China reorg. One person suggested to us that I think is going to be that intensive. Are you taking the other side of that? I mean, look, metals wise, we've already seen a pretty big pickup.
And I'm not an expert to comment on whether the metals intense show going to be the same. But from an energy point of view, we are already starting to see them buy. I mean, look, given how much refining they need to do and how much storage they're building on. I'm very happy to take the other side that their imports are going to be up at least a million barrels per day. You mentioned a supply backdrop.
How vulnerable is the supply side of things coming into 2023? For me, the fact that there is no SPRO. I mean, we've released 220 million barrels last year. That was effectively the supply that came to the market. Yeah. OPEC is maintaining course right now. We are not far away from a big deficit. I think the deficit happens reading the summer. Not right now, but right now it's gasoline.
It's diesel. Things we pay for young. Credibly tight, and it is going to be a very, very tight products market. That translates into crude in the second half of the. I've sat through a week of optimism, constructive views about Europe and Europe escaping the worst of it through this winter. You're smiling, so let's build on it. Did Europe escape a bad winter because
they got lucky with the weather or because they fired up cold? I think it's a bit of both. I really do think the weather helped write if it was asked call. I mean, this week hasn't been warm, this week has been relatively cold, but it's been in sports. If it was a genuinely cold winter, I think Europe would have still been in a little bit of trouble. But yes, call helped.
People have changed behaviors, right? I mean, a lot more people are talking about we wear jumpers at home and keeping the temperatures down. That has definitely helped. But the reason I'm smiling is I also think European policy makers are probably being a little bit smug right now. We still have next winter to get through. I just don't think we should be like, OK, we've solved the problem. Well, let's talk about that and whether
that smugness is misplaced, if you want to call it that. Through last summer, we were building up storage, building up storage, and we have the benefit of Nord Stream to build up some of that storage at reduced levels that reduced capacity. I know. Can they repeat the act this year without Nord Stream? How on earth are they going to do that? And with China reopening, because China is not an old story, only it is going to be an LNG story as well. And I think that's where I come back to look. Yes, it's justified why prices have come off right now.
But to expect these prices to remain for the rest of the year. That's where we would disagree. You've got to forgive me for asking a Canada based question, but I will ask one.
When are people going to stop caring? Because the front page that I've read throughout the whole of this week is sure it's cold, but Europe's escaped recession, Europe's escape recession, one of the people that you talk to kind of start caring about the things that you're talking about. I really wish they already started caring about it, honestly, because, again, it becomes very short sighted. And I also think it's too soon to say we are going to avoid a recession because industry doesn't come back that quickly.
Yes. I absolutely don't think it's going to be a severe downturn, but we are. I mean, look at the layoffs that's already happening in the tech sector across U.S. and Europe, by the way, it will have an impact on growth. So when you say tough winter ahead for Europe this year, regardless of whether weather might go based on the fact that it's going to be tremendously difficult to build up store in the same way they did in the last six months because there's no Nord Stream and China's reopening, it's not just a base case. Tough winter ahead. So I would say yes for the next winter,
not this winter. And it will depend a little bit on what happens with China and how much China buys. But our base case is that China is going to come back pretty strongly. So, yeah, look, again, we're not expecting a repeat of last year, but we would also very much caution that this is not going to be status quo forever. I'm reading this was right to decide. Fantastic.
Nice to see. I'm Richard. Send off energy aspects to how you heard. I think that's a worry to a lot of people. Have they are? Yes. Better off with the winter we've just had in Europe. But ultimately, can you repeat the act? Yeah.
Next winter, I think things have really changed your overnight. John, I assume you didn't see a General Hodges, formerly with the U.S. Army with some real military experience on Europe, wrote a blistering article on the options Ukraine will have with tanks.
So I think the military overlay changing with the new staffing of their material in Ukraine falls right into the energy story is time. I couldn't agree more. There was a real reluctance, T.K., to provide these things. Six months ago, there was a what exactly seen as an escalatory step. And now we're doing that. And now there is a conversation taking place to time.
And I've been looking forward to hearing what Richard Haass is going to say to you in a couple of hours time about have a conversation about maybe providing jets as well. I don't know where we are on that, but certainly we're taking steps in the wrong direction in the minds of many that perhaps this could escalate. It seems to be the Jets story, let's call it in the next conversation is Will John Farrow in London this morning here and again with futures a little run on the screen, but we've seen this this week. Listen to your great comments to George BOERI of all spring. I went back and I did a careful study
while John was yammering away with them. Read a sand bar of the Bloomberg Total Return Index, almost a four standard deviation move down over a three decade. Look at the price of bonds, you know, huge move down 16 percent and we've come up 5 percent, come at 6 percent as well. My word, there's a long way to go, which is the reason why people are looking at this as possibly income over a long term. And the volatility has been tremendous. And even what we heard from George BOERI, you're not going to get that 16 percent return this year and it wouldn't even be full return if you got 16 percent get all of the losses of last year back.
So how much should people come back? How much new value has been unleashed? But what's the pain that people are ongoing and sitting on in terms of losses? And that goes to when I talked to him about about retirement and frankly, the chancellor of the Exchequer, ISE comments about the retired who can't retire for any number of reasons or choose not to retire. That's the next dynamic. Well, people are kind of hoping that that's the case because there have been a lot of people who have retired who are still spending. And people are concerned that that's created a real labor shortage.
We will see the inversion really pretty substantial Wednesday. I'm going to say negative 70, something negative 66 basis points yields higher three point five, six percent on the 10 year yield. Stay with us. This is Bloomberg. When we look at what's happening with the consumer, which is the backbone of the U.S. economy, we are seeing a clear loss of
momentum, further deterioration, the labor market. We're starting to obviously get a flavor of that. The danger is we have to go higher and rates and it lasts for longer than what the Fed is even looking for. We don't think they're going to cut by the end of this year. We do think early, 24, 24. It's going to be a recession, but a mild recession. So it's a hard landing. This is Bloomberg Surveillance with Tom
Keene, Jonathan Ferro and Lisa. Good morning, everyone. Jonathan Ferro in London. Lisa Abramowicz and Tom Keene. Kind of Friday to get to February. Next week we readjust. Think about the weekend reading and the view forward in the backdrop. The overwhelming reality, Lisa, isn't that stunning? That's not the right word, but just a good equity market pushing against the bears. Even though you do have a really
bifurcated picture of the haves, the have nots from the earnings that are coming out, we saw yesterday from Visa and MasterCard, for example. Spending is down. Consumers are spending less. Just now, American Express crossing their earnings are up in their expectation is up for this year. So, again, it's hard to find a cohesive
picture at a time of such distortion. I looked at the Apple dividend stream and share buybacks stream. We'll get to that in a minute. I don't want to lose the flow of the program right now, but there's the headline American Express to boost quarterly dividend by 15 percent. That doesn't sound like recession policy. But then you look at an intel and it looks like recession policy and you look like, you know, a kitchen sinking of the whole affair. So at what point do you get a signal versus a noise? Who is the mainstream? Who is the Zeit Geist at a time where you've got idiosyncratic stories that are telling such different, different narratives? Colgate-Palmolive as well with a little bit of a revenue beat.
We'll get to that here in a moment. A big, big problem here is we're so focused on like 12 names, Apple. Should we do Intel? It's a smoker. Exactly. Well, who's guilty? This is anyone.
The big picture here is that people are feeling optimistic, not just about the U.S., but more so international. And the thing that really stands out to me is the consensus suddenly that Europe and emerging markets are going to outperform and can continue to. Even though you've had a rip roaring beginning of the year, that is the question that I have over the weekend.
When do you know it's gone too far? When has that Rotem ism run into a bit of a headwind of perhaps a reality that isn't even before the day to check in the brief to get to our wonderful guests today. I'm looking at Sterling. And as John has mentioned, one or three to 124 sterling ascendant, dollar weaker is a backdrop into February. Is it about sterling or is it about the dollar? Is it about the dollar weakening? And Peter kind of moving back as they look to get everything? I mean, really, at what point do we have an understanding of what's priced in, especially with all the variables still out there? You've been pointing out with oil and gas and the war in Ukraine, red and green on the screen with a good bull market, we've had VIX 23 breaking through 20, breaking through 19, the optimism of eighteen point eighty eight on the VIX and the yield space, higher yields to higher yield, four point to two percent.
We mentioned the dollar Brent crude. Thank you, Emery, to search for wisdom with Mr. Farrell. Eighty nine dollars a barrel Brent crude.
Yeah. And we did just get Chevron and American Express earnings. We talked about Chevron in their 75 billion dollar buyback. And as we look forward next week, we get Apple, Amazon and Google all reporting on Thursday. Will that set a different tone? Well, that set perhaps a reality check for the previous leadership of this market in what has been a leadership going at least so far this year, 830 a.m., the day to dump U.S. personal income spending and core PCC core PCC.
Really important to understand how much the Fed can move away from perhaps a north of 5 percent Fed funds rate that a lot of people are expecting. Can they do a Bank of Canada raised by 25 basis points and say we're done today and we get University of Michigan sentiment survey? Do we start to feel a sentimen