tv Bloomberg Surveillance Bloomberg June 17, 2022 8:00am-9:00am EDT
>> we are in for a tough couple of months in markets. >> higher rates, lower rates, are challenging for equity markets. >> if federal banks have to try to assert control and call markets or >> there is an opportunity coming, i think it is too early. jonathan: live from new york city, good morning. this is "bloomberg surveillance" on tv and radio. equity futures higher by .9%. damage done year-to-date so far. s&p down 23%. nasdaq year-to-date noun 32%. lisa: if we go into recession, what would draw downs look like and what the pain is. the range of potential outcomes
have gotten as wide as i have ever seen them. i keep going to that range of 3000 on the bearish side or 4750 on the base case. jonathan: i think people have a bull case and a bear case. the bull case is, the damage is done. the bear case is, we have adjusted to rates. we have not adjusted to lower earnings. which point is the more compelling one? lisa: how much does the stock market have to overshoot on the downside when you get earnings downgrades before people start to expect what andrew was talking about, the next cycle, typically, markets get ahead of that. it is unknown. we do not know what we are dealing with in terms of multiples, inflation, growth. even companies are having trouble pinning it down. jonathan: what i haven't seen in credit, that line in the sand for a lot of people is around five -- 500 basis points. how important was that. damian: the question, what is
driving spreads? in my opinion, it is technicals. it is secondary market liquidity. when secondary market liquidity gets pulled out because of financial tightening, anyone gets where they go. we are not talking equity valuations, we are talking spreads where they can go. jonathan: is that a fancy way of saying stress in the credit market? damian: we will have to be for all is said and done. lisa: you are going to rail it to me. you're going to wind me up. i'm going to tarnish my brand, but usually, i am this big bear. the wider spreads get and yields go up, the more i understand the bull case. honestly. people have been complaining for no yields four years. these companies have fortress balance sheets, you are seeing
this and i understand the case for people. jonathan: this analysis is specific, on a fixed income side of things, not equity. in credit or the sovereign space, and treasuries? lisa: treasuries are anyone's guess. we don't know. everyone is trading off every inflationary print. on the credit side, if you look at the fundamentals, the fundamentals are not showing the same stress the pricing is. maybe they will. artists tend to get ahead. this is the descendants -- dissonance and tensions underpinning the volatility in yields. ok. jonathan: it is not you, damien. lisa: you agree, don't you damien? damian: relative to recent years, positive yield now. no figure, 6040 back in june. jonathan: we heard it from david earlier, bonds were back.
scott pushed 350 on a 10 year, same thing. lisa: exactly. i have to say, are you hung over? there is this idea i have been bearish for so long. if you see yields and an economy that isn't falling off the rails yet, you can make every argument under the sun. i understand. jonathan: equity futures on the s&p, .9%. on the s&p this week, down 6% this week. the biggest loss since a pandemic. 321.62. we talked about the median year-end forecast on the south side of wall street, still 4650. john, right to catch up with you.
you have been constructive on this equity market, it has been difficult. walk me through what you are learning as this year progresses and how you are thinking about the future. jonathan: i think you guys are on point. let's start with damien's comments. credit spreads have blown out. there is not a credit performance problem. what i mean by that is, people are paying -- are making their interest payments. companies have lots of cash. they have termed out their liability, so they do not have rollover risk. the credit is performing as if we have is incredibly healthy economy, and yet, you have credit spreads really wide. i think one of the things that is going to drive equities higher, if we do not have a recession before now and the end of the year, which i think is unlikely, i think the credit spreads come down because there is not a credit problem. the market is pricing.
they did a second issue, which john, you were amazed. so far, year-to-date, the market has discounted a higher cost of capital, not a recession. people are saying, is the market -- market discounting a earnings problem? not really. the last week, the market is starting to say, it is not just a higher cost of capital or higher discount rate, it is the damage the fed is going to do, and are we getting a recession sooner? it is a simple debate, when does the recession start? if you think we have a recession in six to nine months, the downside from here is substantial. if you believe the recession is in the latter half of 20 -- 2023 or further out, you have got to buy stocks because earnings will come through and there will not be an earnings problem. lisa: the range of outcomes and how big the extremes are.
go back to what andrew said, volatility may prevail. the market will reprice fed policy based on each monthly inflation reading, how wide is your bear case scenario and will case scenario? jonathan: we put out a report yesterday, it was a wonky report for guys who love market internals. it got a lot of attention. we looked at the dispersion of analyst estimates. microsoft, all the analysts clustered, similar outlook, or all over the map? the more the estimates are all over the map, the more it tells you people are concerned about recessionary outcomes and the direction of the economy. we are seeing that, in nine of 11 sectors, you are below average in dispersion, meaning there is very little doubt from analysts on the direction of profits. where do the analysts come from this, it sounds like they are pulling it out of their head.
they are talking to company management, company management is saying they have a surprising amount of clarity, we are not seeing stress with clients, margins are under pressure. a little, but not a lot. it was surprising when we look at the data how clean the earnings story looks, not only in terms of earnings being good, but how there is a high level of conviction on company management and wall street analysts. damian: we have seen the two main factors driving equity expectations. i question, the pace, are you comfortable with the pace of downward revisions going forward? do you think it is going to accelerate, or are we there yet? jonathan: if you look year-to-date, the earnings revisions have been solidly positive. at the beginning of this year, if you look at the 12 month outlook for earnings and to the same thing today, we are 7.5%
higher than we are. the markets sound 23% or something like that, but you have a positive 7.5% on earnings and a negative -- -31% on the stock multiple. what it says is, we have a problem. you have cash flows, you discount them at a higher discount rate, they are worth less money. it makes sense people would say, may be the market is telling you the earnings are not good. i do not think that is the case. i think what you have is a downgrade to what you are willing to pay for a dollar earnings, not the other way around. jonathan: everything you have said, is it enough to get us back towards 5k on the s&p? jonathan: i think the answer is directionally, yes. i think right now, the market is oversold. if you look at the way how intense daily moves are, how much volatility there is, the key is we have to be confident
we are not -- the fed is not driving us into recession. if we start to see the next couple of job reports, if we see a negative print where you have a loss of jobs in something, the market is going to freak out and you've got much lower numbers. the ism, an indication of industrial activity, well above normal. last job report, very strong in terms of jobs. earnings season, big beats. the fundamentals went out. i will tell you, the last week or so shakes everybody's confidence. jonathan: i am going to the numbers, you are not alone. oppenheim are at 5330 year end, 4900. belsky at imo, 4800. i wonder, as an analyst and strategist, you look at this
market, what do you have to do? what should you do? jonathan: we lowered our numbers. eight weeks ago, we went back to the pieces. the right thing to do is not forecast the market. it is, start with earnings. our my earnings too high or low? we went and tested them, the earnings looks incredibly solid. if we were to make a change, maybe we should move higher. some of that is coming from energy, but nonetheless. we look at the multiple, this is why we lowered our estimates. no, you have to lower your expectations for stock multiples for pes when the cost of capital goes up. if we were to downgrade our number, it wouldn't be because we think earnings are off. it would be because we say, those credit spreads that damien
was talking about before, if they stay wide then stocks cannot rebound. they have to come in. jonathan: it is good to get your perspective. equity set by 1%. next, we hear from the white house. this is bloomberg. ♪ ritika: ukraine one step closer to becoming a member of the european union. the european commission has recommended ukraine be a committed candidacy. it is significant for ukraine, no fast track path to speed up the membership process which can normally last more than a decade. -- expressed interest in a potential acquisition of dutch consumer lender, maybe nm road bank. the biggest bank reached out for a meeting with the dutch government to discuss interest.
to do everything we can to get the supply chain open. jonathan: that was congressman french hill. good morning. equities higher, no correlation at 1% on the s&p 500. on the nasdaq 100, a bike 1.2%. joining us now is heather boucher, the member of the white house council of economic advisers. you guys have taken this seriously. the washington post is out with a story this morning on a range of issues. one of them is imposing price controls and banning exports of u.s. energy, i would like to know first, how seriously we should be taking that this morning. heather: as the president made clear over the course of this week, all options on the table in terms of energy.
he sent a letter this week to oil refiners to say, you need to do your part. that was part of showing how important this issue of inflation and gas prices is to the president. he understands this affects the pocketbooks, american families all over the country. and is doing what he can to make sure prices people pay at the pump are fair, even given the fact we are in the midst of this unprovoked war by putin in ukraine that has upended oil markets, leading to shorter supplies and increases in prices. one of the things we know, refiners -- there is a gap, a growing gap between how much they are paying for the oil they bring in and how much they are charging at the other end. that gap used to be 15 cents, it is over a dollar now. as he said, he is willing to use all of his powers that he has available to take next steps.
he wants to talk to them and figure out what they can do together. jonathan: this is what the president said, exxon made more money than god this year. this is what exxon said, globally, we have invested double the have earned over the past five years on new oil and gas supplies. the president said, historically high profit margins have been passed on to american families. he is alluding to them deliberately -- to price gouging. your administration has reported recently that the industry was working at incredible levels of capacity utilization of over 94%. euro treasury secretary said it is demand and supply that is driving inflation. my question, who is giving the president these talking points, they do not add up? heather: one of the things we
have seen in large part due to the pandemic and the war in ukraine, has been a capacity of refiners that has been taken off-line. over the course of the pandemic, here in the united states, about 800,000 barrels per day were taken off-line. the president is saying, can we work together to figure out how to get that back online as quickly as possible? jonathan: the president is not just doing that, he is suggesting -- that is the politics. he is alluding to price gouging, saying they made more money than god. they are buying back their own stock, making no new investments, yet they are buying back their own stock, yes, they are making investments. your own treasure terry -- treasury secretary says it is supply and demand. we are having a policy conversation, the president is not. he is speaking about politics, he is trying to make out
something happening in texas. heather: that is not true. jonathan: i read direct quotes. what part is not true? heather: the president is having a policy conversation. he is looking at evidence in front of them, what you cannot deny is the last time oil barrels were priced at 120 barrels, and $120 per barrel, asked prices at the pump work four dollars 20 five cents. now, at the same price level, you are seeing prices at the pump of over five dollars. there is a gap, this is what the president is focused on. that does not obliterate anything that is happening between, investments have been made. the president is saying, what more can we do? we need to get this oil supply to consumers, people can change their demand for gas, people need to drive their cars for work. he is focused on what else
refiners can do, there is evidence they are bringing in exceptionally high products ash profits, there is a gap between prices they are paying and charging that is larger than before. it is still about supply and demand. lisa: let's say you cannot get that supply on in the way the president would like in the short-term. how worried are you about going against what the fed is trying to do and dampening demand by subsidizing the prices of gas and other goods at a time when the fed ultimately is trying to get demand to come down? heather: a great question, you have elevated how this particular economic moment is tricky. we have some and he supply side challenges. as jay powell noted, the feds tools are blunt and the system is their downside. we have, we have seen them the past few years, this incredible supply chain snarls, we are seeing challenges because of the
pandemic. that is why the president has a multipronged approach to figure out the different ways we can attack where prices are too high for consumers. lisa: the point is, it is hard to deal with supply chain disruption that takes time. without that getting remedied in the short-term, why is it good not to see demand come down a little bit? heather: the president is letting the fed do their job. yesterday, the president signed legislation on ocean shipping, a place where that legislation and the work the federal maritime commission is doing right now could have an impact on prices consumers pay for goods being shipped from overseas. president is doing everything he can to lower prices using the tools at his disposal and trying to work with congress to do so. jonathan: five seconds left, thank you for catching up with us. heather boucher, the council of economic advisers.
this is a sticky one. an incredibly sticky one. the president has his views, we gave her time to say what she had to say. what he is saying in the facts, sometimes on this, do not stack up. you cannot reconcile the facts with some of the things he is saying. for one, investing. with price gouging, their own treasury secretary saying it is not price gouging. something has gone wrong there. lisa: there have been a lot of messages, they are not always cohesive. president biden has a difficult moment, there is this recognition there is certain things they do not have control over. the speed is what i am concerned about. jonathan: equity futures up 1% on the s&p 500. from new york this morning, good morning. this is bloomberg. ♪
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on the s&p, short .9%. i want to jump straight to this conversation with drew, who is going to give you a different perspective. drew, you think this fed is getting it wrong. that is not new. you think they are wrong for different reasons. can you run us through it? drew: whenever you talk about the fed continuing inflation, the thing i hear, they have to continue it. they are imperative, they have to do whatever it takes including a recession to get us into a lower inflation environment. what i think people miss, there is a trade-off between growth and inflation. we know how to solve the inflation story, we saw that in march of 2020. shut the economy down, inflation will come down. the fed's job is to manage inflation lower in a way that causes the least amount of damage to the economy over time.
in this case, by not getting investors to think about core inflation and not taking signals that longer-term inflation expectations from professional investors are giving them, they are rushing ahead to solve a problem that cannot be solved by their interest rate hikes. lisa: there is a debate about what is causing inflation, one of them is it is more demand driven, or supply driven. the president is saying it is largely supplied driven, saying it was not the stimulus checks sent out last year. are you saying this is a supply issue, not a demand issue, entirely fixed on that end? drew: it is both supply and manned, there are clear supply chain problems creating inflation pressures. there is a demand story. what the fed should be saying, we are not targeting 2% inflation because 2% inflation is a normal environment where
supply chains are functioning. we are targeting core inflation, absent food and energy. and, we believe this portion of inflation is due to supply chain issues, which we are not going to solve with interest rate hikes. if they re-centered the conversation, they could stop worrying about credibility. they have credibility. if you look at five-year inflation expectations, longer-term inflation expectations, the market believes the fed is going to strangle inflation. they are going to stop it, it is going to end, it is not drifting into the longer end of the yield curve. by continuing to say that you can stop inflation now with inflation -- if you keep focusing on shorter term inflation pressures you cannot control, you will lose credibility because no one believes you can do that. lisa: let's say they go ahead
with what they have said they are going to do and dampen demand to offset the lack of supply. how bearish are you? do you think this will be a fed policy error, the likes we haven't seen in decades and will cause you to hide out in cash? drew: there is a series of fed policies -- this cycle, the main one is, they didn't start soon enough. we knew there was a problem, they started quantitative easing. they continued lowering rates, keeping rates low when they could've moved earlier and the market would have appreciated it. instead, they waited, and now they are trying to play catch-up. there is a difference between doing a series of 25 basis moves over half a year, or three quarters of the year, and trying to get there all at once. it is not a linear movement in terms of market response to 25 basis points, three 25 basis
point moves versus 75. that is why you are seeing the market behave the way it is, the fed seems pointed. -- disjointed. they told us 50, after they ruled out 75 the meeting before. nothing really changed dramatically, there was a slight uptick in inflation expectations on one survey. it does not justify the swings we are seeing in fed policy. i think that should make everyone nervous. damian: last months fed minutes, we've got 522 billion dollars of runoff expected between now and your end. there has been a widening of spreads, next week, treasury auctions coming. what are you looking for, what is your confidence in ability to intermediate the treasury market? drew: i do not think we have
seen a lot of movement, quantitative tightening is going to happen over a long period of time. it is not always going to be pushing more supply into coupons. a lot of what is going to roll off with the fed is going to allow, it gets pushed into bills where there is a decent demand for them. i think as we look ahead, the real impact of quantitative tightening should be to lower inflation over time. i know it is out-of-favor to look at the sides of the fed's balance sheet and look at inflation, but if you look at it historically, there is a little bit of a relationship there, more than you would imagine given the fact that people do not like the m.v.p. q equation, money times philosophy -- times velocity equals nominal gdp. there is a relationship there,
you have to wonder what has been causing this inflation pressure. yes, it is the government's. it is the increased man. at the same point, there is a balance sheet component to it. as we move it towards normal, that should alleviate some of the problem. damian: fed credibility, 75 bids, do you think they gained credibility by knowing 75 bids to fight inflation, or did they lose it? i am curious to hear your thoughts on that. drew: it wasn't helpful -- i wasn't hopeful. they laid out a path of 50's, extending that path would have been more reasonable. one of the ways we look at fed credibility is the relationship between real and financial assets. up until a few weeks ago, they were doing well, historically speaking in that relationship. as of late, that relationship between those two is shifting,
which suggests the recent fed movements are not well understood by the markets to be supportive of a longer-term, limited inflation dynamic. five-year inflation expectations continue to stay low, that is what they should be hammering. which is, we cannot contain food and energy inflation. historically, we have never tried to. what we can tell you is, inflation is not going to be this high once we get through this period. to find the period or not, it does not really matter. telling people you can affect inflation now is not great. i took comfort from the economic projections, i know a lot of people do not think they are reasonable. if you look at their court pc projections, core pc is going down. court pc continuing to fall in a way that is realistic. it is still going to be above
four at the end of this year according to them. if they were to take a step back and say, we target two, we are willing to accept two and a half, we have a supply chain dynamic that means it should be closer to three and a half, that would suggest they are getting more momentum towards their goal. it would come for people to understand there is a stopping point to that. jonathan: your analysis is different. you provided that for us. can you tell me how your investment approach is different? what is the big market call that's -- that sets you apart? drew: we live in the same world as everyone else. there is an inflation component, a weakening growth story, the retail sales numbers, which got ignored but were the worst things i have seen in a while. there are signs that growth is slowing. inflation rising. when you look at that, assets
tend to turn -- some assets tend to do better. we are big ag investors. there are opportunities within credit, you just have to be careful. jonathan: you have to be careful in real estate right now? drew: you have to be careful everywhere. jonathan: mortgage rates right now, pretty brutal. drew: it is. that is another interesting point you bring up. raising rates, raising mortgage rates, pushing more people into renting when we have a issue with rental demand. once again, because you are hiking interest rates, doesn't mean everything you're doing is going to help inflation. jonathan: wonderful final point. i can tell you, repeatedly, that point is the point lisa has been making repeatedly. the sick, you are thinking about that a lot. lisa: if you look at the cpi
component, one of the biggest is rent. if you price people out of the mortgage market and home ownership, that keeps them in the rental market and jacks up the more. to drew's point, they are buying properties because they can raise the rents. that is a steady source of income that can be sticky, considering the lack of supplies we are getting in the housing market. jonathan: will you write a column for us this week? lisa: don't get ahead of me. yes. jonathan: i am looking forward to reading that on the plane away from here. lisa: [laughter] jonathan: damian, thank you for jumping in the seat. >> lisa, you are here every day this week, not once do you ever try to speak in a british accent. just a little bit. jonathan: how much money are you getting paid for that? i gave you this to make a golf course, not come after me.
damian: i would never do that. never. jonathan: get me away from these two. counting you down to the market opening. thank you. i think it should be the market omen, not the market opening. futures s&p, up .1%. from new york, this is bloomberg. ♪ ritika: president biden will convene world leaders from two dozen countries in a summit today. focused on repelling the fight against climate change. the virtual summit is on track to be the largest gathering of world leaders focused on climate action ahead of a united nations summit in egypt this summer. the war in ukraine is more evidence to accelerate the need
for clean energy transmission. -- remains steadfast in his belief that value investments can keep winning. cofounder of capital management tells bloomberg there should be more gains to come. >> we are maximally excited at the valley. year and a half ago, momentum, i am ignoring it. this is ridiculous. you have something now that is not quite as ridiculous, but something i didn't think we have prices i didn't think we would see again in a career going on now. we love value going forward. ritika: new governor, will lead the central bank of the -- after the end of the year after steering monetary policy. he will be succeeded by eric to the end.
news comes as -- made policy shifts, the central bank is addressing a surge in inflation and is seeing pressure in rate hikes back in april. global news 24 hours a day, on air and on "bloomberg quicktake." powered by more than 2,700 journalists and analysts in more than 120 countries. i am ritika gupta. this is bloomberg. ♪ at fidelity, your dedicated advisor will help you create a comprehensive wealth plan for your full financial picture. with the right balance of risk and reward.
>> we underestimate inflation. a large part has been the incidence of these new shocks. shocks by nature we could not anticipate. monetary policy cannot respond quickly enough to bring inflation down in the short order. lisa: chief economist at the bank of england after raising rates by 25 basis points, the expectation was for a 50 basis
point rate hike. damian is putting on a british accent. tom keene having an extended weekend. we have been talking all week about the pound, how weak it is and how it is between a bank -- a rock and a hard place for the bank of england. someone comes out with the history of crisis in england, that knows no one then sir howard davies, author of this book, "the chancellors." when did you start writing this? sir davies: i felt guilty, had to use the time i was saving. i thought it would be a good point to reflect on the history of the last 25 years, it has been exciting in the u.k..
the bank of england, scottish referendum, i asked various chancellors if they were prepared to reflect on it. they had time on their hands. in fact, they were happy to talk to me about it. what i try to do -- tried to do was tell the story of the last 25 years as seen from the treasury, which turns out to be quite a relevant thing. lisa: we were talking earlier this week how the bank of england raised rates because they were more concerned about the labor markets softening, or consumer demand than they were about the inflationary input to continue to create huge pressures on the economy. was that the right move, based on the conversations you have had? >> i was with the three in the minority. it was a 63 vote on the -- 6-3 vote.
of the four external economists, three voted for a 50 basis point rise, one voted with the bank of england insiders for the 25 point rise. externals, one of the problems we have is the weakness serving is contributing to inflationary pressures, as well. if you look back at the expense of oil prices, one reason we are facing a two pound a liter diesel price is because the pound has slipped onto 120 something. it was not long ago keep -- we were at 140. we are making a problem more serious, the fact that sterling is weak. in part, it is weak because of the perception the rates will not rise as much as they are going to rise in the u.s. damian: you are right to call it
the central banks for claiming they cannot tame inflation. they can. they have a blunt tool, they can raise rates, choke manned. is there any way central banks can do that without driving an economy into a recession? are there other tools at their disposal, i am curious to hear your thoughts on that. >> what one has got to look at is the -- i mentioned. if you get a sharp shock, like oil price increases, the shock we have had from the war, you cannot expect central banks to deal with that instantly. in fact, the inflation target formula explicitly recognizes that. inflation targeting is meant to target an inflation rate at 18 months, two years ahead. where i can accept the central bank saying, look, we cannot
respond to this immediate spike. that is understood. what they must do is present a plausible path of interest rates, which is going to deliver them back to the inflation target in two years time. that is why, i think, you need the higher rate at the moment in order to give credibility to this medium-term inflation outlook. i do not think that is where we are at the moment in the u.k. damian: you have been a member of the international advisory council since 2003. there are about 2000 china advisory, all that is going on with the lack of transparency with the pc aob, i am curious to hear your thoughts on that. what is china's approach to this? do you think those companies are going to have to lift in the near term?
close up to now, the src, the chinese equivalent of the sec, has had a policy orientation towards opening up chinese markets. they established a link between shanghai and hong kong and london, that is been the direction of travel. there are signs recently, the chinese wishing to pull back because they are unhappy about influence that external regulators have by a chinese company listing in other markets. i think it is difficult to say at the moment where this is going to go. for the last two years, covid has gotten in the way of direct connections. i remain on that advisory council, i am chair of it, we haven't had a physical meeting -- i am not -- what batch it is
difficult to answer in circumstances where you haven't met people in over two years. lisa: do you think the pound is soaring -- going to get over that mark we saw pre-brexit? sir howard: unlikely, would be my guess. i cannot see why. the short term you have been talking about involving interest rates, but also in the longer term, we do have a structural trade deficit. that is been offset by capital flows for a long period of time. you can only sell a london property market once externally. i do not see what is going to push the pound up. lisa: sir howard davies, thank you for taking this time. congratulations on writing this book. i want to bring you headlines
from fed chair jay powell, saying the fed is acutely focused on returning inflation to 2%. damian, i was struck by him saying the dual mandate hinges on ensuring financial stability. is this code for him saying they are getting concerned about some of the liquidity concerns you were talking about earlier? damian: we are talking about policy option alley, flexibility, something chair powell hasn't been good at. for me, that is what we are looking for. a step in the right direction. lisa: s&p up 623693, nasdaq up .8%. treasury yields edging downward, especially on these headlines. coming up, owner of the los angeles clippers. this is bloomberg. ♪
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