Opportunity in the market. The doj is stepping up its probe of Credit Suisse and ubs. We will get you the latest. From new york, dani burger is with me. Welcome to bloomberg markets. It feels like a rally off of a low. Its been a brutal couple of days but we are seeing a little bit higher. Dani it doesnt even feel like a rally, it feels like up pause and a time for reflecting after all those central bank decisions. We certainly see things shifting in the most positive term premium. It something we havent seen for the past seven years. Alix s p futures bounced off the 200 Day Moving Average so it doesnt seem to be a surprise. Its an energy story and we are below the 100 Day Moving Average of the tactical signals leave a question. We talk about term premium but we broaden that out and its about broader risk . Dani it is in a brings us to our question of the day. After what weve seen of the past two weeks, are you getting paid enough to jump in . Joining us to discuss this is michael and ira jersey. If i can start with you and the term premium, its math that boggles my basic mind so i dont want to get into the details but what has changed with the positive term premium and what does it tell us about the world we are in now . Ira it says the model says the term premium is positive. Its like dark matter, we know it must exist but we cannot observe and thats one of the challenges we have using models like term premium models to determine if we are being compensated for the risk of holding an instrument thats five or 10 years. Its hard to say thats the case you have the yield curve inverted as much is it still is. To your question, is the market priced appropriately given the preponderance of where outcomes could be in the next 35 years . The answer to that in the treasury market as we probably are now priced with yields higher than where they probably ultimately will be. If the fed does what it says it will do, something will break and we will have a recession at some point and when we do, you could see a reasonable return. If nothing else, you will get 4. 5 on a 10year note. Alix but you still get the income play. Are you getting paid enough to take some risks . Mike i was thinking just pay the man. Thats pretty much what it comes down to. When you look at the history of rates over the last 50 years, since paul volcker took over at the fed and brought down inflation, what we see is inflation and real rates tend to run about the same level, around 2 until the fed artificially pushed down yields after the great financial crisis. We built a sort of infrastructure around the idea of an extremely low or near zero Interest Rate over the net over the last 10 years and it will be hard for people to break out of. Ira is right is that we are settling probably where we will be Going Forward as far as we can tell right now. We dont know what will happen with the recession or whether our star will fall back and we will see extremely low rates again. At this point, it looks like we priced to wear about you would expect us to be based on longer history. Dani im taken back to the presser you are at of fed chair powell talking about duration, the long end of the curve and saying its not acting based on inflation but Something Else is going on. Think of treasury supply, thats out of the fed control. June we need to evaluate risk that it goes beyond rates and inflation . Mike youve got to take into account supply on the market has been doing that which is one reason you are seeing this big rise in yields. Some of the biggest buyers weve had for a long time are now out of the market including the fed. They are getting rid of longerterm treasuries. That creates a problem in trying to sell them. I guess washington did not think this through and should have issued a lot of debt to do infrastructure work when rates were at zero. Instead, they are issuing debt when the fed is not buying stuff and some of the foreign buyers have cut back. So we will end up paying more for stuff than we would have if this had been done the right way. Alix just looking him much Interest Payments of move the last few years is staggering. You know its super hat we you talk about term premium. To that point, whats the next catalyst . What will juice the market here . Ira when you talk about risk assets, its probably my market, the rates market and where do we think will we end up at the end of the year. It could be that we have a good news is bad news and the bad news is good news kind of thing for the next three months. If we have a significant economic slowdown which is still the base Case Scenario and if we have a recession in december or january or february of next year, can you could see treasury yields rally 75 or 100 basis points i think that helps boost valuations in the risk asset sector. There is an interesting rift dynamic that could wind up going on over the next few months, not necessarily because profitability will be good but it has to do with completely valuations. Fair value on tenure treasuries now according to our model, is 4. 48 . We are not completely under or overvalued compared to where we should be given the preponderance of the data we have. Alix i appreciate it, really great job, guys. We want to go to lisbon where guy johnson is at the World Aviation festival. This is his jam and he is in his element. What were some of the big takeaway is far . Guy the take away is that my jam is your jam. This has been an energy conference. This has been a conference in which fool prices have been dominant. Its a conference in which the future existence of aviation as we know it has been called into question because of the ultimate expense of sustainability of aviation fuels. Its not just the current generation butesaf which is Carbon Capture and hydrogen put together. It will be really expensive and the key question is or we ultimately going to see many people priced out of flying because flying will become so expensive . At the moment, fares may go a little bit higher because of jet fuel where it is now but the market can cope with it. The move into Sustainable Aviation fuel could be a whole different matter. The feeling is that demand is Strong Enough to cope with brent at 100 by the next few steps over the next few years could be really quite interesting. Its been nice to be here. It turns out my jam is your jam which is great. What i get out of this trip is a few tins of sardines but i thought i should get you something. What i got you was this it will settle back. Weve been 110 before. So far, the markets are taking the price points as a result of what we have to face to deliver the margins we need to keep going. Guy sir tim clark talking about energy and using those dreaded words he was not the only one. I have heard of the number of times. We will hear from Willie Wilson later in the program. Crack spreads are difficult because Everyone Wants diesel so its very high on airline fuel. I cant believe that is what has happened here. Alix you are welcome. I think it raises the point that the Product Market is tight if you take russian sanctions of certain exports were is off the table. Thats where the market is supertight which is bad news for the airliners. This is where the nerds stay. Did you get sardines because there is a shortage of fancy sardines in the u. K. Right now . Guy there has been an issue with acquiring sardines that i like in the u. K. But there are lots of tin sardines here. My producer and i went out last night and we got tin sardines, they are delicious and they look absolutely fantastic. The only downside is it is not sardines season. Fresh sardines are not on the menu here but the tin sardines are freely available. Im looking forward to sampling them. I get sardines and you get that crack spread. Alix thank you very much. More with guy from the aviation festival. Stay with us for these interviews. More on the question of the day are you getting paid enough to take risks and where . This is bloomberg. We are starting to see the consumer certainly under some pressure. Weakness in the consumer. Consumers will be facing some headwinds here. The market doesnt like the Strong Economy keeping Interest Rates higher for longer. Even 50 basis points higher from here really will start to impact the consumer. Consumers to continue complain about inflation being elevated. Higher oil prices. The trend in yields is up. Is this last move up in yields the signal that we are end of cycle . You have the last move where people throw in the towel and thats with we are going through. From here, it slows. There is a real spending issue coming up and that will impact earnings. Yields are higher in the fed is higher for longer and that will continuously put pressure on the Broader Markets. The risk for the Fourth Quarter is can the consumer continue to surprise in the upside . Consumers are saying theres trouble ahead. Alix those were some of the voices that spoke with bloomberg tv. Norwegian cruise lines is one of the top performers now in the s p 500. Are you getting enough to take risks . Kelly cox joins us now. What do you think . I think its a loaded question. You can get 5 on cash now so thats your going rate now. If you look around pockets of the stock market, you can still find value but you have to be careful and understand what your timeframe is. We are in it an environment where inflation is picking up in the economy look strong which is good news but it also makes things tricky because it gives you more choices where to put your money. Dani where are those pockets of value . Im thinking about cheap cyclicals if the economy keeps growing. We think there is immense pressure on the economy now so it may not grow this quickly for very long but it certainly is resilient so im looking at banks, energy is an interesting place to put your money. Looking at valuations, a lot of cyclicals sectors are below their p es and earnings season could give you a point to get in there. Alix if the economy rolls over, are they cheap enough to maintain that risk . This is where time frames come into play. Over the next one or two months, the economy is chugging along nicely so maybe look at value in Interest Rates are high. Beyond that, its hard to say that rates will stay this high over the next year or so. You have to remember that if you are in cash. You are getting 5 now but will rates go much higher with so much pressure on the. Economy . Im not so sure dani you had someone like jamie dimon saying we could get to 7 and many folks thought this was the year of the bond market and rates get moving higher so it didnt happen. When you look at the selloff induration, do you want to follow that trend . Do you want to buck that trend . Do you want to buy the dips in the bond market . I think its worth bucking the trend especially if you are the longer term investor. I cannot believe yields are staying the cipher so long. Thats a testament to the economy as well. We are not seeing Inflation Expectations pickup in many markets but we are also seeing yields rally and some could be technical or forces you cannot explain. I think a good part of it is the markets catching up with how strong the economy is. Rates are high and a lot of pressure and inflation has come down a lot. Dani do you buy the bond and get the appreciation . The income is a sweet deal but if you think the economy will slow from here and its doing well, chances are it will slow from here, you can take comfort in the fact that treasuries do outperform doing risk during recessions. You have the income and i think the guest before this mentioned this, five point 4. 5 per year is not bad considering the risk. Dani in a world where bonds and stocks are more positively correlated, what do you do with Portfolio Management . Do Something Else become the tonic when there are tough tides . I think you have to look at a variety of markets. If we hit a recession snag in the economy, what happens to my money . Gold to be interesting at this point. We have a lot of crypto customers. We always encourage them to look into crypto and bitcoin. Dont rule bonds out of the picture. Dont stand up on the market just because you are not sure if it will provide the kind of returns you wish. If youre talking about the vix, i think its showing us Something Interesting now. It hasnt hit 20 even though the s p has sold up 7 . The vix hasnt been 20 since 2005 and there is Market Structure for this. The average investor shouldnt worry about this but i think its another area where you may not get paid for the head you are taking. You have to think about that if youre looking into options. Understand that hedging the Broader Market may not give you the payoff you deserve. Look at single stocks through their and etf options are another choice. Dani but call for 100 per barrel oil keep coming out. How would that change what you just told us . Does it change or calculation for the attractiveness of risk . You have to think about what oil Higher Oil Prices mean for the consumer and economic data. Inflation has been picking up because of energy prices. Oil is in a supply crunch now. Its tough to make an argument Higher Oil Prices are because of higher demand. We dont know how long the supply crunch last and its harder to predict because it is supply focused instead of demand focused. Inflation data may tell us the economy is staying stronger and it may increase Inflation Fears there and that may keep yields higher. I think you have to think about that in terms of how you consider what kind of rates you can get and how you are looking at yields. If you are in cash, that means higher yields for longer and it encourages you to look at value. Dani all right, wonderful to have you on. Still i had, openai seeks a 90 billion valuation. The company is eyeing a possible share salem we will have details next. This is bloomberg. Alix dids 23 past seven on the west coast and we are covering the top tech stories. Silicon valley is starting its gorgeous morning. Ed ludlow joins us. Open ai potentially seeking a 90 billion valuation and possible share sale . That is enormous. Ed when openai did its share sale back in april, 300 million shares, it was valued at around 29 billion. This is a big jump in one point with the journal is reporting as this would be an insider share sale valuing the company at up to 90 billion. They are not offering new shares. 10 billion of the money raised to date comes from microsoft. They own 40 of the company and you look at the financials in the journal reported that revenue this year for openai will be about 1 billion but grow bigtime into next year. Does that justify a 90 billion dollar valuation . Its impossible to answer. Dani the time is maybe right for ai related big tech to ipo and opposed arm world. Is that in the cards . Ed its a great question but sam altman has said no to an ipo for ai. It started as a notforprofit and it transitioned to a cap profit model. They can take outside investment or equity stakes from outside investors but honor the original goals of the notforprofit. If you were a notforprofit and you are beholden to Public Market investors, you will do things they just dont like. The idea around shareholder returns are giving shareholder value doesnt fit with how openai is run as a business. Alix that leads me to ask, how does openai translate to the real world because that will give some real jews behind this. Ed a lot of it is still research. They are still thinking about how they generate and grow the next generation of large language models. The Business Model is quite simple. Licensing the technology to enterprise and subscriptions for consumers. The compute costs are still high am part of the microsoft relationship is they add credit and support through the microsoft cloud in azure. In the real world, it is there. You can integrate gpt into your technology and vice versa. As consumers, we can interact with chat gpt and we pay up subscription if we dont want limits. 1 billion of revenue this year and several billion next year, they are doing something right with something that was only an idea in november. Dani thank you very much and you can catch ed and caroline high on Bloomberg Technology in about 90 minutes. Coming up, the had fudged the Hedge Fund Manager shorting the Housing Market will talk about what hes betting on now. Thats on bloomberg. Alix markets going nowhere. Are you getting paid enough to take risks . And where . Liber max, he made his name by shorting mortgagebacked securities. He says he is the most excited hes been since 2014. What are you most excited about . Guest short duration, given the way the yield curve is inverted. Short duration credit we find attractive. Alix give me the framework for how you think about it in terms of inflation and growth and when the economy will get hit. Greg there are opportunities for a reasonably resilient portfolio with low double digits. Will there be this soft landing which will enable the fed to lower gently . Then, there is the hard landing and soon. Third, the resiliency of Consumer Spending is we have no landing on the fed continues to raise. The first scenario is least likely. We tried to create portfolios resilient to a harder landing or the persistence of higher rates. Alix how is this different than 08 . That was the consumers being leveraged. How are we set up now . Greg its different. Its what you said. People always fight the last war. In the wake of the gse, the government made reforms. The dodd frank rule, the vocal rule, the qualified mortgage rule. In the years since the gfc, the consumer has the leveraged themselves. There are more outstanding mortgages than ever before. On the corporate side, it is the opposite. There is more floatingrate than ever before. Our view, going into the next recession, on the relevant basis, consumers are in better shape than they were in 2008. Great to speak with you. There have been warnings. There is a feeling the piggy bank is running out. The richest 20 of Americans Still have excess pandemic savings. Mike wilson has been warning. Do those cracks concern you . Greg the feds stated goal is to slow the economy down. If you look at the data, in most cases defaults look like they did in 2017. That is the same for high yield. There is an increase in consumer stress off of low levels from before. We are concerned about the consumer but not more so than corporates. Alix how do you play . Buy mbs . Consumer credit loans . Subprime auto . Greg in the portfolios, we have a meaningful amount of hedges relative to the last two years. Second, we play in shorter duration things where we feel we are value covered and getting 36 months of cash flow. It is being selected where you are. Weve been taking more risk in residential mortgages. On the clo side, we have a large allocation with less risk. Weve been buying clos in the process of paying down as opposed, to new issue, which are more exposed to the cycle. Dani it has been a slow year for clos. There been inklings of buzzy names starting more funds. Is there a pickup on the way . Is there more excitement in the industry . Greg clo is great when you can scale it. We bought a clo manager years ago and sought to grow that business. What will be interesting, think about them, its usually on the equity side in terms of starting them. It will be driven by the way the cookie crumbles, the clo equity issued around the gsc, went down in price, similar to other markets but because the default cycle then was short, managers were able to reinvest in wider spreads in 2009. Those deals ended up being great even though they were launched at a horrible time. Alix you are scaling back. What are you keeping . Greg we been increasing exposure to deals done where they were past the reinvestment period. Bb, aaa, the double b becomes safer. The ratings are still in a lot of cases too low. Ultimately, a lot of them get upgraded or called, and that will generate low double digit returns. We like the wide last year. The spreads are very wide relative to the current market. Alix commercial mortgagebacked securities. Our mbs rmbs. Where are you making money off real estate . Greg whats important never to forget is markets react to the difference between expectations and reality. You think things are excellent and they are good, price can go down. You see it all the time. Cmbs, everyone knows there is a problem. The result is there is a lack of Political Correctness and some indiscriminate selling. I want to own it and i dont want to hear about why this is good or bad. Just get rid of it. Weve had that three times in our 13 years. We started the company, subprime mortgages, everyone lives outside of l. A. , they are never going to pay, half as many defaulted as we thought in 2010 even though the number was four times as many as 2006. Its all about expectations. 2014, everyone has a huge student loan and they all work at starbucks. Unfortunately, most of those loans are guaranteed by the government. Getting back to the question about cmbs, the whole sector is priced for horrible and some of the bonds will be atrocious. Some will be medium to bad. If you can invest in technology and data and underwriting skills to sift out which will be bad and which will be horrible and you just buy the bad to the horrible pricing, it will go up. Dani a lot of what we see in terms of debt instruments, products, they used to live on the Balance Sheet of banks. They are increasingly moving to private hands. Private credit has been gaining in popularity. More of loans getting sold off. Just a minute but is there a risk in that of the shifting of the worlds debt . Greg great question. The bull would say they are in vehicles that dont have redemptions. Theres a civility. What the government did in the changes they made, not want to have another lehman ever again, they made the system resilient to bankruptcy but they made it more fragile for selling. When banks could have more leverage than they could have now, when they were selling, thanks could step in and say, some senior person would say i will buy 2 billion. They are not able to do that in structured products because of capital charges. In the absence of private credit, markets are more volatile than they used to be for short moves even if they are protected from a gigantic move like the lehman bankruptcy. Private credit has played the stabilizer. What about when they have to rollover their debt . Are some of those firms using leverage . How many people in 21 thought it would be 3 let alone 6 . The stress case was 3. 5 . Those cracks havent come out yet. That is where i would look for them. Alix great to have you back. Coming up, we are going back to guy johnson. This is bloomberg. When you automate sales tax with avalara, you dont have to worry about things like changing tax rates or filing returns. Avalarahhh ahhh alix coming up, stefan hoops joins for an exclusive interview. This is bloomberg. Guy johnson in lisbon with willie walsh. Guy thank you. Willie joins me, weve had a number of conversations. Let us continue. We talk about fuel. Oil prices are going higher. Does higher oil mean higher fares . Willie believe so. The single biggest cost in airlines. The airlines cant absorb the additional cost. It gets passed on to the consumer. Guy is the consumer in good shape to take that . Willie some macro issues are positive for the airline industry. Not all of them. Oil prices are not positive. Typically it relates to a stronger economy. If the economy is strong and there is double gdp growing, thats good news. Guy how do you see demand evolving . Its been good. Coming out of the summer, sensational. Willie demand is strong. Stronger than i would have expected. They will continue to be good. Supply will be constrained. No fault of the airlines. They want additional capacity. Because of issues outside their control, they cant. The latest is the problem with the gtf which will restrict capacity. Guy there are other restrictions. Willie there is a balance, it is finally balanced between demand and supply. Weve seen the move in line. As supply continues to be constrained, demand will be good. I dont see any issue for the airlines. The environment is reasonably good. Guy im hearing between 60 and 80 , prepandemic levels. Willie differentiate between premium travel and business travel. A lot of people travel in the economy packets. A lot of nonbusiness travel in the premium packets. We see premium growth. That is recovering faster than the economy. Guy it is not as high yield. Willie typically it is. The yield you get from premium leisure is normally similar to corporate deals. I dont think it is an issue for the industry. We continue to see Strong Demand in the premium cabins. Guy the fuel issue. This Industry Needs to de carbonize. This will involve into esav. It is super expensive. I look at the journey this industry is going to have to go on. By 2050, can anyone afford to get on an airplane . This fuel is going to be so expensive. Willie it is very expensive today and will be more expensive. It has to. Ive been saying this. Anyone that believes you can transition to net zero at low cost is misleading. There will be costs. Ultimately, that will be borne by the consumer. Guy does that mean a smaller industry . Willie it will impact the rate of growth. Guy a slower growth. Willie look at china, india, latin america. There is scope for growth in growing markets. The pace is impacted by the additional costs. Guy the industry and passengers seem to be on different pages. The government says you have to use saf. You are saying, thats great but where is it . The passengers are like, we would like a better experience. We dont know how it works. Everyone is talking past each other. There needs to be a moment of truth. Willie i think we are getting there. Its not a common theme around the world. The u. S. Has adopted a position of incentivizing sustainable fuel. They have federal and state incentives to produce more. Europe has taken a different approach. They believe they can beat people into introducing it. That is nonsense. Airlines have used every drop available, despite the significant premium associated with it. What we want is to see greater reduction, which will bring down the cost from where it is today. It is not going to bring it down. There is a price. In the same way they facilitated the transition to clean energy for electricity and road transport, we are not asking for anything different. We want the policy framework in place that will support the industry making the transition to net zero. Guy theres an issue getting headlines. Does the industry have a safety issue . What . Willie there has always been an issue. It has been on a small scale. You need to ensure your supply chain, the providers are reputable. Know your partner and their track record. They know who their partners are and that the chain is secure. This is a small problem. Clearly, anything impacting safety. Guy does the industry have a safety issue . Willie no. Guy atc is struggling to recruit staff. Is that going to translate into safety . Willie the industry is struggling in some areas but what it means, there is no compromise on safety. Statistics prove that. Safety performance is improving, right through the pandemic, during the deepest financial crisis, the Safety Record of the industry continued to grow. The industry works hard. We work very hard to ensure our industry is safe and gets safer. Guy we have just been through multiple challenges the industry faces. Is a more consolidated Airline Sector the only way we see that becoming a reality . Do we need bigger, stronger airlines . Certainly in europe. In lisbon, there is a race to take over tap. Willie i believe so. That was my decision when i was running ihe. Consolidation is part of the solution. It is not the solution. Tap would flourish as part of a larger group, in the same way weve seen with other Smaller Airlines that have joined groups. Guy im going to congratulate you. You managed to get through it without using the words crack spread. I am happy. I know it is an issue. Thank you very much indeed. Alix you just talked about it. This is guy wanting to talk about crack spreads now. Your jargon talk. We will be back with you in the next hour. It is time for wall street beat. We take a look at finance. A bloomberg exclusive on citadel and the whatsapp probe. Citadel is pushing back. Sonali in january, the Industry Group said the rules for private funds are different than that of banks and so the logic for said theyll is similar. There is no sense the fcc, we know they have expanded the probe here in the idea of looking at more private funds, hedge funds, apollo, blackstone all facing these questions when it comes to communication from employees and how the fcc looks at it. Citadel going above and beyond is significant for the industry. Dani speaking of probes and scoops, the breaking story today about ubs, Credit Suisse and the doj. Whats going on . Sonali we have an indication doj, has alerted ubs executives particularly u. S. , that there might be elected sanctions violations among clients of credits weise. They are looking at it. Its early. Ubs shares reacted. When the doj is looking at communications and business with russian executives and wealthy individuals, that could be in violation of sanctions rules, they are looking at ubs and other banks. This is early. Youre seeing this overhang. With ubs, into the summer, they already settled a number of investigations regarding credits weise Credit Suisse. You have them moving quickly to clean up legal matters but this is a new issue. Alix they set aside money for reserves. Sonali thats the greatest question. Its unclear where the new investigation will fall, especially because its early. Its unclear whether this will amount to anything or how significant it would be. These investigations take time, which is why they have uncertainty, which they will look to clear up as soon as they can. Dani what is the next step . Sonali ubs, containing the scope. The deal came together quickly. Think about this issue, they are probably looking to see the scope, like the doj. The doj went to executives about it already. Clearly they are getting a handle on it together. Dani thank you so much. Coming up on the european close, still under pain. Stocks struggle for gains. This is bloomberg. Dani its wednesday, 27 september. Its turned into a selloff. Announcer the countdown is on in europe. This is european close with guy johnson and alex steele. Alix steel. Dani 30 minutes. Where have the dip buyers gone . It looks like a moment to pause. Its resuming. In the case of the euro, resuming with full force. Eurodollar trading 1. 05