tv Whatd You Miss Bloomberg October 26, 2015 4:00pm-5:01pm EDT
alix: and i'm alix steel. u.s. stocks closing lower with the s&p retreating from a two-month high. joe: but the question is --"what'd you miss?" china's shadow looms over commodities. we will talk about that with an expert from goldman sachs and why he is still with the bears. hike by thete year's end more or less likely? alix: don't cry for argentina. i just quoted andrew lloyd webber. scarlet: we begin with the markets. the eccentriceen bank announcements. later this week we will hear from the fed and the doj. for the moment, there is nothing and you saw that reflected in
the trade today. joe: we had a huge day this week. last week was uneventful. you can read much into a couple points. alix: the volume is pathetic. we are 1%, 2% off on the dow and the s&p. the nasdaq slightly higher, but overall relatively lackluster. joe: yeah, really quiet and slow. off 9/10 of awas percent. this is the story. these are natural gas short positions in the market. they have really, truly soared. not only have a sword, but if you match this chart, they are at a record high. not only the oversupply in the market, but el niño could be coming, warmer winter, all of this adding to this record inventory. this is the story to me of the old day. joe: if we have that warm
winter, not so much -- alix: if it gets cold, boom. about aant to talk small company that trades in germany. dialog semiconductor. it fell, and who cares because --badd a that outlook outlook. who cares? we'll show you. you can see here, 78% of their revenue comes from apple, which reports tomorrow. people are nervous. you never know with these chain suppliers. you can't always read too much in. when you have a company where last we look at 78% of their andnue comes from apple the stock plunges, you've got to be worried. has a lot of people concern for apple's results tomorrow, which should determine the tone of where things go this earnings season.
for my deep dive, shares of valeant. what about that? structure. capital the company has more than $11 billion in term loans. the total debt is about $31 million. the market value is $38 billion. that is enough debt to impact to be broader credit market. is off bye that it more than six dollars. it certainly bears watching. alix: what is the function with that though? scarlet: cst. did not haveyou those issues, you would have to wonder how a company that built itself on cheap mergers and acquisitions would fare in this economy. scarlet: you can see more on all
of that with our twitter handle. and with us, our guest from goldman sachs. guest: a pleasure to be here. scarlet: talk about how the rebalancing of chinese demand for commodities plays out in the short-term and the long-term. joe: it's important to divide them into two buckets. one bucket, commodities, iron things you build with. the other bucket, things like gasoline, heating oil. if you build a building with the commodities and then you have to heat and cool it with opex commodities. what we find is gasoline demand -- the previous data points showed a growing at 19.1% year
to year. by contrast, steel, cement, it was declining somewhere around 6.5%. you really see that rotation taking place in broader commodities. what does this mean going forward? you want to be long opex commodities and short capex commodities. is working in china where they have been talking a long time about changing the economic model. sure, they are slowing. is a testament that policymakers are getting this right. my concern going forward, will we see a spillover from the capex economy -- the capex commodities into the opex commodities. the question is, the world has so much seal, so much capex, what are we going to do with it? are we going to see infrastructure development projects around the world take advantage of this cheap steel? alix: also, some commodities
have crossover. yes, copper is used to build roads and bridges, but you also make tvs. how to make the distinction? jeffrey: look at copper and aluminum. they both fit into that bucket. if you look at the demand growth rate, they are not collapsing or they are not doing that well. you look at aluminum growing somewhere around 4%. copper is declining somewhere around 1%. what i like to think, particularly around aluminum, that transition. as they use it for capex, as they get more mature in their growth rate, they use it for packaging. similarly, we think about copper. we use that for medical purposes. we can argue that is what we are looking for when we think about it longer-term. of the things we know about china's economy, it is in all of these areas.
china is still cutting rates in trying to keep the credit driven economy afloat. are they going to continue to export deflation to the world? it is clearly a risk, but i would not put a high probability on it. you want to have relatively high rates. you want to have a strong currency, because that discourages investment, and encourages consumption. while it is a risk, it would defeat the purpose of what they are trying to accomplish. you discuss trying to find out what could be the next china in terms of demand. no other country could even come close to china in terms of aggregate demand. that's true, but if you start aggregating places like the united states and europe, which are candidates to pursue
fiscal stimulus and focus on infrastructure development, there has been a lot of call for that being a 10 going forward. so, western europe, the united states, they are definitely candidates, but the big one everyone is focusing on his india. -- scarlet: would it be enough to replace china? jeffrey: taken altogether, no. you are not even in the same caliber. .ndia would be the most closest but they have a lot of other issues they need to deal with developing infrastructure further in lead before they can become as largest china. what i also find andinating, you relate opex to how rich people are. so, basically, if people are poor, it's better for those commodities. can you talk us through what that means? it has to dot of
with where they are in terms of their development cycle. -- you lookcapita at this happening in some places like china. we call this the s curve, top of the demand cocoa, thinks, like that kick up as part of the demand process. you see china, they do not trust the official data, it's not reliable. from where you sit, where does this unofficial data fit in wheat beer thesis?
-- jeffrey: problem the problem with looking at that data is it is to aggregate. what i like to do is become a look at the individual industries in china. hard landing and then you look at the industries.based a lot of this has to do with the averaging at the individual industry level. shift hen we make that opex in china, how permanent is that? i would argue it has to be permanent. you look globally, places like the united states, they close at 20. if they want a sustainable economy can go forward, they want those investment rates to
resources are necessary to carry effortsue and relief and assistance from the international community will not be needed. a humanitarian group says as many as 100,000 syrians have ced in the last few weeks. the recent surge in fighting following rush of's military military -- russia's invention is to blame. most of the migrants are from the province of aleppo where a groundoops began offensive earlier this month. a warning from the world health processed meat can cause cancers causes meat lovably cancer, too. it is the agency's most definitive statement today about the danger. theuts processed meat in same category as smoking. farmers and industry groups reject the findings.
public displays of confederate symbols, which many view as her minders of slavery and segregation, have faced renewed criticism since the shootings this year of nine black churchgoers centro sin, south carolina. and that is your first word news. alix and scarlet, back to you. alix: thank you so much. we are here with jeff curry. you made headlines when you said there was a possibility oil could hit $20 a barrel. that is basically would mean a cash pot. what does that mean? $200ey: we never forecast oil. we never forecast $20 oil. both are a scenario. to understand the risks scenario, where we come up with you have toario, it understand operational stress and that is very unique to energy.
by that?mean metals, you can store and in get of aluminum. storing aluminum is one of the easiest things in the world. all you need is a parking lot, chain-link fence, a guard dog, you can stack the stuff to the moon. in contrast, think about a barrel of oil. i produce the oil. it has to go into the pipeline. the pipeline goes into the storage facility. if you get to a situation in which suppliers above demand, you have no other option but to bring supply back in line with demand because you have nothing else to do with it. in that scenario, we look at the cash, and we would argue you have to get to $20 a barrel to create that kind of correction. that is the driver that. that is not our base case. our base case for 2016 is $45 a barrel. is to focus onir financial stress as opposed to
operational stress. you i want to ask something equivalent to what i asked you in the last segment, and is the fed putting perverse downward pressure on oil? in business marginal producers that should get out of business? jeffrey: i would put it the other way. go to qe4, the u.s. economy falls apart, ways that the case? this would extend a lifeline to the emerging markets. it would make the dollar weaker. what does that do to commodity prices? a weaker dollar drives up the cost structure of the industry which puts upward pressure on prices. it's interesting. i was making this comment to one of our producer clients in houston. he turned to me and said, what are you telling me? really wellis doing if the u.s. economy does poorly? it's true. we have known this for 50, 60 years. the difference is the causality is going the other direction.
alix: every time the capital markets opened up, you saw the rig count go up. jeffrey: absolutely. when we use the term "new oil tenets is the time to build energy has collapsed. between when you get capital and when you get production. you look at petrobras, 11 years, iron ore, 10 years. shale, 14 days. that is a game changer. that means you put capital to work today, you get production almost in two weeks and vice versa. what it does, it creates more levers for the market to utilize. it has credit, equity, cash flow. scarlet: what are you learning
from the redetermination process of the banks? were you coming away with? jeffrey: that group of producers does not produce that much oil. you can't rely on high yield companies that depend on secured desk. there is a rule in the shale. 80% of the hydrocarbons come from 20% of the fracks. those investment grade groups will have to do some of the heavy lifting and borrowing bases determination does not impact because they are unsecured. joe: a big story that companies like algeria and venezuela want to have a big opec slice. do these companies have any
ability to coordinate and leverage? are they deluding themselves? therey: let's go back to idea of what is the new oil order? in the old days, if you were the big guyssaw cut capex, you knew you could not get supply for for five years. it gave you the green light to let prices go because they could not undercut you. we saw evidence of at the spring. the minute that the prices popped back to $60 a barrel, riggs went back to work, capital markets opened up, and that is the core of the problem. yes, they can try this, but the world is different. that is one of the key implications. barclays had a report out saying $85 brands in 2020 because they need that price to get workers back to work. what you think? jeffrey: when we think that farther out, we use $50 a
barrel. one of the key differences, we see bigger productivity gains going forward, but the macro environment is radically different. oil price goes to $147 a barrel in july 2008 area do you remember where the euro was trading that day? alix: ooh, no, i don't. it was the weakest dollar the united states is ever seen, the same day we had the highest oil price. what that is telling you -- you want to get the higher price levels? you need to reverse the market. where was iron ore trading? all of those markets would have to go up to those higher levels. yes, we have to completely seal the deflationary pressure of all of these nonenergy commodities. the australian dollar. all of that leads to a lower cost structure. so, while we agree with them that the market is going to get tighter and races will go higher
gasoline, you make distillates. there are a lot of distillates out there, but the demand has not been there. storage builds of happened. refiner margins could fall. storage builds, boom. oil prices fall. that is how you track why distillates matter. jeffrey: you have to think when can this happen? there are only two times in the year. march,soline, and that april time. we have the demand coming down seasonally. demand is where it is. the market is going to be distillates with higher inventories. that is the focal point of potentially blowing out storage. the window of opportunity is closing by the minute. the winter heating system begins october 31, which is clearly a few weeks from now.
when we think about whether shocks, and historically when you have blown out the storage, you learn that there is a warm start to the winter. the chart we're looking at now our refinery turnaround as percentage of available refinery capacity, basically how hard are refiners running. they are running quite hard versus how they normally are at this time of year. at refineryyou look margins, particularly in the united states, they have been incredibly healthy. see this as being a byproduct of gasoline. you do build out that storage capacity. you will have to see those refinery margins come down. alix: how quickly do we see that pass through? you brought a chart talking about brent margins versus
utilization. how quickly does it work? historically when you blowout storage capacity, the system adjusts almost immediately. let's go back over the whole idea. storageave great capacity, it means you have no place to put this oil. this collapse in the refinery runs associated with the refinery margins back into the crude market. alix: but the issue, regardless of whether we are running out of time here and in europe, china. they are exporting it because they really knew the gasoline. if this divergence continues, do we breach? jeffrey: i think you hit a great point on what is going on in china. remember when we talked about opex commodity. think about gasoline being a commodity and distillate being an opex commodity.
what. you don't have a desk bed? don't be left in the dark. get proactive alerts 24/7. comcast business. built for business. scarlet: i'm scarlet fu. "what'd you miss?" let's get to mark crumpton. judges have ported a psychological evaluation for a woman accused of driving her car into a homecoming parade at oklahoma state university, killing four and injuring dozens of others. she is facing for preliminary counts of second-degree murder. she is also accused of driving under the influence during that accident on saturday. her attorney says she is mentally ill. jeb bush holding a second day of meetings in houston with top
fundraisers. the former florida governor is trying to reassure backers he has a plan to win the presidential nomination. last week the one-time front-runner ordered job cuts in his campaign and pay cuts for those who remain on staff. of the islamic state is claiming responsibility for a deadly suicide bombing at a mosque in saudi arabia. the attack killed one and wounded several others. the blast went off shortly after nightfall near the southern border with yemen. it was the latest in a series of bombings targeting mosques in the oil-rich kingdom. the leader of indonesia says his nation intends to join the transpacific ownership -- that is the sweeping pacific rim trade deal involving the united states. the president made his comments a short time ago after an oval office meeting with president obama. today was his first washington visit as commander-in-chief and marked a chance to build
relations with mr. obama, who spent part of his childhood in indonesia. and that is your first word news. scarlet, back to you. scarlet: thank you so much, mark. let's get a quick recap on the close. the rally appears to have sold out with the nasdaq little changed. all of the indices little changed. the s&p backing away from a two-month high. it is a waiting game for apple tomorrow and a waiting game for central bank's. treasuries rose in the dollar fell. on that point, i want to take a deep dive alix: -- deep dive intoa my terminal. i know it is a very busy screen. germany, negative yield. .33%. that is a record. you have sweden, the negative territory.
you have mario draghi saying the ecb discussed negative rates. joe: absolutely. i want to bring in the chief we have morelou, easing from the ecb. do these moves make the fed more likely to go because they are boosting the economy, reducing volatility, or less likely? it is a don't think question of the fed being concerned being out of step with the rest of the world. clearly the reasons that foreign central banks take these actions is the reason the fed did not take action in september. that being said, the fed may take its own path in december. scarlet: it very well may go on his path, but it when it looks that inflation, which measure is it looking at? new measures of
inflation it could choose to look at. an example could be the core wage earners, the core pci, the core pce. that is just one chart. pc, others. core telling when very the fed started backing away. they wanted, for parity, to pick one, but really all qualities are valid measures of inflation. while they start to undercut their message by backing away, they did start flagging some of these others. that could be a nation where they could move anyway. -- in a nation where they could move anyway. joe: how much of a gap is there between yellen and her cohort? do you think that there is a big gap and that yellen wants to go, she has to do a lot of work convincing the markets? louis: i don't think she can afford to wait she has convinced
the markets she is going to go. i think everybody knows it is a close call. it's just different shades. yellen is going to think it is a close call. one of the problems they have gotten themselves into, when they do finally go, they are going to tie it to the cumulative improvements they have made, which means there will not be any more smoking gun. it will be the cumulative impact of years of economic improvement, so the market will not know why the are doing this versus the last meeting or the next meeting. we probably will never price in more than 50% probability in the fed will just have to deal with that. alix: this is one of my favorite charts ever. if you look inside my bloomberg terminal, this is the vix futures curve. , orhat because of the fed is it totally different and the markets are reacting at -- a something different.
louis: the fed is not helping. the key point is the amount and anxiety is wholly disproportionate to the economic impact. the getting that move out of the way -- the first move really is important, because it reaffirms to the market that the fed can move. it takes out the notion that you will never get a fed move. is that volatility generated by the lift off debate so disproportionate to the economic impact? what accounts for it? uis: the stock market is a beauty contest. everybody knows it's important and it becomes important just because it is important. even though you're not thinking about the actual economic impact. the macro impact is minimal. joe: there is a small chance that the fed might not be able to raise rates. the mechanics are different because of the gigantic balance sheet on the reserve and a rethink. how concerned are you about that? i'm not concerned the fed
would be able to raise rates if it chose to, but you have to knowledge the possibility that the world may be weaker than you think. there is some chance that, no, we will find the next two months, that that report was a sign of things to common that will not be enough. joe: from a mechanistic standpoint, there have been reports about testing the system , but you're not concerned about that? it's going to be a challenge. the staff will have its hands full. but they can do it. about gdp numbers? i know you are a little suspicious of that read. does that mean the fed should not perhaps change its target to look at nominal gdp? there's a lot of discussion about how maybe they should be targeting nominal gdp? not a little skeptical. i think that the nominal gdp
numbers should not be published. we could talk about this for hours. the vision patterns are absolutely absurd. over multiple years you will have multiple official estimates. the first quarter of 2010 at different point in time the government has reported either the real gdp or real tvi was as low as 0.5 and as high as 6.5. that is a 600-basis point gap. if you can't tell the difference between that, it's not statistics you can rely on and there are all kinds of reasons why you should not expect it to be right. the basic point, gdp made sense in an industrial economy. it does not make sense in a postindustrial economy. all business services, all intermediate services do not need to be measured directly. what you do, what google does, , all of that is ultimately captured in final
goods and services. it makes no sense to say if the sale of razor blades went down in a quarter the amount of google activity advertising razor blades went down by the same percentage. it just makes no sense anymore. at an annual level it's still one of our best economic tools, but very difficult to track in real-time. alix: let me tell you what also doesn't make sense to me. we talk about the fed hiking. but there are articles about the fed easing in some capacity. what are they going to do with the treasuries that will mature or roll off next year? why not buy in the secondary market and help liquidity was to mark what you think about these percolating in the market? they're percolating because of doubts in the economy. tsm very hopeful the doub will be resolved. if the october report is a sign of things to come, the october employment report -- people are
investigating, what could you do in a subtle way without expanding the fed's balance sheet to bring back qe and the new operation twist would be one option. i have heard that. in that case you could have yield of 1%, 2%. do you have a probability for these kind of moves? 20%.: i think that is about the risk of a recession in the coming year and if we get a recession, they would do that. joe: what should they do, twist decide? what do think the best approach would be? let thehey should balance sheet run off as quickly as possible. the great thing about letting the balance sheet runoff is in .he short run, it is costless the treasury will replace the fed securities by issuing more treasury bills. it helps everybody. alix: great stuff.
estimates in the third quarter. that was four cents better than analysts expected. revenue of $2.2 billion also be in after hours. scarlet: shares of rent-a-center plunging after the market close. they were down as much as many present. they have come back a little bit. the reason -- the company is lowering its 2015 earnings forecast. and that is your bloomberg business/. argentina is said to have his first presidential runoff in history. both candidates failed to gain 40% of the vote needed to avoid the runoff. is here to discuss how the markets responded to the surprising results. joe: we saw a pretty strong rally in argentinian financial assets after the election. why? because no one could imagine this scenario. a lot of the polls were showing
the president candidate, cristina kirchner's candidate, they saw him in the 10-point ,ange needed to avoid a runoff and this one, the lead he had was like two or three points, very small. nobody saw that coming. like thedo investors possibility that he could end up the victor, macri? answered the questions the way that every would want. he says we will bring in capital, we will make it a business friendly involvement, and we will settle these old doubts that by eliot management that have been talking with the defaulted bonds back from 2001. argentina needs to raise money
abroad and implement the sweeping changes they need to implement and they can't do that unless money is coming in. joe: the argentina economy is a total wreck. they are saying in with the new, out with the old, except the old is still doing fine. why is the old doing so well? guest: they are doing well because in a populist country -- cristina kirchner has one of the highest approval rates and let america, far higher in the developing world as well. they appeal to the lower socioeconomic classes and they subsidize heavily. if you live in argentina, even if you were making a lot of money, you would pay electricity bill of five dollars, $10. joe: i would take that. guest: they have these policies that are very populist. that is why it is possible you
have a population voting for long-term gains instead of short-term gains. when is the next election, the final round? guest: the final round is the 22nd. joe: what will you be watching and what is your prediction? guest: everyone is going to look at where the votes from the third-place candidate go. he is the mayor of a city in argentina and he is kind of the perfect in between candidate. he is an opposition candidate, whatu think to yourself, kind of argentine is voting for this person? who is fed up with the government? or is it someone just opposed to the government all around? it's interesting. we will be looking to see where those votes go, where he throws his support to. that will make or break it. joe: and if it's an opposition
candidate, but eventually more upside for argentine assets? pretty much no one expected -- bearish people have expected this to happen. peace thataking the the establishment candidate would win. he would have to. it can't go further without comesning, but if macri in, they're hoping he will do things much more quickly in an orthodox way and any smart candidate 10, you take care of these problems right now, even if they are not popular at the beginning with the valuation, but all of the money that will flow in afterward, you reap the rewards for the rest of your term. you sol right, thank much. next, we will talk about china's ball of money and how it is moving. we will explain what that means in just a minute. ♪
scarlet: i'm scarlet fu. "what'd you miss?" in chinaof defaults fell corporate bond market, really not long. the not been many. tracy joins us. you came up with a grades metaphor -- a great metaphor. that isf excess money going out of the stock market into corporate debt. what does the history tell us then? i think we have to think of it as the great ball of china, money. you have a huge amount of excess lot of, get a whole money, by the way, capital controls in china, right? leave the cannot country. it circulates in goes from house prices to the stock market to
corporate bonds. now that we have seen this massive, massive volatility in china. market. we have all of this money pouring into the corporate body market and the interesting thing about the corporate bond market in china is there has not been that many defaults. the government has a long, storied history of stepping in to prevent any companies from experiencing trouble. there is a lot of what you might call world hazard -- moral hazard in the market. joe: one of the things you notice, people get worried about a default and the spreads widen. based on a bank of america-merrill lynch note. anytime there is news about dufault, in particular a corporate bond issue, the tighten. the investors demanding less risk -- alix: that makes no sense. tracy: they are just assuming
the government will bail out that company. it's just a chance to get extra yield. as the leverage increases, that money is going to the bond market. a stunning is statistic. the number of bond repose in the chinese market have gone up something like 43% since august of a.ing to be of a -- b them out bonds, repo in the market, secure loans against them, use that money to buy even more bonds. bonds up on bonds. never let these companies default? as you have more and more expectation that everything can be bailed out, would it be painful? that is the big question. based on what they did on friday, which is lower the ,nterest rates yet again .etting a bunch of companies go
we have rumblings of trouble in specific companies and there's always talk of china saying these ones, finally, a point to be the examples for the market. these are the ones they are going to let go and investors are just going to have to take losses, but it's an open question. scarlet: what evidence do we have that the government or have a solid grasp of how the bond market works? we have reason to be suspicious after how they handle be stockmarket selloff. a good question. china's finances are so deeply, deeply murky and the chinese government has this problem. whenever they quash one sector of the market -- no more shadow bank lending -- all of that money my great summer else. as soon as they say the stock market, we are watching you, again, the money just go somewhere else where. it is a huge problem for them. scarlet: soak -- alix: so it goes to real estate,
corporate debt? where is next? tracy: i wish i knew. that will be a very rich chinese investor. basically.ack a mole tracy: yes. i've used that term before. scarlet: i asked around it -- this literal translation for moral hazard is -- [speaks chinese] it does not mean moral hazard the way that we mean it. if anyone has a definition, tweet us. nothingaybe that says about the corporate bond market but there is no literal translation of moral hazard and chinese. scarlet: we'll be back with what you need to know ahead of tomorrow's trading day. ♪
scarlet: i'm scarlet fu. "what'd you miss?". don't miss this. there are 43 humvees reporting in the s&p tomorrow. everyone is focused on apple. we will be wall-to-wall apple tomorrow. no one will miss it. i'm sure of that. alix: i'm so excited. wow. chinese investors -- i'm so excited i can even speak. eastern.t at 9:30 p.m. the reason is so important, companies have really high debt loads. there's overcapacity which raises questions about production down the road. these industrial companies are feeling the squeeze. how bad will it be? lookingething i will be at tomorrow, the regional manufacturing indexes. are we seeing any kind of bottom
for one of the weaker aspects of the u.s. economy? we will find out tomorrow. we will have a negative reading on that. scarlet: a contraction. alix: we will see you back here tomorrow. joe: ♪ (ee-e-e-oh-mum-oh-weh) (hush my darling...) (don't fear my darling...) (the lion sleeps tonight.) (hush my darling...) man snoring (don't fear my darling...) (the lion sleeps tonight.) woman snoring take the roar out of snore. yet another innovation only at a sleep number store.