The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.
Transcript
BFM
Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.
BFM
Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?
Tony
Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.
BFM
Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?
Tony
Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.
BFM
And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?
Tony
I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.
Tony
But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.
BFM
Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?
Tony
Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.
BFM
And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?
Tony
Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.
BFM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.
BFM
Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.
BFM
Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.
BFM
I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.
BFM
716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.
S&P500 has fallen to 2680, down 23% from the ATH in January. How serious is the equity downtrend? Eric Barna (@doublewidecap on Twitter) talked us through this from the technical perspective. He says the market is in a longer-term downtrend and to expect some sharp rallies as we head lower. We may see new lows for the year and a test of 3300-3500 on the S&P.
Also, we discussed the Fed’s view of a “better balance” in the labor force with Sam Rines, including a detailed discussion of the vacancies to unemployment ratio (V/U).
Lastly, Tracy Shuchart shared more on how energy issues in Europe are pushing manufacturing out of the region toward North America.
Key themes: 1. How serious is the equity downtrend? 2. Fed: “Better balance” in labor markets 3. Energy intensive mfg exiting Europe 4. The Week Ahead
This is the 35th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:55 Key themes for this episode 1:46 How serious is the equity downtrend? 8:19 In what level are we done with the downtrend? 17:00 “Better balance” in labor markets 22:20 Is the Fed still in the demand destruction path? 26:15 Base effect to kick in because of inflation? 28:24 Energy intensive manufacturers exiting Europe 32:01 Where will the energy manufacturers in Europe go? 34:00 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
Tony Nash: Hi, and welcome to the week ahead. I’m Tony Nash. Today, our special guest is Eric Barna. You would know him as @DoubleWideCap on Twitter. We’ve also got Sam Rines and Tracy Shuchart today.
So we’re just joined by an amazing group this morning. As we wake up this morning, we see that the S&P has fallen kind of to 2680 or something like that. It’s down by 1.7%. It’s been that kind of weak. And we thought it would be really good to get Eric in to talk us through kind of how serious our situation is right now.
So in our key themes, the first one is how serious is the equity downtrend? And Eric’s going to walk us through that. We’re then going to look at the kind of the Fed’s view of a better balance in the labor force, and Sam has written a bit on that, and we’re going to talk through that. And then Tracy Is going to talk us through more of the energy issues in Europe and some issues around moving manufacturing, potentially moving manufacturing out of Europe in a way that will hit the most. So guys, thanks so much for joining us today.
Eric, welcome. I know you’re very Technical, and I’m hoping you can bring us into kind of quite a lot about what’s happening technically in markets right now. So really, how serious is the equity market downtrend How long will it last? What will that downtrend look like?
Eric Barna: Yeah, just to start it off. Coming into this year, if you follow me on Twitter for a while with really starting in the fall of 2021, maybe it takes me or it takes the market a little bit longer to realize it, but we were heading out of this just support. 2021 was ridiculous as far as the market goes, I Mean, it was just ridiculous. Pal started signaling this kind of over. We got to kind of adjust things back.
And so that’s when I started thinking, okay, this is going to be a different set of circumstances, but I was looking at just recent history of 2018, 2019 type of market through 22 and 23. And that’s great for people like me because it gives us good to find ranges.
It took a little bit longer than I Thought to really test down into the prepandemic Highs. The first real upshot from not the lows, not the lows at 2100, but the initial push over that precoded low and then the retracement. So there’s kind of a Level. And once you release this on Saturday, I’ll put the SDX levels I’m looking at es the futures, and I back adjust contracts. So everybody’s levels are going to look a little bit Different. But 31 65 to 35 44 is kind of the meat of that first push over the precoded highs, off the 2020 lows and then the retracement back in there.
And I’ve been waiting, waiting, waiting for that retracement to kind of finish off, but we put the highs in early this year and this will be the third leg down. So first leg down was January through March, and then we had our March high, then we sold off again to the June low. We came back up to the August high, and this is the third leg down. So I’m looking for me a dip down.
We’re getting close to that area, but it’s not quite there yet. And when I say by the dip, few people know that November 2020, I sold my house that I’ve had for 20 years. I banked the money and it’s been sitting, drawing ridiculously small interest waiting for this when I put the money in. And this retracement here would get us down into somewhere in the 3000 503,300 and that’ll give us a new low for the year. And we’re generally weak through the first week or so, through August or October.
And if it’s going to happen, you’re going to get a bounce there. But you got to remember, you can kind of look at 2018 and that October, December, a little bit of crash we had there. So it’s possible it goes slower, but I think there’ll be good bounces at, like I said, that level, that 35 44. And like I said Saturday I’ll put the SBX levels in the comment of that or the Prepan Democrat, which on my chart is 33 27, somewhere in that area, a good sustainable bounce.
But it’s just kind of like yesterday on a short term basis, people were all excited about trying to buy that 72, try to buy that dip, and there’s just nothing, there’s nothing to tell you that this is over. The downtrend is pick a timeframe and the downtrend is intact. So the easier trade is still to the downside.
You may get some tradable bounces in there, but for me it’s more be patient for that bounce and then sell it back down. And until that confirms right now my swing high is the August high. And there’s a great deal of volume in that area, the 4000, $104,200.
If buyers can break back over there, I’ll get bullish on the market again. But for now, of course, for me, being typically a day trader, I’ll trade each way, but in the market structure like that. So the same patterns on a monthly show, up on the weekly, show, up on the daily, show, up on the intraday.
But for me, my kind of bearing on my trade is the weekly. And the weekly tells me on bigger rift, you want a size and you want to short. If you are going to catch a technical bounce, you want to be small, you want to be out quick. So that’s just kind of how I use the weekly. But for now, the weekly is solid, trend down.
TN: Great. Sam, do you have a question?
Sam Rines: I’m just listening, just taking notes.
TN: It sounds to me that you think we’re going to bottom out, say around 3400, we’ll say in a general range, and then we’ll see things maybe up around 4100. And if they’re sustainably above 4100, then we’re kind of done with the downtrend. Is that fair?
EB: Yeah, yeah, that’s good. And we definitely don’t have enough time to go through all of it. But just keep following me on Twitter. I want to post a lot more on.
My two big key levels every trading day is where is the trailing week volume? What was the most traded week or price in the last five days and then the most traded price in the trailing month? The last 2022 days? Trailing trading week and trading month. And so right now the trailing week is 37 80. It was yesterday, 3890. So volume is coming down, volume is following price. And that’s what I’m always looking for is where is value for the last five days? And as price moves down, is that value moving down this price?
Because if you start losing that ability to put volume at the lows, you’re going to get that really good snapback route and you’re probably coming back up into the trailing week. And if you get over the trailing week, you look at your trailing month because that’s probably going to be the next target.
Right now. Trailing months, if you’re looking at most of September, last couple of weeks in August, is at mean the snapbacks that we can get out of this market are dramatic for me as a short term trader, but it doesn’t change my opinion that at some point I want to size back down. And so we’re just not over with it now. So heading into we’ll see what JPAL does here, I guess is speaking now, but that’ll be my line in the Sam for next week. Is that 37.80? I’ll be looking for shorts in that area to come back down on any kind of pullbacks because right now the market is dreadfully short.
If you look at breadth, if you look at the options market, we’re sitting at like a billion dollars in negative gamma. Right now. The VIX is high. 28. Short term VIX is 29. So there hasn’t been a reversion yet. And that’s kind of and if you were watching yesterday on Twitter in my feed when we started rallying yesterday, I was like, no, that’s not the dip to buy anything weight for a key level like previous low and short the heck at it because it’s coming back to 80 and that’s what it did.
But we’re inverted on the deck and we haven’t quite recovered from that. We haven’t reversed back to a normal looking VIX. Until that happens, any price lower the 2022 low right now is my key target. What would it take for us to get a normal looking VIX from your perspective? You’re going to have to start seeing as time happens, you start to cane those puts. You get people covering those puts and the dealers can get rid of the hedges that they have. And that puts it in a situation where I call it a dumbbed or mechanical bid, where it’s buy at any price.
They don’t care about my levels. They don’t care where the trailing week and then the second part of that dumb money, the pension funds, the insurance companies who are trading more on risk and volatility, they have those volatility algos that run and again, those are dumb bits. So I look at realized volatility, where’s the three month realized volatility, where’s the one month volatility trailing volatility and who’s in control right now? It’s the short term volatility. It’s higher than the three months. And that gives you it’s great for me as a day trader because it’s going to give me good ranges introduced.
Once the three months realized volatility is higher than the one month, then the market kind of calms down. And so you start looking at big days in that trailing three months. And if those days fall off, so say back in June, we had some really good 3% down days and those days fall off. And if you’re not replacing them with big ball days to replace that volatility, the volatility will drop.
That will set those pension funds and those insurance funds to buy. And it’s just dumb bit. They don’t care if S&P is at 3700, 3800, 3900 they’re just playing volatility. Those are things that I look for for me to go, okay, you know what, I’m going to put a chunk of money long here. And when I say a chunk of money long is it’s usually a couple of weeks, a week. I don’t even know what the retirement fund is. Somebody else. Totally. And it’s that it’s not my game.
TN: Great. Tracy, do you have a question here?
TS: No, I’m just listening to this.
TN: Eric, we’re not super technical. We don’t really talk technicals that much. I think we’ll start doing it a bit more. But this is great. So thanks for that and I think it’s all new for us and really glad to hear all of this. So thank you for this.
EB: Yeah, just follow for me, it’s follow the volume. What is volume doing? Where’s the most traded prices in area? If we’re coming back up, like I said, that 3780 is a big key level. Buyers take that over, you’re going to bring in that shortcoming. There’s going to be plenty of stops over yesterday’s high.
We’ll get you back probably into the mid 3800. And I followed on a weekly. If you look at the weekly now, the most traded price this week is below last week’s most traded price. What is the market telling you? It’s telling you it’s still in price discovery mode. We haven’t found balance. And I’m a dumb day trader.
TN: I think it’s great. Okay, perfect. Eric, thank you so much. Let’s move on to some Fed talk. I think that segues really nicely into what you’re talking about price discovery. And one thing that Sam has published a lot about Fed, he does regularly, but he pretty much masterfully nailed the Fed’s calls this week and the impact of the market.
Sam, do you want to talk us a little bit through that and a little bit about the labor markets, the better balance in labor markets that Chair Powell talked about in his discussion. We’ve got a chart up right now on what you call the switcher spiral. So job switchers and gains and vu. If you could explain I know we talked about it briefly before, but what is vu and how does that play into the better balance in labor markets?
SR: So much like Eric was saying, that the market hasn’t found a balance. Neither has the Fed. And I think that’s kind of critical to think about when we’re trying to process what the Fed might be doing, how they might be acting, et cetera. So vu is vacancies to the number of unemployed individuals, specifically job vacancies. And when, basically, economists and Fed officials were looking for a reason that they missed the embedding of inflation and the overshoot of inflation, they found that there was a pretty tight fit between an elevated number of job openings and too few unemployed individuals. And the reason that that is somewhat disconcerting for the Fed. Is pretty straightforward right now.
If you switch jobs, you get paid a lot more than your old job, right? Those are really where the wage gains are. You’re north of 8% as a job switcher and there’s lots of job openings. So the potential for a wage price spiral there is significant. It’s not necessarily a theoretical at this point. It’s there that’s the disconcerting part. If you have a wage spiral, then you have a price spiral and then it gets really difficult to back away from it over time.
Can I just stop you right there and say is this view concerned the wage price spiral? Is that particularly in the US. Or is that global? That’s us. Well, I wouldn’t say it’s us only it’s a particular phenomenon in the US. And I think that’s really the only central bank that I would apply that framework to.
But Powell made it very clear not only did he state that job openings were too high, too unemployed, I mean, he called out view directly, but he mentioned better balance a number of times. Right? This is a Fed that is solely concentrated on inflation.
It does not care how much pain there is in the labor market until you begin to have a decline in the Vacancies to unemployed and until they see realized, not projected inflation come down. Do they factor in labor participation rate at all? I mean, it’s labor participation rate is lagging, right? So that would make sense that there are more job openings than there are job seekers. Does that factor into the equation at all? No, because the prime age is pretty much back to where it was precovid. It’s a bunch of old people and a bunch of young people that aren’t in the labor force.
And the Fed is going to completely ignore that. COVID did cause a number of older individuals to get out of the labor market. It was that simple, right? When you figure out that you don’t have much time left and you got some money, you retire. There was a bit of a mental shift there. So I wouldn’t say that that is a significant factor. And if you back out to a normal participation rate, you’re still sitting at about 1.6 to 1.7 jobs for unemployed job openings per unemployed.
So it doesn’t take the number down to the .9% to one ratio that the Fed would actually like to see. If you look at the numbers, you’re looking at a 6% plus percent unemployment rate to get the vacancy ratio back down. And so the Fed is willing to take some pain in the labor market. And I don’t think that people are really anticipating it. And I don’t think people are prepared for a Fed that really doesn’t care about your labor market and only cares about its inflation.
TN: They’ve already said they don’t care about your house, so now we’re learning they don’t care about your job.
TS: They don’t. Care about your job either. He basically said that, right?
SR: He said, yeah. His press conference, he stated it directly. And I made a joke that their forecasts were living in a unicorn metaverse about unemployment and inflation.
SR: I stick by that because you’re not going to have a four and a half percent unemployment rate. You’re going to have closer to five and a half to six and a half percent unemployment rate before you begin to see inflation break and have it break in a way that convinces the Fed it’s not transitory.
The Fed does not want to have a transitory breaking inflation. So I’ll bring back transitory and annoy everyone.
TN: If you dial it back in our discussions about six or nine months, we started talking about demand destruction. They’re still on this demand destruction path. Right. Because it’s still really kind of the impacts of supply side inflation, not necessarily demand driven. Right. Or is the demand driven really only in the US. Because we see so much supply side inflation in the rest of the world?
SR: Yeah, it’s two sided in the US. Right. You still have significant demands in the US. Even with inflation running hot, and you have supply side constraints. So it’s a two sided problem in the US. And the Fed knows it can affect the supply side to a certain degree, not necessarily much.
What it can really smack is demand. And so until that demand begins to come down, the Fed is not going to have accomplished its mission. It is going to be a fun time.
TN: So we hear from Eric that markets are discovering prices. We hear that the Fed is discovering its level. So on some level, nobody really knows what the destination is here. They think they do, but they don’t. Right. So the Fed seeing 4.5 terminal rate or whatever, is just like Eric saying, three thousand, three hundred S and P, right?
EB: I don’t think everybody was talking about the palate of it as far as the market is concerned. And it’s just my personal feeling until you get to the prepandemic high, powell doesn’t care about the market in July. At his press conference in July, I was like, here we go, this is going to be it. I listened to it and I was like, damn, he’s hawkers. And the market rallies. And then I started hearing, oh, they’re going to pivot, they’re going to pivot. And then dad came out the last week in August, or, you know, that Friday before the last week and said, son, ain’t done.
If you didn’t take the clue from July, you certainly should have taken it from August. And then even in his press conference in September, he had the perfect scenario in the market to rally this thing, hundreds of points. And all he had to do is say, hey, it’s working. We’re on our path. Everything’s cool. Month on month.
Things are slowing down, right? Yeah, everything is doing exactly what we thought it was. And he came out and he did it again. We’re not done yet. We’re coming after your house and we’ve got to get some people out of the workforce. I don’t know what else you need.
TN: Well, I said earlier this week, everybody is, whether they’ll tell you or not, everybody is secretly hoping the Fed will save their portfolio. Everybody’s secretly hoping for that.
EB: I haven’t done the math over, say, from 17 to 22 or whatever it is, but my guess is before this is all over, that average gain you’ve had in your four hundred and one K over the last 20 years or so, you’re coming back to it.
TN: So Sam, just a question that’s been in the back of my mind before we wrap this up on your side is
we really started to see inflation accelerate last probably November of 21, something like that, right? October, November, somewhere in there, is it possible we see base effects kick in at some point around inflation? And does the fed care?
SR: There’s a possibility we begin to see base effects on headline. With energy prices coming down, food costs beginning to moderate somewhat. But remember, shelter wasn’t running last year at all, right. And shelter is a much larger component of CPI. It’s a smaller component of PC, but it’s a much larger portion of CPI. So in a way you’re likely to see a headline begin to headline, CPI, everything begin to have those base effects take hold. But on core you’re in trouble if you’re betting on base effects.
That’s the dynamic there. And the other thing is it’s been a much broader base this year on the month over month accelerations that you’ve seen. So that’s something to pay attention to. The base effects are not here to save you.
TN: Okay, good. I just wanted to get that out there because it does come up, but it is in the back of my mind, I’ve heard people say it and I just wanted to make sure that’s on the table. Okay, thanks for that.
EB: I’ll give you my N equal one sample. So we moved down, we sold the house, we moved down here to Houston for a couple of years and didn’t want to buy. I should have because I would have made a lot of money. But. November is my lease renewal. It’s my power to choose renewal and everything. And I’m looking at 15% to 20% on housing and electric this November. It’s still ugly. It’s still ugly.
TN: Okay, great. Let’s move into speaking of energy prices, Tracy, you put a Tweet out earlier this week talking about the high natural gas prices pushing European manufacturers to shift to the US.
So really interesting to me, I think we’ve seen kind of some China manufacturing start to shift to the US. Interesting to hear about european manufacturing shifting to the US. Can you tell us a little bit more about that? What’s driving it, and what sectors do you expect?
TS: All right, so Disney kind of has to go back to this fall in Europe. When prices started spiking, we started seeing a lot of the smelting industry come offline, and that had because of high natural gas prices, everybody forget all of this started happening pre Ukraine invasion. So this all really started I mean, it was years in the making, but this really did start happening really in the fall where we really started to see these effects. And of course, with high national gas prices, they have secondary and tertiary effects, such as if you can’t produce fertilizer because that prices are too high, then meat packers are in trouble that buy the CO2 from the fertilizer companies.
So we started kind of seeing a meltdown of these supply chains because of high natural gas prices and then moving forward, if we look, we have almost 40% of fertilizer production is offline in Europe right now. We have iron, copper, nickel, aluminum, zinc smelters, and stainless steel mills all offline too. Over 50% of their metal capacity is down right now. And these companies, if you’re a smelter, they’re so energy intensive, you can’t just restart those up again.
It takes months to bring those back online. So what’s happening is a lot of those companies already have or are considering moving to the US. They either have plants in the US. Or are planning to move to the US. Just because our energy prices are a lot lower. And the cost after shuttering production. The. Cost to bring that up back online is very expensive. Of course, all of those metal companies, they’re going to affect manufacturing. So, I mean, you’re up some big trouble right now. The energy prices are too high.
All their industries is a huge supply chain, right. You have to know it just goes all the way down the supply chain so that supply chains are going to be screwed up for a very long time, and they’re not even better after covet. The other issue is with Europe, they’re going to have a problem with this. They’re still focusing on there’s still tripled down on the screen energy. So what it’s also going to force them to do is to rely on China even more because China provides a lot of the materials necessary to build out, say, solar panels and windmills and things of that nature.
TN: Okay, so where primarily is the industry coming from? Europe? Would it be northern Europe where a lot of these smelters and fertilizer plants and stuff are about it? Where is that general?
TS: A lot of those are well, really, it’s across eight countries. So you have France, Romania, Slovakia, Slovenia, Germany, Netherlands, Montenegro, and Spain.
TN: Okay, and so where would they go? Do they need places that are close to transportation, cheap energy, these sorts of things. Are those the priorities for them?
TS: It really depends on it depends on where they are. Right. I mean, you could essentially build a plant like times like the oil industry does. They find wells. Right. Then they build the town around it. That essentially can happen too. We haven’t really seen any solid moves yet. It’s more of a kind of a speculatory thing of this nature right now. So we kind of have to keep an eye on that to see if indeed they do move to the US. Because I would also think that they’re probably looking at Mexico, where labor is a lot cheaper in South America, labor’s.
TN: Cheaper in Mexico, and power prices are deregulated in Mexico, too, and that happened, what, seven or eight years ago? So they are competitive on the power price site as well.
TS: So I would say let’s keep an eye on that. Honestly, there are no solid moves at this point.
TN: Any chance they’ll move to Asia, or are they already too dependent on Asia?
TS: I think after Koba kind of scoops them from Asia in general, even though, ironically, they’re going to have to rely on China a lot more active.
TN: Okay, interesting. Definitely something to keep an eye on. Okay. Thank you, Tracy. So, guys, let’s just go around real quick. And what are you looking for for the week ahead? Eric, let’s start with you. What kind of levels are you looking for for next week?
EB: Well, we’ll see how we close this week. I’m still hoping we get under $3,700. We test that 2022 low, really get a good flush in the market. And so I’m kind of looking at that 3650 if we can close it at the lowest, and we’ll see what we get out of if we get some short covering coming into the weekend.
TN: I don’t know why you would, but if you do, where do we get to?
EB: But as long as we’re under that 37.80, I’m looking for lower prices.
TN: Okay, great. Tracy, what are you looking for on the energy side?
TS: I mean, I think it’s mostly the same. I think everybody’s in that we have an OPEC meeting coming up right at the end of September, beginning of October. So I think everybody’s going to be focused on that. There’s whispers of larger cuts, like, not the token one hundred K that there was last time. So I’m sure that everybody is going to be focused. I’m sure there’s going to be a million rumors this week.
Sure, up and down, OPEC, job voting everywhere. But I think that most people involved in the energy industry are going to be kind of looking towards OPEC plus.
TN: And is there a lot of fear in OPEC that crew is going to go into the 70s or 60s, or are they seeing things continue to rise?
TS: It’s really a strong dollar story, but is that really the main fear. They would like obviously they would like higher prices. They would like closer to $100. Fundamentally, this market is still tight. Okay. So I think that’s their main concern. If they need to spook it, I mean, they’re not making product.
TN: Real quick, what are you looking for that we get?
SR: I’m just watching the dollar and what all the Fed speak comes out at, basically. Are they doubling down on last week, or are they trying to walk it back and what that does with the dollar and whether or not we can get the dollar to be looking a little peeky here.
The ride-hailing company said it was responding to a ‘cybersecurity incident’ and that several internal systems had been affected. Margi Murphy is a cybersecurity reporter at Bloomberg News and updates us on the story.
Why do we have such an attachment to some of our favorite brands? We know brand loyalty is a marketing executive’s dream – but how have some of our kitchen cupboards seemingly become even more than that – more like old friends? The BBC’s Dave Reid investigates.
The UK competition authority intervened after Facebook’s parent company Meta applied to buy out the gif platform Giphy. Technology reporter Ryan Broderick gives us the background.
Will Bain is joined throughout the program by Tony Nash, founder of the AI firm Complete Intelligence, in Houston, Texas, and by Shuli Ren, Bloomberg Opinion reporter in Hong Kong.
Transcript
BBC
Hello and welcome to Business Matters on the BBC. World Service will be with you today. Thanks so much for ending your week with us. Most linking off today, though, for our two guests, tony Nash, founder of the AI firm Am Complete Intelligence, joining us from Houston, Texas. Tony, welcome back.
TN
Hi, Will.
BBC
Ending the week with us, and you can tell BBC Sport have been in the studio here before because I just saw flash through on one of the panels here, the Houston Astros, your beloved Houston Astros getting underway in momentarily the baseball and joining us.
TN
That’s right. They’re doing well.
BBC
Thank you, they are. And putting in your Yankees under a lot of pressure, too, which I know will give you even more pleasure, tony, absolutely, yes. Tony Nash in Houston, because this is right in your wheelhouse, Tony. I want to pick up that point that Margie made right at the end there. First of all, these companies, A, specialized in technology, b are some of the richest companies on the planet. How on earth does this keep happening?
TN
There are always new ways to hack you’re as strong as your weakest employees. Temptation, I guess. And it sounds like they got in through a phishing attack. And it’s hard to make things 100% secure. If people want access to the outside Internet, if they want access to emails, these sorts of things, you have to have some ways for people to get in, unfortunately. And it’s just not surprising everyone gets hacked whether they admit it or not. And so this was just a very visible hack on Uber.
BBC
Yeah, Uber have been doing something interesting, certainly, tony, in my reading around this, I didn’t know quite as much about this. Perhaps you could explain more to people, but they were using ostensibly kind of a team of their own hackers to kind of test for vulnerable points in their system over and over again. And actually, bizarrely, that might have proved to be one of the vulnerabilities here. Just explain first that how it works and then how that might have happened.
TN
Yeah, I mean, it’s good practice to have people trying to hack your system. It’s probably good to have contractors doing it and also alternate them from time to time because you have to have different thinking about your security because there will always be people thinking differently about your security. And so it’s a challenge, and you have to be very careful. So it’s really easy to second guess Uber and say they did the wrong thing, but I’m sure they are industry best practice and more. It’s just a matter of, on some level, bad luck.
BBC
No, really interesting point, actually. In our earlier sister show, World Business Report, we were talking to Chris Low, one of our financial analysts, who were saying actually the share price was reacting on perhaps exactly that, actually, maybe you were better prepared for this than others. So an interesting kind of wrinkle to that element of it. She’s the blessing and the curse of new technology that we always want something new and shiny to sell to investors and to customers when actually investing, ensuring what we’ve got might actually be better long term for the business. Yes, Tony, I could hear you agreeing with that too.
TN
Yeah, it’s not an easy balance. Right. And Uber is in kind of a weird place, coming out of Covet and trying to get their business at the same place as it was and more. It’s difficult for everyone. And again, everything you do to remain secure can potentially hamper your ability to get revenue. Those are not different sides of the same coin. But I think you have to be careful about your security kind of overwhelming your business needs. So it’s a real hard one.
BBC
So you don’t become too cautious, I guess, going the other way.
TN
That’s right. Exactly. So it’s a real hard one to look at Uber and go, oops, they did something wrong. There’s always something done wrong on the security side within businesses. Right. And so they’re no different. And like I said earlier, they’re probably better than most people.
BBC
I’m a sucker for a good deal. Shirley, don’t get me wrong. Tony, you wanted to come in.
TN
Well, they don’t have people as full time employees, and this isn’t really to defend Uber, but they do give people a lot of flexibility. Again, it’s really hard to look at that and say, oh, they’re such a terrible company. I don’t believe that. I mean, they’re a very popular company.
BBC
Absolutely. That was just only in the past life. Stock markets was very much your bag as well.
TN
Oh, yeah. And also servicing global curry companies. When I was at The Economist, we did work for those guys in 2007. I remember one of them calling me with a situation just like this, and they said, It’s not public. We saw this. What’s your view on this? So I called the chief economist at the time, and I said, hey, this is happening. Should we worry about this? He said, no, it’s probably just a blip. So these are very serious things. We all know what happened in 2007 and 2008. So these are very serious things, especially when a company like FedEx says it. And so we have to pay attention. And if they say it’s already happened or this is old information, then, great, we’re already well into it. That’s the relief that I come out of this with is if they say that it’s happened some time ago, even if it’s a few months, great, that stuff happened. We’ve seen China closing down, and we’ve seen the number of the impact on the supply chains. And the US already had two quarters of negative GDP growth, and we see what’s happening with energy prices, other things in Europe.
TN
So it’s no mystery that we’re in a recession, right? It’s no mystery at all. I’m glad that we’re seeing things like this. FedEx report come to confirm it.
BBC
Tony taking us neatly to exactly one of those issues, the sort of extra pillar putting the pressure on here, energy. Big development on that in Europe today because there have been dramatic developments in Europe’s largest economy. Germany has taken over local branches of Russia’s biggest oil company, where you raised it. It’s all of this that’s in the mix, isn’t it? This sort of mess around where energy is coming from, how people can get it, how much is going to cost.
TN
Yes, it’s a very big problem, to say the least. And energy is going to cost a lot this winter in Europe. There is no debate about that. And we see coal plants reactivated, we see more oil, we see desperation for natural gas. I’m in Texas. That makes us happy. But it’s going to be very difficult in Europe. The saving grace of this is the following. Countries like Germany have plenty of room within their national account to subsidize a lot of energy so they can subsidize something like one time their entire GDP. So there is room to spend at least with the German government and a few others. So northern Germany generally can help their people or northern Europe sorry, generally can help their people with some sort of subsidy to get through the supply type of issue.
BBC
And Tony, obviously in a sentence or two, interesting pressure on the US. To pump more reopen pipeline. Difficult politics, isn’t it?
TN
Yes. Please call DC and tell them to reopen pipeline.
BBC
So speaks of Texas Republican. That Tony Nash with us from Houston, Texas, the energy capital of the US. Of course, sheli ran also with us from Hong Kong. Pay more from both of them in the second half of business matters right after we get you up to speed with the latest worldviews two rapidly middle ageing men discussing gifts there you can see the problem in a nutshell. Ryan Broderick of the content minds podcast helping us out with that. Tony, that’s the issue, isn’t it? Something starts off being cool, and then we’re talking about it in our defense on business matters late at night on a business show on the world service and radio four. That’s when it stops becoming cool. Perhaps.
TN
Perhaps. I sent a gift yesterday and today on twitter. Here’s the thing. I know I’m not cool, so I’m not trying to be cool. I’m just trying to contextualize something that I said. So whether it’s cringey or not, I don’t think it matters. I think people do it. Some of them are a little bit annoying, but a good Austin powers gift every so often is kind of fun.
BBC
Well, this is where I wrestled with it in that interview, tony, because he’s actually from an American advert. I think he’s from a geico insurance advert. But I like the pig who sticks his head out the window and he’s got kind of sort of a toy fan that whizzes in kind of excitement, and I like to use that one pretty regularly. And then listening to Ryan’s interview back, I thought, probably going to have to retire that Shelley bluntest submissions I’ve ever seen in what is normally a fairly dull area, competitions and markets, authorities submissions. Would you maybe advise if you could perhaps be a little less honest in the future?
TN
It’s worth it. Not cool enough. Defense, right? Yeah, I don’t know. I think it sounds like they like Meta headquarters and they like the free meals and the massages and all that stuff, and they don’t want to have to go out in the cold again. I don’t know why else you would do that.
BBC
And in a wider sense, we see it in some of the sectors, don’t we? We were talking about it in the office, actually, about things like craft beer. You get to a certain stage, actually, and that none of your fans or the people who love your product necessarily want you to sell out to a big company, a giant company, but actually, they’re the ones who can facilitate growing more, getting more eyeballs, getting more users on your products.
TN
I’d love to sell it. To.
BBC
Come find complete intelligence, call Tony. We’ll link you all up. Well, we’re going to stick talking brands. Complete intelligence, obviously an excellent one. Surely if you’ve got a plug, you’ve got about 20 minutes left in the program as well that we can get to. Tell us about what the magic of Tabasco is. Louisiana’s pride and joy.
TN
Well, obviously you don’t know about the enemy between Texas and Louisiana.
BBC
Of course.
TN
It’S great, and Louisiana is fantastic. We love that stuff here and it’s really a Louisiana thing, but Texans really love kind of spicy Louisiana food and of course, Texas barbecue.
BBC
In terms of brand loyalty, what is it, Tony? What makes a customer exactly like Shirley says? Because most people are driven by price. So why is it just ease and comfort? Or is there something more hooky about it, something cleverer in the marketing?
TN
Yeah, I think it’s comfort and as much as it’s a feeling, right. I mean, there’s a particular type of condiment that I like that I’m not going to mention on here, but I like that my family knows that I don’t take anything else. I’ve been in since I was a kid, right. And we don’t get any other brands because they just taste different, and my palate is just articulated for that taste. But we grow up with these things and they give us a level of comfort. And I think about my kids grew up in Singapore. We spent 15 years there. So there’s a particular brand, for example, of soy milk that they like from Singapore that reminds them of Singapore. They don’t want Japanese soy milk or whatever. They want this particular brand of Singapore soy milk.
BBC
Play that piece a little bit, because obviously it’s a huge constitutional and historic moment here in Britain. But it’s interesting the kind of global grab that the story and the event has had for days now. Do you think perhaps some of those silver screen portrayals are part of that story, part of that reason why sure, yeah.
TN
I lived in London when Diana died, and I remember being in London when the Queen Mother died, and not so much Queen Mother, but these previous events really did get certainly Western attention, if not world attention. And I think there’s a fascination with the Royal family, but I think there’s also kind of a confusion of, like, what do they actually do? I don’t mean that in a disrespectful way. I think that’s a lot of the.
BBC
Rest of the world no, we’ve seen some pretty quirky constitutional stuff this week, haven’t we? Things that we’ve never seen in this country on the tele before, some of the sort of announcements and Privy Council meetings and things that television is giving us a view into.
TN
Right. And I think that is something that is interesting. It’s puzzling and people romanticize a lot of that.
BBC
Of course, Tony in the US is going to be a huge global television event come Monday with US networks, I imagine, are all piling on the plane as we speak.
TN
Yeah, I’m sure they are. I don’t really know, but I’m sure they are very well.
BBC
But there’s going to be an appetite for it is, and it’s going to do big numbers there. And TV news has become a lot about big events like that.
TN
It is. And all sorts of non expert experts will come up to talk about the Royal family to fill that time. I think what I would love to see is people just take it in, whether it’s on video or whether they’re there. This type of event obviously rarely happens, right? So don’t give me commentary talking over the live events, just kind of show us what’s actually happening and occasionally explain what’s happening, but really just let people take it in more than have this kind of rambling commentary about it.
BBC
Well, of course, if people do want to take it in, the BBC website, BBC TV and right here on the World Service is going to have plenty of coverage of that on Monday. Tony Nash, Shuli Ram, been a real pleasure to have you with us on business matters. As always, both of you, have a great weekend. And to all of you listening, the same, thanks so much for being with us. Bye.
With stronger inflation data suggesting that the Federal Reserve will continue with their hawkish stance, what then does this mean for markets? And will inflation be exacerbated by the potential rail strike. Tony Nash, CEO of Complete Intelligence tells us whilst diving into the impact of a strong greenback.
Produced by: Michael Gong
Presented by: Wong Shou Ning, Shazana Mokhtar
Transcript
BFM
Good morning. You are listening to the Morning Run. 7:06 am. On Thursday, the 15 September. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour we’re going to be speaking to criminal lawyer Srikant Pillay on the criminal defamation charges filed against the edge. But as we always do, let’s kick start the morning with the recap on how global markets closed yesterday.
BFM
It’s the tale of two halves because the US markets all closed up in the green. The Dow was up 0.1%, S&P500 up 0.3%, and Nasdaq was up 0.7%. Albeit actually it was a very choppy trading session with US stocks actually sometimes swinging violently between gains and losses throughout the day. Meanwhile, in Asia, it all closed in the red. Nikkei was down 2%, Hang Seng down two 5%, Shanghai was down 0.8%. Straight Times Index in Singapore down 1%, while our very own FBMKLCI was down 1.3%.
BFM
So first, some thoughts on where international markets are headed. We have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, we saw equities plunged this week in response to worries over US CPI numbers. But if we take a closer look at the numbers itself, headline inflation only rose about a .1% month over month, which doesn’t seem like a lot. Do you think markets are over reacting and making much ado about nothing?
TN
Well, kind of. But what’s really happened is it’s about expectations for the terminal rate, which is basically the terminal rate is when does the Fed have to stop hiking at what rate? Right? So the terminal rate expectations change from 4% to about 4.3%. And with that expectation, that means that the Fed would have to hike more and maybe hike faster. So investors were reacting to that because consensus had become 75 basis point hike in September, then two more 50s before the end of the year, and then maybe a 25 and boom, we’re at the terminal rate. But with a rise in the terminal rate, we could have a 75 in Sep, 75 in October, and then who knows after that if inflation doesn’t slow down. Now, what I see and what you mentioned is a zero 1% rise month on month in August. That tells me that the rate of rise of inflation is slowing. So on a year on year basis it still looks bad, but the rate of rise of inflation is slowing. That’s good news. Okay, let’s see what happens. And we could have some positive unexpected things like, let’s say for example, the Russia Ukraine war ends or something like that, right?
TN
But what I’m expecting are things like a continued deceleration of inflation. It doesn’t mean we’re going back to pre 2020 pricing levels, it just means that the rate of inflation is slowing and spenders get used to paying higher prices over time.
BFM
So, Tony, what then is your feel in terms of what the Fed will do at their meeting next week? Are you expecting a 75 basis point hike? I even hear some houses saying a 100 basis point hike.
TN
Yeah. So I think there’s a 20% to 30% likelihood of 100 basis point hike. And everyone loves to kind of freak out about the Fed. So it’s possible that we have 100 basis point hike. I think what they’ll end up doing is hiking 75 and they’ll try to sound really bearish about things or sorry, not bearish, really hawkish about things. That’s what I meant to say. So they’ll hike 75. They’ll basically say, if you don’t slow down, we’re going to hike more, and then there’ll be another 75 where we hit expected or where the market generally hit expected at 50 for the next meeting.
BFM
Two year US treasury yields continue to spike, worsening the inversion that already existed prior to this. In what time frame can we expect to see some equilibrium return to fixed income markets?
TN
Yeah, I think that’s largely happening because of uncertainty about inflation expectations. I think there had been a hope that inflation would moderate more on a year on year basis in August, which it didn’t. And so that added some uncertainty into the mix. And so you’re seeing those short yield spike based on that uncertainty. And so when we see more certainty, a lot of this stuff really started to rise in October, November of ’21. Okay. And so as we get into those months, what we expect to see are some base effects. So we already started to see things rise in October, November of ’21. As we get to October, November of ’22, we will have already started getting at a higher pricing level in Q4 of ’21 anyway. So we expect to see the observed inflation slow as we get to those months and we’ll see a little bit more predictability, a little bit less uncertainty about inflation.
BFM
Tony, I want to pick your brain on this talk of a potential rail strike in the US. How detrimental will it be to the economy? Or is it just a blip?
TN
No, everyone goes back to the supply chain bottlenecks that we saw, and of course the union is playing on those fears and the consumers are worried about more supply chain bottleneck. Is it a problem? Yes, it’s a big problem. So I don’t think anything you’re seeing in media at this point is kind of too shrill. It could be really bad. And so this stuff will come down there’s brinksmanship it’ll come down to the last minute and will likely, I’m sure it will be solved somehow. Right. And again, that’s a secondary impact of inflation. Right. So we’ve seen things rise. Dock workers are saying we’re not being paid enough. And then it’s that wage price spiral that you hear about. So wages rise. I know in Asia people are a lot more aware of this than people in the US are. Where we typically have say, one or 2% inflation, you don’t really see a wage price spiral here. I think you see it in spurts in Asia a lot more frequently than we see it here in the US. So yes, it’s a real problem. Yes, they’ll get their raise or a significant portion of it.
TN
It could be ugly until it’s settled, but I don’t expect it to be a protracted issue. Sorry. The other thing I’m not to think about is we’re starting to enter kind of the pre holiday import period. So the guys who are negotiating against the dock workers know that if this goes out a month or two months it’s going to hurt all that stuff on the shelf at Walmart, all that stuff on the shelf and all the stores, Amazon, all those guys.
BFM
Yeah. So some people might not get their Christmas presents on time. Right. But do you think the other headwind is the US dollar strength, which it has come down slightly last night, but even if we look at the Bloomberg Dollar spot Index on a year to date basis, it’s 11% and Oracle used that as an excuse to explain why earnings were a bit soft. How much more of these announcements are we going to see from US corporate?
TN
US dollar is going to be the Pinata. It’s going to get the bashing this quarter and earnings reports, everybody is going to blame weak earnings on the US. Dollar. Everybody. So it’s 11% year to date. So people are going to say if they missed by 11%, they’re going to go it’s the dollar is fault, regardless of what operational issues they have, regardless of what inventory issues they have, they’re going to blame it on the dollar. Wall street analysts know better, but they’re going to accept that as an excuse and that’s just the game that everyone’s going to play this quarter.
BFM
Tony, thanks very much for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. I really like the comment he made about the US. Dollar becoming the Pinata in next season’s quarterly report.
BFM
I’m going to bang it, try to hit it to get all the sweets out.
BFM
Right. We could probably do a game like a bingo game how many corporates mentioned US dollar as the reason for faltering earnings perhaps something to look for.
BFM
I mean even in Malaysia we’ve got corporates doing that all the time.
BFM
Right.
BFM
And it’s a non cash item but clearly an excuse. So we’ll be watching this space, lots of headwinds. I think the other news coming out of Asia, which is interesting, is actually and this is of course according to people familiar with the matter as opposed to unfamiliar with the matter, SoftBank Group founder Masayososhi’s Son has revived discussions of setting up a third vision fund. And what’s ironic about it is because just a few weeks ago, he apologized for the disappointing performance of his first two funds.
BFM
You know how they say there’s that saying goes, insanity is doing the same thing over and over again, but expecting different results. I wonder if that’s what this third vision fund is in a way. If the first two haven’t really performed, is setting up a third fund really the answer?
BFM
But it’s amazing. People do give him cash, right? It’s not like he doesn’t get new injections of cash all the time.
BFM
It reminds me very much of Adam Newman, actually the founder of WeWork. And even though he had such an infamous fall from grace, he is back in the corporate scene now with a new venture and people still continue to give him money. So go figure. Some people are just really good at getting cash.
BFM
Selling themselves in the brand.
BFM
7:16 in the morning, we’re heading into some messages and when we come back, we are going to be taking a look at the proposal to expand the parliamentary seat allocation for Sabah and Sarawa. Stay tuned for that conversation. BFM 89 nine you have been listening to a podcast from BFM 89 nine, the business station. For more stories of the same kind, download the VFM up.
It has been a terrible week in markets. It is not looking good for anybody, at least on the long side. A lot of that seemed to change when the CPI number came out. It’s like people woke up and terminal rate is going to be higher and just everything flushes out.
We talked through why the dollar is where it is and how long we expect it to stay there. Brent Johnson recently said that the USD & equities will both rise. And so we dived a little bit deep into that. We also looked at crude.
Crude’s obviously been falling. Tracy discussed how long is that going to last.
We also did a little bit of Fed talk because the Fed meets this week. And we want to really understand when does the Fed stop? After last week’s US CPI print, the terminal rate rose from 4% pretty dramatically. Does QT accelerate?
Key themes: 1. $USD 🚀 2. How low will crude oil go? 3. When does the Fed stop? 4. The Week Ahead
This is the 34th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamps 0:00 Start 1:20 Key themes for this episode 2:24 What got us to stronger USD and will it continue to rise? 8:29 Dedollarization 10:23 Intervention in the dollar if it gets too strong? 12:22 Both the USD and US equities will be rising? 14:18 Crude: how low can it go? 18:03 Look at the curves for crude 19:17 Slingshot in December? 20:18 How India and China buys Russian oil and resell 21:33 Restock the SPR at $80?? 22:57 When does the Fed stop raising rates? 29:33 What if Russia, Ukraine, and China don’t lock down anymore? 32:08 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
Tony Nash: Hi everybody, and welcome to The Week Ahead. My name is Tony Nash. We’re joined today by Tracy Shuchart and Brent Johnson. So thanks guys for joining us, really appreciate the time to talk about what’s going on in markets this week and next week.
Before we get started, I want to remind you of our $50 promo for CI Futures. CI Futures is a subscription platform to get forecast for thousands of items: currencies commodities, equity indices and economics. The currencies commodities equities are refreshed every week. So every Monday you come in for a new forecast, economics forecast every month. That $50 a month promo ends on September 21. So please take a look now go in and check it out and if you have any questions, let us know, we’re happy to answer them. So thanks for taking the time to do that.
So, Brent and Tracy, it has been a terrible week in markets. It is not looking good for really anybody, at least on the long side. And so a lot of that seemed to change when the CPI number came out. It’s like people woke up and we’re like, oh no, the term rate is going to be higher and just everything flushes out, right. And earnings and a bunch of other stuff. So we can go into a lot of specifics. But one of the items that I’ve been really curious about for weeks, if not years, ever since I met Brent in 2018, 19, is the dollar. So we’re going to go a little bit deep into the dollar today.
We’re also going to look at crude. Crude’s obviously been falling. So we’re going to ask Tracy kind of how long is that going to last? And then we’re going to do a little bit of Fed talk because the Fed meets in the week ahead. And I want to really understand kind of when does the Fed stop.
So those are our key themes today.
So, Brent, welcome. Thanks again for joining us. I’d really like to talk through the dollar and we are where we are, which is amazing. And you have seen this years ago. On the screen, I’ve got a chart of our CI Futures forecast which shows a dollar continuing to rise over the next year. We’ve got some bumps in there, but for the most part we see a persistently strong dollar.
CI Futures provides highly accurate commodity, equity, currency and economics forecasts using advanced AI. Learn more about CI Futures here.
So I’m curious what got us here and what will continue to push the dollar higher?
Brent Johnson: Sure. Well, first of all, thanks for having me. I always enjoy talking to you, Tony. The reason I like talking to you is you’ll talk a lot about Asia, but you’ve actually lived there and you actually know what you’re talking about rather than people who’ve just read it in a book. And same with Tracy. So I’m happy to do this and happy to do it anytime you invite me.
But anyway, what’s really going on with the dollar is a function of the fact that it’s not only the Fed and it’s not only the US that has, for lack of a better word, idiotic leaders. The rest of the world does, too.
And I think over the last several years. At least in the retail investment world. There’s been this theme that the Fed is out of control. The government’s out of control. They’re going to spend all this money. The dollar is going to pay the price. And it’s going to get inflated away and go to zero. And the rest of the world is going to do great and we’re going to do poor.
And I understand that view if you just analyze the United States. But the problem is you can’t just analyze the United States because it’s a big world and everything is interconnected. And all of the problems that people have forecast to fall upon the US.
Dollar are currently happening to a greater extent in Europe and Asia. And the budget deficits, the printing of the money, the central bank support, the holding down of rates, all of that applies even more so to Japan and Europe than it does the United States. And that’s really what you’re seeing.
Over the last, let’s just call a year, you’ve seen the yen fall 20% versus the dollar. That is an incredible move for any currency, but it is an absolutely astonishing move for a major currency, specifically the third biggest currency in the world, or some would even argue the second biggest currency in the world. And then you’ve seen the euro over the last year is down 10% or 15%.
So these are very big moves. Again, the reason is because the Fed is raising rates. So on a relative basis, we have higher rates than those two big competitors. And on a relative basis, those two big competitors are doing more monetary stimulus or QE or extraordinary measures, however you want to define that central bank activity.
And you always because the globe runs on the dollar, there is a persistent and consistent bid for the dollar globally. And so it’s really a supply versus the demand issue. Now, everybody always focuses on the supply. Central banks are increasing the currency in circulation. They’re going to print all this money and so therefore the dollar falls or the currency falls. Well, that’s just focusing on the supply side.
But again, you have to remember that all central banks are increasing supply, but the demand is what makes the difference and that there is global demand for the dollar. Now, whether you think there should be, whether you think it’s the right thing, it doesn’t really matter. It just is. That’s the way the system works.
But there is not that same global demand for yen. There’s not that same global demand for yuan, there’s not the same global demand for euros or Reals or Florence or Liras or anything.
And so what you’re really seeing play out is Trifan’s dilemma. And so I’ve spoken about this before. But Trifon’s dilemma is an economic theory that states that if you have a single country’s currency that also serves as the global reserve currency, at some point the needs of the domestic economy for that global reserve currency will come into conflict with the needs of the global economy. And that’s what we have.
We have an inflationary pressure problem in the United States. The Fed is very embarrassed about it. They got it wrong and now they need to do something about it. And they’re bound and determined to try to bring it under control. And so they’re raising rates to counteract that. Well, when you raise rates, you’re tightening the monetary supply. And that’s happening. That’s fine for the US. But there’s many countries around the world that cannot handle that right now.
But that’s what’s happening. And so the needs of the domestic economy are in conflict with the needs of the global economy. And it’s going to be the global economy that suffers more than the domestic economy as a result. It doesn’t mean that the domestic economy won’t be hurt. It just means on a relative basis, you want to be closer to the money than far away from the money. And because we have the global reserve currency, we’re closer to the money.
TN: So it’s interesting when you talk about the dollar versus other currencies, and we often hear people say, oh, CNY is rising as a share of spend, which that’s debatable. But from my perspective, it’s not the dollar that’s kind of in the gladiator ring of currencies. It’s the yen, it’s the euro, it’s the British pound, it’s the aussie dollar, it’s these secondary currencies. They’re going to lose share before the dollar does. Is that wrong?
BJ: No, I think that’s absolutely right. And again, that’s a very good way to put it. I know gladiator walks into the ring and thinks, I’m not going to at least get a few scratches. It’s going to hurt. That’s just the nature of being a gladiator. But what matters is who’s standing at the end of the day, right? And so I think it’s these other currencies are getting hurt by the battle more so than the dollar. It doesn’t mean that we’re not getting hurt. It doesn’t mean it doesn’t sting. It doesn’t mean there isn’t going to be any pain involved. But at the end of the day, if you’re at war, you want to be the last man standing because of the way the system is designed, I believe that that will be the US dollar.
The other thing that I would just quickly point out is a lot of people say, why can’t you see it? It’s very obvious. The rest of the world wants to de-dollarize. They’re putting all of these trade deals in place, the dollars falling as a percent of reserves, etc. And the point I would make is, yes, I do see it. I agree with you the world would like to dedollarize, but it’s much harder to dedollarize than just saying, just because you put an announcement out there doesn’t mean you’re actually going to be able to do it.
I’d like to make the analogy that I’ve said I want to lose weight and get in great shape for 20 years. It doesn’t mean it’s going to happen. It hasn’t happened yet.
But that’s the headline versus reality, right? I just think that’s where we’re at. And the dollar, for better or worse, it’s a rigged game in favor of the dollar. And the US set it up that way is the global hegemon. They set it up that way. Now, it doesn’t mean they’re not trying. It doesn’t mean that the world doesn’t want to get away from it. It’s just very hard to do it.
The last thing I’ll say and I’ll shut up, but the other thing I would say is the process of de-dollarization, even if it is successful, will not be a calm transition. And the process of dedollarization is not necessarily, and in my opinion, not probable to be negative for the price of the dollar. I think the volatility and the lack of liquidity in dollars that would go along with de-dollarization would actually squeeze the price of the dollar higher.
And so it doesn’t matter to me whether de-dollarization happens or not. I think the dollar is going higher for all of these reasons.
TN: I think what’s funny there is people always put de-dollarization in this almost moralistic language. It’s a good or a bad thing. And it’s just not. It just is.
Tracy Shuchart: I just had a question for Brent. I mean, do you see at any point that there’s some kind of intervention on the dollar? The dollar gets too strong because it’s going to crush emerging markets? Do you think there’s any point in which Yellen kind of backs up?
BJ: I do think they will. And that’s why I think the dollar is going to go back to all-time highs before this is all said and done. I don’t think it’s going to be a straight line. It can’t be a straight line without absolute devastation. Doesn’t mean it can’t happen. But I think this is going to play out over several years rather than several weeks. It could play out over several weeks, but I think it will take longer. And the reason I think it will take longer is I think that they will interact or they will get involved, as you’re suggesting, Tracy.
I actually think right now the Fed and the Treasury want the dollar strong. I think they’re using it as a weapon or as a tool. It’s something that can be used very effectively. Again, whether you think it should be used or not, I don’t care. I just think it will be, and I think it is being and so I think that will continue.
But I think the Fed and the treasury, they want the dollar higher, but they want it done in a measured fashion that they can control. If it starts to get out of control, I think that they will rein it in. I think they want some of the other parts of the world to be an economic pain, but I don’t think they want the whole system to collapse. And so my guess is that we’ll get the dollar higher, maybe it goes to 115, 120, and then they’ll do something, it’ll pull back for six months, three months, whatever, and then it’ll get higher again and they’ll come out and do something.
So I think this will be a process, a little bit of a roller coaster, up and down, but I think that the general trend is higher and I think there’s more pain to come for the global economy as a result.
TN: Brent, real quick, before we get onto oil. You sent out a tweet earlier this week that said you think that we’re going to come to a point where both the dollar and equities and US equities are rising. Can you walk us through that just real quickly? I know there’s a very detailed thesis behind that, but can you walk us through that very quickly so we understand kind of what you’re talking about there?
BJ: Yeah, so the first thing I’ll say for anybody who’s just kind of passing through this conversation is that I don’t think this is happening right now. It could happen right now. In the short term, I expect US equities to go lower. I think that’s just kind of where markets are headed.
But as the pain develops throughout the global economy, I think we are going to experience a global sovereign debt crisis. And when the world, the US included, starts selling sovereign debt rather than buying sovereign debt, I think that money will have to go.
Now, some of the money will just be, it’ll just go poof. It’ll be gone. And so that money won’t have anywhere to go but the people who start selling the bonds looking for another place to go, I think the next best place to go will eventually be US equities. And I think US equities will be seen as the new… I don’t want to say new Treasuries.
That’s a little bit hard to say. But on a relative basis, the place where big global capital can go, that is the most advantageous to them. And so I think we will get into a point in the sovereign debt crisis where US equities will get safe haven flows and I think the whole world will potentially be printing more money, right.
So be sending more liquidity out there. And so I think that liquidity that is generated with little liquidity there is, I think we’ll find its way into the US and the US Dow, big blue chip stocks and I think they’ll go higher. I might be wrong on that, but that’s my working thesis as of right now.
TN: Let’s move on to crude oil. Obviously we’ve seen crude take some hits over the past few weeks and we’ve got a WTI chart on the screen right now.
So how low will crude go? Are we almost there? Are we headed to 65 where it was for a while? And what then pushes it higher?
TS: I don’t really want to forecast exactly where crude is going to go. I definitely think that we could see some more downside, but we have to look at what is weighing on price and sentiment right now. One, there’s more Russian barrels on the market than everybody anticipated.
Two, you’ve got never ending zero Covid China lockdown that haven’t seemed to let up yet. We also have EU recession, right? And then we had 160 million barrels of SPR thrown on the market. And so that’s really weighing kind of on the front end of the curve. Those are the things kind of weighing on sentiment right now. That’s why we’re seeing a lot of weakness.
That said, if we look at the fundamentals of the market, the market is still very tight. We’re still drawing globally. We definitely have a diesel problem that is global. And I think where we start to see kind of a change in this, I think when it comes to the end of October, when the SPR is done this with kind of been looking over the last couple of weeks, had we not had such large SPRs, we would have actually been drawing a regular stock.
So it’s not as if that oil is going piling up anywhere. So I think as soon as the SPR stops, I think after Midterms, because I think this administration is trying to do whatever they can to suppress the price of oil, thus, gasoline. And I also think that we have to see kind of what happens in China after the People’s Party Congress in the middle of October and trying to see what their policy is going to be moving forward.
Are they going to open up? I mean, they’re looking at they want 5.5% YoY GDP by the end of the year,
which…
TN: They’ll hit it. On the nose, we can guarantee that.
TS: But I think they’re going to have to start stimulating the economy a little bit more. And we kind of saw announcement Evergrande is going to start financing more inspection projects and whatnot going into starting at the end of September. So I think we’ll probably see the last quarter if we get a little stimulus and if they back on their policy because, that’s the big thing for oil right now, is that if that demand comes back because they’re down about 2.7% on the year and as far as consumption is concerned.
So I think if that demand comes rushing back, know that’s going to be a huge upside surprise for the market. I think over the long run, oil is going higher, but out looking out into 2023, I just think that’s just the trajectory of it. I’m not calling for $200 oil, anything crazy like that. I just think that we will see higher oil, and I think we’re poised to see higher for longer than the functionality of the market and the fact that we have no capex for the last seven years.
TN: So last month you said to look three to four months out, look at the curves three to four months out to understand kind of what the real oil price was or is going to be. And so that would be two to three months now. So that’s November. December.
TS: Look at those spreads are widening out or not, right. You want to see if we’re moving into more backwardation and even more backward dated market, right? So you kind of want to look at that.
TN: Okay, so I paid $2.88 a gallon for gas at my local last night. We’re the energy capital in the world. Yeah, I’m going to show it off. Anyway, that is kind of coming down. And energy has been the biggest upward factor in some of the inflation issues. That’s good news, at least until the election. Hey, I’ll take it while I can get it, right? And if it heads back up after the election, I think we’re all prepared for that on some level.
So I guess SPR, as he said, election happens, there’s no political reason necessarily to suppress these prices and so on and so forth. So do you expect to see almost a slingshot in, say, December, where things trend higher pretty quickly?
TS: I don’t think we’ll have… I don’t want to call it a slingshot because anything can happen in the oil market. I mean, we’ve seen $7 to $10 in a day before, so that’s not unheard of. But I do think we go higher, especially if you’re looking into the market, is going to get even tighter in December because of tax reasons. December 31 is the tax assessment date for the barrels that you have on hand. So they tend to pull back on production so they can move out inventory as much as they can, so they’re not taxed at the end of the year.
Usually we see a little decline in production anyway in December and the second half of December, we do see prices start to rebound off the seasonal for regular seasonal trend low. Okay, so that would be normal.
TN: Brent, I think you had a question for Tracy on crude markets as well.
BJ: Yeah, I actually had two quick questions. One, I wanted to get your thoughts on the fact that India and China are buying oil at a discount from Russia. And then there’s lots of stories about them selling that oil
on to Europe or other places. And so they’re making that spread. I just wanted to get your thoughts on that and logistically how that actually takes place.
TS: So if you’re looking at India, definitely they are buying discounted crude. What they do is they don’t
resell that to Europe. What they do is they blend it and they sell fuel. So that’s refined. So it’s really hard to trace what’s in… They don’t trace those barrels that way.
So that’s how that oil is kind of emerging back in Europe. It’s really by way of refined products. Now when we talk about China with the gas, really what they’re doing is they’re buying gas right now, literally half off from Russia, and they’re turning around and selling their own gas to Europe for the higher marked up. The gas they already have. So they’re selling the gas they already have? So that’s kind of how that’s working.
BJ: And then the other question I have for you quickly is I was surprised this week when the rumor was floated by whoever floated that they would restock the SPR at $80. It seems like they’re doing everything they can to get the price lower. And then to have that rumor come out and put kind of a floor under it was kind of surprising to me. So maybe nothing more than just the speculation, but did you have any thoughts on that?
TS: Yeah, I mean, basically they put a floor on it. Everybody’s calling it, the Biden put now. But the thing is that it’s all nice and well if they want to do that, they still got enough 60 million barrels that they need to release. And then by the time those contracts go through and you want to refill the SPR, I mean, that’s months away. We’re looking at months and months down the road. And who knows what oil price would be? To me, it was just another try to jaw bone market down lower.
BJ: It kind of reminded me of the ECB where they’re raising rates on one hand, but they’re buying bonds with the other. Biden wants his cap. He’s like got a collar on it. He’s trying to put a cap on it and a foot on it.
TN: Strategy. Let’s move on to a little bit more of kind of the Fed kind of Fed talk. There’s a Fed meeting next week, and when CPI came out this week, the terminal rate really rose very quickly. And that’s when we started to see equities fall pretty dramatically. And we’ve got on the screen right now expectations for the rates coming out of each meeting. So 75 in September, 75 in November, and another 50 in December. That has accelerated the expectations for the Fed by about 25-50 basis points?
When does the Fed stop, basically from where you are now, do you think this continues to accelerate in 2023 or given, let’s say, CPI? Of course on a year-on-year basis it looks terrible. But once we get to November, when CPI really started to accelerate, November 21, do we start to see some of those base effects in a year-on-year basis and the Fed starts to pull back a little bit and go, okay, wait a minute, maybe we’re okay with the plan we have when we stop at say 450 or whatever as a terminal rate.
The other complicating factor will add in there is University of Michigan came out, University of Michigan survey came out on Friday and it’s a bit lower than what was expected. And the Fed has really been looking to University of Michigan, which is kind of a semi-serious survey, but they’ve really used that to justify some of their decisions.
So we obviously have a mixed environment. But I’m wondering, with all of this stuff coming out this week, do we expect the Fed to keep marching pretty aggressively into 2023?
BJ: I’ll take that first. So I actually do expect them to keep marching higher into 2023. And I say that for a couple of reasons, and I’m going to qualify this and say that they will pivot when they have to pivot, but I don’t think they’re going to pivot until they have to pivot. And so I think a lot of people that are predicting the pivot are misunderstanding the Fed’s intentions and perhaps for a good reason. They’ve done a fantastic job of ruining their credibility. So it’s understandable not to believe them.
But in this case, I think you kind of have to believe them. And I’ll tell you why I think you have to believe them. Number one, I think they don’t mind the dollar being stronger. Again, I think that’s kind of policy that I spoke of earlier in conjunction with the treasury.
Number two, I think they want asset prices lower. So the fact that the stock market goes down I don’t think would bother them. I think if the Dow was at 28,000 and the S&P was at 3600, I think they’d say that’s totally fine. I don’t think they have a problem with that as long as it’s not collapsing. Right? Now, if it collapses, then they have to come in. And they will come in, but I don’t think they mind if the stock market is 10% or 20% lower than here.
The third thing I’d say is the Fed central banks in general, they’re always lagging. They’re a reactionary agency. They’re not a predictive agency. We all know that. They can’t predict anything anyway. I’m not sure I want them predicting things, but to me they’re always behind the curve because they always wait until they see it and then they react, right? They come in and they try to save the day. So when things get really bad, then they’ll eventually come in and provide support.
And when things are always too late to tighten as they are now, and then they try to make up for it. So I think they’re going to despite, like you said, the Michigan number starting to come down, Atlanta Feds already slash their GDP. So even though they’re getting these signals that things are slowing down, they’re not reacting to it yet. They will react to it late.
And then the fourth thing I’d say is that I think Powell is mad and he’s pouting, right? Not just Powell, but mainly Powell, but he got all this advice from all his staff and however many staff, PhD staffers they have at the Fed, and they all said inflation is transitory and it’s going to be fine. And then it wasn’t. Right? Now he’s mad.
TN: He’s a lawyer, not an economist.
BJ: And I’m going to do something about it. And if you don’t think that I can bring inflation down, well, then you just watch me, right? And I’ll take my ball and go home. And his ball is interest rate. So he’s taking them higher, and he’s taking them home, he’s taking them higher. And so it come hell or high water, and after the, I don’t know, the chink in their armor or the threat to their credibility that they’ve had over the last year or two, I think the last thing in the world that Powell wants to deal with is the fact that he slowed down or, God forbid, cut rates and then inflation kept going higher.
That would look even worse than waiting for it to crumble, right? So I think for all of those reasons, you kind of have to take them at their word. Again, I’m not saying not unless the markets force them to do it
and the markets might force them to do it. I’m not saying that that’s out of the possibility. The only thing I don’t like saying about this is this is the hole they’re going to hike until it breaks theory, right?
And I agree with that. The thing I don’t like about it is everybody else seems to agree with it now, too. That seems to be the common refrain, is that they’re going to hike until something breaks, and everybody says, yeah, that’s kind of what’s going to happen. Usually when everybody thinks something, it doesn’t happen that way. But as long as equity prices are higher and as long as inflationary prints keep coming in high, I think they continue hiking.
And think about it, inflation could fall by 30%, and it’s still at five or six, which is still two or three times higher than their goal. So is there a path to a pivot? Yes, I think there’s a path to a pivot, but every week, when people come out every week and, oh, they’re going to pivot, they’re going to pivot. I don’t think they’re pivoting next week, and I don’t think they’re pivoting in October unless they have to.
TN: Okay, Tracy, what do you think of that?
TS: Yeah, I absolutely agree. All the data coming in, there’s no way they’re not doing 75 next week. In my opinion. I could be wrong. Somebody will come back. I think that’s pretty much a lock.
TN: Yeah, I think short of, let’s say sometime in Q4, Russia, Ukraine ends, and China says we’re not going to lock down anymore, that would fundamentally change the Feds calculations, right?
BJ: Well, if they weren’t locked down anymore and it pushed demand higher and it pushed prices higher as a result of demand increasing, then to me, that would keep them on their path to hiking. The flip side. And the flip side is that if something breaks in China, and China has to devalue or revalue the yuan in order to deal with the real estate collapse or the internal problems, whatever it is, that could send a deflationary wave to the rest of the world.
So I’m not going to sit here and deny the inflationary pressures that we’re seeing, but I think to a certain extent, people have again dumped themselves into the inflation camp or the deflation camp, and I think we’re going to have periods of both.
I think if you fundamentally understand the design of the monetary system, the threat of a deflationary
wave is always there. But if you don’t admit that the inflationary pressures are here, I think you’ve also got your head in the sand. I’ve said this several times, but I will admit to a big mistake, and that is, for several years, I hated the term stagflation. I thought it was a cop out. I thought it was for people who just couldn’t decide if they were in the inflation or deflation camp. But I think that’s what we have, and I think we have it in spades. I think some assets and some prices are going to continue to rise and be higher, and I think others are going to collapse, and that’s what makes it so hard to deal with.
So to anybody I ever took a shot at for them using stagflation as a cop out, I apologize. I’m with you now. I got that part wrong.
TN: Brent, one of the things I admire about you is you’re not afraid to say you were wrong, right?
BJ: No. I mean, do you mind if I just make a comment on this really quick? I think too often in our business, people will make a call and then they’re just so afraid to change it. Or you’ll make a call, and then somebody else will call you out on it if you got it wrong. At the end of the day, our job is sort of to predict the future. And so anybody who thinks that they can accurately predict the future 100% of the time has the biggest ego in the history of the world.
The reason I don’t mind making predictions is number one. I don’t mind being wrong because I don’t think I’m the smartest guy in history. And if I get something wrong, then I’ll have to deal with it. But this idea that we’re always going to be right and we know everything, it’s ridiculous. So anyway, we’re all speculating at the end of the day.
TN: That’s right. Okay, real quickly, guys, what are you looking for in the week ahead? More the same. More the same disappointment, difficulties, headwind, all that stuff. Until the Fed meeting? Is that what we’re looking for until the press conference?
TS: Yeah, I think we’re the markets will be in limbo, definitely until the Fed. I mean, everybody expects 75. We get 75. Maybe we see a bounce in equity, actually, because it’s already done with, right. There’s no question anymore. So maybe we get a bounce after that.
TN: Slightly less hawkish language than is expected, right?
BJ: I think that’s right. Now we’ve got the potential of maybe 100 basis points, right. So if they come in a couple of weeks ago, although now there’s a path to pivot, they’re probably only going to do 50 basis points in September.
Well, then we got the CPI print and it’s 75. That’s 75 is going to happen. Then a couple of people go hundreds now on the table, right? So now if they only come out and do 75, maybe the market kind of breathes a little bit. At least it wasn’t 100. So my guess is that we would have some volatility leading up to the meeting. Maybe they do 75. Perhaps things get a little bit of a bounce as a breather.
But I don’t think markets are going to change a whole lot between now and the election. I think they’re going to be volatile. I think the Feds are going to keep hiking. And I think Market Powell said it himself. We had the boom and now we have to deal with the pain. This is the unfortunate side effect of what we have to do. So he’s telling you he’s going to cause pain. He just doesn’t want to collapse. So if it starts to collapse, it’s the sad truth.
TN: Guys, thank you so much for your time. Thank you so much. Have a great weekend and have a great week ahead.
This past week, we’ve seen a lot happen in equity markets. But what’s looming in the background of all of this is geopolitics. And so, in this episode, we talked about the long tail of Europe’s energy crisis. We also looked at the impact of US Dollar strength on the EU and to a lesser extent EM. Lastly, we discussed the growing US-India tensions over the Russian oil cap.
Key themes: 1. Long tail of Europe’s energy crisis 2. Impact of USD strength on EU & EM 3. US-India tensions over Russian oil cap
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This is the 33rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Today we’re focusing on geopolitics really. We’re joined by Albert Marko and we have a special guest, Velina Tchakarova, joining us from Vienna. Velina, thanks so much for taking the time to join the Week Ahead this Week.
Velina Tchakarova: Thank you, Tony. And it’s great to discuss with Albert as well.
TN: Fantastic. Before we get started, I’d like all of our viewers to note that our promotion on CI Futures ends on September 21. So this is $50 for CI Futures. 3000 assets forecast, economics, currencies, commodities, equity indices, forecast every month. We have weekly forecasts for currencies, commodities and equity indices. That promo ends on September 21, so please check it out. And if you have any questions, send us a note. We’re happy to give demos, do whatever you need to bring you over the line on that.
So this past week we’ve seen a lot happen in equity markets, but what’s looming in the background of all of this is geopolitics. And so really what we’re talking about this week, since we’re focusing on geopolitics, is the long tail of Europe’s energy crisis. We’re looking at the impact of US dollar strength on the EU and to a lesser extent EM, but mostly on the EU, as well as the US-India tensions or growing US-India tensions over the Russian oil cap.
So Velina, Albert. Let’s really get started. I’d like to talk a little bit about the energy crisis. And of course, we understand there’s been a lot of talk about kind of the coming winter and what’s happening the coming winter, and that’s well covered. We’ve done that for the past few weeks here. But I’m really curious about how long is this expected to last and what do you think will be the long term impacts of the energy crisis in Europe?
VT: Well, that is definitely a question that is hard to answer, but let me give you a try. Now. First and foremost, as we know, the energy crisis in Europe has been already ongoing before the war was launched on February 24 and it still has structural factors, structural causes, and of course, with the war being inflationary, these causes have been further amplified.
Now on the side of the fossil fuel dependencies, because I need to answer the question whether it’s going to be short or long. And I am actually inclined to think that this energy crisis is here to stay and it’s going to have a long term impact not only on European markets and European economies, but also in general, we have to also think of the global context of the energy crisis. So, on the side of the fossil fuels, you have a serious situation how to cut off an individual energy supplier.
Only to give you the idea, in terms of gas, it’s not easy in the short term to diversify away from 170 billion cubic meters of Russian gas. So that already shows you that it’s a tough scenario. Of course there are some opportunities mostly coming from the United States in terms of LNG. The European countries have also reached out to other potential suppliers. But as we know, this takes time. And I argue that two thirds of Russian gas being cut off for December, as this is the plan, is going to probably not work out the way it was planned.
But still I also don’t see a scenario in which there is coming back to Russian gas. When it comes to the oil, 90% of the oil should be cut off. That worked better in a sense because most of the economies were diversified.
Now, what we are observing, of course is on the one side that of course there is a main narrative to go, let’s say to speed up the decorbonization. That means to transition towards renewables, which of course is going to have effect also on economies and on all these relevant networks. Why? Because on the one side you’re going to have a surging demand for commodities.
And by the way, when we talk about decarbonization, you know very well that processing and production of critical raw materials is more or less located in China and also in other not like minded partners, partially also in Russia. So in a sense you end up in a similar scenario. When it comes to also the plan of, let’s say to use nuclear energy, once again we see a bifurcation within the European members because some of them are vehemently against it, including Austria. Germany is considering to close the last three nuclear plants even now in a situation of crisis. And then again we have countries like France which are rooting for nuclear energy as part of the energy portfolio. And of course, finally you have also the dirty coal, which once again is now going to be used as a transitionary energy source. Why? Because there are not many options on the table.
So to summarize, the situation is critical. It’s going to be a lot of political, let’s say messaging in terms of cutting off consumption, reducing electricity consumption, cutting off gas consumption, oil, so on and so forth. But then again it’s going to be also about diversifying and it’s also going to be finally about decarbonizing. So obviously, all of these goals are long term oriented and I’m not expecting any short term outcome.
Albert Marko: Yeah, that’s interesting, Velina, I had read just recently that the European grid is very complex where all the member states, not just within the European Union, but reaching all the way into Eastern Europe and the Ukraine is all connected. I can see a situation where the French might use this as a political power play against the Germans or the Dutch or so on and so forth because they can basically corner the market and the output for power because I think they have like 57 nuclear reactors. There could be situations where there could be political discourse within the European Union going forward for the coming years.
VT: Well, when it comes to the grid systems, it’s also important to understand that in general, the grid systems of the European states are not at the level that they can operate in a scenario of, let’s say 40 to 50% share of renewables. So maybe with few exceptions right now, like I think immediately of the exception of Sweden, some countries managed to speed up the process of increasing the share of renewables, but still we are not there yet, which means of course, that going towards increased share of renewables in the energy portfolio of each individual European state is going to affect the grid system.
As Albert said, the grid system is also interconnected. So that means a lot of ripple effects. In the case of Austria, blackouts are actually on the agenda in our national risk scenario for the next three to five years. So the anticipation for blackouts in the case of Austria at least, and I think that in other countries is a similar picture, we are going to witness with the proceeding towards decarbonization also scenario in which there will be more blackouts.
Then again, of course, here the question is when it comes to electricity, right? We are still not diversified to the point and I once again have to use the example of Austria. Austria is a front runner in terms of electricity that is being produced based on renewables, and yet 25% is still dependent on Russian gas. So you could imagine what it means in the short term. Even for the scenario of electricity production and consumption. If one important. One critical supplier is cut off. How this is going to affect not just the country, Austria, but of course the neighboring countries. Because in the moment where we are going to have a significant crisis. There will be also the expectation that other neighboring countries come to the risk.
TN: Okay, so there’s a lot to dive into here and I wish we had about 3 hours with you guys, but I guess the question that comes to mind for me is as you talk about decarbonization and as you talk about blackouts,
does that also mean deindustrialization of parts of Europe over, say, the medium term to accommodate the energy crisis?
AM: Of course. That’s a simple answer. Never mind just the simple part of the electrical output being lower, but the cost being exponentially higher. You’re not going to sit there and build an item that’s 300% more to create than you can actually sell. It just doesn’t work like that.
I mean, even the German Economic Minister came out with an absolutely astonishing comment saying some companies might stop making things and they’ll be not really insolvent, but it’s just only for a short time. Well, if you stop making things and stop producing money, you’re going to solve it and you’re going to be awarded the state.
So the European countries are going to have to flood the economy with money, whether it be the energy companies or the manufacturing companies, that they don’t go under.
TN: And I could see that for a transition period. But does this mean that let’s say over three to five years or longer, kind of France becomes the industrial heartland of Europe because they have the energy supply with nuclear? Will France be the place where, say, German or Austrian or other manufacturing migrates to to have affordable and continuous electric supplies?
AM: Yeah, I think so. And I’ll push it over to Velina because she’s more of an expert of it. But from my perspective, yeah, of course, you would go to a grid system that’s more stable and cheaper. That’s going to cause problems within the European Union, because other countries are not going to like this. They’re not going to like their corporations flying over, moving over to France. It’s the way the game goes.
VT: Maybe just to add something to the picture. First and foremost, I think that I agree with what Albert said. But then again, we have to think of the complex political box that is the European Union decision making, because it’s not just about the states. We have also European institutions. They’re going to pump a lot of liquidity. If you take a look at all these programs that have been announced by the European Union, by the European institutions, we talk about trillions of Euros that are going to be invested in the European recovery.
On the upside of the story, we see that there is a readiness, political will to do whatever is necessary decision-making, to use another famous quote from another famous political figure in the European political decision making. That means and that is my anticipation that is what’s going to happen. We are going to see trillions of Euros being pumped into the European states, into European industries, and into European institutions within the states to save whatever possible.
Then again, we are going to witness, of course, a situation in which, still fossil fuels will be on the table. That is the story and I think that politicians should be honest with citizens. We are going to see a lot of LNG coming.
The problem once again is infrastructure, interconnectors. So that kind of things are going to be built in the next three to five years. A country like Germany doesn’t have even a single LNG terminal. But now they are planning to build three of them.
So this kind of very awkward pipeline system, gas pipeline system going from east to the west that has been built over decades is going to be useless as we see and is going to be replaced. This is how well economic mindset works, right?
So in a sense it’s going to be not only nuclear, just to answer the question, it’s not going to be only about France. If the industrial heart of Europe is destroyed, that is obviously Germany. I just don’t see, because Germany is trade partner number one of all member states. So it’s going to have ripple effects for all of them if Germany is crushed, if Germany collapses. So I argue that it’s going to be both. It’s going to be nuclear, it’s going to be renewables, but it’s going to be also a lot about fossil fuels in the next three to five years.
TN: Okay, that’s interesting guys, we could dive into this for an hour and I would love to do it, but let’s move on to strong US dollar and the impact on Europe. And I’ve got a chart up showing our Complete Intelligence forecast for EURUSD and it shows a continuing deterioration of the value of the Euro over the next six months.
So we’ve seen devaluation of the euro. We’ve also seen the ECB come out with a 75 basis point rise this week. So what do we expect? Given the headwinds that Europe is facing and say high commodity and energy prices that are largely dominated in US dollars, what do we expect?
First of all, what does Europe kind of generally think about a strong US dollar? How is that playing and how do we expect Europe to react over time to compete and to be able to afford some of these factor inputs both for manufacturing and for energy?
AM: I think Tony, it’s a double-edged sword for Europe. On one hand, lower euro helps their exports. I don’t know how much exports are actually going out right now, but it does help the exports.
On the other hand, high dollar is creating inflationary problems for the Europeans and on top of that, they have to service any kind of dollar debt. It’s a problem. I think it’s a manageable problem for the Europeans right now. I think they can deal with the dollar at 110, 112, maybe 115 better than any other emerging markets can absolutely take the dollar that high. But for right now the game is to hit inflation globally and they’re a key player in that component with the Fed working tangent.
So right now, I don’t think it’s a dire problem, but it’s certainly something that needs to be addressed in the coming six months.
TN: Great. Velina, what’s the feeling on the ground? Do European policymakers kind of resent a strong dollar?
VT: Not really, and I completely agree with Albert. I think that the European Union countries, these are the 27, are well equipped to handle this compared to many other fragile economies all over the world. And I argue also that the ECB is going to continue with its copy paste policy, basically following what the Federal Reserve is doing, just to tackle the inflation and to really limit the demand as much as possible in the short term. And in that sense, I just don’t see a real kind of panic mode, to be honest with you.
On the side of political decision makers and just to add probably a final sentence. Probably a little bit of cynical one. But I still argue that the ECB fills or sees itself on the safe side because they know that the Federal Reserve will always offer the swap lines as a last resort just to keep the system afloat.
AM: Right? Yeah, they do have swap. Not only does the Fed have swap lines, but even US banks to key European banks have swap lines. So they don’t have to technically report it. But the United States is in no way in the mood to allow Europe to fail. They are our key allies, and they’re a buffer for the Russians and the Chinese. So they will be suffering, but they will not fail.
VT: I think this is a good point that Albert made. I think this is a critical point because in a bifurcated global financial system, if we refer to the last statements of the Russian President Putin in Vladivostok, where he explicitly pointed to this scenario, bifurcating the global financial system and creating two alternative networks based on our, let’s say, euro dollar system against the system of Chinese traded or Russian traded currency or whatever third country you want to take as an example that is allying or siding with them.
So I think that even looking from this scenario, you see that there is readiness, political will. Wherever there is a will, there is a way, I would say.
TN: Very good. Okay, let’s move on to kind of the US. Russia, India Triangle and Russian petroleum exports to India. So if we look at Russian seaborne crude exports, India is taking about half of Russia’s seaborne crude exports right now, and China is taking the other half. There are some others, but for the most part, India and China are splitting that.
And as we look at the G7 proposed price cap, we’ve had India’s petroleum minister come out a couple of days ago saying, we will buy oil from Russia, and we will buy from wherever we want. He said this in a CNBC interview a couple of days ago, and he’s saying,
“I have a moral duty to my customer.” So he is focused on Indian citizens. India has a very independent foreign policy, and they’re showing that. So that’s creating some tension between the US and India.
So what do you think is going to happen there? How does that play out?
AM: This is nothing new. The Obama administration had a disdain for Modi in India over multiple issues, and this is carried over into the Biden administration. The Biden administration is just not realistic. I don’t know what they’re thinking about trying to isolate India and pressure them into joining this anti-Russian crusade because they need the Russians as a counterbalance towards China. They need the Russians there, they need, their energy. And there’s a counterbalance to the US, to be honest, right?
Well, I mean, of course. They have their own national interest in ours. Every nation, every nation on earth cares about their voters and their citizens before anything else. And that’s what foreign policy is based on, is the needs of the nation. And the Indians are doing exactly what they need to do. They need to solidify their energy imports and their exports and have their economy stable. And I don’t blame them one bit.
I think this is all about the United States overreaching at the moment. And it’s just silly to me.
TN: Velina?
VT: I absolutely agree with Albert, and I will just add the following several points. First point, fertilizers, arm sales, cashmere. These are the three pillars, actually, of India-Russia relationship. So long as no other external actors, including the United States, is able and willing to replace Russia on these three topics, I just don’t see how the Indian foreign policy position is going to move away from it.
Second, this is not the whole picture, of course. Right now, the oil supply is increasing, but who has been financing the war in Ukraine? It has been solely the majority of European powers. The majority of oil and gas profits for more than six months have been actually due to the dependence of Europe on Russian supply.
Okay, so what was miscalculated right from the beginning was actually the international isolation of Russia. This is not going to happen.
As also Albert pointed out, India is going to pursue its own interests. If you have to feed 1.3 billion people, and if you are projected to become the Third World economic power in this or next decade, and you have already overtaken UK as economy number five, I think that you are going to look after your own interests. This is my reading of the Indian position.
And final point, if you are getting a discount from the Russians, why would you actually agree on oil price cap? And this is what is going to happen. The Russian oil, I’m sorry to be so cynical, but the Russian oil is going to find the markets, the gray markets, the black markets, the one way or the other. It was an important gesture coming from the G7. But like I said, the G7 miscalculated in the sense that international isolation of Russia for 2022 is not possible. And this is what is going to happen.
AM: Yeah, I made this point last time I talked to Tony about it. The United States, the Biden administration specifically tried to put a foot on the Russians throat is just back far. You already won. Having them defeated from taking Kiev and losing so many soldiers in Ukraine, there was no need to push the envelope and put yourself in a situation where Russia can use their commodities as an asymmetric weapon against the west, which they’re doing fantastically right now. It’s just miscalculated all over the place.
TN: Yeah. So there are two things that I come away from this. First of all, the US couldn’t necessarily keep Iran from selling oil internationally or Iraq or anybody else. So how could they keep Russia from selling oil? It’s just not possible.
AM: No, it’s not. We have ship to ship transfers. You have ports like Freeport, Bahamas, where they mix Venezuelan oil with whatever. The documents are easy to get.
TN: Naive, impossible policy. Right. It’s simply for the optics of it,
not necessarily for the reality of it.
AM: Well, these are academics that don’t really understand real politics until the prices.
VT: Let me give you one final example because you made a very good point. How do you think 4300 km border between China and Russia is going to be observed if the Chinese are actually not sending chips or any technologies or whatever you like with the Russians right now?
So that is the whole point that in the real world, of course, we have this gray area where we cannot verify, but that means that absence of evidence is not evidence of absence and we should really be mindful of the real motives and interests of the main actors.
So what we are saying with Albert does not mean that we are normatively agreeing with these policies, but we are just pointing to realities the way they are.
TN: Yeah, of course. And I’m going to make one last comment and close out with this. It’s interesting to me how Russia has inserted itself in between the India China relationship and it’s a fantastically strategic position to be in. And I think that’s one benefit that Russia has come out with over the past, say, nine months of this conflict is they’ve become an interlocutor for that relationship.
So guys, thank you so much for your time today. Thank you so much for your thoughts on this.
We could talk for hours on this and I appreciate this and I look forward to the comments that people are going to bring to this because I’m sure there’s going to be a lot of discussion on this. So thanks very much and have a great weekend.
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UK Prime Minister Liz Truss is expected to announce a package of support to deal with rising energy bills in the coming days. It’s understood the government could spend $115 million on plans to subsidise bills. We weigh up the pros and cons of subsidies and windfall taxes with Caroline Meyer, energy analyst and CEO of Meyer Resources.
US e-cigarette maker Juul is to pay a $438.5 million settlement, following a lengthy investigation that found it had marketed its products to underage teenagers. Rachel Butt from Bloomberg in New York explains the background and implications of the story.
Rahul Tandon is joined from Austin, Texas by Tony Nash, CEO and founder of Complete Intelligence, and from Freetown, Sierra Leone by media entrepreneur and TV presenter Stella Bangura.
Transcript
BBC
Hello, there. How are you? This, of course, is Business Matters here on the BBC World Service. I’m Rahul Tandon as always, coming up on the program, we’re talking about changing your leaders. Does it work? That’s happened here in the UK. Liz Truss was sworn in into her new job. We’re going to be looking at the energy challenges that many countries, many of you listeners, are facing at the moment.
BBC
It’s going to be a terrible winter and in many countries, it will be for some of the lower income households. It will literally be a question, do I heat or do I eat?
BBC
There we go. That is a question I think that many people, unfortunately, across the world, will be facing. A lot of tough questions that are going to face businesses here in the UK. Tony Nash joins us as well this evening from Complete Intelligence. Hello, Tony. Always a pleasure to have you on the program. Our new Prime Minister here is going to need a lot of intelligence. Can I ask you, Tony, sometimes when we’re faced with big problems, we think, let’s just change the leader. That doesn’t always work, does it? Just putting a new person in charge. The problems are still there.
TN
The problems are still there. And the problems that we have right now are very hard problems to solve. So Liz Truss is going to really need a lot of help and a lot of deep thought to solving these problems.
BBC
Let’s switch it on its head, though, sometimes, having that new leadership in place, new ideas, new thoughts. She announced her new team a short while ago, Tony, that can make a difference. A fresh look at difficult problems that people are facing, whether it’s countries or businesses as well.
TN
Sure it can. I think some of the problems she’s facing right now, though, are they’re global problems. It’s the energy supply chain, right? It’s the cost of energy, it’s the downstream costs of energy. It’s the cost of things like fertilizer and food into next year. So these are not problems that the head of the UK, the leader of the UK, can solve on their own. This is something that really takes some deep thought to solve, say, the domestic symptoms of those problems, or not the symptoms, but the domestic impacts of those problems, as well as the global sources of those problems. It takes a lot of effort, especially for a new leader, to come in, set up their team and get going.
BBC
Yeah, that’s a good point. Tony, last question to you on this particular issue. Sometimes with leadership, the key is knowing when to take over. This is not the best time for any leader to take over in the country because of those problems you outlined there, which we’re going to be talking about in the program in a lot more detail a bit later.
TN
No, you’re exactly right, but I think there’s a certain kind of leader that’s attracted to taking over in a very difficult time. So I’ve done a turnaround and a couple of startups in my day, and it takes a different kind of person who to want to take a leadership position in that situation. And hopefully she’s a person who is focused. Hopefully she’s a person who can take criticism really well. Hopefully she’s a person who can get people on her team and build trust. And if she can do those things and all of the other things that a leader is supposed to do, she may actually do really well.
BBC
Stella, you were talking about the elections in Sierra Leone, which are coming up by the beginning of next year. I wonder we’re talking about leadership. I suppose the true test of a leader or somebody who wants to be a leader is taking over in difficult circumstances. Not when it’s easy, but when it’s tough. Against your labs. Tony, when you go around Texas, are you seeing a lot of youngsters vaping nowadays?
TN
I have two kids in university and one in junior high. And my kids who are in university were part of that initial group that was marketed to. And so when they were in high school, there was a lot of vaping in high school, and there still is. And even now the kids in junior high are being marketed. And so when I say junior high, that’s kind of 12, 13, 14 years old.
TN
So are they being directly marketed to? Probably not. But the problem here yes, that’s right. And the influencers and the way that they get to these kids, and there are efforts in the schools here to counter that. A lot of the messaging in the schools is countering, and again, I’m talking 12, 13, 14 years old is countering vaping and trying to get the kids to not start vaping. So it is something that’s very common even at a young age, and there are a lot of efforts to really stop it.
BBC
Yeah, go on, Tony.
TN
Yeah, the appeal here for the kids, there are a couple of appeals. First of all, they don’t smell like tobacco, right? So it’s a lot easier to do and conceal. But the other part that’s pretty common is to get vape use that has THC in it. And kids in, say, public schools will smoke in the bathroom between classes or something like that. But it’s the THC juice for their vape.
BBC
Because I’m listed, I know what that is.
TN
It’s basically smoking marijuana, right? It’s the THC is the active ingredient in marijuana. And so it’s a very easy and pretty inconspicuous way to distribute this to schools, to kids in schools. And so it’s not necessarily nicotine, it’s the THC. I’m not saying every kid who vapes has THC in their vape juice, but it’s both. And it’s balancing both out that we see a lot in the junior highs and high schools here.
BBC
I want to bring in Tony here very quickly, because I remember being in India when the government had demonetization completely changed the currency. It’s not that easy, is it? Sometimes?
TN
No, it’s not easy. It’s a shock. And I think that it’s a little bit of a shock by design so that people understand the new value. But when it doesn’t hold, then that’s a real problem. So I’m not laughing at this specific situation now, but with demonetization in India, obviously, that had an organized crime drive, right? Like they wanted to take out the large bills to take the power out of some of the organized crime transactions. Is that fair?
BBC
Yeah, it was. It was also about removing some black money from the economy. Did it work? It’s an interesting discussion that’s still going on in India. Lots more interesting discussions coming up here on Business Matters after the latest news.
BBC
What about where you are in Texas? That’s a part of the world that is known, isn’t it, for its energy resources? It’s fossil fuels, also renewables. Now we’re heading towards Midterms. How big an issue is energy there? Not quite as big maybe as it is in Europe, I suppose.
TN
Well, I live in Houston, Texas, the energy capital of the world. So you should know that everyone in my neighborhood has put in a new swimming pool except me over the past year. So the energy companies are doing well and my neighbors are benefiting. And so I don’t say that to be horrible, but these times part of the problem with times like this is people realize that there is actually under investment in energy.
TN
And so whether it’s electric, power companies or storage or transmission, other things, so what comes out of Texas is natural gas, which goes to Europe to kind of fill the gap that isn’t coming from Russia. Okay. And so because there’s not as much supply, those prices go up, and that benefits the people who take things out. But the under investment happens in two places. It happens kind of on the electricity side, but also on the extraction side. So things here actually in Texas pretty good, and we’re not seeing a lot of the downsides that Europe is seeing.
BBC
Yeah, very much. And I suppose the price of the gas at the moment, a lot of that liquefied gas coming into Europe at the moment means that a lot of those companies in Texas will be doing very well. We were talking about Liz Truss earlier in the program, the new British Prime Minister, because she’s unveiling her energy plan a little bit later this week, on Thursday. But it’s quite clear now that her government’s going to borrow hugely to keep bills low. In the EU, though, Brussels are going to propose levies on energy companies that would channel sky high earnings back to vulnerable households and businesses.
BBC
This is going to cost Europe a huge amount of money because they’re going to have to bail out a lot of people because of the rising cost of energy here and that’s going to have long term economic consequences for the continent.
TN
Sure, yeah and I think that whenever you get a governor estimate, it’s always a little bit low. So whatever the governments are putting out to spend, you can probably count on two times that or more maybe then. Sure, yeah. The government estimates are intentionally low and they always are because they underestimate probably supply constraints in this case.
TN
If you look at things like gas storage. So I’m not of the belief that we’re going to have like a horrific event in Europe this year or this winter because if you look at gas storage, for example, Germany has a natural gas storage, it’s something like 84% of reserves and their target is 95% and they’ll fill that 95% by probably November. So there will be supplies of gas in Europe. It will be expensive.
TN
So as your guest said, people will have to choose between food and heating. I don’t necessarily think that’s the case. If you look at the German government, they have the capacity to issue a massive amount of debt to pay their people to survive through the winter. So not every government in Europe has that luxury, but Germany certainly does and a lot of northern European governments too.
BBC
Well, we did see, didn’t we, earlier this week, the Chancellor of Germany outlining plans to help people will have Liz Truss do that as well. Texas, California, two rivals. I think a lot of our listeners across the world will be surprised to hear about blackouts in a state like California, one of the wealthiest in the US.
TN
Well, yes, in California needs a lot of investment in its power grid. That’s really something that’s long overdue and they haven’t necessarily put the investment in. It’s got a creaking power grid and so this is why power is so inefficiently distributed in California. And until they do that they’re going to continue to have these brownouts and blackouts and power distribution problems.
BBC
And do you think that’s one of the reasons why we’ve seen a movement of quite a lot of businesses, haven’t we? It’s not just about taxation from California to your part of the world.
TN
Yes, absolutely. It’s about regulation, it’s about the continuity of power and it’s about education. And the students that come out of Texas institutions are very good, very hard working students. So there are a lot of factors related to it. And land, there’s a lot of land in Texas that can be built on for things like Tesla and other places.
BBC
Stella well, that’s very similar to the situation in Bangalore, a city that you know well. As you Tony know very well, yes.
TN
Gosh, I spent a lot of time in Bangalore about 20 years ago, before the new airport, before the second ring road, all of that stuff. So it was the same town, but it was a little bit different, not quite the scale that it has today, but the disasters there, it’s heartbreaking.
TN
I moved to Texas in 2017 when we had a Hurricane Harvey, and one of the things your guest was talking about is how people would help each other out in Bangalore with the floods. And that’s exactly what we saw here where we went and helped ten or 20 people take all of their belongings out of their house and started new life. It’s heartbreaking.
BBC
It is indeed. And it has been a sad end to the program, talking about the city I know very well in Bangalore. Hopefully, I’ll get on its feet. Thanks to Tony. Thanks to Stella. We’ll be back same time, same place tomorrow.
This week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in the US market downturn. There’s a lot of speculation around the Fed. But we’re really focusing on Europe this week.
Key themes:
1. European Natgas Stock vs Flow
2. Russian Oil Price Cap Fallout
3. Europe’s Food and Fertilizer Fallout
4. What’s ahead for next week?
This is the 32nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines, Tracy Shuchart and Albert Marko. We’re going through the events this week and looking toward next week.
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Also we have a promo right now on our subscription product, CI Futures. That promo ends in two weeks. So you get forecast for about 3000 items. About 900 of those are renewed every week. We show you the forecast, the error rates, all sorts of stuff about all of these different assets, global assets. So please check it out. That runs out in mid September.
So this week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in US market downturn. There’s, a lot of speculation around the Fed. But we’re really focusing on Europe this week.
The key themes this week are really around European natgas stock versus flows. Russian oil price caps and the fallout that has come with that. Food and fertilizer in Europe. And then we’ll look to the week ahead. So I think we’ll look at some non Europe activities for the week ahead.
First for European natgas, Sam Rines in his newsletter came out with some really interesting points around natural gas stocks and flows. You can see the chart on the screen. Sam, can you talk us through kind of what’s happening in storage for natural in Europe and what we should be looking for as winter approaches?
Sam Rines: Yeah, sure. So you get this really interesting dynamic where everybody talks about the stock but very few people talk about the flow. So talking about the stocks of that gas in Europe is a really interesting one. Yeah, you’ve got stocks building up pretty quickly, particularly in Germany, sitting north of 82% overall for European stocks in general, north of 80%.
So it’s good, right? Stocks seem to be well ahead of where you would anticipate. Germany has a 95 target for November. They might actually reach it even with the shutdown of Ms one, Nordstream One. It’s actually not that big of a deal incrementally to Germany in particular. You go from about call it a 3.2 kilowatt hour type pump into Germany to about a three.
You didn’t really lose that much. I mean, it was pretty much anticipated anyway. So if they keep it off
for longer, whatever. You don’t have significant usage coming through at the moment for natural gas.
It’s a time where you can actually afford to not have those significant closing. They’ll probably still have some stock bill that will just be slower.
So overall, I think it’s a lot of headlines that a lot of it’s already priced in. If you were looking at the expectations of complete and utter frozen winter, you’re pretty much not looking at that assuming that Norway and Belgium continue to put their flows through to Germany at the current rate.
So overall, you’re actually sitting on a decent call it stock level. Right? That’s fine. And as long as you continue to have the flows from call it Northern Europe, you should be okay for the winter. You’re not going to be great. It’s going to be expensive, and it’s going to suck. But relative to the expectation of Europe’s going to freeze this winter,
I think that might actually be a little bit of an overblown one, and you might begin to have a significant blowback on that. And you’ve seen significant declines in things like electricity pricing ahead, which is a ridiculous contract anyway. And Dutch TTF, the net gas contract you’ve seen collapse this week, even with the shutdown of Nordstream.
So I think a little bit of the froth, a little bit of that angst is beginning to come out of the market, and you might actually have a positive surprise relative to expectations in Europe.
TN: So Dutch TTF peaked on Tuesday or something, right? It was early in the week, right?
SR: Correct.
TN: And Tracy, what are you seeing with that? Do you expect us to hit back up to those peaks, and do you think that was kind of a one time hit? And what Sam saying about storage is really kind of starting to take hold.
Tracy Shuchart: I think it really depends over the long run and how slow go. I totally agree with Sam here. Right now, for winter, Europe is pretty much okay, not great, as he said, but I think given if we don’t see increased flows, that storage would drain significantly by February. So we really have to keep an eye on flows from other countries, particularly in the United States, in the Middle East, and to see how those flows go. So I think it’s too early to be completely doom and gloom, but that is something we need to be cognizant of, because that storage can only last until February.
TN: Right. And for those people who aren’t in Northern Europe, northern European winter really stays cold, really until like, April, right. It’s not something that February comes and goes and it’s spring and everything’s great. You still have cold temperatures in Northern Europe until probably April or so. Is that about right?
TS: Yeah, absolutely. Anecdotally, if you’re been on Twitter, you see a lot of people starting to buy wood. The big thing on the European sites is to post how much wood you collected before this winter. So people are sourcing. People are expecting energy prices to be high and doing whatever they can personally, to kind of lower the prices. Because you have to understand, when you’re talking about European power prices, it’s not just your solid power price. They have that almost all of their taxes on top is on top of what they actually would be paying, which is outrageous carbon, et cetera.
TN: And so I just want to go back to one point in Sam’s chart as well. I think sam, you said the storage is about 82% full or something and they’re targeting 95%, but we’re ahead in 2022 from where we were in 2021, is that right?
SR: Yeah, that is correct.
TN: Okay, so the doom and gloom that we’re hearing again, we have inflation, we definitely have shortages, but in terms of storage, we’re ahead of where we were. And we don’t expect like a mass extinction event in northern Europe because of heating or whatever, right?
SR: Correct. I think that is a good base case. That’s good for everything. No mass extinction is low bar, but yes, that’s right.
TN: Exactly. Okay, very good. Do you have anything to add on this?
Albert Marko: I’m on middle of the road here. I do agree with Sam that they’ll be okay so long as they’re okay with no manufacturing, no growth in their economy, and so on and so forth. I mean, if they tried to kick things up and the demand starts to rise, I don’t think it will be okay. I don’t think that the Russians are going to play ball, especially when they start talking about these price caps on Russian oil and gas. It’s one of those things where economically, I can understand where Sam is coming from.
Politically, I’m inclined to say that Europeans are going to screw up and just agitate the Russians. And then you start getting into this back and forth. That economic trade and price.
TN: Let’s set the price cap aside for a minute. But when you say no manufacturing, so we’ve seen some manufacturing dial back and some facilities slow down and shutter. Is that expected to continue or do we expect that to ramp back up?
AM: I expect it to completely be just stalled for the entire winter. I just think the energy prices are so astronomically high that it’s just not economical for companies to manufacture anything.
TN: Okay, so if you’re sourcing things in Germany, then you should expect supply chain issues for the next five or so months. Is that fair to say?
AM: At least six months. And this is why I keep saying that this inflation doom loop keeps recurring because as the demand rises, there’s not enough supply and then you get back into an inflationary event. What’s the inflation rate in the UK right now? Like 20% reported. 20%? And in Germany, I think it’s like 19% and rising. It doesn’t stop.
TN: And PPI is in the 30s or something. Just to play this out, I wouldn’t have a whole lot of time to cover this, but if private sector is shutting down, even parts of it, then government spending has to kick up. And if government spending is kicking up and we have an ECB that’s tightening, that’s a difficult environment for the German Finance Ministry, right? Or is it no big deal then?
SR: No, I would completely disagree. I mean, Germany is one of the few countries in the world that has they could basically print their GDP and they’d still be perfectly fine on an ability to pay basis. They spent, like, three years getting paid to have debt.
TN: So very good, because, look, nobody wants Germany to suffer, right? And if government spending
has to kick up, then great. If they’re not going to suffer as a government to be able to do that, then that’s even more fantastic, because with ECB tightening, it could create some difficult trade offs for some countries in the region, of course.
So let’s take this and park it and let’s move on to fertilizer, because, of course, that’s related to natural gas.
And we have some there’s a recent Bloomberg story about Europe’s deepening fertilizer crunch. 70% of fertilizer production is halted. And then we have a chart showing the price of nitrogen fertilizer in Germany. Obviously, it looks pretty extreme. Can we cover that, Albert, and look at the impacts of fertilizer and how that’s going to hit food going into spring or summer of next year?
AM: Oh, yeah, the fertilizer, specifically what you’re talking about, nitrogen based ones, are relying on natural gas. Natural gas prices just keep on spiking over there. And again, we can continue this whole discussion about inflationary, commodity prices, but food is a big problem. They shut down their potash.
On top of that, the farmers, they’re notorious penny pinchers, whether it’s the United States, whether it’s Europe, so on and so forth. But they’re going to have to make up the nutrients for the soil in the spring of 2023 and most likely into 2024, they can’t deprive the land of nutrients.
So, of course, they’re going to have to have another round of demand for fertilizer. I don’t know about the night gas based ones, but potash certainly will have a surge.
That’s why I’ve always on Twitter have been big on Mosaic being the 800 pound gorilla outside of Morocco’s. OCP, but OPC, I think it is. But that’s not a tradable stock mosaic fertilizer. I’m very bullish on that. That’s going to relate to bigger increases in food prices, specifically in the UK.
TN: What crops in Europe would be most impacted by this?
AM: Wheat. Most likely wheat.
TN: Yeah. Okay. And where does Germany traditionally, where does it source most of its fertilizer? Is it from Russia?
AM: I believe they get most of their stuff from Belarus originally. And I know that they have potash fertilizer plants inside of Germany itself, but I’m not sure how. I don’t know the exact numbers on the importance of what they do for a fertilizer, but it’s certainly a problem specifically for Germany. Of course it’s a problem for France. It’s even bigger problem because they’re a big food producer.
TN: Okay, Tracy, you’ve said a lot about fertilizer in the past. What are your thoughts on this? Does it just get even more intense or do we see some relief on the horizon?
TS: Well, I think it does get a little bit more intensive when we just saw And, Norway’s largest fertilizer company, all kind of curve back production in various countries wherever their plants are concerned. So it’s definitely a concern. 100% agree with Albert. Going into next year is going to be a very big problem. I mean, everybody’s harvesting right now. Everything’s fine. We’ve seen big pullback in those prices. But going forward, in particular next year, we’re going to have a problem.
AM: And a lot of that, Tracy, has to do with the national governments are going to look out for their national interests, their own farmers, so that although the imports will drop, so the exports will drop and they’ll just keep it closed within their own nation, so they can feed their own people.
TN: Fertilizer nationalism.
AM: Well, it’s just the same thing with oil. I mean, the countries are not export more than they can handle.
Yeah.
TN: Okay, so sounds pretty dire, but do we see any relief next year? Or, like you said, is it going to go into 24, or does it all depend on Russia?
AM: I think it depends on Russia whether the Europeans and the United States come to their senses and stop trying to put their foot on the throat of the Russians. You’re hampering your own economic growth, and they’re sitting there talking about, oh, we’re going to get away from fossil fuels and do this whole new climate thing. That’s just not realistic. And I don’t think they just haven’t come to grips with that yet.
TN: I think it’s a time frame thing. Right? I mean, it’s going to take some time, and I think there’s a hybrid mix in the interim that I think we’re trying to rush.
AM: Well, that’s the point. They’re trying to rush things. When you rush things, your own people are going to suffer economically and so on and so forth. It’s just not politically. They just can’t swallow it. Some of the voters don’t swallow that. Sort of stuff.
TN: And things break. Like Californians can’t charge their electric cars. Right. These are weird times.
Okay, great. Thanks, guys.
And then on the oil price cap, we had about this week, former Russian President Good about this week, saying that Russia just won’t deal with people who subscribe to the price cap.
And then we had Xavier Blossom, Bloomberg tweet about it, saying that he and his friends are going to agree to a price cap on beer at their local pub and that the guys at the pub don’t agree with it, which is a nice analogy, I guess.
Tracy, what are you seeing on the price cap? Is it actually going to come about?
TS: First, they just announced that they’ve been talking about this for months. Let me give a little bit of background. And they just now say there’s going to be three different kind of price caps, one for crude and two for refined products.
However, if you look at the actual G7 statement that was out today, they were pretty vague on it. Basically, they said, we invite all countries to provide input on the price cap design and to implement this important measure. So in other words, they’ve decided they’re going to do this, but not exactly holiday.
TN: It’s going to be 2030 before they come to an agreement on.
TS: it’s because. They’Re asking all their stakeholders to join in this. And so what I see as the problems with this right now is that there are four specific problems. One, it’s not really enforceable outside of G Seven countries if people don’t sign up for this. Two, Russia already said, again repeating you, that they won’t sell to countries that enact price caps. Three, part of this is the maritime insurance on vessels carrying Russian oil India is already providing safety and notification through IRGC class.
So by Dubai, subsidiary of the Russian shipping group. So I hope I pronounced that right. But anyway, they’ve already kind of gotten their way around this. And four, they’re also thinking about creating their own benchmark.
So right now, Russian crude oil is expressed as a discount to Brent because rent is the benchmark price. They already have an oil trading platform in place via RTS and MYsix. So they could build out this platform, which they’ve been talking about, and go through near Mir, which is basically their version of Swift, and completely by past that and just let market forces work.
I think this price cap is still way off from seeing the light of day. But this actually could turn out much more bullish because this price cap overlooks how Russia could influence global markets.
If they wanted to, they could opt to cut off the EU and NATO, not just G7. G Seven members shut production and raise global crude oil prices through the roof because they would take barrels off the market there by hurting the G7 nation.
I’m not saying that would happen. I’m just saying that’s within the realm of two box. And it’s not surprising after we just saw today, as soon as an oil price cap was announced as a plan, suddenly we just saw gas problem with Nordstream one, therefore I’m off of national gas.
TN: So what’s to stop, let’s say, a European country that signs onto a price cap from buying, let’s say, Russian crude that is sent to Chinese, say ownership and then resold to say, I don’t know, Germany. I mean, that type of circumvention is already happening, right?
TS: No, you can definitely do that. What we’re really seeing now is that kind of circumvention is happening in the product market. So it’s very easy for, say, India to buy Russian crude oil, refine it until it’s anywhere else because it’s very hard to track where those barrels really came from. It’s easier to track a resale. Right, if that makes sense.
TN: Sure it does. But they put in a barrel of, say, Emirati crude with a million barrels of Russian crude and then they label it Emirati crude. Right? Something like that.
TS: Yeah. If they both have the same API level, depends. You could mix them. If they both were the same exact API level, then you could mix them. It’s kind of different than, say, the natural gas market. Yeah.
AM: The Iranians do this with the Iraqi oil and bozzar. Often they mix it and label it As Iraqi
TS: because they share oil fields. I mean, Albert and I have been talking about this for years now.
AM: Years.
TN: Let’s be honest, the rules apply to the people who abide by the rules. Right. And so even if these price caps are put in place, there will be circumvention in a big way, of course, at least a refined product, if not crude product. And so a lot of it’s for sure. Is that fair to say?
AM: Of course, yeah. A lot of it is for show. This is a political thing right now for scapegoating Russia
for inflation problems. Now they’re just snowballing things and saying Russia’s gas is the problem
for inflation, Russia’s oil is the inflation problem, and other caps. But like I said earlier, and even just Tracy reaffirmed it’s like the moment you mentioned price caps against Russia, Moscow finds an issue, whether it’s gas, prom leak or Belarus problems, or Algeria has problems with Wagner. They create these issues all the time.
TN: Of course, anytime there are sanctions on a country, right. These things happen. Okay, very good. Thank you, guys. We spent a lot of time talking about Europe. So let’s move on to the week ahead and
what we expect to happen the week ahead.
We saw some really interesting action in markets, and last week we talked about how Palo speech, we really should have been a surprise to no one, but markets seem to kind of take it on the chin this week, acting shocked that he repeated himself again. So what do we expect going into next week? Do we expect things to kind of moderate a little bit or do we at least in equity markets, do we still expect some downward movement and also, say energy markets? We saw crude down, I think at 86 or something.
Tracy, do you expect, say, energy markets to continue to fall next week?
TS: What I would really look at, and what I’m looking at more, instead of looking at just reprice, which seems highly manipulated right now, especially going into midterms, not suggesting anything, but I think what I would start looking at is in like second and third month spreads or fourth month spreads. Right. So you really want to be looking, I think, just a couple of months down that curve a little bit. And if you start seeing because those curves are still kind of telling us that the market is very tight and curves, you can’t really manipulate as much as you can somewhat of the front line. So I think that’s where you should be looking at. I think we’ll really get a better grasp on these markets and to see what front market is next week is OPEC meeting, right. So they were talking about cuts, right, over the last couple of weeks. That’s right. That’s all. I will be on that. That’s on the fifth.
TN: And SPR keeps going until October. So we’re only looking at November,December before we’ll see some upward pressure on prices. At least a stand up pressure.
TS: Yeah, exactly. And depending on what OPEC says, we could see an initial pull back. The general consensus is they’re not going to do anything in September. However, OPEC has been known
to give us some surprises. So just keep that in mind.
TN: That’s good all right. Very good. Sam, what are you looking for for next week?
SR: Next week I’m looking at the ECB. I want to hear how hawkish they are and how quick they’re going to go and what type of language they’re using. They’re still in the QE boat, right? They’re still buying Italy, they’re still buying Spain, they’re still buying a bunch of the southern debt periphery type debt.
So I want to hear what they’re saying, how they’re saying it, and just how call it, quote, unquote, inflation-oriented. They are. They probably should be particularly versus the bank of England, who is very hawkish and likely to continue to, one, explore actually outright sales from their asset purchases to shrink their balance sheet and how quickly the relative moves are there.
I think that can create some fireworks, particularly called the Euro pound type crossed I think that could be really interesting and cross asset class could be.
TN: Do you think you should be able to surprise hawkish?
SR: Yes.
TN: You do? Okay, interesting. That would be very interesting to see. Wow. Okay. And so you think the Euro recovers a little bit on that?
SR: I think it knee jerks, yes. But the question is how long does that last? Right. That, I think, is a much more important question than the initial knee jerk. And I think over time, it would be a fade the news move.
TN: Okay, very interesting. Okay, very good. Thanks for that, Albert, close this out. What do you see for next week?
AM: The big boys come back to play from vacation. That’s right, they do. I think they’re going to start holding the market a little bit more accountable for all this bad data. And I think earnings were just atrocious when you look at what inflation was. I’m actually going to be watching though
China as we get closer to the CCP, the Party meeting, I think it’s October 16, I think XI might start announcing many stimulus packages in certain sectors. So I want to see if those materialize and what that does with commodities that are attached to them.
TN: Okay. I just want to say, with regard to the Party meeting in November, if anybody talks about reading tea leaves or any of that garbage, you’re banned immediately. Okay.
So we’re not going to imply, like, cultural mysteriousness on Chinese political processes. It’s just they’re a bureaucracy like everyone else. They make decisions like everyone else. They’re no more or less mysterious than anyone else. So I would say that for the people watching, because the people watching are going to see a lot of kind of China experts or whatever China watchers talked about how mysterious the CCP is and a lot of question marks. A lot of them are Fed talking points from the CCP spin machine. So they’re not mysterious, they’re a bureaucracy. They’re boring, just like every other country.
AM: Yeah. And the Party is I believe that Congress is October 16, not November. Yeah. So it’s closer than people realize. It’s only 30 days away, but China is going to have to probably stimulate some sectors associated with whoever is in line with the party leadership to keep them happy. So that’s what I’ll be watching next week.
TN: Yes. Very good, guys. Thank you so much. Looking forward to have a great holiday weekend, and I look forward to seeing you next week. Thank you very much.
Can the Federal Reserve engineer a soft landing for the US economy? Are the odds stacked against them especially if consumer spending stops suddenly. Tony Nash, CEO, Complete Intelligence gives us his views.
Transcript
BFM: The business station BFM 89 Nine is seven. 6th Thursday, the 1 September, and we are in the final quarter of the year. But nonetheless, we don’t need to look so far ahead because in the next half an hour, I’ll be speaking to Hannah Pearson of the travel consultancy Pet Anderson on Asian tourism recovery.
But in the meantime, let’s recap how global markets closed yesterday. So the Dow was down 0.9%, S&P 500 down 0.8%, while the Nasdaq was down 0.6%. Meanwhile, in Asia, Nikkei was down 0.4%, Hang Seng was up very marginally by 0.3%, Shanghai was down 0.8%, Singapore Street Times was up 0.6%, and our very own FBM KLCI was of course close due to the medical holiday.
But for more in terms of where global markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, the S&P 500, in fact, the US markets continue to slide, but the S&P 500 we know, is down by 4.2% on a monthly basis, even though US jobs and consumer numbers released this week were largely positive. So why is this bearish sentiment in the equity markets persisting?
TN: It’s pretty easy. Equity investors weren’t prepared for Powell to have the conviction to fighting inflation that he showed in last week’s speech. So everyone else, bond vestors, commodity investors and so on, understood Powell’s conviction.
But equity investors had expected the Fed to pivot. And by pivot, maybe coming close to loosening and maybe coming close to ending rate rises. But the Fed was never going to pivot. If anything, the pace of rate rises may slow, but the Fed’s ultimate destination is 4%. And they’ve said that for months.
So there really shouldn’t have been any surprise with that. But equity investors just didn’t want to believe it. And so they’re in price discovery, continuing lower now. So once they hit the valuation that will reflect getting to 4%, I think we’ll be back in decent territory. But until then, we’re in a downward price discovery mode.
BFM: Okay, Tony, the other thing that’s going to happen in next few weeks is of course, the Fed going to reduce their $9 trillion balance sheet. What kind of impact do you think this will have on markets?
TN: Well, it’s tighter. So it’s going to be more difficult. So in September, the Fed will double quantitative tightening. So they’ve been tightening at about 47.5 billion dollars per month. They’re going to more than double that to 95 billion in September. So it will definitely add upward pressure on interest rates.
And when there is upward pressure on interest rates, that means the cost of money is higher and the cost of buying a house is higher, and so on and so forth. And with respect to buying a house, the Fed is about $50 billion behind on shrinking their mortgage-backed securities portfolio. So they do have some catching up to do, but they’ve got time on their side. They can do it at whatever pace they want.
BFM: Okay. In the meantime, right, let’s look at the US consumer. Super important in the US. Economy, but at least 60% of GDP. Do you have a sense of what’s happening there? Are they still very confident? Are they still buying, especially discretionary spending? Has it been robust?
TN: I don’t necessarily think. You have a separation. You have luxury buyers who are very confident. But I think your average buyer, I don’t necessarily think there’s a lot of confidence behind their buying. I think they’re just trying to maintain their pace of spending.
So spending continues to grow, but consumer credit has also expanded. Visa, I think, two days ago said that their payments volume grew by 11%. So that’s not the value. I mean, you could say with inflation, of course, the value is going to go up, but they saw their payments volume go up by 11%. Part of that is due to things like back to school here in the US. The school year starts in late August, early September.
But until consumers stop growing their spending, the Fed will keep raising because the Fed, part of what they’ve been trying to do is what’s called demand destruction. And until consumers and businesses stop raising the pace of their spending, the Fed will continue raising interest rates in tightening conditions.
BFM: But doesn’t this then just mean that the US is officially in a recession? Because you’re basically sending out signals to the market that the economy needs to slow down. And if we continue to do so, we’ve already seen two-quarters of it, right, which means it’s a technical recession. How bad will this recession really be? I mean, it will be official at some point.
TN: Yeah, I really honestly don’t care if we’re in a recession or not. If two quarters is the rule of thumb, then we’re in a recession. And we’ve been in a recession since Q1. So it’s really just a matter of labeling.
I think the difficulty is, as you say, what’s the impact on, say, business growth, job growth, spending growth? And we’re seeing that the job market has remained pretty strong, spending growth has remained pretty strong. And the concern is, will that stop? When will that stop? And I think we have seen things slow down, at least in terms of economic growth, but a lot of that has been around government spending as well.
So things will likely become dramatically slower in 2023 if the Republicans take over the US. House of Representatives, which controls the budget. So if Republicans take over the House, they will put a stop on a lot of the spending bills that the Biden administration continues to want to pass, and they’ll be more budget conscious. So government spending may not necessarily decline, but the pace of the rise will stop. And so government spending has been what’s been keeping, say, GDP and other things moving, but that will likely stop if Republicans take over Congress.
BFM: Okay, but what about the Fed, the actions of the Fed? Because so far it seems like markets are looking to them for engineering a soft landing in the US. Do you think they’ll succeed, though, or are we going to look at the politicians for doing so?
TN: It all depends. Well, not all. A lot of it depends on the Fed’s actions this month, in September. So if the Fed slows the pace of rate rises, let’s say to 50 basis points instead of 75, they’re signaling that they’re willing to slow down a bit with the destination remaining 4%.
So if the Fed were to come and say, a 25 basis point rise, then that would be a real signal that, yes, they’re definitely committed to getting to four, but they’re willing to slow down to get us to four by, say, Q1, maybe late Q1 of ’23. And I think that would be a signal to equity investors that the Fed understands and they’re okay if some of these valuations continue to be stretched.
If we see a 25 basis point rise, which I don’t think anybody is really calling for in September, then that would be a real kind of green light from the Fed. I think we’re likely to see 50. 75 is also likely, but I think 50 is slightly more likely. So we’ll likely see 50 and then a few 25s. And that’ll get us to four in, I think, December or January. And at that point, the Fed is just going to reassess and figure out kind of which strategy to pick after that.
BFM: So is it too optimistic to say that maybe we might have a year-end rally for US. Markets? What do you think?
TN: It’s possible. I wouldn’t necessarily count on it. Again, I think the upside is capped for a period because of the uncertainty of the Fed, at least until we have clarity on the September signaling. So if they do raise 75 in September, then that likely means we have a couple of 25 rises in October, November, something like that. But it doesn’t necessarily mean they’re going to stop. All it means is that they’re going to reassess and the beatings will continue effectively.
BFM: What about oil, though? It’s now $89 a barrel for WTI. Why have prices come under pressure so much?
TN: Well, the Saudis came out with a statement last week around the gap between the paper value of oil and the physical market. And they have been talking about cutting their output because of the difference, the broad difference between the physical market and the paper market. And so I think when we see falls like this, it just convicts the Saudis more. Unless there’s political pressure put on them, it just convicts them more to cut their output.
The Saudis, the Emiratis and others have come together and said we’re likely going to slower output. Part of this is also putting pressure on the Iran deal, assuming that there’s more capacity from Iran. So if exports from Iran are normalized, then that could put downside pressure on the price. So the Saudis are just trying to keep the price up.
Within that context, we also have to look at the Strategic Petroleum Reserve releases in the US. So that will end in October unless they slow down the pace of the SPR release, but that effectively cuts off supply to the market. And so when the SPR release ends and if the Saudis cut their output, we could have a spike in crude prices, say in Q4.
That’s kind of what we’re expecting is for crude prices to rise into the end of the year. The US midterm elections will be passed as Saudis will likely cut their output. Other OPEC countries will likely cut their output. And the US SPR release will be done. Unless the Russia-Ukraine war ends, which would put crude in the open market, we do expect to see crude price rises towards the end of the year.
BFM: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, telling us that we can expect Brent crude prices to actually perhaps go up for the last quarter of the year as there are more output cuts despite some of the demand destruction we are seeing because of the global economic slowdown.
