Month: October 2022

China risks, tech earnings, and crude stockpiling: The Week Ahead – 31 Oct 2022

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Post date October 29, 2022

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In this episode, we’re joined by Isaac Stone Fish, who is the CEO of Strategy Risks. He’s the author of a book called America Second, and he lived in China for seven years.

We talk about how are foreign companies dealing with the political changes in China? Or what should they be paying attention to? We’ve seen changes in Xi’s team that, to be honest, weren’t all that unexpected, but seems unexpected anyway. It’s certainly a hard turn to the CCP’s commie roots. This tweet really underscores how desperate Xi is to set an old school tone.

Markets have seemed a little spooked this week, so we saw orders from Beijing to prop up the CNY and Chinese equities, which didn’t work all that well. But with all the political and market backdrop, what does all of this mean for US and other foreign businesses? Are foreign employees at risk? Do we expect direct investment to slow down?

On the risk side, we look at tech earnings, which are super bad. Hiring is a huge issue and tech firms seem to have been hiring based on their valuation not based on their revenues. When will we see headcount reduction announcements? One of Meta’s investors was saying they should cut 20%. Albert shares his views on this.

And we’re also looking at crude oil inventories and refined product inventories. They’re way below averages. We saw another draw on global inventories this week. As OPEC supply is contracting ~1.2m bpd. Russian crude sanctions start soon. And US exported 5.12m bpd last week, making it the 3rd largest crude exporter. We know global inventories are low, but when will it start to bite? Tracy shares to us what’s going in.

Key themes

1. China risk for Western companies
2. Tech earnings & China
3. Crude inventories & Asia stockpiling

This is the 39th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Isaac: https://twitter.com/isaacstonefish
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Time Stamp:

0:00 Start
1:00 Key themes for this Week Ahead
2:52 What the news about China means to Western businesses
6:38 What has changed around the concept of Communist Party membership over the last ten or 15 years?
8:20 Anybody who’s overseeing a business in China has to understand modern Chinese history
9:31 Risks for foreign staff in China
12:34 Congress does not want US companies to do business with China
14:14 Danger of a rush to the exits in twelve months
17:58 Tech earnings are super bad – how bad will layoffs be?
21:10 Is it possible to cut 20% of Meta’s workforce?
22:44 China and US competition in India and other countries
24:52 Crude inventories – when will this start to bite?
28:31 Japan is stockpiling crude – is it because of geopolitical concerns?
29:47 China stimulus – will they do it in February?
31:55 What happens to the crude demand of Covid Zero ends?
34:27 Will oil prices raise by 30% before 2022 ends?

Transcript

Tony Nash: Hi, everybody, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Isaac Stone Fish. Isaac is the CEO of Strategy Risks. He’s the author of a book called America Second, and he lived in China for seven years as the New York Times in New York Times bureau. So we’re really lucky to have Isaac with us. We have Albert Marko, of course. And Tracy Shuchart. We’re very fortunate to have them again today with us.

So, Isaac, welcome and we’re really happy to have you.

Our theme today that we’re going to talk through first is how are foreign companies dealing with the political changes in China? Or what should they be paying attention to?

On the risk side, we’re looking at tech earnings and the impact that tech earnings will have on other earnings and headcount reductions and other things over the next few months. And we’re also looking at crude oil inventories and refined product inventories. They’re way below averages.

And we want to hear from Tracy as to what’s going on.

Please take a look at our product, CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon. Economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

So, Isaac, welcome. Would you give us a quick overview of what Strategy Risks does?

Issac Stone Fish: Strategy Risks works with corporations and investors to help them manage and reduce their China risk. And with increased tensions between the United States and China, and growing awareness of the liabilities in both China and the United States of working with the People’s Liberation Army or the United Front or the Ministry of State Security or the Chinese Communist Party more broadly, it’s been a good couple of months for us.

And so excited to be joining you and chatting with you on these issues.

TN: You must be working 24 hours a day. I have no idea how you stay, how you get any rest right now with all the stuff that’s going on in China.

ISF: Under drugs right here.

TN: Isaac, I’m curious, with all of the political changes announced this week, of course, that’s been way analyzed, a lot of different perspectives on things. I would warn people as they read through that analysis, just be careful of kind of some anti China bias, but we have to kind of read things for what they are too.

We saw changes in Xi’s team that, to be honest, weren’t all that unexpected. People have talked about this for months, but the fact that he actually carried through with it, I think made people feel like it was a little bit unexpected.

But it’s certainly a hard turn to the CCP’s communist roots. I’m showing a Tweet right now looking at Xi taking his team to pilgrimage where the long march ended during the Communist revolution. And so he’s just the optics around the hard turn to the party’s communist roots are front and center.

So Isaac, markets were spooked this week. Of course, we saw orders from Beijing to prop up CNY and prop up Chinese equities. Obviously didn’t work very well. But with that backdrop, what does all this mean for US and other foreign businesses? I know it means a million things, but if you had some top level takeaways, what are the things that you’re seeing that it means for, say, US and other foreign businesses in China?

ISF: Have a really good understanding of leftist ideology. If you decide that you want to stay, which oftentimes we discourage, and if you decide that you don’t want to reduce your exposure, which we always discourage. Have a really good understanding of how Communism works, and read the tea leaves. Spend a lot of time on analysis. Understand that every Chinese company or every company in China that has at least three party members has to have a party cell. And for a long time people overlook that law.

But companies like Alibaba have tens of thousands of party members. So understanding that you’re partnering with the Chinese Communist Party and things that you used to be able to get away with, you can’t anymore. I think the other high level take away is with increased media, consumer and congressional scrutiny on China.

What happens in China doesn’t stay in China. So the work that you do with a major Chinese charity which does say party building exercises in Chinese orphanages, aka Brainwashing Chinese Children on Party ideology, we can get that information here. Congressional staffers can read that, journalists can pick that up, and you’re going to have to start dealing with the liability of that from a PR perspective. The final highlevel takeaway, the more Xi marches to the left, the more draconian things get. And the more saber rattling we see with Taiwan, the more likely it is that the US and China go to war over Taiwan.

Right now, I would say that’s still not the base case. War is very avoidable. It probably won’t happen. But it’s a very concrete risk and investors and I would argue especially boards of major corporations, need to be discussing this risk. And perhaps the best thing to do with the risk is to say, okay, we know this, we’re not going to change.

But I think if there is a war, companies are going to have to face some pretty serious shareholder lawsuits because it’s a viewable risk and you didn’t do anything about it.

TN: Right. So let me ask you, take two questions. First is, in 2010 or ’11, I spoke at the Central Party School in Beijing, and the person who drove. I was giving an economic update. I was working with the Economist at the time, and it was so surreal for me. The person who drove me to that event was a venture capitalist. And so I think the view that many people have of Communist Party members is, oh, you know, they’re these soft guys, they’re capitalists like us too, you know, that sort of thing. What has changed around the concept of Communist Party membership over the last ten or 15 years?

ISF: Think of the perception. So when Rupert Murdoch in early 2000s was going into business in China, he would downplay the importance of the Communist Party and say things like, oh, they’re just like us, there’s really no difference. And some people just join the party for opportunistic reasons, and some people do it because they believe, but they’re fairly soft spoken and gentle. And then there’s the very hard security element of the party.

And I think people are realizing that for every venture capitalist, there’s also the PLA secret agent or the MSS agent or the public security agent in that these people are increasingly important in the Chinese system.

And the other piece of it is that it used to be seen from a Western context, both PR and regulatory, relatively benign to be working with party members in the Communist Party. But after the genocide in Xinjiang, after Xi’s increasing authoritarianism, people are not getting the pass that they had before when you and I were out there.

TN: Right. And so I think it’s really critical. Anybody who’s overseeing a business in China has to understand modern Chinese history. You have to start from the great famine, really. I mean, start from the revolution, but really the great famine through the Cultural Revolution, through the 70s, through Deng Xiaoping, through… That era is really critical to understand what’s happening today. Right. Because that’s when Xi Jinping grew up and that’s when his ideologies were formed. Is that safe to say?

ISF: Good is safe to say. I think the other thing that we have to understand is we do have to be incredibly humble about our ability to understand what’s going on at the top of the party. We have very little idea. People are going to keep speculating about that crazy video with former Chairman Hujing Tao. We probably won’t know what happened there for decades, I would guess.

And I think when we talk about war with Taiwan, we talk about what’s going to happen between the US and China, we have a lot of insight into how Biden thinks and almost none into how Xi Jinping thinks. We just need to bake that into our predictions.

TN: Yeah, that’s absolutely right. And I cautioned on that earlier this week about the Hoojin Tao exit. It could be health, you don’t know. Right? It could be intrigue. You don’t know. So none of us know.

So let me also ask you, when you talk about you had a tweet about potential China-Taiwan war earlier this week, and you talked about Chinese staff for American companies or Western companies, sorry, and you talked about Western staff in China. So can we talk about some of those risks, like the real people risks for multinational companies who hire Chinese employees. And none of this is intended to be Xenophobic.

This is intended to be purely practical in understanding really what the risks are. And also with those foreign staff in China. Can you help us understand some of those risks?

Tracy Shuchart: Yeah, I was going to ask something along that line, if I can just tag on my question to that one. We saw a bunch of people who are Americans pulling their staff from Chinese chip companies right, lately. So I was wondering if you saw that, see that trend continuing and bleeding into other sectors besides just the tech sector.

ISF: I very much do, and I think there’s two ways to think about this. One is the economic and regulatory so increasing difficulty doing business in China, desire for localization of staff, Biden regulations that restrict the ability of Americans to work at certain Chinese chip companies. And then you have the potential for war.

And the idea is that if the US and China go to war, American staff in China and also Chinese staff for certain American companies could be seen as enemy combatants. And we saw this with Afghanistan, we saw this with Ukraine. There’s orders of magnitude, more staff for Western companies in China than in these places. I mean, it’s not even comparable, the numbers.

And I think from an ethical perspective, I get really worried that people don’t talk about war because then war could just be on us. And the United States has a terrible history of interning Japanese during World War II and harassing Germans during World War I. I think with the dynamic with Chinese people here, we need to have a concrete conversation about it so that we can defend the rights of Chinese and Chinese Americans in America if we go to war.

And from a corporate perspective and from a risk perspective, companies need to have exit plans for their staff in China because they’re going to be dealing with major, major ethical and insurance risk issues if this happens. And they can’t just take the foreign staff out to Hong Kong anymore. Because that’s not like a free zone anymore. And you hear stories of people being smuggled out now, and I think we’re going to hear a lot more of those, and that’s going to be more and more common.

TN: So, Isaac, what are we missing when you see the discussion about China right now and with American businesses, what are we missing? What’s not being discussed that you’re like, Gosh, I can’t believe people don’t see this.

ISF: Congress does not want American companies to do business in China. And with the UFLPA, the Uighur Forced Labor Prevention Act, we talked to a lot of corporates about that, and they don’t seem to understand how to comply with the law. And that’s the point. It’s a law that’s meant to deter behavior as opposed to shape behavior.

So it’s okay, we can’t invest in Xinjiang, but this company that we work with, has a branch of Xinjiang. Well, don’t work with that company. And I think the American political calculus of this too.

People don’t really get Pelosi’s trip, I think didn’t really bake into corporate behavior in the way that it should have because people think this is a Republican issue. They hear Marco Rubio, they hear Ted Cruz, they hear some of the awful remarks that Trump made, and they don’t realize that Nancy Pelosi and Chuck Schumer sound almost exactly like Rubio and Cruz on these issues. They think it’s a Republican issue. It’s not a Republican issue. There are holdouts on the progressive left, there are holdouts on the libertarian right. But the US is pretty united about this from a government perspective.

It’s just not from a business perspective. And that’s fine. You can have that discordance. But businesses need to understand main street and Congress feel very differently about these issues than they do.

TN: Yeah. So one last question on this. Unless Albert, Tracy, you guys were going to come in, but do you think we’ll see publicly traded American companies disposing of their China units with say a Hong Kong IPO?

I mean, I know this is an old idea, but better than nationalization, at least they can get some value of it. And I think of like a GM or something like that, right? It’s a huge business for them. So they could potentially either have that nationalized or they could make it public on the Hong Kong stock exchange or something.

So do you think we’ll see more of this? Young Brands is the one that everyone knows about from ten years ago or whatever, but do you think we’ll see more of this? And if people don’t do it now, is there a danger of a rush to the exits in say twelve months?

ISF: I think that’s an excellent point. Ping on, which is a major shareholder of HSBC, suggested HSBC break up into two different banks, one headquartered in Hong Kong to focus on China market and one of the rest of the world.

And companies like Boeing, which has an airplane business that I think it’s something like 14% to 18%, goes to China, specifically the Chinese Communist Party and then has a very important government contracting business which is increasingly at odds with its relationship with the Chinese Communist Party and need to start considering these issues.

I think you’re right also on the timing, these things take a lot of time and companies are very private with them for obvious reasons. So if they’re considering them now and we’re going to see announcements on it and it doesn’t require that much scrutiny from Cyphius or the Beijing’s regulatory Agency or other Beijing other Chinese agencies, I can see these things happening.

I think if companies are starting to think about it now, it’s probably too late. I think years process. But in the same way that nobody wants to talk about war, nobody wants to talk about spinning off their China assets.

TN: Right. But you either do it now or it gets nationalized. Or you do it for $0.10 on the dollar in a year or two years.

ISF: I think you’re exactly right. And Tony, we should write something on this, and I think this is a good time to talk about this issue.

Albert Marko: Okay. There are other issues. Capital flight out of China, even if you decide to list in Hong Kong, is like, where’s the money going to come from? It’s not going to come from the west. Even the Chinese are starting to take their money out into Singapore and Macau and anywhere else they can get it out of at the moment.

But I agree with Isaac on 90% of what he’s saying. I don’t think that war, Taiwan is even a remote possibility in the next ten years, to be honest with you. The pilot bureau, Xi is inspired politburo. It looks scary. There’s no question about that. And the Western companies need to take a look at that because it reminds me of the Nazis from the 1930s.

Now, I’m not talking about what the Nazi crimes were, but just the mobilization of the country and the nationalization of corporations and then starting to boost the economy internally. It’s most likely going to start happening, and they will nationalize companies that they see are instrumental for their vision going forward.

TN: Yes. I mean, honestly, I don’t know why anybody related to SAIC Shanghai automotive. Why would that not become the property of SAIC? If they’re really taking this nationalist bent, that’s a real risk, right? I think so. Any of these guys really need to pay attention and really start to evaluate what is their path going forward? What is their path for Chinese staff? What is their path for foreign staff there? What is their path for IP that’s shared between those units? These are real head scratcher questions.

Okay, Isaac, thank you so much for that. This is so insightful. I’d love to spend 2 hours with you on this, but we’ve got to talk about tech earnings.

So, Albert, tech earnings are super bad, right? Super bad.

AM: Super bad is an understatement.

TN: Yeah. Horrific. It’s a tech wreck, all that stuff. So we can talk about what missed and kind of we all know what’s missed. That’s been analyzed over the last 24 hours or say a few days or whatever. But I guess what I’m most interested in tech is staffing.

So the vacancies in the US. Workforce has been a big issue for the Fed. Okay. And I’m showing right now on the screen that the Meta’s stock price from $350 all the way down to I think it was $97 yesterday, just over one year. It’s incredible, right?

So a lot of these tech firms have been over hiring. They’ve been putting out job wrecks for things that they where they just want to target one person and they don’t really want to target the job and all this stuff. They’ve almost been hiring based on their valuation rather than their revenues. So in terms of those productivity metrics, do you think we’ll start to see headcount reduction in tech? Or they’ve been saying, hey, we’re just going to slow down our hiring.

So do you think they’re going to stick to only slowing down their hiring? Or do you think we’re going to see this kind of tech halt and kind of shrink the tech workforce?

AM: Oh, absolutely. You got to shrink the tech workforce. But that’s not going to come till after midterms. I mean, nobody wants to be in the line of sight of Biden’s firing squad over firing 10 thousand people just before midterms happen. But afterwards you will. Probably after Christmas, you’ll actually start seeing quite the number of job layoffs in the tech industry.

TN: Every time I’ve worked with a tech related firm, the pink slips come literally the week before Christmas.

AM: Yeah, you know what I mean? I don’t think that people understand how bad these tech earnings are. Right. We can note Facebook and Amazon and whatnot, but they had tailwinds of inflation of an extra 10% because CPI, they say 8%. It’s really like 20%. So they had an extra 10% baked into their earnings that people don’t really catch. Right? And even with that, they’re down 30, 40%.

Amazon lost 25% in two days. Amazon. These are just astronomical. Which is a solid company. I love Amazon. I don’t have any… Company. Yeah, it is a solid company. And I like Amazon, I like the tech, I like the delivery service. And everything they do is correct. But I mean, realistically, they were, them and along with another dozen tech names were so over inflated for the last two years because the market just kept pumping up to just the high heavens that this was just I mean, it was an easy call that tech had to come down.

And on top of that, tech is based on zero rates. We’re not going to see zero rates for years.

TN: Right, that’s fair. Okay, so, you know, one of the hedge funds, I can’t remember who, was pushing Meta or Facebook now, I guess, again, to cut 20% of their workforce. Do you think something like that is possible?

AM: And it sounds like a lot, but given what’s happened with their valuations, do you think a 20% cut is possible? Do you think more or less is possible? And 20% is a lot. Usually when you have over 12%, you start looking at a company as going into bankruptcy. That’s one of the signs that you look at. So 20% is way too much. I don’t think that’s going to happen. Maybe seven to 10% staggered over the next few years.

TN: Okay, that’s fair. But I mean, they hire a huge number of people. What that would do to wages in tech would be immediate, right? $300,000, 22-year-old dev, that would be gone.

AM: Well, yeah, that cuts into the state’s budgets also because they take those tax revenue and whatnot. The other thing that we should talk about is China’s mix with the tech industry. I mean, now that the US congress, like Isaac was saying, is actively trying to prevent companies to go over there, I don’t know where tech earnings are going to come from. I just don’t see it. They’re taking away massive market share. They’re taking away supply chains and semiconductors and everything. I don’t see any silver lining in tech for the next two, three years.

I think they need to run size their organizations and really focus. Plus there’s more competition in the ad market, so you’re not going to see ad rates necessarily rise from here for some time.

So, yeah, I think there’s a lot of headwinds. I actually have to get Isaac’s opinion on this one is no one is talking about the tech industry in China competition with American companies in countries like India. Right? Because you have Chin Data and a couple of other countries that are massive and makes generate a ton of cash out of there.

And nobody’s talking about the competition level in India between the two. And I don’t know if you’ve heard anything, Isaac, but like, that’s something that I wanted to start looking into.

ISF: I think that’s an excellent point, is it doesn’t get nearly enough attention. And the market for the rest of the world for most of these companies is larger than the market for the US and China combined. There are a lot of contested spaces, especially in countries like India, Brazil, Indonesia.

And I think the lens through which we should see it is the political battle between the US and China because both countries are really pushing all of these third countries to be more sympathetic towards their way of view because so many of these tech companies can be hobbled by regulations. We see that with Huawei. We see that a lot in India where there’s a lot of distrust for Chinese tech companies, a lot of restrictions on the ability of Chinese tech companies to operate.

And so it’s protectionist, but it’s good political warfare for both sides to be making these arguments in countries around the world. And it is good business for these companies to be spending heavily on government affairs in all of these companies, in all of these countries and figuring out how they position their relationship with the government, whether it be the Chinese government or the US.

AM: Yeah, and that’s something I actually criticized the Biden administration that they’ve been so hard on India about using Russian tech and Russian oil. It’s like, come on, you guys got to be a little bit pragmatic here. You know what I mean? They’re stuck between a rock and a hard place with China and Pakistan.

TN: True.

ISF: I think that’s a great I mean, they buy huge amount of weapons from Russia, and they buy those in large part to defend against China.

TN: Yeah, very good. Okay, great. Thanks for that, Albert.

Now, Tracy, let’s move on to crude inventories. I’ve got a Tweet up where you talk about there was another draw this week.

And we saw a draw on global inventories. As we have inventory drawdowns, we have OPEC supply contracting by what, about 1.2 million barrels per day, something like that. Russian crude sanctions starting. We also have with the SPR, it was interesting to see the US became the third largest exporter of crude, I think last week or something, with over 5 million barrels per day because of the SPR draw.

So we know global industries are low, but when does that start to bite? I feel like the easy answer is well, after the SPR stops, right? What more to the story is there?

TS: I mean, I think it really depends on where you are. I mean, we’re already seeing the SPR. Those draws are kind of dwindling down, right? We’ve gone from about seven, 8 million barrels per week to 3.5 million. Even though that’s still a lot. That’s been part of the reason why we’re exporting, because we kind of, first, we were drawing down sour crude because that’s really what US refiners need. But at some point, that’s almost gone, so we had to start releasing sweet crude, and we can’t do anything with those barrels. And so they are making their way to China, they are making their way overseas.

And that’s why our exports have increased over the last few months there. In particular, we’re kind of seeing an uneven balance where we’re seeing global inventories are drawing, still drawing, right? US inventories are drawing, by all intents and purposes. I mean, we had, what, a 2.8 million build, but we also had a 3.5 million SPR release and an adjustment factor of 15.8 million barrels. Technically, we are drawing. And really, if you include the SPR, we had a draw of 5.9 million barrels total crude plus products this week.

But we are seeing what’s interesting is we are seeing Japan. Their stocks are actually going up because they’re stockpiling mad right now. So they’re buying everything from everybody. It’s stockpiling, and they were giving subsidies for companies to buy that in their SPR. So Japan kind of had a different kind of way of looking at things and the rest worlds just dumping. But they’re literally stockpiling.

China did stockpile for a while, but really their SPR is down, obviously, from the 2020 highs. They’re not stockpiling as much. But with China, I know that there are many problems going on there, but if they increase those import quotas for the Teapots, then we’re going to start seeing them by a lot.

TN: By Teapots, you mean the small refinery?

TS: Is just correct, because they’re talking about possibly raising those import quotas. But we won’t really find that out until December, and that’ll be for into 2023.

TN: Okay, so just a question on both, well, in Japan, first of all. With the yen at these dramatic lows, they’re stockpiling and it’s hugely expensive for them. It’s not just kind of incidental decision, this is a really intentional decision for them to stockpile. So are they partly, do you know, are they partly stockpiling

on geopolitical concerns?

TS: Yes, absolutely. I believe so. And all around, because we really saw them that sort of started to kick off in March after Ukraine invasions. Same with LNG, right? They’ve always been huge importers of LNG, the world’s largest, but they’re importing even more because they’re kind of seeing what’s happening in Europe right now and they don’t want that to happen to them.

AM: I think it’s a little bit more than that. Also, I think that they see that we’re probably even got cues from the US that Japan is going to be a manufacturing hub to try to pick up the slack from China. So I think they’re preparing for that in 2023, 2024. And on top of that, the price of oil right now, that’s still discounting China not stimulating because once China stimulates, the demand is just going to skyrocket.

TN: Okay, all three of you guys want to ask about that China stimulus. So you guys all know China Beige Book, and they’ve been saying everyone’s really foolish for thinking China is going to stimulate, and they’ve been saying that for something like six months. Right? And I hear a lot of people say, oh, they’ll stimulate after the Party Congress. I said that too, and we still haven’t seen that. Do we think that we’re going to see stimulus in China, say, before Chinese New Year, which is what, February?

ISF: I would say absolutely not. I think the real stimulus for the Chinese economy, too, will be less a government led infusion of capital and more a relaxation of COVID concerns.

And I think that’s going to be a lot more likely after Spring Festival than after the March Congress because, A, you have the appointment of the premiere, you have some important events there, but you also don’t have to worry about mass contagion with hundreds of millions of people wanting to travel.

So I think the base case for the opening of the economy and then potentially economic inflation is after the Congress, after Spring Festival. And who knows, it’s very hard to predict, but that would be my best guess for that.

TN: I think that’s really solid. What do you think about that?

AM: Yeah, I think COVID Zero policies are going to be still in place until March. There’s no question about that. I think stimulus happens around the same time that they think that inflation is under control. I think that’s pretty much their driver at the moment, because if they stimulate price of copper and oil and everything in the country is going to go to the moon and they know this. So I think it really depends on inflation. What the US can do to tame it.

TN: So when do you think they’ll think that inflation is under control?

AM: I think close around March after the US. And also the end of quantitative tightening and whatnot. So it’ll probably be a coordinated effort.

TN: Okay, so Tracy, if they just let go of the lockdowns, what does that do to crude demand?

TS: Well, definitely we obviously start to see that rise because they’re locking down millions of people at a time, you know what I’m saying? An entire city, and not for a couple of days. We’ve seen some cities lock down as long as two months.

So I think as soon as they start relaxing that we’re definitely going to see demand come flooding into the market.

And again, China hasn’t really been stockpiling this whole time during this, which they have a little bit from their lows, if you look at their SPR, but not a lot. Not as much as everybody thinks they are. Everybody thinks they are because oil prices are lower and they like lower oil prices. But really, comparatively speaking to how they purchased in the past, the SPR hasn’t been as much as most people think.

AM: Okay, do you think that they could be? First of all, I don’t trust the data of China. I don’t have anything.

TS: Well, what we can see from satellite systems, right? We have no idea what their underground storage looks like or anything of that nature. But what we can tell and what we can track, what’s actually going into the country.

AM: Do you think that they can hide that in tankers on the sea for a while?

TS: Yeah, absolutely. I mean, they’ve been known to do that before. Absolutely. They’ve used Myanmar,

AM: Singapore also, I believe.

TS: Well, Singapore is a little bit harder to hide just because it’s so huge and so many people are tracking vessels there. So they kind of like to kind of stay away from there when they’re kind of trying to hide stuff.

But definitely, I mean, they’ve, you know, hidden purchases from Venezuela through Singapore, through other ports in that area. From what you can see from the best guess. From the best guess, what you can see, what you can tell what satellite services have picked up, like Kepler or whatever.

TN: OK, let me kind of close up with this question. So I just filled up with gas in the US last night and I posted this price in Texas is $2.95. So I’m sure you’re all jealous. I said, will this be 30% higher by the end of the year? Because post election, SPR releases stop, other things? Do you expect gasoline to rise, say, as much as 30% before the end of the year since SPR release and other things are stopping? Or do you think we’re kind of in this zone that we’re going to be in for a little while?

TS: Well, I think that generally this is kind of lower demand season anyway, right? I mean, usually typically we don’t see prices really start to rise again until about mid December, just seasonally speaking, right before the holidays. Christmas in particular, and everybody goes on vacation, et cetera, et cetera.

But I think, I don’t know. 30% might be a lot for this year, but definitely for next year we’re going to have some problems because they took that last 10-15 million barrels and they pushed that out for December, so we’ll still have some releases then.

So I think they did that it was actually 14 million barrels that are left and so they did push those out until December. So they’re kind of going to triple it out in order to kind of control prices.

TN: Okay, so the selection bias for people telling me that I was right is wrong.

TS: I think it’ll probably depend on where you are in the country, you know, depending on the state. Yeah, absolutely. I mean, if you’re in the Northeast, you’re going to have a huge problem, right, because they have the same issues going on that Europe. They don’t have any pipelines, they don’t have any storage, and they don’t have any refining capacity.

So this winter, especially with the diesel shortage, you’ll probably see the highest gasoline prices, obviously in California and then the Northeast will be the next higher.

TN: And I just want to say to everybody, I’m not promoting the gasoline price as a reason to move to Texas. I mean, it’s all scorpions and rattlesnakes and really terrible bagels here, so please don’t move here. It’s just an incidental benefit of living in a place that’s a pretty rough place to survive.

So anyway, guys, thank you so much. Isaac, really invaluable. I don’t think we’re going to gotten this perspective from anybody else on earth, so I really appreciate the time that you spent with us.

Albert. Tracy. Thank you, guys. I always appreciate your point of view. So thanks very much. Have a great weekend. Thank you.

Podcasts

Nasdaq Breaks 3-Day Winning Streak

Post author By admin
Post date October 27, 2022

This podcast was originally published on https://www.bfm.my/podcast/morning-run/market-watch/nasdaq-tech-stocks-sell-off-meta-alphabet-apple-amazon

Investors were not impressed by results from Meta and Alphabet leading to a sell-off in tech stocks on Wall Street. We speak to Tony Nash, CEO of Complete Intelligence, to find out how results from Apple and Amazon set to come out soon might impact overall market sentiment.

Transcript

BFM

This is a podcast from BFM 89.9, The Business Station.

BFM

BFM 89 Nine. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam. It’s 7:06am on Thursday, the 27 October a rather overcast Thursday morning. For now, perhaps we’ll see the sun come out a little bit later. As always, we’re kickstarting the morning with a look at how global markets closed overnight.

BFM

It was a bit of a mixed day for what generally red though the Dow Jones on Wall Street, the Dow Jones ended marginally higher, that’s 0.01% barely changed. S&P 500 was down 0.7%. But the action was on the Nasdaq that closed 2% lower because of disappointing results from Meta and Alphabet. We’ve just got to wait for the Apple and Amazon results that will be out tonight US time. So we’ll be discussing that tomorrow. Early in the day, Asian markets were generally green. The Nikkei was up 0.7%, the Hang Seng was up 1%. The Shanghai Composite and Singapore’s STI, they were both 0.8% higher. And back home the FBM KLCI closed 0.7% up.

BFM

For some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony, thanks for joining us today. Now, notwithstanding overnight results, global equities led by US stocks have extended gains over the last week, avoid by the expectations that peak inflation has been reached. What do you think? Are they being too sanguine about inflationary pressures?

I don’t necessarily think they’re being too sanguine. There are cases to be made that housing prices and wage growth have turned the corner. Goods price inflation has likely peaked, but there doesn’t necessarily mean that we’ll see prices decline. Regardless of what’s happening in the inflation environment. The Fed is going to raise rates in November, likely by 75 basis points and again in December. So the Fed typically lags inflation on both sides on the way up and on the way down and so they’re likely going to over tighten. Markets have largely factored in a 75 and 50 basis point hike over the next two months. So are they sanguine? I don’t know. I think if we start to see inflation really take a downward turn, then it could be a very good thing for all of us.

BFM

But Tony, the 75 basis point expected hike by the Feds comes at a time when a lot of analysts are also expecting recession to hit the US sometime sometime next year. Would there be some reassessment as we go along?

Well, we’ve already had kind of negative economic growth for half a year, so we do need to see jobs come down. And with the tech earnings coming out, as you guys mentioned in the news segment, we expect tech companies to announce some pretty major layoffs before the end of the year.

BFM

Let’s get into that a little bit, Tony, in terms of tech results, I mean we did see Meta overnight, we’ve seen how Microsoft also came in below market expectations. What do you think this tells us about the direction of the tech sector moving forward, especially with this environment of rising interest rates and a looming global recession?

Yeah, well, tech companies have overhired. They were hiring based on valuation, not necessarily based on revenue. And so now that their valuations have come down, they have excess staff and they need to clear the decks. And the productivity within the technology sector, although it sounds a little weird, the productivity is pretty low because they’ve had too many people. So as these companies come out and give pretty sad earnings reports, there’s going to be pushback from investors that they need to lay people off, and that will come out in the next couple of months. So we’ll see some of that. Now, if you compare that to, say, companies like Coca Cola and GM who beat the street, those companies have been able to pass on cost rises to their customers, so they’ve factored in cost rises to their price. Now, many of those companies saw volumes decline, but price rises more than made up for the volume decline. So they’ve beat expectations by raising price, in many cases by double digits.

BFM

Tony, we’re expecting Amazon and Apple results to come out tonight, and what we’ve seen from the previous results have sort of, well, dampened market sentiment, if you may, what are your expectations going forward?

Yeah, I don’t think they’re going to be stellar results. I think Amazon had this, at least in the states, they had this kind of second prime day a couple of days ago to goose sales revenues for the quarter, which tells me that things are not stellar at Amazon, and so there are signs that things aren’t working out. The new iPhone is kind of a yarn for a lot of people, so it’s not necessarily pushing out. And so I think the expectations are for pretty mediocre results. So if they report in excess of expectations, then tomorrow will be a fantastic day in markets. But I don’t think that’s necessarily likely at this point.

BFM

All right, something we’re going to be keeping an eye on. Another thing to keep an eye on is the slew of indicators that are going to be coming out. We’ve got US GDP, durable goods, and initial jobless claims numbers. Which indicator are you paying the most attention to in terms of being a gauge of how well the economy is going?

Yeah, one of the things that I always tell people to be careful of with some of these macroeconomic numbers is things like GDP. What’s being announced is what’s called a preliminary release. So they kind of have a sketch of what’s happening in the economy, but it’s not detailed. So when these GDP announcements come out and it’s the first release, it’s not really accurate. And those things can change by 50% or more in some cases. So GDP is not really something I look to. It’s kind of a headline, but it doesn’t really mean a whole lot.

Durable goods is interesting because that tells me that people are investing in things, buying things that last a long time so that they can deliver new services or new products in, say, three to six months time. So that would tell me people are looking forward. So if durable goods is a bad number, then it tells me people are really just trying to take care of today and not investing in the future.

Jobless claims. I don’t know. Sometimes it’s meaningful, sometimes it’s not. I think the sentiment around jobless claims is overhyped. The Fed is definitely watching jobless claims because they want to see wages and jobs come down. So with jobless claims, it’s one of those good news and bad news types of things. So we’re kind of hoping for a poor jobless claims so that the Fed can kind of tick off the box and say, mission accomplished.

BFM

Tony I just want to pick your brains on this. We’ve seen three straight days of market gains on Wall Street and this morning, or rather last night for you or today for you. We’ve just seen a reversal of that. Is this an indication that maybe fortunes might be changing going forward?

I think it’s a good question, and I think it’s hope that the Fed is changing course. And I think regardless of what comes out, say, this month, and I think probably next month, I don’t think the Fed is going to change course. They were caught flat footed. They said that inflation was transitory, they messed up, they’re embarrassed, and they’re going to make people feel it. And people are going to lose jobs and homes and all sorts of things because regional Fed governors don’t want to be embarrassed again. So I think at least over the next two months, they’re probably not going to change course. They’re going to continue to tighten. I don’t think there’s been a dramatic change in everything. I think this is a little bit of hope, and I think it is some earnings that have been reported that are better than expected. But I think in general, people are being very cautious about trades they make.

BFM

Tony let’s end the conversation with a look at oil prices. They are taking a breather on news that US stock bells have risen. How will that translate in terms of energy prices as the Northern Hemisphere moves into winter?

Yeah, the SPR, the Strategic Petroleum Reserve release, it’s put a lot of volume in the market in recent months. And of course, that’s lowered crude prices and it’s lowered the price of refined products. So after the election, and it’s no secret we expect the SPR releases to decline dramatically. And we’ve talked for a few months about how we expect crude prices to kind of spike towards the end of the year. And that would be spikes in crude prices and downstream products like, say, petrol. So we do expect that to happen in the North American market, kind of in Q4 and through Q1 out of the effects of that SPR release wear off.

BFM

And meanwhile, OPEC has also forecasted that China’s oil demand will decline by 60,000 barrels per day. Is that something that you see could cap further spikes in prices?

It could. I mean, 60,000 barrels isn’t a lot, but it could. I think if China were simply to end COVID Zero, it would really drive consumption of crude. So OPEC must expect further dampening of the economy in China, and that’s no surprise. I mean, China is really having a hard time right now, and whether or not they can come back in ’23 is questionable, so it’s no surprise. But 60,000 barrels a day really isn’t a lot, and I don’t think it would affect prices dramatically.

BFM

Tony, thanks as always, for speaking with us this morning. 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.

BFM

Yeah, so we did see Meta shares plummet 17% on week fourth quarter forecast. And earning miss. It basically came up well short of Wall Street’s expectations. Earnings per shares earnings per share was $1.64 versus a $1.89, which was what was expected. Revenue was at $27.7 billion. Daily active users did meet expectations at 1.98 billion users, and the monthly active users came in at 2.96 billion versus 2.94 billion.

BFM

I mean, Meta is contending with a broad slowdown in online ad spending, challenges from Apple’s iOS privacy update and increased competition from other players like TikTok. It’s getting more expensive to run the company as Meta’s costs and expenses rose 19% year over year to $22.1 billion. And that’s something that Tony alluded to earlier, the fact that they’re likely going to see more layoffs moving forward. Tech companies have just been on a hiring spree that they cannot afford at this point. And I bet the WhatsApp outage the other day didn’t help a Meta’s fortunes either, at least in terms of its reputation and image. It could see a lot of people try to migrate elsewhere from using WhatsApp as their main communication source to another platform that is more stable, perhaps.

BFM

I must say we could wait until to see what happens towards the end of the year. Well, November actually, just next month when the midterm elections come, and we see if there’s any pick up in usage then.

BFM

That’s true. All right, it is 7:18 in the morning. We’re heading into some messages, and when we come back, we will be covering the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9. You’ve been listening to.

BFM

A podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VFM app.

Podcasts

The Federal Reserve Was Slow To React But Inflation Is Real This Time

Post author By admin
Post date October 19, 2022

This podcast was originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-fed-reserve-inflation-rate-down-slowing-car-homes-sales

All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.

Transcript

BFM

This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.

BFM

Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.

BFM

So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?

Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.

BFM

Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?

Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.

BFM

Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?

Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.

And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.

BFM

And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?

Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.

So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.

I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.

So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.

BFM

OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?

Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.

So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.

BFM

Tony, thanks very much for speaking to us this morning. 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.

BFM

Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.

BFM

Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.

BFM

I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.

BFM

We just heard headlines coming out Shanghai, parts of it under even more lockdown.

BFM

Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.

BFM

It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.

BFM

Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.

BFM

All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.

BFM

To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.

Week Ahead

US Policy for Small Businesses: The Week Ahead – 17 Oct 2022

Post author By admin
Post date October 16, 2022

Learn more about CI Futures here.

We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.

Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?

Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.

Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.

Key themes
1. US policy punishing small businesses
2. The dovish Fed is dead
3. Diesel inventories
4. The Week Ahead

This is the 38th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Carol: https://twitter.com/caroljsroth
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Time Stamp:
0:00 Start
0:48 Key themes for this week ahead
2:43 US policy on gig workers
7:48 Is this to slow down job creation?
10:00 What other things will make things uncompetitive for small businesses?
12:07 What adjustments would Carol Roth do if she’s with the Fed?
16:47 Debt buying and the Fed
19:00 Forecasts for some currencies
20:00 Does the Fed understand that this is a supply-induced inflation?
23:50 They’re not thinking through the political fallout
25:25 Is diesel priced in dollars globally? And what’s the impact?
28:00 How long does the diesel shortage last?
31:34 What’s for the week ahead?

Transcript

Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today.

We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things.

Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over.

Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.

So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.

Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,

TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?

CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.

So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.

And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.

So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States.

So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.

Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis.

If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.

So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.

So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.

TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job

creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation?

CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.

Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.

So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.

TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?

CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.

That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.

And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove

barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out

of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.

TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?

CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.

But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.

So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.

So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane.

The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.

Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.

TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.

Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.

And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.

AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.

And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.

TN: November and December.

AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have

no more tools left to hit. Inflation at JPY at. Euro will be at 90.

TN: And JPY will be what?

AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.

TN: Oh, they have to be. Yeah.

AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.

TN: Okay, so does the Fed understand that this is largely supply induced inflation?

AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.

CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything.

And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here.

And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.

So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they

could get their hands on dollars because the Fed wants to keep raising interest rates.

It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.

The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.

AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed

policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.

TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.

So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started.

We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see

this in a big way globally.

AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians

or the Swiss at the moment. This is how bad it’s become.

TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries

Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now.

But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe.

So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.

TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.

TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.

That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian

oil and oil products.

TN: So this isn’t something that’s done by January. This has legs for quite a while.

TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.

CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?

TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.

TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?

AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,

they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.

TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?

CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.

TN: Great. Okay. Thanks, Tracy.

TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right.

There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.

TN: Central planners always have plans, don’t they? That’s right. So if you talk to any China economist

for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.

And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting.

Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.

AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.

CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.

TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.

Podcasts

Global recession risk rises as IMF lowers growth forecast

Post author By admin
Post date October 11, 2022

This podcast was originally published at https://www.bbc.co.uk/sounds/play/w172ydq1zf6tjvb

The IMF says the risk of a global recession has increased as it lowers its growth forecast for the coming year. Its managing director, Kristalina Georgieva, said the gloomy outlook was fuelled by Russia’s invasion of Ukraine and the continuing impact of the Covid pandemic.

Hong Kong has relaxed several of its coronavirus restrictions in recent weeks. Now it’s giving away 500,000 airline tickets worth $250 million in a bid to boost visitor numbers. Will it succeed?

The Rooney Rule was adopted by NFL teams in the US in 2003, with the aim of creating equal opportunities for Black coaches. But there’s criticism that it hasn’t achieved what it set out to do. Gus Garcia Roberts from the Washington Post has been investigating and shares his findings with us.

Sam Fenwick is joined by Tony Nash, chief economist at Complete Intelligence in Houston, Texas and Zyma Islam from the Daily Star in Dhaka, Bangladesh to discuss these stories and the other big money and work issues of the day.

Transcript

Sam

Hello. You’re listening to the BBC World Service. I’m Sam Fenick, and this is Business Matters. Welcome to the program. Today we’re going to be talking about the risk of a global recession. It’s apparently creeping close. It’s the stark warning from the International Monetary Fund. We’ll be talking about what it might mean for businesses and consumers around the world. Why the price of oil affects more products than just the petrol in your car.

Tony

So natural rubber has gone up, oil prices have gone up, and therefore the tire industry margins, margins have come down.

Sam

And have you ever quit your job? Is it liberating? We’re going to be talking about that. We’ll be joined throughout the program with two from my two guests on opposite sides of the world. And pleased to say that Tony Nash joins us. He’s in Houston, Texas in the USA. He is the CEO at Complete Intelligence. Hi, Tony.

Tony

Hi, thanks for having me.

Sam

And Zyma Islam is a journalist at the Daily Star newspaper in Dakar in Bangladesh. Hi, Zyma.

Zyma

Good morning, Sam.

Sam

Hi. Good morning. It’s Friday morning with you. It’s Friday morning with us, but it’s still Thursday with Tony.

Tony

Yes, it is.

Sam

And have either of you ever quit a job?

Tony

Yes.

Sam

Have you?

Tony

Yes.

Sam

Was it liberating? Worrying?

Tony

Well, I had a better opportunity in both cases, so I guess it was liberating.

Sam

Zyma, have you?

Zyma

Oh, I’m terrified by the very thought, even when I’ve had better opportunities.

Sam

Yeah, I’m with you. Maybe it’s a female thing. Well, we’ll be talking about that a bit later in the program. But first, shall we look at the global economic outlook? Because the International Monetary Fund warned on Thursday that the risk of a global recession is rising because of Russia’s attack on Ukraine and shocks caused by the COVID pandemic.

Sam

Tony, I think we should start with you on this because you are an economist. Some of the quotes that I was reading in the speech, which she gave greater uncertainty, higher economic volatility, geopolitical confrontations, more frequent and devastating natural disasters. It doesn’t sound great, does it? It makes for quite grim reading.

Tony

Yes. And if it’s going to be more volatile than the last two years, look out. I think part of this is obviously post pandemic. Part of this is the backside of a lot of the stimulus that we saw over the last two years. Part of it, of course, is because of the war. Part of it is because of the other side of supply chains. There’s so much that’s happened over the past couple of years and there’s always the other side of it. Right. And I think that’s what we’re seeing right now is the other side of all of this drama that we’ve all lived through over the past two years.

Sam

The IMF is going to downgrade the economic forecast for next year, 2023. Explain what that means.

Tony

Well, in civil terms, it just means things will grow slower or they’ll do the opposite of growing and they’ll contract. So that’s really what they mean by contracting economic growth.

Sam

And energy prices are a big problem here, aren’t they? You mentioned them. The war in Ukraine is really causing a problem with gas into Europe, but also oil prices.

Tony

Sure it is. Yeah. I mean, Russia has been selling that to Asia primarily, but it has disrupted, obviously, the flow of oil to Europe, and that’s just dislocated global prices. Of course. In the US, the president opened up the Strategic Petroleum Reserve, which put millions and millions of barrels on the market and alleviate prices somewhat. That will end in November. And so we should see some at least in the crude market, we should see energy prices rise toward the end of the year once that slack is cleared from the market.

Sam

We’ve discussed some of those inflationary pressures come from the rising cost of crude oil. Crude oil derivatives make up nearly half of the cost of producing vehicle tires. About seven gallons of the black stuff is used to produce a single tire. Apollo Tires is India’s largest manufacturer of tires. Their annual revenue is $2.6 million. But over the past couple of years, their prices have gone up by about 30 or 40%. The vice chairman and managing director of Apollo is Near Edge Canoe, and he told me that he’s had to put his prices of his tires up.

Sam

Tony, I just wanted to come briefly to you just off the back of that. Mr. Kamwa there was talking about how they try and reduce costs. But it takes a lot of infrastructure to get those costs down, isn’t it? A lot of capital expenditure. And then it’ll be a while before these businesses start to see the reduction in cost because of the investment that they’ve made.

Tony

Well, it could. I mean, some of it could just be changing processes. I think when things like the input costs like crude oil or natural rubber are cheap, there’s very little incentive to refine your processes. Right? And so I think those first steps, him talking about going to the factories and getting, say, the same output with less input in the factories, that sort of thing, those are obviously the first steps. And I think every business, if they’re honest, can probably ease out productivity gains. I don’t know. I wouldn’t estimate what percentage they could, but those are obviously first. But part of it could potentially be, as you say, investing in equipment, investing in automation, other things which could produce a lot more. But I think what I found really interesting about what he was talking about was you’re seeing the primary impacts of inflation, which is crude oil and rubber. The secondary impacts of inflation is the tire price, and that the tertiary what we call the tertiary impacts of inflation are the freight costs that he talked about. So in that interview, we saw three different phases of inflation impacting the economy. It was really interesting.

Sam

Great. Well, thank you very much. Well, we are going to now move to another update on Twitter. Billionaire Elon Musk, he says he aims to complete his purchase of Twitter by the end of the month, but the company will not take yes for an answer.

Sam

And Tony, I mean, so many countries have no travel restrictions for COVID at all now. That you tend not to go to places where there are restrictions, because why would you?

Tony

I’ll be honest, I really miss Hong Kong. I used to go there once a month when I was at The Economist. Our original headquarters was there and I was there a lot. But even with small restrictions, it’s just an inconvenience. And so there would have to be a serious incentive to go and put up with really any restrictions.

Sam

I was looking at the various different restrictions that have been kind of removed over the past few weeks. So, Japan, so from next Tuesday, the 11 October, there will be no border controls in Japan similar to the US. But the thing with Japan is that China was the largest source of tourism revenue before the Pandemic, and of course, people can’t leave the other parts of China.

Sam

Welcome back to Business Matters on the BBC World Service. We are live in Salford in the UK. I’m Sam Fenix. Thank you for your company. We’ve got Tony Nash with us. He’s in Austin, Texas. He’s an economist. And Zyma Islam is a journalist from Dakar and she joins us from Bangladesh. We’re going to start the second half of the program by talking about whether it’s a good idea to quit your job. It’s often seen as a negative thing to do, but it doesn’t have to be. One in five of us are expected to quit our jobs this year, according to PwC’s Global Workforce Survey.

Sam

So, Tony, you said earlier in the program that you have quit a job. Tell us about what happened.

Tony

So I got a job at one point with a company that I thought was fantastic. After a couple years there, I realized that kind of everyone who had worked there for more than five years had really just kind of settled and they stopped being excellent and the best at what they could do. So I told myself at the time that I would stay there for five years and then I would find another job. And I did. And I moved on to a job with quite a lot more money and less work to do, which was really nice.

Sam

Did you listen to your body like we heard in that clip?

Tony

I guess so. In a kind of a silly way, I guess so. I just knew that I wasn’t comfortable being mediocre, but I didn’t want to leave the job right away, so I had to stay there for a period of time, do my time, and then find something where I could do great work?

Sam

It doesn’t always look good on a CV, does it? To have lots of different jobs in very short space of time.

Tony

I don’t necessarily think that’s the case anymore. Look, my company is a tech company and in tech you stay at least in the US, you stay for a year and you move on. That’s pretty common with, say, developers in tech. So I think it depends on the industry. But I don’t think moving around jobs, say, every few years is necessarily seen as negative as it once was.

Sam

But you felt in that job you did have to stay there for a certain amount of time.

Tony

I did, and I wanted to stay there for a period of time because I wanted to make sure that my initial feeling wasn’t wrong. And I also wanted to make sure that I could get the most out of the job. You know, good experiences, great people, all that sort of thing. And I did. I enjoyed the next few years, but I also realized that it was time to go. And that’s something kind of early career, mid career, I think people need to do is when they come into a job, understand why they’re at that job, and then understand when it’s time to move on. And it’s not necessarily emotional, it’s just part of a growing process.

Sam

That’s the truth, isn’t it? Tony perhaps in the US, people are more likely to move around because there’s more job security, there are more jobs.

Tony

Possibly. I think especially in the US. Through the pandemic, there is so much work from home and so many people would switch jobs because it was just arbitrage. They could do the same work for more money and stay in their home. So I think that was a big factor in a lot of the job leaving in the US over the last couple of years. As things slow down, it’ll be really interesting as we enter recession or as things continue to slow down, it will be really interesting to see what happens with job leavers and job switching in the US to see if that slows down and what the expectations around jobs really are.

Sam

Well, I’m going to speak Tony.

Tony

It’ll happen. My company automates finance jobs, so highly educated professional workers in developed countries. So automation is going to happen to a lot of jobs where they’re not innovated. That’s just a fact. And so the entrepreneurs and the planning officials in Bangladesh should better get busy because automation of garment jobs is coming pretty quickly. And so.

Zyma

Absolutely, but there’s going to be a gender component to that, Tony. So when you start training garment workers for these more highly technical jobs, what happens is that women, they get cut out of the picture because they’re not as skilled graduating.

Tony

I spent most of my professional life in Asia. My son is South Asian. I understand the cultural issues around many of the workforce debates that happen in Asia. Deeply. I understand them deeply. And so that is a cultural issue that can only be solved by Bangladeshis in Bangladesh. It can only be solved by Bangladeshis in Baghdadesh. And so that’s not something that anybody else can solve. And I hope that there are people in Bangladesh who have the courage, your President is a woman. So I hope that people have the courage to solve that in Bangladesh.

Zyma

We’ll actually need to get our woman to start going to university. Because what happens here is that after high school, they drop out, they get married. When it comes to high school, we do have like an equal there’s, like a 50 50 balance when it comes to graduates. But the minute you go off to the treasury sector, you see fewer female graduates. So with fewer female graduates, they’ll be less eligible for the automated jobs. It’s easier for them to get these brick and mortar jobs involving, say, sitting in a supply chain line of some sort.

Tony

I’ll tell you what will happen with the automation around the garment sector. That won’t happen in Bangladesh. Because of supply chain issues, those automated garment factories will be put in Europe, or they’ll be put in the US or somewhere else closer to where they’ll be consumed. So, to be very honest, those jobs will disappear in Bangladesh if those higher level skills aren’t taught, and now is the time for that innovation to happen.

Sam

Do you see that happening? Any of that innovation, that education that Tony mentions?

Zyma

No, not at all. Absolutely not at all. I simply see women getting replaced in the menial workforce.

Sam

Well, Tony, we are actually on the eve of a big jobs data day, aren’t we? It’s a big day tomorrow in the US on Friday. Indications show that the jobs market might be slowing.

Tony

Yes, and we’re in a position in the US where kind of bad news is good news, I think, because the Fed is hoping that the rate of job growth slows so that they can ease up on interest rate rises. So Americans are kind of hoping that it’s a down number so that there’s less expectation or lowered expectations that the Fed will raise rates. So bad news is good news with that particular print.

Sam

Well, that’s a good thing for our listeners to look out for. Bad news is good news. When did you ever hear that? Thank you both very, very much for joining us. Tony Nash, economist with Complete Intelligence in Austin, Texas, USA. And Zyma Islam, a journalist with the Daily Star in Bangladesh. My name is Sam Fennick. You’ve been listening to Business Matters on the BBC World Service. Thank you to the producer, Hannah Mullane, and the team in the studio here in Salford. Join me again tomorrow at the same time, midnight GMT.

Week Ahead

Systemic Risks: The Week Ahead – 10 Oct 2022

Post author By admin
Post date October 8, 2022

Learn more about CI Futures here: http://completeintel.com/futures

In this episode, we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve, along with regular guests Tracy Shuchart and Albert Marko.

First, we looked at systemic risk in the case for hard assets with Simon. When we look at recent events like the BOE intervention in the long-term gilt market, where does he think the next systemic risks could come from? Is it developed more market (European) debt?

Also, Simon discussed how we should be looking at the gold market now. Why is there a divergence between physical gold at the retail level and institutional demand for gold derivatives?

Next, we went into a little bit on OPEC cuts with Tracy. OPEC cut supply by 2m BPD. Everyone has talked about this. We’ve spoken in earlier episodes about a price spike in oil later in Q4, partly owing to SPR releases stopping or slowing. Is this even likelier now? Some US legislators are pushing a bill to break up OPEC. Is that even remotely possible?

And then finally, we took our first look at US midterms. Democrats now control both House and Senate. That’s a huge advantage for Joe Biden. For many reasons – inflation, crime, etc – Democrats are in trouble for November’s midterms, but will they lose control of both the House and the Senate? Albert discussed that in this episode. We’ll cover more of this in the coming weeks, but we want to have a starter conversation here.

Key themes:
1. Systemic risks and the case for hard assets (Gold)
2. OPEC cuts = Q4 Crude price whipsaw?
3. US Midterms
4. The Week Ahead

This is the 37th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Simon: https://twitter.com/S_Mikhailovich
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Listen to this episode on Spotify:

Transcript

Tony Nash: Hi, everyone, and welcome to The Week ahead. I’m Tony Nash. This week we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve. Simon, thanks so much for joining us. We really appreciate it. We’re also joined by Tracy Shuchart and Albert Marko.

We’ve got a lot to dig into this week. The first we’re looking at is systemic risk. And the case for hard assets? We’ll dig into that quite a bit with Simon.

Next, we’ll go into a little bit on OPEC cuts with Tracy. You’ve all heard about it, there’s no secrets there, but what do we expect for crude prices in Q4?

And then finally we’ll take our first look at US midterms. I think we’ve got a lot to talk with Albert about over the next few weeks before US midterms, but we’ll just do a quick dive in this week.

So before we get started, please take a look at our product, CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon, economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

So, Simon, welcome and thanks for taking the time on a Friday. I know there’s a lot going on in markets, so it’s a huge compliment for you to be here. I want to ask about systemic risks, something you tweet about quite a lot. And we put a tweet, one of your tweets on screen.

You talk about the BoE commits to ensure unicorn in every pot. And this happened a couple of weeks ago, the Bank of England. And I’m really curious, when we look at events like the BoE intervention in the long term guild market, where do you think the next systemic risks could come from? And I guess, more specifically, do you expect those risks to come from developed, more developed markets or emerging markets or does it matter?

Simon Michailovich: First of all, it’s a very difficult subject because obviously you can spend hours and hours talking about it. It’s like the existential problems of our time. And I know we’re also going to talk about gold and systemic risk. What I think I’d like to do is I’d like to have a little parable that kind of explains, I think, or illuminates the situation that we’re in generally. And the dichotomy that may exist, I think exists between markets and life out there.

And terrible comes from very appropriately named for the Times from Russia With Love, which is Ian Fleming’s story, one of the James Bond books. And just to set up this quote that I’m going to read to you, the situation is that James Bond is absconding with a Russian decryption machine on a train and it’s supposed to be met somewhere down the line by the British intelligence agents. And he’s accompanied by a much wiser and older head of station from Istanbul whose name is Kareem Bay.

And Kareem advises him to get off the train immediately because there’s existential danger. They’re being hunted and Bond wants to see this gamble through. And so Kareem tells him a little story which I’d like to read to you which I think kind of explains more or less or answers a question about systemic risk and generally what’s going on between the markets and events that we’re all observing through press but may not necessarily fully understand or yet appreciate their implications.

So what Kareem tells him, he says “you’re a gambler. To me, this is business, to you this is a game.” And then he puts a hand on his shoulder and he says, “this is a billiard table. An easy, flat, green billiard table and you hit your white ball and is traveling easily and quietly towards the end. The pocket is alongside. Fatally, inevitably you’re going to hit the red and the red is going to go into that pocket. It is the law of the billiard table, the law of the billiard room. But outside the orbit of these things a jet pilot has fainted and his plane is dining straight at that billiard room or a guest main is about to explode.

It already has actually, in the real life with Nordstream or lightning is about to strike and the building collapses on top of you and on top of the billiard table. Then what has happened to that white ball that could not miss the red ball and to the red ball that could not miss the pocket. The white ball could not miss according to the laws of the billiard table.

But the laws of the billiard table are not the only laws. And the laws governing the progress of this train and of you to your destination are also not the only laws in this particular game.

And so the point is that for 40 years, the markets, the financial system and the economy has gone along with that, have lived by the laws of financialization, by the laws of the billiard room and of the billiard table and other laws that are outside the real economics more famine, pestilence, inflation have not entered into the equation. And so within the framework of the billiard table there is no, for example US Treasuries do not have credit risk. US dollar does not have counterparty risk. Banking deposits are safe, 100% safe. That’s by the laws of the billiard table. That’s by the laws of the markets.

So essentially this bubble, the everything bubble that the credit bubble that we have been in for x number of years. All the problems inside this bubble were nominal problems related to nominal values in financial markets. And those values can be fixed by creating additional money, by creating additional credit, by creating conditions, by providing liquidity. What cannot be fixed inside this bubble are real problems like energy shortage, like supply chain disruptions, like World War, like the fact that a significant number of other countries are suddenly developing their own ideas as to economic policies and monetary policies and other policies that they want to pursue.

Whereas our system has come to depend on the US dollar as a source of cheap financing without any limits and without any constraints on our ability to create credit, create money, pay the bills, however much, in any quantity at any time. So when you ask me about systemic risks, what I would say is that systemic risks are coming from outside this framework and are not yet fully understood inside the framework.

Which is why, for example, the dollar is on a tier relative to other currencies. And the phrase that’s used to describe it is it’s the least dirty shirt? What is not being said in that statement is how dirty is the least dirty shirt? Has it been already worn for ten days and all the other ones for 20 days, or is it just been worn for ten minutes? That’s my point. So how healthy is the healthiest course in the soap factory? That’s the question, right?

TN: And I guess the question about systemic risk, which is almost unanswerable. But when these things break, do they usually break gradually or do they usually break all at once? Is that an answerable question?

SM: Well, they break gradually and then all at once. Just like the famous also overused quote from Hemingway how do you go broke slowly and then all at once? Obviously you can think of this phenomenon as a confidence collapse. Now, confidence collapse is not a problem in itself. It’s a consequence of other problems where the preponderance of the evidence and preponderance of the mental recognition reaches a certain critical mass, where in the physics it’s called phase transition.

Like for example, boiling water, which looks the same whether it’s half boiling or almost boiling. And then suddenly you see the bubbles, you see the churn, and it almost happens in moments, but it didn’t happen in the moment. It’s been heating up for a while. So that’s how I would describe it. And

TN: this is all great, I guess, if we have a doomsday clock, are we like really close to midnight or are we kind of approaching midnight? And it’s something that will come at some point I know that’s kind of an ambiguous question, but does it feel to you like we’re really close to midnight or can we put it off for a little bit?

SM: Well, I would answer it this way. I think the proverbial train has left the station. The crisis is now underway. Okay? The crisis, geopolitical crisis, military crisis, supply chain crisis, economic crisis, and financial crisis. All of the… And political crisis. You’re going to talk about elections. So all of these events, and by crisis I mean a moment of high danger, again develops similarly to boiling water. Crisis itself, once it starts, it means the heat is now in real time, is going up. The boiling point has not yet been reached. How long does it take to reach it? It depends on the intensity of the flame. Right. So that we cannot gauge. But what we can gauge is that the process has started and it can accelerate or decelerate as it goes, but I don’t think it can stop suddenly.

TN: Right. And a US president using the word Armageddon in a fundraising speech half a dozen times this week doesn’t really help lower the boiling point.

SM: It does not help lower the boiling point. It does not help. And frankly, I think that people are not paying much attention to what happened with this Nordstream explosion. But this is the first act of sabotage on an international against an international supply chain infrastructure, which I think is going to have dramatic consequences ultimately, because it changes the rules of the game. Sure something unthinkable becomes feasible.

Albert Marko: Just real quick. I agree with Simon on the systemic risks. And the fact is the Fed policies have completely ignored geopolitical issues, political issues, supply chain problems. I mean, they keep going on this tear about raising rates is going to bring down inflation, but then they put themselves in doom loop because the demand is going to come back faster than the supply damage that they’re creating.

So, yeah, Simon is correct that the systemic risks are there and getting worse and that’ll see any chance that they can be alleviated in the next six months. I’m skeptical that ongoing rate rises or rapid rate rises is going to have an impact on inflation given… Wait till they end QT in the next couple of months and continue on with rate hikes thinking that’s going to fix things. It’s not. It’s not. It’s whistling past the graveyard. It’s way overused. But that’s what we’re doing.

TN: So before we move on to other things, I want to ask you about gold. Okay, Tracy, kindly put out some questions for you last night. And we got some responses from some Twitter users and this Twitter user @Spudlink1, asked, “if gold doesn’t rally in this environment, how could conditions possibly get more perfect than the last three years? Is gold dead?”

So, very poignant question, but what are your thoughts on that?

SM: So my thoughts on that are very simple. Gold itself. Gold is not a company. It doesn’t release results. It’s not like things are going better or worse. Gold is the same gold. So the price of gold and the prospects of gold are not determined by gold itself or anything that it does, but it is determined by supplying demand, which is human driven. So it’s human perception and human behavior.

So why is gold not behaving like certain people like this gentleman expect it should? That’s because what this gentleman thinks and what few of us think is not accepted as received wisdom by the vast majority of investors. That’s not consensus.

So the fact that these are perfect conditions for gold is absolutely not consensus because by the rules of the billiard table inside the billiard room, gold is not seen at the moment as a safe haven. The dollar is because the dollar is fiat gold. Now, fiat of gold is no gold. But inside this framework that we’ve been in for 40 years, it has been and so demand for gold, you don’t need to take my word for it. I mean, you can just look at the ETF flows like GLD publishes ETF laws and you can see that money is not flowing into gold.

So demand from investors for gold is anemic in an environment where some of us think it should be robust. But that’s because we see certain things and we believe that there’s tremendous systemic risk and market large does not believe it.

Again, you don’t need to take this as the only example. You can look at the Treasuries, they’re trading, I mean for something percent with the percent inflation. Well, why is that? Well, because the breakeven rate, which is market expectation of future inflation, the curve, the forward curve shows that rates are actually positive and getting more positive because inflation is supposed to drop to 2-3% imminently. Well, is it going to? Well, that’s conventional wisdom is that it will. So that’s one thing.

The other thing I would say is when people say that gold is dead, I mean, it’s an American century theory because gold is essentially a reserve currency. It has outperformed all other currencies, reserve currencies but gold. So let’s say in dollar terms gold is down like 6% year to date, but in yen terms it’s up 18%. In pound terms it’s up 13%. In Europe, in Swiss Franc, all of the DXY components, currencies, DXY, Canadian dollar in all of those currencies, gold is up.

So gold is outperforming financial assets, stocks, equity is down 23%, Nasdaq is down whatever it is, 33% or 34% here today. Gold is down 6%. So it’s outperforming financial assets and an underperforming US dollar because US dollar is gold by the rules of the billiard table and the guest line has already blew up, but maybe the plane has not yet hit the room.

And so as long as that’s continuing, everybody’s playing by those rules where there’s no credit risk in the dollar. So if there’s no credit risk in the dollar or in Treasuries, in US sovereign obligations, then by the dent of that reasoning, getting any kind of coupon beast getting no coupon, if you factor out credit risk and market is not factoring in credit risk, I think the credit risk is tremendous. And obviously people who are asking and wondering how come gold is not surging, they think there’s credit risk. But that’s a minority opinion. That’s a simple answer to that question.

TN: And that is fantastic. Thank you so much for that. This is an amazing perspective because I think there is a lot of cynicism around gold in the markets today around kind of popular chatter. And it’s so great to get this perspective.

AM: Tony, I mean, I’ve been a big critic of gold for a long time. However, in this scenario, I even have to admit that if you want to arbitrage for dollars, especially in other currencies and FX’s, gold is the only real way to do it. And the longer that the Fed makes errors in policy, there’s no question that people are going to start resorting to gold just as a hedge.

SM: My only warning to people is gold is a commodity that’s sort of it’s an industrial commodity in physical form. So, of course, all the paper gold exposure has counterparty risk. Physical gold does not have counterparty risk, but physical gold is a manufactured product. And manufactured product borrows coins.

By the way, the premiums on coins are surging, and it’s doubled this summer since the beginning of the summer. So manufactured products, they’re supply chains, they’re manufacturing facilities that produce them. They can work 24 hours a day, but three ships, but they can’t work faster than that.

So just like with toilet paper, it all works until suddenly there’s a surge in demand. Then there’s no toilet paper in your supermarket. It’s the same thing with gold. It’s available until everybody wants it, at which time, by definition, it’s not available because the inventory and supply chain is geared towards test demand, not towards surging demand. So as soon as demand surges, it disappears.

So you buy insurance when you can, not when you think you really need it, because you’re not the smartest guy or person you know, other people achieve the same reach the same conclusion at the same time. And so everybody wants insurance at the same time.

TN: You’re the only guy I’ve ever heard who compared gold to toilet paper in a positive way. Yeah. Okay, let’s move on to crude from one physical quantity to another. Tracy, we talked about OPEC in recent weeks. We talked about crude prices in recent weeks.

And with the OPEC announcement, the supply cut announcement this week, I want to revisit our discussion from a couple of weeks ago about crude prices in Q4. We talked about the possibility of a whipsaw effect for crude prices in Q4. What’s your thoughts on that? Do we see that happening?

Tracy Shuchart: Well, I think what we’re… First, I kind of wanted to touch on this 2 million barrels because it’s not actually a 2 million barrel cut, right? Because the group hasn’t been producing a quota all year, basically. So we’re running at a 3.58 million barrel shortfall, really, which happened in September. And so if we take a look at the cut distribution, yes, the five countries that are producing at or near quote, which are Iraq, Kuwait, Saudi Arabia, UAE and Russia, yes, they are shouldering most of that burden. But when you net everything out, it’s really closer to like 1.25 million barrels. So I just kind of wanted to clear that up because it’s really not 2 million.

Going into Q 4, what we have to pay attention to is, one, the ending of the SPR, which if they keep releasing it, eventually it will drain. But so far it should end in November, which is going to immediately take four to 7 million barrels off the market because that’s kind of what they’ve been releasing per week on average. Then we also have to look at China and their COVID lockdowns trying to come to an end because they’re looking for 5.5% GDP by end of year, which is not going to happen.

TN: Well, it’ll happen.

TS: Well, on paper it’ll happen. Statistically it’ll happen. But we are starting to see a little bit of firmness in mobility data in traffic and airlines. What I’m also looking at is they are talking about lifting export quotas. If they do that, that means they are going to have to purchase more crude barrels because it would be a significant increase. Those are kind of the things that I’m.. Going into Q4, in other words, I think the pressure is definitely to the upside rather than the downside, just looking at what is coming online potentially that could propel this market higher as far as… I mean, we’re already in a structural supply deficit, so it’s not going to take a lot for this kind of freak out.

TN: Post US midterms, post CCP meeting, post SPR, post other stuff. Right.

TS: And then December 5, we have to see if EU actually follow through with their oil and product embargo for Russia. So also another thing that would take more barrels off the market.

TN: Right. So I’ve also heard, I think you may have said it where this OPEC meeting, and what we’ve seen over the past few months is really OPEC changing their orientation to Asia and really forgetting about the west. Is that real? Are you seeing that, in fact, or is that just kind of a myth?

TS: Well, no, I mean, if you look throughout the last few years, I mean, China and Russia basically compete, sorry, Russia and Saudi Arabia basically compete for China’s fitness. So off and on, one of those countries has been their biggest suppliers. So this is not new where the focus is towards Asia, especially because over the last few years, the west is pursuing green policies and trying to stay away from that. And so where they can sell barrels like you see Saudi Arabia or you see OPEC in general raising their OSP to Asia consistently, right. Because they can capture above markets for their barrels. That’s not really a new phenomenon.

TN: Well, China’s perpetuating green policies, too, right. Kind of wink wink, supposedly as they build out coal plants and other things. But I think what I find interesting is Europe and the US are kind of begging for more energy and OPEC is saying, no, we’re going to cut back. I think the headline is more important than the fact the 2 million is more important than the 1.25, because that’s what really moved markets in the immediate term. But China had really bought all their crude already by, say, April or something, right? And so they had fixed all that stuff, the prices for the year in kind of second quarter. So this doesn’t at least for now, it doesn’t really affect them. It won’t affect them until early next year or something like that. Is that fair to say?

TS: Well, unless in Q4 they raise these export quotas, then it’s going to matter because that’s still on the table for discussion next year. This is kind of a last-minute thing. And so that’s definitely something that I’m watching if they actually follow through with that. Right?

TN: And also with purchases in a dollar equivalent, whether it’s not US dollar, whether or not it’s US dollar, these are extraordinarily expensive barrels compared to what they could have gotten in Q2. So something has to change for them to want to buy the volumes that they bought. And then if they’re buying at the same time the US is trying to refill the SPR, that creates even more pressure on the market. Is that fair to say?

TS: Yeah, absolutely. In fact, our SPR barrels are going to China, right? Right.

TN: So, Tracy, what are we missing? I mean, we’ve heard all this chat about OPEC over the last couple of days. What’s the nugget that you feel like people are missing?

TS: I think as prices have come down, I think everybody has been forgetting we are still in a structural supply deficit. Even though prices were coming down, they were down to extraneous reasons like recession fears and not as many Russian barrels off the market as initially anticipated. But really, the market structure hasn’t changed, nor has the supply problem. Right. Let me add another question there. I want to ask about refining capacity. What are we at now with refining capacity? We need more refining capacity. 90 something. We’re currently we’ve been between 90 and 95% of our refining capacity, which is crazy because I’m actually surprised that we haven’t seen more heart breakdowns. They’re not built to Google at 95%.

TN: So we have a hurricane goes through Louisiana, cuts out some refineries for a week. What does that do?

TS: Well, that would be a little bit of a relief for crude prices, right? Because you shake it with the barrels. But that’s going to take your product prices through the roof, and your current tax rates are going to go through the roof.

TN: And what’s the lag on that? What’s the tail on that?

TS: That really depends on how long the refinery is offline for. Right. Whether it’s a week or two, that’s fine. But if we start going into, like Katrina, where you’re going in months, then that’s going to be longer. Problem.

TN: Okay, very good. Thank you for that. And as we talk about gasoline, it becomes very political at some point. And Albert, as we go into we’re deep into the midterm season right now, and I’ve got a couple of graphics from Real Clear Politics looking at the House and the Senate races in the US.

And it looks like it’s very competitive in the Senate. The House, it seems like Republicans are doing very well to reclaim the House, but it seems like the Senate is really competitive at the moment. Can you walk us through that?

AM: Yeah, well, simply, the Republicans will easily take the majority. Redistricting alone will give them 20 seats, which is the majority, and then you start looking at any Democrat that one with 2% or less across the country is probably going to lose. So I think that will probably end up getting 250 seats in the House of the GOP. So I think that would end up being like 185 for the Democrats, which is important because you need a buffer to avoid any messy infighting the Senate becomes difficult because the Republicans have kind of weak candidates in Oz, in Pennsylvania, and Walker in Georgia.

If those two candidates were stronger, it would have been a slam dunk, but it’s not at the moment. Nevada looks like it’s trending towards the GOP, which is a big, big problem for the Democrats at the moment. If they lose Nevada, they’ll probably end up losing Arizona. And if they lose Arizona, it’s going to be a one or two seat GOP majority.

TN: Okay, and so what does that do? Okay. We covered Pennsylvania, right? You said it’s potential

Republican but not strong. Georgia potential, but not strong. Arizona is leaning that way. Nevada is leaning that way. Wisconsin is Wisconsin.

AM: Wisconsin and North Carolina are solid Republican.

TN: Okay, so then what does that mean for the second half of the Biden administration?

AM: Not good things. Hearings all over the place, from Hunter Biden’s antics to Biden’s pipeline policies, environmental policies that’s affecting the economy at the moment. Border crime, elections, election integrity, I mean, you name it, it’s going to be all over the news. So it’s just not good for the Biden administration. I expect them to keep on going with executive orders because there won’t be anything that he can pass.

TN: Okay, very interesting. Now for the people not in the US. Most Americans view legislative gridlock as a good thing, right? I mean, it’s a good thing for business when we have legislative gridlock. So this is not necessarily a bad thing for US government. There will be a lot of talk about can’t pass a budget, can’t get extensions on certain things, and that’s just drama that comes every year. But legislative gridlock is not necessarily a bad thing for American business. Is that fair to say?

AM: It’s not. You’re absolutely correct about that. However, actually, with Biden insisting on producing executive orders for his own policies and the treasury, with the Allen just acting insane, in my opinion, god knows what they’re going to sit there and pass. If you can’t pass something legislatively, they’ll do it via budgets. That’s fine. But it sets a terrible pressing going. Forward because we’re well past that, Tony. We’re well past that president. We’re well past that.

TN: Okay, great. I want to cover this over the next couple of weeks as we lead up to the election. So I just want to give people a taste of what we can talk about. So if we don’t mind if you guys don’t mind, let’s just go around and I’d love to know what you guys are looking for in the week ahead. Tracy, do you want to get us started? Then Simon will go to you. And now what are you guys looking for for the week ahead?

TS: Obviously, I’m watching the energy markets right as we get closer and to see what sort of policies the US is going to or the current administration is going to try to pull out of a hat to derail oil prices in front of Midterms. They’ve been talking about fuel bans, fuel export bans. They’re talking about actually trying to pass the no peck bill again. They’re also talking about actually seizing assets of Saudi Arabia, which they do own, motivo, which is the largest refinery in the US. Which is paramount to all out oil war. So closely watching the administration and how they’re going to move forward with energy policy.

TN: is this Venezuela thing real? Will they dial back the restrictions on Venezuela to get Venezuelan crude?

TS: Venezuela produces 7000 barrels per day and literally most of that goes to China to pay debts. There’s nothing more you can squeeze out of Venezuela.

TN: Okay, that’s good to know. So that’s fake news. All right. Okay. Simon, what do you see

going into the week?

SM: Well, a week is not my reference, in my opinion, but I think that the most important thing people should be watching are international geopolitical developments because I believe we are in a world war. It sounds very dramatic. War usually is assumed to be bomb flying, but there are other forms of enforcing essentially will on other people and economic, financial, political, ideological, cyberspace,

space, outer space these days.

So I think the most critical thing to watch are developments like with Tracy’s talking about confiscation of Saudi refinery. I mean, that’s an act of war. That’s an act of economic war. So this is where I think a lot is going to come from. And the other thing I would watch very carefully for the types of developments like what we saw with Gilts in UK just overnight, things happen. Like for example, the repo lines right now are in excess of 2 trillion. I mean, in 2019, the first blow up, they went in with 30 billion. So this is a crisis that’s continuing and it’s being bailed out by the Fed.

So I would watch all these excess, telltales of all these excesses and watch for ripples on the surface to make sure to identify if something is really breaking. Like you said, when is it going to come? Well, is the water starting to boil? That’s what I want…

TN: Real quickly, do you get the sense that at least in the US, they’re trying to hold this back until midterms and then we’ll start to see a bunch of bad news come?

SM: Well, for example, they’re releasing strategic petroleum reserve, which is clearly controlling an attempt to control energy prices at the pump, gas prices at the pump. So, yes, I think after the elections we’re going to see some damage break.

TN: Yeah, interesting. Albert, week ahead, what do you got. Your eyes on?

AM: CPI. And I think it’s going to end up coming in hot and all of a sudden you’ll see the dollar surge once again, maybe threatening 120. Then you talk about what Simon is saying about things breaking and building up of a narrative of ending QT, although we haven’t really started it, but it is what it is.

TN: Well, exciting times guys. Thank you so much. Thanks for your time. Thank you very much for all your insights. And have a great weekend. Thank you very much.

Week Ahead

Inflation in Asia and the US: The Week Ahead – 3 Oct 2022

Post author By admin
Post date October 1, 2022

Learn more about CI Futures here: http://completeintel.com/futures

In this episode, we talked about what’s happening with inflation in markets, and where it’s hitting, particularly in the US in different sectors. Mike walked us through the Asian contagion for inflation. Also, given where USDCNY has been over the past week or so, how vulnerable is China? Are they more concerned about inflation or export competitiveness?

Sam put out a couple of wonderful newsletters about central bank responses to inflation last week. The Fed seems – and is – unrelenting in their response, regardless of what happens with UK gilts. One area Sam raised last week is the car market versus mid-market dining: Cars vs Cracker Barrel. He walked us through the price and volume considerations with these two.

And then we looked at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech?

Key themes:
1. Inflation: Asian Contagion
2. US Inflation: Cars vs Cracker Barrel
3. Meta’s move: More to come?
4. The Week Ahead

This is the 36th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mike: https://twitter.com/UrbanKaoboy
Sam: https://twitter.com/SamuelRines

Time Stamp
0:00 Start
0:49 Themes for this Week Ahead
2:47 How vulnerable is China? Are they more concerned about inflation/export?
10:23 China will not be the exporter of deflation anymore
13:28 Will China give in to devaluing CNY?
16:15 Cars VS mid-market dining
22:00 Price increases will continue?
24:26 Is this the beginning of the end of tech wage spike?
29:11 How does this current ad slowdown compare to the past?
30:20 What’s for the week ahead?

Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/5HrIhlEwZMwIBDdFwBo5Ib

#inflation #asiainflation #usinflation #stockmarket #stockmarketnews #economy #economics #inflationrate #costofliving #effectsofinflation #comparingpricesinflation #metalayoffs #meta #layoffs2022 #investing #inflationinasiaandtheus

Transcript

Tony Nash: Hi, everybody. This is Tony Nash and welcome to The Week Ahead. Today we have a couple of very special guests. We’ve got Michael Kao. You would know him from Twitter as UrbanKaoboy. And we’ve got Sam Rines. And obviously you know Sam from previous shows. This week we’re going to talk about a lot about what’s happening with inflation in markets. We’re going to talk a lot about where inflation is hitting, particularly in the US in different sectors. And then we’re going to cover a little bit of tech.

So our key themes this week first is the Asian and contagion for inflation. And Mike’s going to jump into that in quite a bit of detail. We’re then going to look at US inflation. Sam put out a really interesting note covering kind of cars versus Cracker Barrel, although that’s not really the comparison, but it’s something in that range. And then we’re going to look at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech? And finally we’ll move into the week ahead.

So before we jump into this, please be aware that we have our product called CI Futures, where we forecast hundreds of commodities, currencies and equity indices as well as economic indicators. I was just going over our error for GDP USD for the month of September, and our area was about 2.23%, I think, for the month. So it’s a very relevant product even in these times. You can find out more on the link below.

It’s $99 a month and you can see everything in the subscription there. We publish our error rates. We publish our forecast. You can download the data, you can download the charts and do comparisons. So please check that out.

Michael, thanks for joining us. I really appreciate your time. I’ve heard you on a number of other podcasts and it’s just so great to have you here. I really appreciate it.

Michael Kao: Yeah, thank you. Great to meet both of you. Yeah, I appreciate you having me.

TN: Fantastic. Hey, there’s a tweet that you put out a couple of weeks or about a month ago actually looking at the Asian contagion and pretty much it was reflecting a tweet that you had put out in January, talking about your expectations for the year ahead and the set up for the year ahead.

So given where, say, CNY has been over the past week or so and the set up that you put out earlier in the week, how vulnerable is China? Are they more concerned right now about inflation? Are they more concerned about export competitiveness? What does that look like? And as you start talking, we’ll put up a chart of USDCNY as well.

MK: Sure. Before I answer that question, I just want to take a quick step and just outline for you, like where I kind of arrived at this Asian contagion thesis. Right? So about a year and a half ago, I’ve been invested in the oil patch for quite a while. And I’ve expressed my bet through a long term private equity plate because it’s my belief that years and years of underspend and then exacerbated by this worldwide ESG push right, and diversion of capital away from the sector and then of course, further exacerbated by all of this massive monetary and fiscal stimulus first created oil inflation way back. Right.

So I started noticing this basically around the beginning of ’21 and I wrote a bunch of threads about it. And then during the year I started thinking what are the ramifications of this? Well, the ramifications are that it’s going to make our Fed more hawkish than the rest of the world earlier than the rest of the world. And so what are the ramifications of that? Well, given that currencies are mainly driven by interest rate differentials that would in turn create this what I labeled a USD wrecking ball effect.

And so as that thesis started kind of coming true and gathering steam throughout the year, the tweet that you referenced that I wrote at the beginning of this year was that I said, look, the setup is a scary one for this year because we have the makings of a stagflationary energy crisis not seen since the 70s. It’s going to create tightening ahead of the world, creating this USD wrecking ball. And then we have this everything bubble to boot on top of that.

And this wrecking ball really reminded me of my sort of baptism by fire into the hedge fund business. In 1997, I joined a hedge fund here in LA called Canyon and we were value credit based investors and a lot of our idiosyncratic bets essentially got swamped by the macro, right? So what started as seemingly innocuous devaluations by a couple of EM countries in Southeast Asia metastasized over the course of a year and a half until full blown credit contagion. Except this time, what I wrote about in this thread is that what’s scary is that number one, the level of inflation that’s driving this US dollar racking ball is much higher than before.

And from my oil centric point of view, I think a lot of it is structural. And then the second thing is that the vulnerability point… I mean the EM countries are also vulnerable. But what’s scary this time around are the developed nation currencies like the Euro, the Japanese yen.

And now I come back to your question, the Chinese Yuan. Your question is a really interesting one that I actually tweeted about this week is China. China is in a box. Just like the Bank of Japan, just like the ECB. They’re all in a box because their respective economies are much weaker than ours.

I think the big question, and I don’t know when the US dollar wrecking ball is going to peak, maybe it already has. But I suspect though, my hunch is that maybe it’s still got some legs to go because until you reach a point where the macro fundamentals of those respective economic zones are strong enough to allow their central banks to essentially outhawk our central bank. Any interventions are going to basically be just a wasted burn of their reserves.

And so you saw that with the BOJ, right? They spent something like 20 billion of reserves defending their currency and that lasted two days. And we’re back to all time lows in the Yen.

So China is really interesting because China is such an export-driven economy. One would think that with their economy on the back foot from the property crisis, from zero COVID policy, one would think that as their neighbors are devaluing and becoming more competitive versus them, that they would be more worried about their current account getting hit, right, their current account surplus getting hit. And so you would think that they would want to let their Renminbi devalue.

What we saw instead, I think, was that yesterday that the PBOC had a pretty strong intervention in CNY. That tells me, I actually put a tweet out to exactly the effect that’s a big tell to me that they’re more concerned about inflation. And China, just like Japan, is uniquely vulnerable in that they are also net importers of something like 80% of their energy. They’re in a tough bind.

And the million dollar question is no one knows when… That day, when the BoE intervened and all risk assets rallied hard. I think that was the market kind of conflating that all these interventions are going to be exactly. It’s going to lead to the Fed also going to QE. And I put out another thought on Twitter saying that, you know what, I don’t know that you can conflate that because the Fed was happy to be the world’s plunge protection team in a world of where there was no structural inflation.

When you’ve got a world of structural inflation, it becomes kind of an every man from self dynamic where I don’t know that how much we can go help stymie the yen or stymie the Renminbi or stymie the Euros collapse by queuing here. Because that’ll just completely inflame inflation. And the big tell on that was on that risk on day. You know, what was really roofing also was oil. And so it comes back down to oil.

If the Fed actually blinks and goes back and pivots, the thing that’s going to moon and lead us right back to square one is oil, which is what started this whole cycle in the first place.

TN: So let me take a step back from what you said, because you just unloaded a lot, which is great, and I think Sam will violently agree with you on a lot of stuff. But what’s really interesting to me. If China is worried about inflation. Although this is somewhat like 2011. When they had the, or 2007 or whatever. When they had the pig flu and all this other stuff.

And there was inflation pressures but China has been the source of deflation for the last 25 or 30 years right and so if China is no longer the global exporter of deflation then it is a dramatic change in the structure of the global economy. Dramatic and I think so many people use this that this is not something that we’re not going back to 2019 prices ever. Right? But I don’t really hear people talking about China not being able to be the exporter of deflation anymore and that’s just one that’s come and gone that’s already gone right.

MK: And it’s not just China. It’s Eastern Europe, too, right, because I wrote a thread that basically borrowed some of the thoughts from Professor Goodheart’s paper about how this was kind of a once in a lifetime demographic dividend that allowed the world and the Fed to basically pay for over every financial crisis of the last four decades with aggressive monetary policy because there were never any inflationary repercussions. But as you so validly pointed out, that was due to like a once in a lifetime sort of demographic dividend that is now in secular reversal.

Sam Rines: To this point… I want to jump in and just reinforce this point here because I think it’s a really good one that China was a massive source of goods deflation globally along with East Germany, Poland. Etc. as they joined in following fall of the Berlin Wall.

But I think there’s something really intriguing here is that it doesn’t even matter if they still continue to export some goods deflation over time. Their commodity inflation tailwind is going to be problematic. The only thing that has really saved them with a Renminbi north of seven is that they haven’t had to import anywhere near the amount of commodities that they would typically have to. If you’re locked down, they have the longest commute times on average in the world in China. That is a tremendous tailwind to gasoline. Food. Et cetera. When you begin to reopen and have China’s economy going full bore, that is a tremendous issue for the commodity complex in general in an environment where it’s already broken. It’s going to be a tremendous amount of pressure on that system and I don’t think people are prepared for that either. That China is now the exporter of an incredible amount of commodity inflation over the next half decade or so.

MK: It’s actually really insightful because commodities which they have to import. They’re super afraid of that and that oil is basically the primary factor of production for everything under under the sun. Yes, everything.

TN: Back to CNY do you think they’ll kind of give in to devaluing or do you think they will continue to fight this, which is a battle that everyone loses eventually?

MK: That’s such a hard question to answer because if anybody can fight it, it would be China right?Because they have a non convertible currency, right. So I think, for instance, Japan is much more vulnerable because I don’t see Japan imposing capital controls and I don’t see Japan relaxing on their yield curve control. So the only exit valve there is the Yen devaluation. Right.

But in China’s case, they have capital controls. I spoke on an interview earlier this week with Mike Nicoletos, and we were discussing about whether or not there’s a porosity through the Hong Kong dollar. Right. I think they have to clamp back down, too, right? Because. If they really want to manage the pegs, they need to really like stymie capital controls. Otherwise, I think capital just going to flow out.

TN: So will we see a divergence between CNY and CNH?

MK: What is the divergence? I mean, it’s tiny. Two or something.

TN: Okay, great. I’m just wondering if CNH is trading offshore and that’s allowed to freely trade or relatively freely trade? Maybe. Sam, you have a better idea? I’m not entirely clear on what the restrictions are on CNH trading because I don’t think it’s completely for all. Otherwise that divergence would be much bigger, I think.

TN: Well, it’s a spread, right? It’s a proxy of a spread. And so you can see pressure on that, and you can see that pressure pushing the expectation of seeing why potentially devaluing if they don’t handle it. Like PBOC, they’ve got a lot of smart people, but policy wise, they make a lot of mistakes. Don’t think they’ll elegantly.

MK: I was just going to say that I actually think that if they let CNY or CNH freely float, it would have a nine handle on it. At least, I think that’s where it goes.

TN: Yeah, at least. Okay, very good. Thanks for that, Mike. I really appreciate that. Let’s move on to Sam. You put a note out earlier this week talking about inflation and central bank responses to inflation. And the Fed obviously seems unrelenting in their responses. Mike mentioned, as you mentioned in your newsletter and here several times, but one area you raised in your newsletter this week is kind of cars versus mid market dining.

So you talk about cars, Carvana versus Cracker Barrel. Can you kind of walk us through that? And I’ve got a couple of shots from your newsletter. One is on the Carvana release, and the other one is on Cracker Barrel. Actually, we only have the one on Cracker Barrel to show the group. But do you mind walking us through that?

SR: Sure. So the impetus behind the note was really to kind of make the point that Mike made earlier, that the Federal Reserve does not care about what’s going on in the Gills market. It is not going to come save the Bank of England and Downing Street from what they’ve done. That’s not their problem. That’s a domestic issue. And when you decide to have a massive fiscal tailwind and a monetary policy that was being highly restrictive and going to sell bonds, your currency is going to fall. And that’s your own problem. That’s the way that the Fed viewed it. And then a bunch of Fed speakers came out and said basically exactly that, but in a little kinder tone.

But the idea there kind of pulling that together is that the US domestic economy is still doing well. So the CarMax report was really interesting because CarMax has used autos, right? That’s what they sell. And all the headlines about inflation and used autos, their volumes got absolutely trashed in the past quarter. And that makes sense, right? People?

There’s a drawback from interest rates moving higher. It’s one of the most direct things that is affected housing and car financing. But the interesting part about it was while the volumes were down, they still had revenues up on their retail segment because prices were higher 25% year over year, their average selling price. So they did a really good job of kind of managing their revenues.

But that speaks to the inflation problem, right? The Fed doesn’t care about volumes going down. If the prices are still higher. Then you kind of go to Cracker Barrel, right? Middle America in my mind is you can encapsulate middle America in a Cracker Barrel I mean, it’s kind of perfect. And when you look at their release, it’s pretty clear that they called out 65 and over dining down. Guess what? That’s highly sensitive to inflation. They cited lower income individuals dining out less. Again, highly sensitive to inflation. And they still had their comp store sales up 6%, which is pretty good. And then you read a little further in the same sentence and they’re like, and we had pricing higher by 7%, so traffic was down. So they had negative traffic at higher prices. So that is again, they’re giving up volumes to be able to push the price and grow reps.

I think this is kind of a microcosm of the US economy, right? It is a strong economy. If you can continue to push price like that on the consumers. If you can grow revenues while pushing price at those levels, that’s pretty incredible. And then it’s pretty interesting to me because there’s this whole idea that corporate America is going to slow down their price increases. Cracker Barrel basically shot that idea right in the foot by saying, hey, listen, we think wages are going to inflate 5% over the next year. That’s september to September. And then if we’re going to have comparable store sales up, right?

So guess what? They’re going to continue to push price. And that’s where I think we kind of need to take a step back and realize these inflation pressures are broadening out and they are beginning to become embedded. Their food costs, when they forecast that, I believe that number was 8%. These are significant figures, right? These are not things that we would have thought were possible five or six years ago. They’re becoming embedded. I mean, that’s 2023 that these guys are thinking that.

And just one more point going back to the CarMax report, their SG and A, their cost of doing business, we’re up 16% year over year because they hired more people and they paid them more. So you think about you grow revenues at 3%, but your costs are up 16%. I mean, that’s a pretty big problem. Again, it goes back to the two things that the Fed really wants to get under control, including inflation is two things, right? They talk about the vacancies to unemployment ratio. They need less hiring to happen and they need wages to begin wage growth, to begin to subside a little bit because that’s a tailwind consumption.

So I think you’re having a number of pieces working against the Fed that might not be showing up in the data, mostly because I think the data is kind of crap. But the best part is if you’re kind of willing to go to that microlevel to get the macro and pull the macro out of it, these trends are not going anywhere anytime soon.

TN: So what I get out of that is I hope Cracker Barrel has digital menus. If not, I want to be their menu printer because every time I go into a restaurant, I wonder how often they change their prices, right? And basically, from what you’re saying, it sounds like they’re going to continue to push up, I don’t know, quarterly, semi annually, but they’re going to continue to push these prices up based on what’s happening in the market, and I suspect they’re not going to come back down. Oh, no.

SR: There are other ways to do it, right. You can push price by pushing less food on a plate, too. Right. So you can do some creative things on multiple fronts. Shrinkflation. The shrinkflation. But I do think that you’re not going back to anything like 2019. Right?

MK: I just want to riff off that for just a second because I participated in a real estate panel a couple of weeks ago and listening to these asset managers from around the world present. One big asset manager was basically saying that they’re still seeing essentially. Even though the rent growth is slowing down. It’s still growing for Q3 of this year where you would think that the hiking has already kind of worked its way into the system. That rent growth is still annualizing at a 10% click. So you talk about sticky.

I’ve had this thesis that it started with commodity inflation. Commodities have abated somewhat and certainly will abate more if there is an Asian contagion. Right. But the core stuff, which is what Sam is talking about, and also rents, that’s really sticky. But here’s the problem. When that stuff starts curling over, I really agree with you that if China reopens, you’re going to see a resurgence in commodity stuff again. So I call this sort of like the core energy tag team. And I think we’re going to see this tag team effect possibly for years.

SR: Oh, yeah. To rip off that I called it the COVID earthquake is going to have more aftershocks than anybody really wants to admit.

TN: Yes, there was so much intervention. You can’t just earn it out in six months, right. Or a year. It takes so long to work that out. So that makes a lot of sense. Guys, staying on this inflation theme and Sam, you mention SG and A and wages. Meta announced yesterday that they are imposing a hiring freeze and they’re warning their employees about restructuring.

So obviously now that as of yesterday, they’re the second most valuable company in the world with Exxon taking over. But if Meta is instituting a hiring freeze and Sam, you talked about Carvana hiring a bunch of people last quarter and their costs going up, what does that signal for tech?

I think, Sam, you showed me the site layoffs.fyi or something like that to look at layoffs in tech, there are a couple of issues which we covered with Mike Green before and you’ve talked about up befor Sam, where ad space is becoming almost infinite and these guys who are ad based have a lot of headwinds and Meta is no different. And so that’s obviously one of their headwinds.

But the SG&A cost is huge. Right. What do we need to be looking for with Meta and companies like Meta? And is this the beginning of the end of the tech wage spike?

SR: I’ll take part of that. Okay, good. Is it the end of the tech wage hike? I don’t know that is going to be the case simply because we don’t have enough people with those skills, even if we do have a pullback in the number of hires. Right? On the marketing side, yes. But on the tech hiring front of people with programming skills, et cetera, I don’t think that’s going to slow down or those are going to slow down anytime soon, at least until we have enough of them.

But maybe on the marketing side, et cetera, I would say that the Meta announcement is far more indicative of a slowdown generally in Silicon Valley startup ad spending on the marketing. That’s a problem for Meta on the margin. A significant amount of their ad revenue comes from startups.

It’s a much larger problem for a company like Snapchat. Right. There is a hierarchy of where you go to advertise and when you’re going for eyeballs. So if it’s a problem for Meta, it’s probably a much larger problem for a Snap in some of those smaller, less ubiquitous platforms.

But yeah, it’s always going to be a question of where is Meta putting its incremental dollars, because it is making a pretty big push into the Metaverse. It’s unlikely that people are getting slashed, jobs are getting slashed there. It’s more likely that what you’re going to see is a reduction in places. They’re simply not seeing the returns that they want to see and they’re going to continue to grow the hiring base on something that’s important to them, like building out the Metaverse side of the business.

TN: Sure. Yeah. Mike, what are you seeing with tech?

MK: I don’t follow Idiosyncratic tech as much, so yes and no. I’m actually, ironically, one of my Idiosyncratic positions is actually a dyspacked ad tech company that’s in the ad arbitrage business. That’s a different type of a different type of play, but I haven’t been as focused. So I’m very interested to hear your sort of microcosmic views. Really interesting.

TN: Yeah, I think everything Sam says is spot on. I do think that in terms of the core coding skills, there’s a lot of slack there. So for example, as we talk around, because we hire developers. Some of the developers who work for some of the very large tech companies who make mid six figures, something like that, their daily code commit is something like eight lines of code. That’s it.

Okay, so these guys are not sweatboxing code. It’s a very minimal amount of code they have to put in every day. So I think there are major productivity gains to be made on the developer side within these large tech companies. So maybe it’s not hitting yet, but I think it will hit soon as it always starts with marketing, right? It always starts with traveling expenses and then it goes further. And so I think give it a few months and we can see it go further into development.

MK: I’m curious, Sam, if what you’re seeing in the sort of tech ad slow down, how does this compare to past downturns, past cycles?

SR: It’s hard to say because we haven’t seen many significant down cycles. Because COVID wasn’t a down cycle for ad spending. It was kind of strange. Right. Social media did very well during that time frame, and social media was so young in ’08, ’09 that it’s hard to really get a read there, except you can kind of extrapolate Google. Google did pretty well in ’08 ’09. They took a lot of market share from traditional media, but that was a different age. So I would say it’s pretty hard to look back and say it’s going to be similar this way or not similar.

MK: But wouldn’t you say, though, that the ad slowdown is just across the board? It’s not as if traditional ad spending is going to start eating their lunch across the board.

TN: Real quick before we wrap up, if you can, in ten to 15 seconds, what are you looking for for the week ahead? Mike, what are you looking for next week to watch?

MK: Well, this has been a very confusing week in that I think there have been a lot of quarter inch shenanigans and window dressing. I’m still macro pretty bearish. Okay. I’m concerned that I think after the window dressing is done, I think some of the supports from the market may actually not be there. I watch bonds and commodities a lot.

TN: That makes sense. Yes, Sam?

SR: I’m just watching the Euro and what happens with TTF next week. I think that’s really important after we get through the quarter close.

TN: Absolutely. Guys, thank you so much. I know this is quick. I wish we could talk for two more hours.

I guess we got cut off at the very end there, so I really apologize for that. I just wanted to thank Mike Kao and Sam Rines for coming on The Week Ahead. Thanks, guys, so much for all that you contributed this week. And thanks to everyone for watching. Have a great weekend.

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