Month: January 2023

Unveiling Shocking Risks: Markets, Cracks, Freeport, and Ukraine’s Hardware

Post author By admin
Post date January 28, 2023

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In this video, our first-time guest Jim Iuorio leads the discussion on the topic of whether markets are too good for the Fed. With speculation around CPI, layoffs, and interest rates, the question of the Fed’s direction and potential pivots later in the year is raised.

Jim also delves into the recent success of the metals market and offers insight into where the market may go in the future. He also offers his thoughts on the potential impact on equities if the S&P hits his target of 4060.

Next, Tracy takes the lead in discussing cracks and Freeport. She explains the significance of rising crack spreads and its impact on the market. She also shares her insights on the recent opening of the Freeport facility and its effect on US natural gas prices.

Albert then discusses the risks associated with Ukraine’s new hardware. He addresses the classification of “direct involvement” and its potential impact on European countries. He also offers insight into what actions Russia may take to further complicate the situation and the potential impact on markets such as wheat.

Finally, the team gives their expectations for the upcoming Fed meeting and what to look for in the week ahead.

This is the 51st 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
Jim: https://twitter.com/jimiuorio
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Listen on Spotify here:

Listen on Apple Podcasts: https://podcasts.apple.com/us/podcast/complete-intelligence/id1651532699?i=1000597046195

Transcript

Tony

Hi, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Jim Urio. Jim is at TJM Institutional and he’s with the Futuresedge podcast. Or is it on the Futuresddge podcast, right? Yes. Also with Albert Marko and Tracy Shuchart with Hightower Resources Advisors.

We’ve got a couple of key themes. Obviously, it’s the week before the Fed and we’ve had a really good week in markets. So one of our key themes is our market is too good for the Fed. Second I think Tracy is going to talk about crack spreads and Freeport and what’s happening there. And then we’re going to look at the risk with Ukraine’s new hardware. There’s been a lot of talk about tanks going to Ukraine this week, so we’re going to talk about some geopolitical risks with Albert.

Learn more about CI Futures tiered pricing here.

So Jim, first, thanks again for joining us and watching some of your comments through the week with markets breaking through some of the key levels that you were looking at, the Fed’s direction is obviously a big factor in markets and there’s a lot of conjecture around CPI, layoffs, rates going lower or pause or pivot or whatever you want to call it, and people saying the Fed may do 25 and then pause.

What’s your view on that? You’ve been obviously speaking about this several times this week. So I’m curious, what’s your view after seeing a whole week, where do you think we go from here?

Jim

Well, I’ve been somewhat more of a bull, I think, than most over the last few months. And I’m not trying to take a victory lap or anything, it’s just a fact. And my reasoning was that every one of us knows that these Fed rate hikes have a huge lag period before we feel the efficacy. Fed knows that too. As stupid as the Fed is, this is something that’s so fundamental, but I think they genuinely do know that. So now we’re starting to see things happen. We saw a pretty good PCE report today. CPI has been trending lower too. The only things in CPI that are stubbornly high, consistently, are food and energy, which are the two things that are least rate sensitive. The yield curve is still wildly inverted, signaling to them that they still are in a financially tight market. I believe that the Fed is getting close to having some sort of gentler language. Now, whether they go 25 basis points this time and then 25 basis points again, that’s fine to me. Now, the one thing I do have a problem with is that the Fed Funds futures curve says 50 basis points over the next two meetings.

And then toward the end of ’23, there’s going to be an ease. But they say it’s only going to be a quarter, two and a half point ease. And that I say “no way.” If they’re ever going to actually pivot and start easing, it’s only going to be as if something is burning and something is falling down and then it’s not going to be a quarter point ease. That being said, I still like risk assets. And I have because I think we are nearing the end of the Fed tightening cycle. I believed, I’ve been doing my podcast for the last hour. I wanted the market to settle above 4070. It certainly did, right? We went into the closed pretty strong, I thought. And I think that that green lights the next move higher. I particularly like the metals market, and I’ll shut up in 1 second, I swear to God. I particularly like the metals market because I think that… I don’t mean to talk for so long. I thought copper was being held down by China news, by the Fed, by the strength of the dollar, and all those things have seemed disappeared. And I’ve made good money on that so far, and I plan on keeping those lumps.

Tony

So it’s a good question about metals. What are you looking at? You said China and you said China reopening other things. What are you looking at in metals? Are you looking at industrial metals, copper and so on? Are you looking at precious metals or kind of all of the above?

Jim

Copper is number one and that’s my biggest position. Silver and then go down from base industrial all the way to just gold being pressured. And the gold thesis for me is different than the copper one in that I believed at the time when I started buying more gold, that Bitcoin and Etherium in the crypto market and all that dollar safety hedge or whatever the hell it is, if that was disappearing, then money would go back into gold. Well, that didn’t disappear. Bitcoin is butting up against new cycle highs now, but gold is still doing well. So in that I was kind of wrong on the thesis. The thesis was also the dollar weakening, which happened as well. Once the Pound of the Euro started really bouncing off those October lows, I thought, okay, the green light is on for all these metals. So I’ve done okay in gold, even though my thesis about crypto was wrong.

Tony

Okay, but was your thesis wrong? Do you see crypto and gold as substitutional somewhat at the margin still?

Jim

I don’t know. I was going to ask you that same question. I always did. And I thought that the $3 trillion crypto market was sucking away some of the gold. And I thought that that was a big deal. But then it doesn’t seem to be now, so I guess I can’t answer that. I’m confused, I guess.

Tony

Yeah. I’m curious. What do you think about that, Tracy, in terms of crypto and gold? Do you think there’s a trade off there?

Tracy

This is not really my… Crypto market, is not really my market.

Tony

Internet, say whatever you want.

Tracy

Albert knows way more about this than I do, to be honest, because I’ve never traded crypto, and he’s traded a lot in the past. So I’m going to defer this to Albert.

Albert

Before I do think that there was a correlation between how much money was flying into crypto versus taken away from gold, I think there is no doubt that gold suffered because of that. I don’t think that as the case right now, simply because there’s been too many blow ups in the crypto world at the moment. I don’t really know how liquid it really is. There’s certainly no retail left in the crypto market, so it looks like it’s all institutional. So I don’t know. You can’t really make a fundamental call on crypto at the moment.

Tony

Could you ever make a fundamental call on crypto?

Albert

You could at some point, because institutional money was flying in there because their clients were forcing them to get into the space. So you could make a little bit of a fundamental case for crypto, but as all these ponzi schemes blew up, like FTX and everything, that’s just gone completely out the window at the moment.

Jim

Sure, Tony, I can make a slight fundamental argument of it. When they were adding an additional $7 trillion, throwing it into the money supply, and really being poor stewards of the dollar, that was somewhat of a fundamental argument for crypto, I guess, right?

Tony

Yeah. Okay. Are markets too good for the Fed. As we’re going into next week, are these levels too good for the fed? Is Powell going to come out and really, you know, say, look, this is irrational or whatever, and it’s too much, and is he going to pour out, say, 50 basis points and disappoint a lot of people?

Jim

Just to punish me a rug pull? I mean, I think he’s capable of that. He certainly did at the Jackson Hole meeting a while back. So you have identified, I think, the major risk, and it’ll probably go into that somewhat hedged. And again, hedging is probably going to be expensive going into it because people realize that that’s where the risk is. So on balance, I will say, no, I don’t believe he is. I think he believes that going too far this way. And again, I think he thinks going not far enough in this direction is the worst possible thing. But I also think he’s starting to realize going too far and what that looks like. He sits around and talks about creating slack in the job market, and to him, it’s just an equation on a whiteboard where the reality is talking about people losing their jobs. I think he balances a lot of realities. I think he’s incompetent. His entire tenure has been mostly incompetent, but I think he’s done a pretty good job trying to clean up the mess that he made over the last year and a half, and I don’t think he’s going to do something stupid like that. But, yes, to your point, it is a risk.

Albert

I actually disagree with Jim on this.

I think it’s going to really matter about what the market does. If we start flying into the 4200 before Tuesday on the SPX and whatnot. I think that Powell will come out. I don’t know if he’ll do 50. I don’t think he’ll do 50, but he might come out with a 25 basis point rate hike and then start talking extremely hawkish and dismiss all the rate cuts that everybody’s been talking about, which would be essentially the same thing as doing 50 to the market. If the market says that. If the market here is that we’re not getting rate cuts till 2024, I don’t see that as positive whatsoever.

Jim

I certainly hope you’re right in the near term, too, because I’m short some of those 4200 calls, like, too many. That’s the position I keep checking in my bold position was like, oh, sh*t, they’re getting too expensive. So I actually like what you’re saying a little bit in the short term.

Albert

Yeah, I have a problem because of this is falling liquidity right now and tightness at the same time. I look at the market and I’m like, well, money is starting to fly out into Asia, which we talked about Tony, repetitively for months now. Where are we going to get that $5 trillion incremental money coming into the market to keep this thing afloat? For me, it’s like I don’t see the math adding up to 4300 on the S&P and anytime soon. And on top of that, if you calculate rate hikes and everything you’re looking at the market, 4150 or 4200 is more expensive than 4800 was. It’s technically even higher valuation. So for these things, I’m just like I think we’re probably going to retrace the 3850 on some kind of ridiculous Powell talk. And on top of that, Brainard is talking about leaving. She’s not leaving if Powell is talking about being dovish. She wouldn’t be doing that, in my opinion.

Tracy

I asked a question. I was just saying and that’s for both of you. I mean, considering that the Fed has hiked so quickly, do we even think, and the data has remained pretty good, considering right, so do we think that the rate hikes have actually even been able to filter down into the economy at?

Jim

I don’t, Tracy. I think that that’s the point. I think when you look, just take the real estate market. How in the world is it not going to be a major hurdle for the real estate market to take mortgage rates from 2.8% to 7%? I think that it’s silly to think that if they just left things the way it is, I believe that we would certainly go in recession at some point in time with money being restrictive as it is compared to… I’ve argued for 30 years that rates had to be inorganically low to make up for the fact that we have all these crappy regulations and punitive taxes on companies. They need low rates to function. I think rates are to point now where eventually they would drag on us too much. Albert, do you agree with that?

Albert

I do. But the flip side of that is, like, if Powell doesn’t stay the course, Yellen is using the TGA, in my opinion, from what I heard, to offset quantitative tightening. This could set off another round of inflation if China comes on too fast, or even Europe starts to gear up a little bit and reset their manufacturing sectors with stimulus. The fear I have is a second half inflationary run again, and then we’re going to be talking no more pauses, but another round of 50-75 basis point rate hikes.

Tony

Second half of Q2. I don’t think it’s a second half inflation run. I think it’s Q2. I think it happens a little bit sooner than that.

Albert

Yeah, it could. I mean, you could have any kind of geopolitical event like Russia re-invading Ukraine with some gusto this time.

Tony

Okay, guys, here’s my question, though. We’re talking all this potential dovishness, but all we’ve seen is the rate of inflation slow. We haven’t seen prices come down. Okay, so why would he go to zero? Or why would he just do 25? I’m not seeing it. When you look at the job market, sure, you’ve lost 70,000 tech jobs, but they hired 2 million since 2020 or something like that, right? So it’s nothing. It’s dropping the bucket.

Tracy

Chipotle hiring 15,000 so those people can get a job.

Tony

Exactly. What is it that would tell us that he’s going to go 25 or pivot or whatever? I’m just not seeing that thing because the job market is still really strong.

Jim

So here’s what I would say to that, is that the job market is going to be strong and tighten. It’s a weird kind of anomaly that happened with 3 million boomers leaving the job market prematurely over the last three years. To your point about why would he not stay the course if prices aren’t coming down? Because, remember, ultimately, the end of the day, the inflation was intentional and it was done because of this wild indebtedness all over the board. But I always focus on the five states that could not possibly have paid their bills under any possible scenario. And that’s why for ten years, they kept telling us that they needed inflation. So I think in Powell’s mind, he tells us 2%. I think he’d be perfectly happy with three and a half.

Albert

And they’ll get three and a half because they’re starting to change the way CPI has waited starting 2023.

Jim

Just like when Nixon changed the definition of unemployment back in the 70s.

Albert

The BLS have done that in the past. They changed the way unemployment is calculated. Now they changed the way the CPI is calculated.

Tracy

They changed the way inflation is calculated.

Albert

Perception is reality in the market. We can sit there and b*tch about fake data from China and fake data from the Europe and the US. But perception is reality in the markets.

Tony

Yes. So we’re going to change the rules to win.

Albert

Well, yeah, of course.

Tony

And the CPAC calculation changes this month, right?

Albert

Yeah, January 2023.

Tony

Fantastic. Okay, so you guys are in the 25 basis point camp for next week, right? 25 and very hawkish. 25 and very hawkish.

Jim

Okay, I don’t I like what Albert saying. I say 25 and mildly hawkish.

Tony

All right, we’ll see. I think it might be a little harder than that. So we’ll see. That’s good, though. I appreciate that.

Tony

Okay, Tracy, I want to talk a little bit about refineries and crack spread. You sent out a tweet on Monday about diesel prices.

Can you help us, help us understand what’s happening at refineries and what’s happening with diesel and gasoline and other refined products prices?

Tracy

Well, this is actually the perfect segue because I tweeted out a chart of ULSD, which is diesel, basically. And so we’re seeing those refinery margins explode again. And most people say, well, that’s anticipation of the diesel embargo in Russia and refineries across the world that are not part of Russia are seeing these increases. But that’s not just happening in the diesel market, that’s also happening in gasoline cracks. And so higher refining, basically the long and short, higher refining margins mean higher prices for consumers. Right. So Tuesday we just hit a three month high of $42. And when oil was at its highest price, those crack spreads were at $60. So this should start ringing alarm bells a little bit about inflation. This is why it kind of correlates to what we were just talking about. And so CBs, even though they don’t count energy in the CPI as part of inflation, they should be keeping an eye on these indicators because it kind of indicates that we’re going to see higher gasoline, diesel costs, jet fuel, et cetera. And that could add to inflationary pressures across the board, not only for just the consumer, you and I, but for companies that are heavily dependent on these products.

Tony

And when there’s inflation in energy, there’s inflation in everything.

Tracy

Right, right.

Tony

Second or two tier impacts.

Tracy

Exactly, yeah.

Albert

One of my oil friends was telling me that normally January, February, they’re running at minimum rates, trying not to lose money. But this has been like absolutely insane, where they’re just making money hand over fist right now because the demand is so high.

Jim

Tracy, I have a quick question for tracy, by the way. Is that okay?

Tony

Yes.

Jim

So, Tracy, just last week, I don’t know if it was Chevron or Conical Phillips, where they announced raising the dividend or whatever, paying bonuses and not investing in it. Was that an indication that they still feel that the government is not smiling upon fossil fuel companies expanding their operation?

Tracy

Oh, 100%. Right. For over a year now, we’ve seen elevated energy prices in that seventy dollars to eighty dollars range. Negating, the spikes that we saw from the Ukraine invasion. But so after a year of pretty much stable higher energy prices, we are still not seeing anybody want to invest in this sector. Right. They still want to cater to the investor. They still want to pay down debts. They still want to do higher dividends. They still want to engage in stock buybacks. All to placate the investor. And so that is very telling that after a year, they’re still not willing to reinvest into capex, particularly in shale.

Tony

It’s nothing but downside to invest, right?

Jim

No doubt.

Tracy

Yeah, absolutely.

Jim

It’s maddening when you think about it. Everything seems like it’s such a self inflicted wound. And this is the kind of thing that keeps me up at night. It seems like a government that’s working against us. And I’m not trying to be that guy. I’m not political. I just see policies and they’re asinine.

Tracy

Who wants to invest when they say, we want to phase you out, we want to kill you?

Jim

Right? Yeah.

Albert

Well, this is the problem when politics gets mixed up in economic policy, it starts muddying things up and mistakes become exponential at this point.

Tony

But politics is always mixed up in economic policy everywhere. You know that. I’m not telling you you don’t know, but it’s always there. When I hear you talk about refineries, and it’s been how many decades since we built refineries in the US, Tracy? The 70s was the last time we built refinery?

Tracy

70s was the last major. We’ve had a lot of brown projects, which means we’ve added refinery capacity to already existing refineries, but we haven’t had any new green projects, which means building new refineries. And we were talking about, I think, last week or the week before the expansion that we’re having in Texas. But the problem is that the amount of refining that is coming offline is more than the refining capacity that is coming online.

Tony

Right. So what’s our capacity utilization right now in refineries?

Tracy

Well, we’re down right now because we’re in the middle of maintenance. And we also had Elliot storm, which some refineries, for instance, Baytown, is just coming back up this week from the storm in December. So utilization rates right now at about 89.5%. But, you know, you have to realize that, you know, we’ve been over, well over 90%.

Tony

Yeah, 94 or something like that. Right?

Tracy

Yeah. And we have aging refineries. And so what does that mean? Those refineries are more prone to breakdown because we’re running them at, like, ridiculous max capacity. Right, exactly.

Tony

Okay, so since you mentioned Texas, let’s look at this tweet that you put out a couple of days ago saying that Freeport gets approval.

So USLNG, the Freeport terminal has been approved and reopened. So can you talk us through what that means for European nat gas and what that means for US nat gas prices?

Tracy

Well, for US natural prices, that is positive. And I know that all nat gas prices have tumbled 35% to 45%. Regardless, we’re back into that two area that is pretty much where we’ve been for several years. But it is a good thing. I think the market, I think, spiked 15% or 15% $0.15 sorry, on that move. And they kind of retraced it. I think the market is a very Freeport is an export place. So what that means is that if Freeport being closed basically landlocks US nat gas, which is obviously a negative because we have a lot of it. But I think that the market in general is a little bit skeptical. But as soon as we actually start seeing export capacity increase from that facility, then I think that the markets will be more enthusiastic about the success of that because it’s really been since August since that facility is shut down.

Tony

So you’re saying we should see US nat gas prices rise as we have more export volumes from Freeport?

Tracy

Absolutely. And even this week, Semper Energy announced that their new Port Arthur facility has already been booked. And that facility isn’t even all the way built yet. And that’s another export facility. So there’s a lot coming online and a lot being built out that we will be able to see. I think that just market participants have become a little bit placated because they look at European stocks and European stocks, of course they’re still full. They’ve had a mild winter, but everybody kind of forgets that last year 50% of their storage capacity came from cheap Russian pipeline. And that’s not going to happen this year.

Tony

Yeah. So all of those new roads that are being built in Texas, it may have been started with other money, but it’s going to be finished with European money. Right. So I just want to take this moment to thank our European friends for finishing our transportation.

Albert

About time they give back.

Tony

That’s right.

Jim

Finally, their currency has come back a little bit, so now they can actually buy stuff here.

Tony

Perfect. Okay, very good, Tracy. Anything else on nat gas? Are you still keeping eye on fertilizer for kind of late spring time period?

Tracy

Yes, absolutely. I think that’ll still come into play. I mean, nat gas prices are extremely low right now, which is great news for fertilizer prices. That will give farmers a break. This is all good news in that respect, but I still think we need to keep an eye on this going forward and keep an eye on that gas prices because obviously that’s going to affect fertilizer prices and farming in general.

Tony

Jim?

Jim

Tracy, you talked about diesel before, and I don’t trade diesel. Is the spread between diesel and regular WTI still blown out? And what could possibly get diesel back in line?

Tracy

Well, I think that there’s been a shortage for a very long time. That spreads come in a lot, comparatively speaking. But now it’s starting to blow out again because again, you have the EU embargo of diesel, and they got literally like 95% of their diesel came from Russia. Another dependent project. And I’m sure Russian diesel will go somewhere else. It’s not more about that, but it’s more about really boils down to refining capacity as well. Because even in the United States, we can’t refine. If Europe wants to buy from us, we can’t even refine enough. We’re sending what we have over there as well as our domestic needs. So really, diesel to me comes down to refining capacity altogether.

Jim

That’s an unfixable problem, right?

Tony

Until Russia’s solved, right?

Albert

What about the Jones Act waivers for sending diesel up to these coast cheaper?

Tracy

Yes, they could do that, but they haven’t done that. They’ve done that in the past for Puerto Rico after the hurricane and all of that, but they still haven’t given waivers. Even when prices were extremely high in the United States, when we were at the height back in June, July, when prices, gas prices were highest, diesel prices were highest, they still wouldn’t give Jones Act waivers. You have to understand that the Jones Act came into play into 1920 when we had a fleet of over 1000 vessels, and we now have under 100 vessels that can transport that. So, you know, it’s the government could do it. They’ve chosen not to. Why? I’m not sure, but…

Jim

We can come up with some guesses. They’re either stupid or they’re nefarious. I believe at some point in time you’re going to have to say some of it’s nefarious, where they keep making the wrong decision at every turn. And I apologize for that.

Tony

No, don’t apologize. Look, it’s making it more expensive for people on the East Coast to get diesel. It’s not good.

Tony

Okay, great. Speaking of Russia, Albert, we saw a lot of news over last week about tanks going to Ukraine. And there’s a tweet from Max Abrams, who’s a great geopolitical professor talking about Russia, says that tanks from the west count as, quote, “direct involvement in the war”.

So I wanted to get your… Jim said what would solve the diesel problem. Obviously, Russia coming back into the market would solve the diesel problem. Now with a lot of Western countries sending tanks to Ukraine, that doesn’t sound like we’re coming closer to a solution on that. So first of all, why are they sending them if they don’t have the people to operate them? Second, tanks are to take land. Right? So what do you think is being planned? And third, how risky is it? Do you think it really implicates these kind of donor countries as direct participants in the war?

Albert

I don’t really buy into the whole direct participants of the war. The rhetoric coming out of Russia is a little bit bombastic in that respect. Referring to those tanks, there’s only going to be about 100 of them, right? They’re not going to be able to push out the Russians with those tanks. On top of that, they’re going to be about six months out until they’re actually even deliver, and then you still have to train these guys and they need supplies, and the Ukrainians don’t really have all that. So the best guess that I have is that they’re forcing Russia to come into a ceasefire in about six to eight months time, which gives them a window now to try to take Dambus and have some kind of wind before these tanks get delivered. Listen, they’re no joke. The Leopard tanks and the Abrams are better than what the Russians have. But in terms of the Ukrainians using them to push Russians out of all Ukrainian territories, that’s just not happening.

Tony

Right. So are these just old tanks or is it a quality kit that they’re getting?

Albert

Well, I think they’re getting like the second tier tanks of what the west has, but that’s still better than what the Russians have or even willing to use for Ukraine. So, like I said, this is more of a measure to force the ceasefire later on in the year.

Tony

Okay. Yeah, Jim?

Jim

Albert, a couple of days ago, when this escalation started in Germany, we announced I immediately put on my screens, looked at oil, wheat, even the defense sector ETF, and nothing really budged. Do you think the market was looking at it like it wasn’t a big deal? Or do you think the market was looking at it as somewhat balanced, perhaps a quicker end of the war and not an escalation, or perhaps an escalation, the two things come around?

Albert

Oh, man, that’s a good one, Jim. I honestly think that the market’s probably in a wait and see position at the moment.

Jim

Numb to the shit kind of. Right?

Albert

Yeah. You got to wait and see what Moscow is going to do. I certainly think they’re going to use wheat and grains and other grains asymmetrical responses to the west to push inflation out over there, make it hurt. That’s the only thing they have. They don’t really have anything else to go after. I mean, the oil that they’re selling to India and China is enough to sustain their pocketbooks for a little while until this gets sorted out. But until there’s some sort of major upheaval in Ukraine, I don’t think the defense stocks will take off or wheat yet. But they will. I think they will. They haven’t moved.

Tony

The defense stocks haven’t moved for a while. If it is we and other AG stuff that is going to be their lever, that probably means the Turks will get more involved in the discussion because they’re the ones who arbitrated the discussion earlier. Is that right?

Albert

Well, they’re trying to get into the discussion. I actually have really good connections with the Turks and their main thing is to distract the West and the Russians into Ukraine while they push their trade deals out into Africa at the moment. You know, the Turks have a great drone, the TB Two, which they sell to pretty much everybody. So that’s as far as they’ll actually get into the war besides making media comments.

Tony

Right, okay. And so what risk do you think there is on wheat? Do you think we see more wheat risks, say, in Q2 – Q3 this year?

Albert

I absolutely do. The Ukrainians, they’re planting a lot less. I think 40% less is what they’re reporting, is probably even more than that.

Tony

Right.

Albert

And on top of that, if the Russians decide to blow up a port or blow up a few ships that are trying to get out with wheat, and all of a sudden, wheat, you know, takes off back to the 900 or $1,000 mark again. So I definitely see that happening in Q2 Q3.

Tony

Okay. That could be exciting. All right, guys, let’s close it up. We’re in that quiet period for the Fed. We have that Fed discussion next week. So what are you keeping an eye on next week aside from the Fed, of course, but what are you keeping an eye on in markets? Tracy, why don’t you get us started.

Tracy

Well, I know that most people are looking forward to OPEC is next week at the beginning of February. My personal stance on that is that I think they will keep everything as is. Right. They made that 2 million cut, even though it’s technically not 2 million, because they were under quota anyway. They said they were going to carry that through 2023 unless something came up that they really needed to address. And I just don’t see anything coming. I don’t see any reason they would need to change this policy stance right now. We have Russian barrels still on the market. We have China is still kind of an unknown because they haven’t really opened up yet. So that’s what I’m looking forward to, or at least that’s what my feeling is about the data.

Tony

Great. Okay. Albert, what are you looking at next week?

Albert

Well, obviously the Fed. I think, is in order with a hawkish tone, but honestly, I want to see how the dollar reacts to all this. And the VIX. The VIX at 17, start looking at some good old put options and call options with the 17 VIX is fantastic. But, yeah, basically what the dollar is going to do. I really want to see if the dollar breaks into the 90s with some kind of bull market talk.

Tony

Excellent. Okay. And Jim. Wrap us up. What are you looking at?

Jim

The unemployment numbers on Friday. Big deal. The last shooter drop is going to be the slack in the labor market that they want. Albert mentioned that level on the dollar. I call it like 101 to 100. As soon as it goes below that, as soon as we get a nine handle on the dollar, I think it greenlights a lot of risk assets. But the thing I’m mostly focused on is unemployment and then the week after that my trip to South Florida. Because every time I leave these damn markets, something crazy happened. So you guys can count on that. I’ll tell you when I’m on my flight. Something weird is going to happen.

Tony

When is that?

Jim

I don’t know. My wife makes the arrangements. I think it’s the next, like a week from next Thursday. I think we’re going on vacation.

Tony

Keep an eye on. Jim, thanks so much for joining us, Jim. Guys, this has been great. Thanks very much everyone have a great weekend. Thanks Jim.

Jim

Thank you guys. Yeah, let’s see you guys.

Week Ahead

The Great(ish) China Reopening: Unveiling the Timing of the Next Breakout

Post author By admin
Post date January 21, 2023

Learn more about CI Futures: https://www.completeintel.com/futures

This Week Ahead episode discusses the current state of the Chinese economy and its potential trajectory in the future, with experts Leland Miller, Mary Kissel, and Samuel Rines. In this episode, the panel discusses China’s gradual reopening, China’s place in the world, and the Chinese Communist Party’s economy.

Leland Miller, who leads China Beige Book, talks about China’s Great(ish) Re-opening. He notes that the reopening has been a gradual process and not as quick as some had claimed it would be. He raises the question of when we will see China really break out, whether it will be after the Lunar New Year/Spring Festival or later. He also discussed what activity we should be watching to know that China is really back to normal, such as investment, hiring, etc. He concludes by commenting on what a “normal” Chinese economy will look like in 2024 and beyond.

Mary Kissel, from Stephens, leads a discussion on China’s place in the world. She notes that with confirmation that China’s population has already peaked, there seems to be a subtle reassessment of the “China opportunity.” She points out that there is a very different view of China from the European perspective vs the US perspective. Europe seems to be growing closer to China while the US seems to be pulling back. She also shares how US-China relations will change as China normalizes and whether US companies are really moving out of China. She also discusses the push-and-pull factors that influence these decisions and if US companies will be complacent and stop moving to manufacture elsewhere after the slower opening in China.

Samuel Rines, from Corbu, leads a discussion on The Party’s economy. He notes that under Xi’s leadership, we’ve seen the Chinese Communist Party return to a more involved role across Chinese society. He shares if the government will be more assertive toward businesses – both domestic and foreign businesses – in a post-Covid world and if that could impact how foreign investors view investments in China. He also mentions recent central government intervention in several sectors, most notably tech and real estate, and asks how involved the government will be in the repair of the real estate sector and protecting the tech sector. He also shares that if given renewed government involvement as well as factors like population and economic slowdown, we expect these sectors to return to rapid growth anytime soon.

Finally, the panel members share what they are thinking about China that they’re not sure most people see.

Key themes:
1. China’s Great(ish) Re-opening
2. China’s place in the world
3. The Party’s economy

This is the 50th 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
Leland: https://twitter.com/ChinaBeigeBook
Mary: https://twitter.com/marykissel
Sam: https://twitter.com/SamuelRines

Listen on Spotify here:

Listen on Apple Podcasts:

Transcript

Tony

Hi, and welcome to the week ahead. I’m Tony Nash, and today we’re joined for a special discussion on China. We’re joined by Leland Miller of China Beige Book. We’re also joined by Mary Kissel of Stevens and Sam Rines of Corbu. Guys, thank you so much for taking the time to talk about this. I think it’s a really critical time to understand what’s happening with China, and it’s just a really timely discussion. So I really, sincerely appreciate the time you’ve taken for this discussion.

Tony

CI Futures has thousands of assets that we forecast every month. We do commodities, currencies, and equity indices every single week. On Monday morning, there are hundreds, almost 800 of those that we forecast every week, updated on Monday morning. We forecast economics variables every month. Those are available on the first of every month. In total, it’s thousands of assets. We show our error. We are the only product out there, the only forecasting product out there that actually discloses our error. You can see our historical error, and you can see a year’s forecast at monthly intervals. Please check it out. Please click on the site. If you need a demo, let us know.

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Tony

Thanks very much. We’ve got a few key themes that we’re going to talk through today. The first is China’s kind of great-ish opening. Everything in modern Chinese history is the great whatever. So this is kind of the great-ish reopening. We also want to talk about China’s place in the world. And so I think that’s a really important thing to understand. There’s a lot of discussion about the rising CNY and other things. And so we really want to understand China’s place in the world. And finally, a discussion about the economy, kind of the party’s economy versus the entrepreneur’s economy. And so I’ve heard some comments recently, actually, from an interview Leland did about kind of, is this the party’s economy? Is this not the party’s economy? So let’s kind of jump right into it.

Tony

Leland, I really want to understand the reopening in China. Post COVID, we had these protests. It’s been well covered. We had this really quick change from the central government in terms of when they’re going to open. And it seems like it’s been not as quickly as was claimed initially. And I think markets had this expectation that things were going to open on a dime.

Tony

And some of that’s happened, some of that hasn’t. So can you tell us what is your data seeing? Are we seeing a slow, delayed opening? And when do you see kind of the full reopening of China?

Leland

Sure. Well, look, reopening was always a bad term to use because markets equated a COVID Zero reversal, COVID Zero pullback with the reopening. So the second that Xi Jinping did this mystery call to just reverse himself the next day, they said, okay, China’s reopening, that was never going to happen. Obviously, if you’re opening the floodgates on COVID, then you’re going to have a COVID tidal wave wash over the country. So it never made any sense that there was going to be an immediate reopening. We like to use the word reactivation of the economy. There was always going to be a number of months in which things were just going to be bad, as people were either getting COVID, or they were hiding from COVID or they were dying from COVID. The reality was December was terrible. I mean, we don’t have to rehash the old economic data from last year, because we really are in a paradigm changing time right now. But 2022 was atrocious. The fourth quarter was in contraction. December was in contraction. It was just absolutely terrible time. January, this is where people, I think, are jumping the gun on the entire reopening question.

Leland

People are obsessed with subway indicators. So everywhere you turn there’s like somebody quoting a Beijing subway has more people this week than it did last week. Same with Shanghai, a couple of other tier one cities. That’s great. Look, it’s great that the low point has been pushed past in some of these bigger cities, but China is big, China is real big, and China is real rural, and a lot of the major economic engines of China are in smaller cities, manufacturing commodities, et cetera. So you’ve got a long time, or a longer time than most people think, where COVID just has to wash over the entire country. We don’t know what’s going to happen with Lunar New Year. I mean, you have the potential for it. This is the all time, world record super spreader event that anyone’s going to be ever see. And so what is going to happen? They’ve taken care of it in the big cities relatively well. Although people are dying and they’re not admitting to it. Many, many tens and tens and tens of thousands of people are dying and they’re not a day and they’re not admitting it. But when you get into the rural areas, you have massive hospital under capacity.

Leland

You don’t have ICU beds, you don’t have doctors, you don’t have nurses. They’ve run out of cold medicine, they’ve run out of other types of medicine. So what are they going to do? We don’t know. The assumption is that we’re not going to have a real good idea of what’s happening, but we do know it’s going to suppress any type of commercial activity, economic activity, for a little while. So I think the way we look at it is an optimistic take on this would be maybe by the end of February you start to have economic activity starting to come back. Not that you’re not going to see little jumps in travel here and there. People are running around. Obviously travel is going to do better. But in terms of the economy getting back open, maybe you start seeing that in March more broadly. It may be April, it may be later, but let’s just assume March 1 is a very optimistic way of looking at it. It still means that the first quarter is going to be bad. You’ve got January and February are going to be bad. Nothing is happening. We don’t have our January data out yet, but I can tell you what’s happening and that is very little other than people getting sick.

Leland

So you’ve got bad data. Q1 will look bad. The recovery story starts in Q2. And then there’s a question of how intense will this be? Will Chinese consumers… The story I hear ad nauseam from just about every one of my hedge fund clients is Chinese consumers are chomping at the bit to go spend, spend, spend, spend. I mean, that’s never been true of Chinese consumers, but let’s assume that they’ve been pent up, they want to spend. So that’s unclear. There’ll be some pent up spending. I think the big issue here is firm behavior. So in 2022, China Beige Book, probably the single most important conclusion takeaway we had from all our data was that firms told us, and thousands and thousands and thousands of firms told us that until COVID Zero was pulled back, they weren’t going to invest, they weren’t going to borrow, and they weren’t going to hire. They just weren’t going to do it. And that’s why you never saw any bounce backs after the lockdowns were eased along the way. Now COVID Zero is pulled back, COVID itself, the initial wave at least, will be passed as soon firms will start reinvesting.

Leland

So you will get a cyclical bounce back from that coming in the next couple of months. That’ll be great. Then maybe you have consumers spending on top of it to some degree, at least in the early going. The question is then do you have stimulus on top of that? Probably so in the early going. How moderate, modest? Mild? We’ll see. But look, you have the potential because this is the base of comparison, 2022 has been so bad, you have the potential for this beautiful cyclical bounce back for a time. But I think that the last point I would make here is 2023 has the potential to be a giant head fake because you’re going to see this cyclical bounce back. You’ve got all these things lining up. Maybe they stimulate and get the bigger numbers. Maybe they, they hold off and, and get just pretty good numbers. But this is in the larger context of a major structural slowdown. And so you’re going to see the numbers come up and then you’re going to see the numbers go back down and whether that’s the end of the year. We have an internal discussion about this.

Leland

Our chief economist Derek Scissors and I have different opinions on this, but he thinks it’ll go longer, a little longer than I do. But let’s say it’s two, three, four quarters of elevated growth and then you’re pushed back down again at the end so 2023 has a potential to be this nice year, particularly in the middle. People are going to start talking about the old China’s back, the old growth models back, the old stimulus playbook’s back. I don’t think any of that’s true, but you will see better times, better numbers, certainly in the middle and towards the end of the year. And then the question will be, where are we going from here? And I think it’s pretty clear we’re going to continue on the structural slowdown. But then that’s when the big questions about stimulus and whether they want to do any types of uturns, that’s when these got kickbacked in and become really interesting.

Tony

Okay, just to clarify a couple of things. First, you guys get new data every day, right? This isn’t a monthly or quarterly thing. You’re always getting renewed data on the Chinese economy, is that right?

Leland

Yeah. Back in the old days, we started over a decade ago. We were doing a quarterly survey because people said, you can’t get in for you. You’re not even going to be able to do a quarterly survey. It was smaller. Now we are not just releasing data quarterly and releasing a monthly. We have data populating our analytics platform on a daily basis in real time as the surveys are being conducted. So it’s daily to the extent that during survey periods, we’re populating the platform daily. So we don’t release the information daily because you got to be careful in what conclusions you’re making before you get your full set of data. So we release it monthly, but we populate the platform on a daily basis.

Tony

Right. I just asked that question because you’re not talking anecdotally, you’re talking about real data when you make the assertions that you’re making. Right.

Leland

Always perfect. Usually good.

Tony

Mary, what are your thoughts on this in terms of what you’re seeing right now and what you see in terms of the ramp up? What are the things that you’re really watching to know that a ramp up is happening?

Mary

Well, first of all, it’s great to be on with you guys again, and great to be on with you guys who I’ve known for a really long time. So thanks for inviting me. I agree with what Leland said. I think we should put it also in a broader context. You know, the idea that China is going to snap back to the kind of the Gogo days of the 2000s also has to be seen in light of the regime and its its view of economic growth. They don’t think about economic growth in the way that we do. The economy serves the party. Everything serves the party. And Xi Jinping was brought in to crack down on the excesses of corruption in the elite circles. He has done that. He moved on to cut off the heads of a lot of the corporate leaders and to rein in some of the more successful enterprises in the country. That’s not going to change. So in order to go back to the Gogo days, it’s not just about reopening or stimulus, it’s what is the extent to which businesses will be allowed to invest and take risks? And Leland raises a great question here about their willingness to do that.

Mary

How has behavior changed over this crisis? We don’t we don’t know yet. There’s another macro factor here, of course, which is demand for the goods that are being produced in China. We’re in an unusual situation where you have kind of the three pillars of the global economy, the United States, Europe and China really not positioned or implementing policy for growth, sustainable growth. And so that’s a factor as well. I think it’s interesting to see, and very predictable, by the way, to see Xi Jinping and his cadres kind of fan out and try to lure in particularly the Europeans and the labor government in Australia to renew their relationship with the regime. The Australians just in these last days came out and said that they had gotten close to some sort of trade they thought with China. Remember that Xi Jinping punished that country for some very principled stance that they took on COVID. I would expect that to continue, and I’m sure that the Germans and the French and the Australians and others will rush back in. But as Leland said, they may do well in the near term, but it could be a real suckers game in the long term. So I would absolutely caution against that.

Tony

Sounds like a really delicate year for China. Again, I think the prevailing sentiment is there’s all this pent up spending waiting to go, and it sounds like that’s not really what you’re seeing. And what about the lead times for some of these manufacturing firms to get back up? Is that a month or two months? So if we say March 1, hypothetically, is the date that things start, if all these factories started on March 1, would it be say, six to eight weeks before things are really moving? Or is it quicker than that?

Mary

Is that from you, for Leland?

Tony

Anybody? You guys all know what you’re talking about.

Leland

I could start then Mary can correct me. I think there’s a very fast turnaround in terms of how fast they can get up. The question is, what are they turning around into? The global economic situation is not terribly good going into next year. And the Chinese manufacturing sector has been going like gangbusters for years because it was producing for the world as the world was stimulating and the world was otherwise shut down for COVID. So the manufacturing numbers we’ve seen for years, up until relatively recently in 2022, were just unbelievable. So the idea that manufacturing can get back up pretty quickly, I think that’s fair. But the idea that there’s going to be a manufacturing sector and demand that will export market that will be there for this manufacturing sector the way we’ve seen the last couple of years, I don’t think that will happen. So manufacturing is unlikely to be this big driver over the next year or so and beyond. It was for a couple of years. It’s not anymore. The big idea here now is, oh, well, look, they’re going to rebuild property. They’re going to fuel a push a bunch of credit back into property, and there’ll be growth there.

Leland

I think that’s totally oversold. They’re going to do that a little bit, but they’re not going back to the old days. And then the question is this Chinese consumer. The Chinese consumer. I mean, how many times in the last decade have I had an interview about the Chinese consumer where people are like, we’re on the cusp. They’re going to take it away.

Leland

So, look, it’s a long, long myth that a lot of people on Wall Street pushed as a marketing ploy in order to get money sucked into China. So it’s never been true. It’s not going to be true. You could see a few months, maybe even a few quarters of retail sales bouncing because maybe there is pent up spending, maybe there is stuff to do. Services certainly bounce back when you’re talking about travel and other things. But look, do you have a robust enough domestic economy to sort of push this through? Well, you got enough to to give China some decent growth numbers for 2023. But this idea that Chinese, the Chinese economy resuscitated is going to be a global growth engine, I mean, that’s total nonsense.

Mary

We should also just talk about what was that growth engine to begin with. It was exploitation of labor. It was mercantilist policies. Yeah. It was ripping off all of the great innovation produced in the United States and to some degree also in Europe. That was the model. And I think you had a lot of credulous reporting in the west touting this kind of new version of capitalism that actually wasn’t capitalist really at all. It didn’t rest on property rights or the rule of law or fair competition or any of those things, right? It was a model to entice the capital in, to steal the innovation and to try to produce it themselves. And so it’s going to be really interesting to see, like, let’s take one sector, the tech sector. How are Chinese semiconductor companies really going to do without having American engineers over there and the export of our chips and all of our innovation, right? They’re going to hurt. They’re going to hurt bad. And you’re going to see that across several industries. I think this also really exposes the myth of Chinese competence. I mean, this is something I should say CCP competence.

Mary

There are many very innovative Chinese people in the United States and elsewhere and in the mainland who just, unfortunately, are stuck in the middle of this horrible system. But I’ve been talking to clients about this for years now, this idea that there’s some kind of far sided newfangled way to manage an economy. And, wow, look at the results. Well, gee, look at the results. Now we’re reopening and we’re figuring out that, hey, they’ve spent almost three years now doing absolutely nothing to prepare for the reopening, to figure out how to import drugs or develop their own that could deal with the symptoms of COVID So now they’re importing paxovid and they’re selling it at high markups to the rich people in Beijing who can afford it. And everybody else, good luck to you. I think that the scales have fallen from the eyes of a lot of investors and importantly, a lot of operators, American or otherwise, who really woke up during COVID and are waking up now in this reopening, looking at the supply chain disruptions, really for the first time asking, honestly, how much money can we really make here? Is it worth the risk?

Mary

What is my risk profile and what’s the trajectory of that risk profile? And they’re coming to the conclusion that actually it’s not what it was cracked up to be. And ultimately, I think that’s a good thing because I think that pulls capital to other parts of the world that, frankly, are friendlier to us and also far more predictable in the business environment.

Tony

Okay, that’s a great point. Sam, you talked to a lot of US investors, of course, and is what Mary is saying. Are you seeing that as well, where us investors are seeing through kind of the myth of CCP competence? Like, Mary, I’ve been talking about it for years. I know Leland has as well. And do you see us? Investors catching on to that, or is this something that I just kind of wish would happen?

Sam

Oh, no, they’re 100% catching on to it. Businesses are catching on to it, et cetera. Right. Because now it’s more of a risk to have that long supply chain and to have that supply chain based at least partially or mostly in China. Right. That is a significant risk not only to call it for headlines or headline risk, but also to actual revenues and earnings. Right. You miss out on actual sales. You miss out on margin expansion. That’s really becoming something that people are really paying attention to, that investing in people, plant and equipment is something you have to do closer to home. It’s not something that you can do with unfriendly neighbors. Yellen called it French shoring. I call it reregionalization. I prefer mine over hers. But I do think that there’s a lot to be said for that. There was an interesting quote from the United Airline CEO that said, “listen, we’re overstaffing by five to 10% because it costs a lot less to overstaff than it does to miss out on those revenues.” And I think a lot of manufacturers, a lot of US based companies are figuring out that it’s a lot cheaper in the long run to invest in Mexico or the US. Or maybe in parts of Eastern Europe for your plant and equipment than it is to lose out for years with a very volatile system in China.

Tony

Yeah. I’ve said this several times on the show. Pre global financial crisis, there was this China plus one, china plus two, China plus three strategy that a lot of Japanese companies were trying to look at. And the financial crisis went through, and everyone kind of shrugged their shoulders and said, look, it’s just cheaper to keep everything in China, so let’s not proceed with that. My concern is that these Western companies who have invested so much in China over the years, as China reopens, they’re just going to forget about kind of 2020 through 2022 and go, “oh, what the heck? We’ve already got that fixed investment there. Let’s just keep things as they are because the status quo is easier. We’ve got a new CEO.” They don’t want to figure it or whatever. Right. So is that likely to happen? Do you think American firms. And Sam, if you can start on this, do you think American firms are likely to just leave their capital in place and not diversify? Or what’s going to happen there over the next, say, two to three years?

Sam

Well, I would say that maybe they would want to. Maybe that would be something corporate America would do. Because corporate America tends to be rather short sighted in some instances. But you’re having it mandated. The chips act is probably call it the first shot over the bow, so to speak. Diversify your supply chains and put them in the US. Or put them in a friendly country. That’s the first stage, right? That’s the first kind of we’re going to force you to do it, period. And not necessarily force, but we’re going to highly encourage you to do it and we’re going to encourage you to do it over a fairly short time frame. So it’s not simply what corporate America would prefer to do. It’s what corporate America is somewhat being told to do. And I think that you’re going to continue to see that type of legislation, that type of tax incentive, continue to be put out there for various industries, particularly of relevance to defense and staying ahead in technology generally. Those areas are going to become much more difficult to outsource to save a couple of dollars on the bottom line.

Tony

Yes. Leland, what are you seeing on the ground? Or what are you hearing on the ground?

Leland

In terms of companies moving in terms.

Tony

Of companies moving remaining commitment to diversifying their supply chains, is that just a narrative that we’ve heard, or are people actually moving in that direction?

Leland

No. I think it’s finally happening.

Tony

Okay.

Leland

For years. There were all these reasons to be doing this contingency planning and no one did it. So you had geopolitical tensions. Companies refused to change their ways. You had the trade war, companies still refused to trade their way. You had COVID, people still refused to trade their way. It was really COVID Zero. That sort of broke the camel’s back on this. And so the combination of all these things, the fact that Expats didn’t want to be there, the fact that supply chains were just clearly breaking down, and the discussion points in the corporate boardroom changed from saying, look, we need to maximize profits, we need to maximize earnings per share. This is about efficiency. The conversation pivoted to this is about security. This is about making sure that we are not cut off, that we are not in a really bad position, and the politics are backing that up. So I think you have had a move from corporates more and more to take this seriously. Everybody has a plan B or plan C now. Some can move their supply chains easily. Some, like Apple, are going to be just toiling for years trying to get this right.

Leland

So it’s different depending on the size of the company and the industry. But I think this is a major issue. What I think is going to happen as well is that a lot of companies are saying we need to pull out supply chains. That is, previously Chinese production is producing for the west. So they’ll still funnel money in investment into Chinese production, but it’ll be for the Chinese domestic market. And then the rest of this will be supply chains pulled out for production demand ex China. So what you’re actually seeing or will see in the coming years is a bifurcation of production, supply chains, et cetera, going forward. So I think that’ll be inflationary. That will be costly. Corporates have resisted it for a while, but the risks of something bad happening, either geopolitically or through COVID or through something else, have just grown so significant that shareholders are finally demanding that companies do something about it. So companies finally are.

Tony

Yeah, sorry, Mary. I suspect that seeing companies pull out of Russia really abruptly, although it was a relatively much smaller opportunity for most, I think that may have emboldened people to be more assertive on China over the last, say, nine months. Mary, are you seeing that? And our investors from the investment community, do you believe that people will have a tolerance for that?

Mary

Yeah, I was actually just going to raise Russia. Totally anticipated.

Tony

Sorry, I’m sorry.

Mary

Take my thunder. Yeah. Actually there was a very interesting no doubt this morning from Euro Intelligence, which is a great little newsletter, I really recommend it of a St. Gallen study, and I’m not going to repeat it because it’s a subscriber only newsletter, but essentially the argument was, hey, we looked at how big was the actual pull out from Russia? And it’s not as big as you would imagine, but I do think that it jolted investors and sometimes it takes moments like that for investors in particular to realize, wait a second, my world could change on a dime. Have I really thought and planned for all of these scenarios? And I think that, yes, indeed, it was a very major event and a real wake up call, not just for investors, but also, as I said, for operators. There’s one other theme that I’d like to mention here, and I may have said before on this show, Tony, but that’s the concept of strategic narcissism. This idea that it’s all about what are us investors doing and what’s our next move? Well, China itself is planning, and not just planning, but activating the dual circulation strategy of Xi Jinping.

Mary

And what’s the goal of that? It’s to disentangle them from us. It’s to pull us in, get our capital, get our intellectual property and our expertise, train up their people and then kick us out. And that is a stated policy. You don’t need a security clearance to know about this. And I think we just didn’t pay attention, but I think investors are paying attention now. And so, again, it will be fascinating to see who the Patsies are, primarily from Europe, who go right back in and fall right back into this trap and give them all this valuable expertise.

Tony

I think we saw that in December when screwed. Yeah, I think we saw that in December when a bunch of German executives went there and just did everything.

Mary

I mean, Macron is going over. And we should talk, too, about Washington stance because let’s be honest, this is a very complex, difficult relationship to manage. I have an enormous amount of sympathy for the Biden team in what they’re confronting here from China because I’ve worked in that job and it’s hard. But I think it is also notable that you’ve had now a Republican and a Democrat administration in the United States, really recognize that this is not the partner we thought it was. And that’s where the Chips Act comes from. And they have expanded much of what we started in the Trump administration, to their great credit. Whether it’s expanding the relationship with our allies or taking some more of these steps to protect our strategic industries, I would not expect that to change. But it’s important to remember that as we take these measures, you also have to look at what is the regime saying about its goals and plans. Right. That in there. I think the direction is just very clear. They want to disentangle from us, create their own economic sphere through their Belt and Road to have their own market, and they want to pull allies of ours and partners like Saudi Arabia, like Turkey, like Brazil and others away from us and into their sphere. That’s the investment world that we’re confronting. It’s a brand new era.

Tony

Right, so Mary, you jumped into kind of China’s place in the world, and this was one of our key topics. We’re going to talk about. For people who are watching, who don’t understand. You advised Mike Pompeo as Secretary of State on many of these key issues. So what the person sitting in that seat today and going forward, how has that changed from, say, ten years ago? What are you watching today from, say, ten years ago? I remember when the Trump administration came in, there were all these cries of kind of free trade. Like, you can’t do these things because of kind of free trade, which is kind of a 1980s era, really sweet dream when that equates all to, say, zero tariffs without incorporating things like non tariff barriers and subsidies and other things. So do you believe that State and treasury and other organizations are now smarter about things like non tariff barriers and subsidies? Because certainly the WTO isn’t. Okay, so I believe the US. Administration. I’m hoping the US administration more constantly is paying attention to those things.

Mary

Well, I wouldn’t count on Treasury to get realistic about anything. It’s usually headed by a guy from Goldman who just wants to go in and do as much business in Beijing as possible on whatever terms, and then come back to the United States and talk about how great China is. Right? He’s kind of the useful spokesperson for the regime. And we’ve seen that repeat over and over, Trump administration. Hey, I too was one of those people, I’ll admit it, who said, “I don’t like the tariffs. It raises the cost to US consumers. That’s bad, bad. We can’t do that.” And then I got into the administration as the Secretary’s senior advisor, kind of his right hand person, strategist, whatever you want to call it. And what I realized was just how little leverage we actually had over the regime, how bad the behavior was, and how unfair, fundamentally unfair the relationship was across a number of areas. And so you can set ideology and demoralizing about it, set that all aside. It is very simple, I think, for US businesses and investors to understand, hey, we really just want a level playing field. If that’s the approach you’re going to take.

Mary

Right? Americans intuitively understand the concept of fairness and fair competition. We were never going to go from China as a friend to China as an enemy. Right? There was going to be an awakening and a process there. And so that started under the Trump administration, and it has continued under Biden. And so we call them a competitor. Well, that’s not actually accurate because if you’re competing, you’re agreeing on the rules of the game and the rules of investing in your respective rights as you trade or invest or whatever they don’t, period. And so that’s a problem for us. So eventually, I predict someday we will get to that point where we really level with the business community, with the American people, and the rest of the world. We say, no, they’re actually an enemy. Europe is moving in that direction. Remember, in March 2019, the EU called China, quote, economic. They said “competitor,” but they also called it a “systemic rival.” Okay, that’s a little bit different. So they’re starting to move there too. But, you know, we’ll have fits and starts. We didn’t figure out our strategy to confront the Soviets for decades. It took us a very, very long time, and we had great and robust debate about it.

Mary

I think the same thing is going to happen here. But like the Soviet era, I think the trajectory of it is clear. We’re recognizing what it is. Investors are recalibrating just how much they want to risk there. And operators, as Leland said, we’re looking at the feasibility of diversification because I don’t think anybody in their right mind believes that we’re going back to the good old days of the 2000s.

Tony

Okay, that’s great. And I guess, Leland, the question that comes to me after everything that Mary said is if we are truly competitors, and if those in some magical hypothetical world where all the rules are agreed, can Chinese companies generally and I know that’s a big generalization, but can they generally compete with, say, German and American companies? Do they have the ability outside of, say, cost, to compete in global markets?

Leland

Some can, but Beijing won’t let them. I mean, look, if you’re looking at Alibaba and Tencent, these are not Chinese data companies. These are global data behemoths. Tech behemoths. Extremely impressive. I mean, some of the stuff they were doing, we’re blowing our tech companies away. So can these companies compete globally? Sure. Is Beijing clipping their wings right now? Yes. So the question is, will Beijing let them compete? But there’s another part of this. If you’re seeing a movement towards the state sort of gobbling up just about everything. They’re gobbling up debts on one side, they’re gobbling up companies on the other side. You’re seeing golden shares being taken and all these big tech companies and other companies, too. And so what’s going to happen to these companies? Well, you’ve got them answering first and foremost to the state. Has it always been true? Sure. But it’s very different when you’re answering ultimately to the state or whether you’ve got party hacks yelling in your ear on a day to day basis about the direction of strategy. So to the extent that they keep doing this, and it looks like they’re doubling down and tripling down on this as we speak right now, then this is dramatically going to affect their ability to compete with Western firms on a global stage.

Leland

So this is a favor that the party is doing for the west in terms of clipping the wings of these Chinese companies. They would be able to compete. Many of them would be able to compete, but they’re not going to be allowed to.

Tony

Great. Okay. It’s a really valuable perspective. Sam from the perspective of, say, Western portfolio manager. If you’re evaluating Chinese companies or Chinese sectors, what are the special risks that you have to pay attention to, and how does that factor into your, say, valuation or other calculations?

Sam

That’s a broad question.

Tony

Yes.

Sam

If you’re an EM manager that’s tied to an EM benchmark, that’s going to be a big China allocation. If you decide that you want to be underway China, you’re going to be way outside your bench. And you’re potentially going to be in some trouble if they begin to rally. If you’re not tied to a benchmark, it’s a lot easier to look at the Chinese investment landscape and say, what are the risks here? And one is that you’re going to have significant government intervention without warning. That I would say is the number one risk. Number two would be what is the real ownership structure here of the securities I’m buying? Most investors would not be able to purchase the actual shares in the company. And number three is, what are the chances that I get Russia on this at some point? Whether it’s China decides to sell defense equipment to Russia, and all of a sudden, you have some pretty significant, instantaneous reactions from the US. And all of a sudden you’re donuted on all of your investments. And that’s an existential risk as a money manager. If that’s a three to 5% risk, that’s one thing. It begins to escalate to a 10-20 percent risk. That’s another thing. And while it’s a significant tail, it’s not a 0% risk. So I think those are the top three things that I’d be paying attention to on that front.

Sam

And the other one is how exactly do you define a state-owned company in a world where most at least have some sort of stake from a government entity? And I think that’s the other one. To Leland’s point that when your governance begins to break down, that’s the number one flashpoint. And there was a very large hedge fund that announced late last year that they were no longer going to do Chinese tech equity investments on public markets. That was pretty shocking. They were one of the larger investors in those securities. And they just said, no, not anymore. We’re not going to do any incrementals there. So I think there’s a number of call it cross currents to really getting behind investing in China. There’s a lot of derivative ways to do it that are a lot less risky. If you want to play the second or third quarter rebound, you don’t have to buy a Chinese equity to do it.

Sam

You can buy Australian Equities. You can buy mining equities. You can buy commodities. You can even buy European manufacturers. If you have really bad manufacturing numbers in the US. And you’re up on the margin, and all of a sudden, you begin to have a flood of orders on Capex from China that are pent up. That’s a significant tailwind to companies that have a lot less governance risk. And a lot less currency risk. I think if you’re looking to call it play a China reopening or play the Chinese economy, you don’t have to take the risk of buying the equities that are Chinese labeled.

Tony

That’s a great point, and I love the way you kind of triangulated that. So that’s excellent. It’s also a good kind of move into our last segment on kind of the party’s economy, and we’ve covered this in a lot of different ways up until now. But I think what I’ve been most surprised by over the last several months is the assertiveness of the Chinese government, not just with Chinese companies, but also with Chinese tech companies, which has really been the last couple of years more intensely, but also foreign companies. So it’s almost as if there’s a view that anybody doing business within the borders of China is, by extension, almost a party extension. Is that fair to say? And there are two big automakers, one German, one American, who sell more cars in China than they do in their home markets. Right? And so does it come to a point where firms like that start being seen as extensions of the party? So, Mary, why don’t you start us off? And then, Leland, if you can help us think through that.

Mary

Well, just definitionally. The PRC is a party state. The party runs everything. You can’t differentiate between selling a Mars bar in China and selling them military equipment that could help them build hypersonic missiles. It all is for the party before anything else. That’s the most important thing to understand. And I think if we had won a second term in office, that’s something that we would have socialized more broadly, because that’s, of course, what investors that’s how they’re going to try to split the baby, right? They’ll say, well, hey, look, we’re not investing in hickvision in the surveillance state that was put to such use now after the protest and in places like Xinjiang. But, hey, it’s okay. We can make T shirts and jeans in China, and that’s all fine. We’re not really helping the regime. Well, yeah, you kind of are. So you can’t separate doing business in China from the party. And the party itself never viewed the opening up to the rest of the world as embrace of our system. They viewed it, as Aaron Friedberg put in his book, getting China Wrong. They viewed it as a bird in a cage. It was something that had to be harnessed but always controlled.

Mary

And what we’re seeing now is the actual face of party control. And that’s not going to change because it’s not due to a single man or a single leader. It’s due to a system in which we’re doing business. It’s unfortunate but true. Now, we’re not going to decouple from China. That is a fantasy. There’s too much invested capital there. It’s going to happen in stages, or as has been mentioned earlier, it’s going to happen due to a shock like Russia when we’ll just all be forced to pull out. But will US automakers leave China tomorrow? No. But if you have a Russia situation, they may be like situation where China invades Taiwan or does something else extremely provocative. They may be forced to.

Tony

Right. Thank you. Leland, what are your thoughts on that?

Leland

Yeah, I agree completely with Mary. I think that this highlights the next big US political issue because if you look at what the Select House Committee on China, which is just getting put together by the Republicans at the Bipartisan committee, it’s going to focus on China. It may be the only part of Congress that actually works. It may not work, but if anything works in the next two years, it probably will be the Select House Committee on China. The big issue that I think that they’re looking to tangle to address is investment flows into China. And there’s two elements to that. The first is that we’ve spent a long time not being able to identify what’s going where or even how much of it. So there’s recent studies, the recent tracking shows that the amount of portfolio investment that’s going into China, the investment flow, it’s just many, many times what we thought it was before because it’s going through separate jurisdictions and it’s sort of making its way back to China. There hasn’t really been transparency on where all this money is going. So essentially you’ve got a huge investment flows that are going from Americans, American firms, American households going into China.

Leland

And to do what? Some of this may be buying something that’s relatively benign. Some of it may be going into parts that did fuel missile that could be shot at US troops down the line. There’s no transparency on it. So the first order of business will be to get clarity on what the situation looks like. Where is this money going? How much money is it? And then there’s a question like what do you do about it? So the question is, Mary brought up a point there’s no black and white line between here’s civilian and here’s military. But because she also brought up the point we’re not going to completely decouple, it means we’re going to be drawing these artificial lines based on what’s reasonable, what’s practical from a national security perspective in the coming years, those lines will move over time, as she said. But we’re going to have to draw, at least draw them, because we’re not drawing them very well right now. And that means figuring out, okay, well, this money is going towards the party and helping them do X, Y and Z. And we don’t like that. This money is going towards inputs into the tech sector which are helping build up their military.

Leland

We don’t like that. So we’re going to see more and more focus on making sure that investment flows are not going to things that Americans, by and large are very uncomfortable. One, they don’t know, but if they did know, they’d be very uncomfortable to money going that way. So this is sort of the next step in the entire decoupling drama. All of this is going in one direction, but it’s slow because it’s cumbersome and there aren’t bright lines. Not all of it’s obvious, and a lot of it has to do with Chinese behavior. If the Chinese are acting up around Taiwan, that’s a different set of circumstances than if for some reason we need Chinese assistance or support for something else that’s going on around the globe. So we’re going in one direction. This is going to be the big issue in the next couple of years. But it’s a slow plotting movement. That’s correct.

Sam

And to Leland’s point, from an investment perspective, it’s worth remembering. There’s a nontrivial amount of SP 500 sales and the growth over the last decade, two decades that have come from China, mainland China, right. If you look at Apple, if you look at Starbucks, Yum Brands, they split out GM.

Leland

Every chipmaker.

Mary

Every chipmaker.

Sam

Caterpillar, John Deere. There’s a significant amount of what I would call, “earnings risk” to an escalation of this type of rhetoric that shouldn’t really be ignored. There’s a tremendous amount of revenues and earnings that emanate from the mainland, at least in one way or another. Two very large, very high weights in the SP and other indices that maybe should get a little more attention as we move forward. Because if you begin to have call it tip for Tat type rhetoric it’s pretty easy to say, well, maybe Nike shoes can’t be sold now because we don’t like where they’re made or Starbucks is being investigated for the water quality. Right. There’s a lot of ways that you can have some pretty interesting movements here that kind of fly under the radar a little bit, but should not be ignored.

Tony

Very interesting. The American regulatory state applies to Chinese investment. That’s interesting. Guys, let’s wrap it up. One last thing. What are you thinking about China that you’re not sure that other people see? What do you think about that you wish other people saw, even if you already mentioned it? What’s the main thing that you’d like to underscore, that people need to see about the Chinese economy, US-China relation, anything we’ve talked about? What is that main thing? Ladies first, Mary. I hope I can still say that.

Mary

Yeah, of course. I love that. I think it’s the realization that the longer you’re there as an operator or manufacturer or an investor, the more you will be forced to do things that you would never do in any other jurisdiction to make certain choices of including a party member on your corporate board or requests for bribes, or tolerating a kind of risk to your staff or to your reputation that you would never tolerate if you were doing business in, say, you know, Australia or Colombia or somewhere somewhere else in the world. And so I think that China exception is going to go away. And I don’t see why we aren’t talking more about just how great the Gulf was between what we tolerated in China and what we tolerated in every other jurisdiction in the world. And increasingly, I think we’re going to talk about that, recognize it and act upon it.

Tony

All right, Sam, what are you saying?

Sam

I would go back to what Leland said about the head fake. I think that’s one of the most important things for investors to think about going forward, because it’s going to look like a wave in a lot of ways when you begin to have ordering of manufacturing goods and services out of the west again. And it’s going to look like a wave, and it’s going to look like we’re all getting back to normal, and then it’s not. Right? If Covid was an earthquake, this is an aftershock, and it should be treated as such. Yes, it can probably be treated and there will probably be some great returns, but that shouldn’t be extrapolated forward. That is one of the real critical dangers here, that investors get trapped and thinking we’re back to some sort of normality and we’re after normal. So let’s not forget that.

Tony

Yeah. One of the things that the Chinese Information Ministry is fantastic about is creating an air of inevitability around China. Right. It’s inevitable that they are the predominant economy. It’s inevitable that you have to put your manufacturing there. So I think what you’re saying is really important, Sam, like, don’t be misled by the head fake and make sure you separate the PR from the reality of the cycle.

Sam

Trade it, don’t invest.

Tony

That’s a great point. And Leland, what’s your last point? I think it’s really important for us to close out with you. Yeah.

Leland

I strongly second both what Mary and Sam just said. But I would add one piece of advice, and that is, when evaluating China, react to what not to what they say, but to what they do. I cannot tell you how many supposedly sophisticated investors react to Bloomberg headlines as if they are a reflection of actual policy. We make fun of this on our Twitter feed. We talk about stimulus 500 times a month. There’s something in which the Chinese announce some form of stimulus, ramping, rail stimulus, some sort of stimulus, this stimulus. And we saw during 2022, people react to that. It just wasn’t happening, you know, so so don’t react to these. With this, you know, shift to consumption. Yeah. Investments falling, but consumption, they’re doing nothing to structurally incentivize a shift to consumption. If they do, we’ll identify it, we’ll talk about it. It will be very interesting. But just because it’s in a headline, and just because someone like Leo Hood, Li Ka Chiang, someone comes out and makes a speech about how China is going to do this, it doesn’t mean it’s actually happening. You got to actually look at what’s happening on the ground, because 90% of the time, they just like to say stuff.

Tony

Yeah, that’s perfect. Guys, thank you so much. This has been incredibly valuable, and I know that everyone who watches it is going to get a huge amount of it. So thanks for your time. We hope to see you again and really appreciate all of the value and stuff you’ve shared with us today. So thank you very much. Have a great weekend.

Mary

Great, Steve.

Sam

Thanks. Take care.

Podcasts

BFM Market Watch: King Dollar Deposed For Now

Post author By admin
Post date January 19, 2023

This podcast was first and originally published on https://www.bfm.my/podcast/morning-run/market-watch/bank-of-japan-monetary-policy-revisal-japanese-yen-us-fed-rates-markets-outlook

The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.

The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.

He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.

Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.

Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.

Transcript

BFM

This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.

BFM

I get the hint.

BFM

Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.

BFM

After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.

CI Futures has S&P500, Nikkei, Nasdaq, Hang Seng, and nearly a thousand other assets across equity indices, currencies, and commodities. Subscription starts at $99/mo with a monthly commitment. Learn more here.

BFM

Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?

Tony

Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.

BFM

Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?

Tony

Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.

BFM

And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?

Tony

Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.

BFM

Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?

Tony

It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.

BFM

Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?

Tony

Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?

BFM

Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?

Tony

I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.

BFM

All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.

BFM

Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.

BFM

I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.

BFM

And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.

BFM

Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?

BFM

Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.

BFM

Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.

BFM

The iPad at home, but they’re quite old.

BFM

Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.

News Articles

Zero Hedge: A Country Can’t Save Both Its Currency And Its Bonds

Post author By admin
Post date January 19, 2023

This article was first and originally published on https://brucewilds.blogspot.com/2023/01/a-country-cant-save-both-its-currency.html and can also be found on https://www.zerohedge.com/personal-finance/country-cant-save-both-its-currency-and-its-bonds

I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate.

The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.

Brent Johnson of Santiago Capital is credited with coining the term the “Dollar Milkshake Theory.” It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a “grand master plan” or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global huge recession.

About 28 minutes into the discussion which came out in both video and transcript form here:

Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his “slightly edited” words;

“The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.

And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.

So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say.”

He later added “The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting”

When you think about the true motivators driving this “system,” it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we “need them” to steer things forward for the “greater good.”

While Johnson’s remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see;

Week Ahead

2023 Supply Chain: How China’s Future & Germany’s Dependence on Russian Gas Will Impact Global Trade

Post author By admin
Post date January 14, 2023

Learn more: http://completeintel.com/futures 👈

In this episode, Ross Kennedy of Fortis Analysis, Ralph Schoellhammer of Webster Vienna Private University and Albert Marko joined Tony to discuss three main themes: supply chains in 2023, the existence of China in 10 years and Germany’s dependence on Russian gas.

Ross Kennedy led the discussion on supply chains in 2023, and he explained that although supply chain issues have appeared to normalize over the last 4 months, with trans-Pacific shipping rates falling to levels at the start of the Covid pandemic, there are still things to watch out for in the upcoming year.

Albert Marko led the discussion on the prediction that China will not exist in 10 years. This claim was made by Peter Zeihan, a geopolitical analyst, during his appearance on Joe Rogan’s podcast. He went on to say that some of Zeihan’s predictions sound impressive, but he and Ross Kennedy both have doubts about the validity of this claim.

Tony pointed out that similar predictions were made by George Friedman in his book “The Next 100 Years” (2009), where he said that China would split into 5 countries. However, both Albert and Ross argue that China’s economy, military, and political power are too strong for this to happen in the near future. They also highlighted the fact that China’s growth and development have been hindered by the pandemic, but the country has managed to recover quickly and is still a major player in the global economy.

Ralph Schoellhammer led the discussion on Germany’s ongoing dependence on Russian gas. He wrote about how the green push in Germany has led to a decrease in the country’s dependence on Russian gas, but there are other considerations. He explained that the Russia-Ukraine War had a major impact on Germany’s dependence on Russian gas and that when the war stops, it is likely that Germany will welcome Russian gas again. He also highlighted the fact that Germany’s dependence on Russian gas is not just a matter of energy security, but also a matter of economic and political considerations.

Key themes:
1. Supply Chains in 2023
2. Will China exist in 10 years?
3. Germany can’t quit Russian gas

This is the 49th 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
Ross: https://twitter.com/maphumanintent
Albert: https://twitter.com/amlivemon
Ralph: https://twitter.com/Raphfel

You can also listen on Apple Podcasts: https://podcasts.apple.com/us/podcast/complete-intelligence/id1651532699?i=1000594418263

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by two new guests. We’ve got Ross Kennedy. You may know Ross as Huntsman on Twitter. He’s with Fortis Analysis. And we’ve got Ralph Schoellhammer. Ralph is at Webster Vienna Private University. And we have the honor of having Albert Marko with us again today. So there’s a lot that’s happened really over the past couple of years around supply chains. And we’re going to kick off talking about supply chains in 2023, and Ross is going to lead us on that. But next we’re going to look at China. There have been some claims made about kind of existential claims made about China over the past couple of weeks, and Albert is going to walk us through those. And then finally, Ralph is going to help us talk about Russian or sorry, German energy and German dependence on Russian gas. So let’s get into it, guys. Thanks for joining us. Ross, you know, I’ve seen a lot on Twitter. You’re you’re talking quite a lot about supply chains. And in 20 and 21, you really opened a lot of our eyes to some of those issues.

Learn more about the CI Futures app: https://www.completeintel.com/futures

Tony

So I’ve wanted to have you on the show for a long time. On the screen right now, I’ve got a chart of shipping rates, Asia to us, west coast seafood rates, and those obviously ballooned up in 21, came back down in 22. And we’re kind of now down to about where we were in Q, one of 20. So the last four months, things have really started to calm down in terms of the costs.

But I guess really what I want to get into with you is, are supply chain risks a thing of the past? You know, what should be we be looking for in 2023? I guess that’s let’s just start with that. Are they a thing of the past? And what should we be looking for in supply chains in 23?

Ross

Yeah, I think supply chains have changed in terms of the scope of risk. Certainly it shifted from one to the other. We had a short term risk that was very systemic as far as manufacturing in China being completely disrupted, the ability to ship out. And then we had the entire issue of people changing their buying habits basically by force as far as lockdowns from a lot of events, a lot of entertainment, a lot of things where their dollars are being spent on, not physical things that actually have to be chipped. And all of a sudden, everybody took that spending, they took the stimulus money, and they just began buying things that were feathering their nest or occupying their attention. And so you had the disruption not only of lockdowns, not only of that, but you had this very enormous shift in purchasing from experiences or non tangible things to physical things that have to be shipped. That’s why you saw the run up in stock for Amazon and numerous others, it was because people were doing that right. So we had this enormous crunch that was driven by that fundamentally. And now we’ve seen we have the bullet effect.

Ross

Inventories were dramatically over ordered and now we’ve got inflation happening. So inventories are full and demand is down, particularly on the transpacific trade to the West Coast, the US. China. What we have seen, though, is that there has been container volume shifted to the Gulf. It’s also shifted to the East Coast because we’ve had the risk really since July of last year of longshoreman strikes. And then you have the concurrent risk of rail strikes coming off the West Coast. So we have seen some volume that’s still in place shift. But depending on who you are as a company, we’ll determine if that has actually your supply chain problems have begin to unwind a little bit or if they have really only begun or if they’ve just changed as far as what they are. If you’re a retailer in the US, you really just started shipping over the East Coast if you’re concerned about West Coast risk and you still have to move inventory. But that’s assuming that now the lockdown, lockdown, lockdown, no lockdown, back to lockdown and now no lockdown again with people out sick right in front of the Chinese New Year, if that hasn’t dramatically impacted your business.

Ross

There are some sectors that have been heavily hit by that hard. The impact is less to China in some ways because they’re heavily subsidized in a lot of their industries. The impact is more so, I think, felt by the US. And I know Albert will talk about the China side of that factor. But what we’ve seen now is a dramatic disruption, really, to the way things are. Not in a foreseeable way, not in a way that a lot of people know how to forecast. In a very I would say very unexpected way where you’ve got this sort of well, not unexpected to this group, but unexpected through a lot of supply chain and planners and executives of. They went from huge amounts of demand to very little demand due to inflation here in the US. And then you also have the supply side disruption in Asia. So that’s sort of the twin monsters that a lot of North American companies and European companies are dealing with related to planning this.

Tony

It sounds to me like we have a couple of things in general that are helping to alleviate this. First is price, right? Things are more expensive and so that’s pushing down demand on a volume basis. But we also have China opening up and so that is alleviating supply chains on the supply side. So those two dynamics seem to be really helping us into 23. Have we also seen I know there’s been a lot of talk about this, but to what extent are we seeing rotation of manufacturing locations? Is that a major effect or are we in the early stages of that?

Ross

I think we’re in the very early stages of it. It takes multiple years if you’re going to uproot a semiconductor foundry, for example, which everybody’s made a big deal about, the chips act and all that. And I think Nancy Pelosi had a great run financially because of that for a while. But it takes three to four years, even five years, from soup to nuts, be able to get the process of moving something halfway around the world from one location to another. You have to make a lot of things before you install them and then begin making chips. Other things that are able to transition very quickly are doing so. Things that are fungible, where you’re essentially reprogramming a machine to print a T shirt in China versus Vietnam, that stuff is already shifting. You’re already seeing demand pick up for things like garments and textiles in Southeast Asia and India and Bangladesh. Pakistan also has gained a little bit on the textile side, but things that are energy intensive to manufacture, things that require critical raw materials or certain types of inputs that China does very well. We’ll probably talk a little bit about Zahance hypothesis with regards to China, but China is very dominant in a lot of raw material sectors, and assuming they continue to have the energy and labor available, it’s going to be a lot slower to ship that type of stuff away from China.

Ross

But things that can shift. Are you’re seeing more tires produced outside of China again, for example? So, again, it’s very sector dependent, and a lot of people want to make projections or economic plans or suggestions about the way things are on a macro scale without really understanding that in certain ways, china still very much holds the whip hand. And you won’t see manufacturing shift in other ways. You’re seeing it shift very rapidly away from China and that’ll have an impact on them as well.

Tony

Okay, so let’s take a step back to, say, 2019. Okay? We had Trump, who was trying to get different things out of China and bring things to the US. And reduce China’s centrality or centricity to supply chains. And then we have COVID come in, and that really disrupts supply chains. And then there’s this wake up call for people to kind of regionalize manufacturing, right? So this reminds me a lot of, say, 2007 eight, when it started with Japanese companies doing a China plus one, china plus two, China plus three strategy, right? That’s happening again. But after we got through the financial crisis, everyone just was like, China is easy. Let’s just go back and do that. Are we going to see that again? Are people just going to kind of shrug shoulders at the end of the day and go, people are inherently lazy. I don’t want to have to do the work to have three different sites to manufacture this stuff. So let’s just put it back in China. Is that likely to happen? Or was this wake up call the one that really pushes people to have resiliency in their supply chain?

Ross

I think, again, from a sector dependent standpoint, it’s yes and no. To the extent that if the stakeholder, if the primary stakeholder of a company is the US. Let’s say a Honeywell, for example, they will have to pull out US policies. We have reached a point that even if the US has a company is US based and they’re like, we’re going to still try to manufacture there for whatever reason, it is too much of a lift to pull out of there. In a lot of respects, xi Jinping has a vote on that too. If he wants a company out, or if he wants to just see that company’s manufacturing capacity or whatever, he’ll do it. Right. So the bad guy always has a vote on how the fight goes too. So that is one group of companies that very much can be expected to either leave on their own or be forced out in other sectors where a company can be co opted or the US. Isn’t really paying attention. Yeah, I think you’ll see the impetus to just kind of try to hunker down and ride out this ten year sort of economic cold war, if you will.

Ross

In their mind, they’ll do that as well. But again, so many of the unknowns that are driven here are the fact that China has a vast ability, if it chooses to, to leverage its own strategic advantages to push us around the anchor companies there if they want to, to kick them out if they choose to. And for whatever reason, really, outside of a relatively small group of Natsych types and people that do analysis really well, they’re not discussing what the calculus is on the other side. They’re just discussing what the US. May or may not be able to do through our own policy. At the end of the day, particularly when it comes to energy, anything that’s super energy intensive to manufacture, it’s not attractive to restore to the US right now because the Biden Administration, the Department of Energy, particularly FERC, they’re not going to get out of the way, and they have not proven to do that. So we’re not going to be able to make the fertilizers and fuels that we need to if we are continuing to drive them away with terrible energy policy and drive the price of energy sky high.

Tony

And as a Texan, I will tell you, we have all the raw materials here, right? There’s no reason for us not to do that. A lot of Americans may not like Texans, but generating wealth here really does help all of America, right?

Ross

So in my view, particularly when you talk about the Gulf, the raw capacity is there from a transportation side, from a labor side, from a raw material side, particularly energy, to to turn the south MidSouth all the way down to the Gulf into a manufacturing mega region. That that would be one of the great economic success stories of all time anywhere in the world. And that’s a policy issue. It’s certainly not a capability or capacity issue.

Albert

Yeah, the problem with that is the EPA makes a lot of manufacturing in the United States inefficient and uneconomical, just something yeah, we can’t get around it. It’s the problem.

Tony

Okay.

Ross

And Europe has done very well with a lot of that stuff as well, too. But again, it’s subsidized in Europe, some of those offsets, if you will, they’re heavily subsidized. And so the companies don’t bear that burden to the extent that they would in the US. Where that type of thing is just as heavily regulated and penalized with zero subsidy.

Tony

Right. So since we’re talking about supply chains mostly into the US. Since we’re often here, let’s talk a little bit about Germany. We’ve seen German politicians go to China over the past couple of months, and German heads of industry go to China and kind of almost double down on their commitment to China and double down on their dependency. And it almost feels like Germany is having the opposite conversation from a policy perspective that the US. Is in terms of the US. Is trying to reduce its dependence on China. It seems like Germany is just going all in. Is that a misread, what’s going on there?

Ralph

Well, yes and no. There have been voices in Germany getting louder, particularly when it came, for example, to the Chinese buying parts of the harbor in Hamburg or a German Chip producer. So there are some voices that are getting more critical, but overall, the Chinese market is still crucial for German exports. So kind of when the German Foreign Minister, Angelina Bieberk was in Asia a couple of months ago and she said, we will stand side by side with Taiwan in the case of a conflict. That kind of was immediately backpedaled by other German parliamentarians who said, well, the Taiwanese didn’t ask moral support, so we have no intention to give tomorrow support. So I guess it would be very similar to the Russia Ukraine thing. I mean, in a sense, I think what’s always very important when we look at particular German foreign policy, they are not really for or against someone. They primarily want to maintain the status quo. So they want to maintain as much as they can the 1990s early 2000s status quo. That is true in the Asian case. It’s also true in the case with Russia and Ukraine. Right. Because some people say, why are the Germans not more supportive of Ukraine?

Ralph

Or are they all in the pockets of the Russians? I don’t think that’s the case. I think German policy is to maintain a status quo when it comes to exports in China, when it comes to energy with Russia and everything that quote unquote disturbs the peace is seen as a nuisance, and they usually kind of bet on the party that they hope can end that nuisance as quick as possible. And then I think was a little bit the miscalculation in the Russia case that they originally believed that this is going to be a war like Georgia, like other earlier conflicts, that this is going to end very quickly.

Tony

And we can all pretend it didn’t happen, right? If it ends quick, it didn’t happen.

Ralph

Precisely.

Ross

And that didn’t happen too, that are like leading indicators of German behavior with regards to China. BASF is one of them. Not only is BASF not recognizing its potential position of dominance on the vitamin and specialty chemical side, it’s actually doubling down on China and expanding its manufacturing operations there, not retracing from it. And if you look at Mercedes, for example, I love Mercedes Benz as a company, and I think they make some of the most amazing machines in the world. But you’re not going to tell Mercedes, get the hell out of China. They’ll do, and they can.

Tony

But they have got Volkswagen cans. Mercedes can.

Ross

Volkswagen can.

Ralph

And as a quick second point of this, the German energy planet, we’re going to talk about this a little later in more detail, but they still want to double down, particularly on solar and wind. And they need China as a partner to have good relations with China because they control most of the supply chains in these areas. So as long as Germany doesn’t really have this often announced but never actually materialized u turn in their foreign and domestic policy, this is not going to change. So I think, as you guys correctly point out, whatever the headlines say, whatever the Sunday speeches by politicians are, I think the underlying indicators still strongly point towards not just Germany, I would say all of Europe kind of being at least economically very benevolent towards China. And I think sooner or later, with the exception of some Eastern and Central European countries, I think many Europeans would be more than happy to renormalize relations with Russia as much as possible.

Tony

Let’s get on that later.

Ralph

Okay.

Tony

Before we move on, what do you see in supply chains that people aren’t talking about, that we need to know about? What is a thing where you’re just like, gosh, why don’t people see this? What is that? What’s supply chains?

Ross

It’s food. Probably the biggest and most obvious one that comes to mind. Everyone’s talking about semiconductors. That’s an obvious one too. But that gets beat to death. And frankly, the US. Really holds some major strategic advantages with that as well that don’t get discussed enough when we talk about that issue. On the food side, though, particularly with regards to China and Russia, russia is an enormous manufacturer of certain fertilizers. That’s very true. Now. The US. Has tremendous optionality with Canada next door. We make a tremendous amount of nitrogen. We have the ability to make more. We do find for ourselves on phosphates. We have significant phosphate reserves on the potash side. Canada has the far and away the most reserves in the world and an untapped capacity to move more to the US. So I don’t subscribe at least as far as like Europe and the US are concerned to the macro nutrient issue of NP and K that you’ve heard recently and for a long term elsewhere, that Russia and China control the world on it. They don’t. We do find out fertilizers amino acids are an enormous issue. Vitamins and micronutrients. And those are the ones where, when you’re talking about there’s roughly ten major vitamins that go into animal and human nutrition, but particularly into animal feed to keep them alive, to help them grow faster, to help them produce higher quality meat and eggs and milk.

Ross

Almost all of those vitamins are 90% or more manufactured in China, most of them at 100%. When you talk about key minerals that needs to go into their diets, whether it’s a zinc, calcium, or you see sometimes manganese and magnesium added in as well. Other than Turkey, India and Brazil, most of that stuff comes from China, too. And then you talk about the big amino acids. The US. Is far and away the largest meat producer in the world per capita, even more so than China. But we make about 40% of the amino acids needed in the diet. So we make far and away adequate supplies of DDGs or soybean meal that we use as the crude protein and the crude fiber. But the other 20% of that is completely, almost completely controlled by China. And then BASF and one other company based in Switzerland. And so if they turned off the tap on that, I hope you got it, that she’s not watching this, they turn off the tap on that, it would be crushing for our food sector.

Tony

So is there anybody who’s talking about rotating that production elsewhere? Any company is making that?

Ross

Adm and Cargill talk about it because they’re the only ones that actually make the stuff in the US. In ADM’s case, they manufacture in house. In Cargill’s case, they’re actually the glucose or dextro stream that gets fed into that fermentation cycle to make aminos. You have Ivana and Blair, Nebraska. You’ve got two companies in Iowa, korean and Japanese. And that’s CJ and International and Naji Namoto. They are also an over the fence agreement with an extra cargo, corn mills. That’s it, really, as far as that type of product in the US. We could expand that capacity relatively rapidly. But we have seen amino acids in particular go through so many expansion contraction, volatility cycles that to an American company, particularly one that’s publicly owned, one like Adm, the juice isn’t there for them. They’re not going to take a 20 year investment risk on something that on a year to year basis could lose a lot of money.

Tony

Okay, but if they had to, how long would it take to get that up and running?

Ross

It takes less than two years to build a wet corn mill. But if you were to expand fermentation capacity at any of the already existing wet corn mills in the US that are making, let’s say, high fructose corn syrup, I think of Golden Growers, which is a 50% joint venture with Cargill up in the southeastern corner of North Dakota. All they’re making up there is high fructose corn syrup for food. They can easily convert that stream into fermentation inside twelve months or less. So we do have a dormant quick to market capacity, relatively speaking, the faster we could get that type of thing online, you could do it with subsidies, you could do it with some market protections, you can do it in the food bill and just add certain things in there that favor that type of production. So these are not unsolvable problems. Vitamins. We are, pardon the language, if China really does decide to cut us off on that, that becomes very problematic in a hurry because it’s three to five years to get vitamin production online. If you’re talking synthetic vitamin production, all of that is adjacent and utilizes coproduct from the petrochemical industry.

Tony

Okay. So when I hear this stuff, it makes me wonder, with all of the money that the federal government puked out in 20 and 21 and early 22, this seems like a relatively small investment.

Ross

And it’s very small. A couple years to build a massive vitamin plant? Yeah, you could co locate a vitamin plant right next to Port Arthur, any of the places that are along the Gulf that are very dense and natural gas, and within 24 to 36 months, depending on permitting, if you put a fast lane in place, you could do it in 24 months. And the expertise exists in the US. To build that.

Tony

Okay, thanks for that frustrating example, but it’s something we need to talk about, right? And people need to know about it.

Ross

Albert will tell you this. It’s not talked about much in DC. I’ve briefed numerous Senate committees over the last year on this. A couple of House committees, a whole lot of staff members and Congressmen to their faces. And I show them the charts, I show them the numbers. And it’s really outside of anybody who’s part of the Midwestern congressional delegations. They have no idea. It’s completely foreign to them, and it’s really one of our pacing. Strategic risk.

Albert

Yeah, there’s like deer in headlights when you start bringing up these complex issues, supply chains and asymmetrical responses that the Chinese hold against us, it’s just nothing. It just doesn’t register.

Tony

Yeah, it’s terrible. Okay. Thank you, Ross. Sober, let’s move over to you. And I want to since we are talking about China, let’s talk about, I guess, a Twitter discussion that you and Ross had last week where you invited him on the podcast to talk about some of Peter Zaan’s comments about China.

So, just so everyone knows, I tried to connect with Peter Zion on Twitter and invite him to come on, but he’s very popular and we’re really small time for him, so I don’t blame him for not coming on.

Ross

But anyway, he just doesn’t want to be challenged, maybe.

Tony

Well, possibly. Look, the guy is a great speaker. When I watch him speak, I wish I could speak that well. Right. He’s obviously very smart and he says some stuff that sounds really impressive. Big old predictions, all that stuff. So, having said all of that, he was on Joe Rogan last week and talked about China and basically said that China won’t exist in ten years. Right. Now, this, to be honest, is a derivative of George Friedman’s hypothesis in a book called The Next Hundred Years that was published in 2009, where Friedman said that China would split into, I think, five countries. You know, part of it owned by Japan, part of it, you know, whatever. It’s it’s a really interesting book where he talks about a research in Turkey, a stronger Mexico, all that stuff. I definitely recommend that to people. Some of the stuff doesn’t sound real, but directionally it’s interesting. But Albert, both you and Ross have opinions on this, and you can talk about any of the stuff that Peter Town said. But I guess, broadly, do you see China as a nation state by 2033?

Ross

Of course I do.

Albert

It’s an absurd comment to say that it’s going to break apart within ten years. I mean, you’d have to have something cataclysmic to break up some major industrial nation into ceasing to exist. I don’t understand how that could possibly even come to come to fruition. I mean, China has a strong economic growth. They’ve brought up a middle class, they have a CCP that’s a centralized government that can initiate policies and stimulate the economy at will. They have a grasp on the country, they have a good grasp on the population. Everything that you see that comes out of these protests or whatnot, that’s something that the politicians in China allow you to see. And it’s a messaging thing. I was on here what is it, like, a month ago with Atlantic Council guys, and they’re about the COVID lockdowns and whatnot, and I said, this is your signal that China is opening. And literally, I think it was like a week later, they opened. The thing is, people look at China and they take things at face value with politicians and with data that comes out of China at face value, and you simply cannot do that.

Albert

As much as we blast the Chinese for their belt and road initiative, the key component of that is they have food security coming through that. They have farmlands in Africa, they have meat coming through the South American border. And even if we were to cut off their meat supply, by some measure or another, they still can fish the Sea of Japan, that has 5% of the world’s fish. So they have options for feeding their population in a pinch, and they have the stability and the military and the police force to keep people aligned. So I don’t see how, barring a meteor hitting the place or barring some kind of like, supercharged COVID starting to kill millions and millions of Chinese people, I don’t see how it’s even possible, even logical, to say that it can end up ceasing to exist in ten years. Just the asymmetrical challenges that the world would have to bring China down if they tried to would be devastating for the global economy.

Tony

Yeah. Ross, what do you think there?

Ross

Yeah, I think almost every discussion about the demise of China ignores one simple thing, and that’s not unique to Communists. Will to power is certainly very baked into the cake when you’re talking about communism. But in terms of strategic optionality, china has done a better job than any communist country ever at reinforcing their flanks strategically in a lot of different ways. And so you have to account for that. You have to account for the agency, again, of the adversary, which I think a lot of the discussions about the decline of China do not account for. It at least makes it incredibly complex and certainly is by no means is anything certain one way or the other. On the demographic time bomb issue. I have a very cold hearted way to say this. I don’t think they care. I don’t think they care. When you look at an enormous number of people that are, on the one hand, potentially would die off in some sort of food shortage, certainly with the reopening the percentage of people that at least from the people I talk to and deal with in China on a daily basis. It’s not a lot of young people, it’s not a lot of the productive workforce.

Ross

Again, just like in the US. It’s a lot of people that are unhealthy or older or both. And so you’re talking about people that already have significant respiratory issues in the cities, then getting hit with any sort of cold that’s beyond a basic cold, it’s going to be a problem for them. Right. So even if they survive, you’re still talking about a percentage of the population that in the communist mentality are viewed as less productive or drains on the state’s resources. They don’t really care if a lot of these people die. They truly don’t. And some level of very minor famine where they have the ability to begin to marshal resources and shepherd them a certain way where they can even target who wins and who dies, that type of thing, we will see in that sort of scenario. And they will be able to almost indefinitely put on not indefinitely, but for a much longer. Period of time be able to put off the more severe impacts of a demographic time bomb. And the other issue is, of course, too, they’re atheistic, right? They don’t recognize Christianity or a Jewish god or an Islamic god or whatever.

Ross

So they’re really unbound by any sort of traditional moral or ethical constraints that we have in the west. And so who knows what sorts of technology, what sorts of medical procedures and things they’re pursuing that will in addition to things like automation, they’re now one of the top 15 most automated manufacturing economies. A lot of the robots in the world have shifted production to China from Europe. So they’re dealing with things in a way that all these other models talk about the demographic time bomb don’t account for. They’re going to be a smaller population, but I think long term that also may be baked into their calculus or even serve the interests of what they’re looking towards. Absolutely.

Albert

Yeah, I could have said it better myself for us, I mean, the Chinese are pragmatic. They don’t make foolish mistakes when it comes to their existence. They went out and bought grains for a year and a half. They went out and secured meat for a year and a half. They took advantage of the Ukraine war and secured energy supplies for a year and a half. I mean, they’re not some kind of blind entity that’s going to be taken by surprise. They know their challenges. They understand these problems. There’s something that it’s not as simple. The population goes down, they’re in trouble, they cease to exist. Those dots I just can’t connect.

Tony

Sorry, Ralph, you had some comments.

Ralph

Yeah, just that I fully agree with Albert and Ross said, and I think the demographic part what is often overlooked. I mean, imagine you as a dictator, right? What kind of population would you like to have? One that is on average in the early 20s, or one that’s, on average in the late 30s or early forty s? I think an older population is easier to control because we see this in the Middle East and in Palestine. In these areas, it’s young men who are the biggest problem for social stability. If you can find this golden middle ground of late 30s, early forty s, I think that actually could be to the advantage of the stability of the political system. The only thing because Ross, you mentioned the religion part. I mean, I don’t know if this is still true. It was definitely true a couple of years ago, right, that China had the fastest growing Christian minority in the world. So that doesn’t matter if it doesn’t penetrate the political system or the political leadership. I’d be curious. That’s kind of the only scenario where I would see major changes if all of a sudden kind of these ideas, for whatever reason, start to penetrate the inner circle of Chinese leadership in a kind of ancient Roman scenario.

Ralph

Where all of a sudden the Roman Empire became Christian in an exaggerated fashion. But otherwise, I think you guys are completely right. The I think the the rumors of China’s immediate demise are strongly, strongly exaggerated.

Tony

Yeah. Let me let me add a couple things here. I think when when people make comments about the demise of China, I don’t think they understand modern Chinese history. If you look from, say, the mid 50s until today, certainly well, I guess the 19 teens until today, right. The the volatility that you’ve seen in China’s social structures, the conflict you’ve seen, the famines you’ve seen, the deaths you’ve seen. And certainly in the CCP area, the tolerance that the population has had for leadership, whether that’s coercive tolerance or whether that’s genuine tolerance, they have tolerated a lot. Okay? Now, when we look at, I think, part of the pressure on the CCP, maybe not China as a nation state, but the CCP as a ruling party is through much of the CCP’s existence. The population was very poor and not very educated. And this was Deng Xiaoping was really the one to say, hey, we need an educated leadership. Because until then, most of the people kind of dumb and not really well educated. And a lot of the universities were closed down in the 60s. Right. And so they really started having this educated leadership in the an educated business class starting in the 90s.

Tony

Right. And so you now have a very widespread level of education, and you have a pretty widespread communications platform where people can understand what life is like in other parts of the world. And so I do think that there will be more pressure put onto the CCP to open up and to do things like respect individual rights, whether that’s Christian or not. It’s something that with wealth comes an expectation that individual rights are respected. Right? And so if somehow there was some sort of economic regression where people were poor again, fine, but that would make people really angry. But as people get more wealthy and as they get more educated, I think that does put more pressure on the CCP to be more responsive to the population. Because in the past, people would go into their government guy or woman and they didn’t really have any ability to push back, say, intellectually necessarily. Right now they can go into their government representative and go, oh, that person’s stupid. They don’t know what they’re talking about. And we do that in the US. And we do that in Europe, and we go, our politicians are stupid.

Tony

Right. And so that’s happening more and more in China. And so I don’t think that it leads to the demise of China as a nation state. I think it leads to heavy pressure to the CCP to evolve into something different. And I’m not sure what that is, but I think the pressure on the CCP to evolve will become immense over the next five to six years. And maybe that’s what Dion meant and he just kind of simplified language.

Albert

I don’t know. The CCP morphing into something slightly more liberal is obviously going to happen. I mean, they’ve used actually done quite a good job of promoting national unity. If you want to give them any sort of praise, you know, national unity within China has risen over the past five to ten years. The CCP, like I said, they’ve been around for 70 years. Tony, you said that they’ve got a grip on the country, and I just don’t see it releasing anytime soon under any circumstances.

Tony

Let me just go back and say one thing. We’re all disagree with you. It’s a rare moment of disagreement, Albert, but I actually think the CCP are terrible planners. They’re terrible, yes, they bought things for a year and a half at a time, but they’re just terrible planners. And because they have such a heavy current account surplus, they have the money to make up for their mistakes. And that’s been their situation for the past 30 years. But I think in general, central planning is horrific, and I think Chinese central planners are incredibly awful. So the belief and I’m not accusing you of having this belief, but I think there is among kind of Western intellectuals, there is a belief that Chinese are amazing planners. And central planners, they’re really thoughtful, and I think that’s garbage because it’s just not true. They make a lot of mistakes.

Albert

Oh, no question about that. When you start talking about, like, central piloting and strategic moves, the Chinese have not been historically not been good. You’re right. But those are like 2030 years out, right? I’m talking about four or five years out. They usually don’t make mistakes when it comes to their own domestic politics within the country itself. I mean, they’re they’re still around 70 years. Nothing’s, you know, nothing’s changed, really, in 70 years. So in that respect, I would give them credit to, hey, for national unity’s sake, if they keep themselves in power, they’re done a good job for everything else.

Tony

They do a terrible job. Yeah.

Ross

Again, the dog not barking so much for China when they talk about this stuff. This is the first time we’ve ever seen any sort of synergy between the PLA and the CPC leadership. There has historically been a significant externally, people don’t realize it, but if you’re in the game, you give it. There has always been a historical significant antagonism in a lot of ways between PLA senior leadership and the CPC, the civilian Mandarins, if you will. And this is the first time that we’ve ever seen. And going all the way back to Mao and before him, any sort of cohesion, whether it’s enforced at the barrel of a gun or not, but cohesion because of all these corruption purges that she’s been on since he took power in 2012, going all the way now to today. We’re seeing for the first time, really, the output of a unified PLA CPC kind of mega deep state, if you will. And that gives for the first time, the civilian side a lot more control over what has historically been a multi trillion dollar dark economy and revenue engine of China. And that’s that massive network of shell companies and enterprises that the PLA owns through everything that they’ve got.

Ross

And I’m not saying necessarily we can predict yet what this means, but if that cohesion, if that’s some sort of maybe for the first time unity, if you will, from a political side and from a commercial side, the more that’s.

Tony

Going to look like, the more that happens, the more fragile that whole infrastructure becomes. It becomes so inflexible. And I think for the adversaries of China, that’s a great thing. So go down that path as fast as they can because it creates a very fragile infrastructure within the Chinese government.

Albert

I’m glad that Ross brought that up because I actually had a Tweet thread today about something similar where Xi has been messing with the CMC, which is the PLA Navy’s group that kind of operated away from the CCP and was instrumental in dialogue with the US navy. He’s like, pretty much eliminated those leadership and starting to put his own people in there. So there’s room for error. When you put civilians inside of a military complex.

Ross

That’s a path that I would say if we see a decline of China as an actual aspiring global head of mine, if you will, I think it’s more likely to come from that vector than it would be any sort of demographic time bomb considerations.

Tony

Yeah, I don’t disagree with you. Okay, guys, let’s move on to Germany. Ralph, you had sent a Tweet earlier, I think you sent it a couple of days ago talking about the German energy mix and the push for clean energy in Germany and how ultimately that will lead to more demand for Russian gas.

Can you talk us through that hypothesis? I know you wrote a detailed thought piece about it. Can you talk us through that and then help us understand when the Russia Ukraine war stops, how long before Germany goes kind of rushing into Russian gas again?

Ralph

Yeah, I think the first and most important takeaway is that the underlying German energy strategy has not changed despite the war in Ukraine. And maybe just to sum it up a little bit, in 2021, where we have the most recent numbers, right, about 40% of German electricity production came from coal and nuclear, all kinds of coal. So lignite and black coal. And they want to phase that out in the next ten years. Actually coal, they want to phase out now faster than originally planned. So that means they have to replace 40% of their electricity production. But at the same time, until 2030, the expectation is by German industry that they will have an increase in 20% of demand. And what is the German plan to kind of meet replacing the lost coal and nuclear and meeting this new demand of 20%? The plan was always gas fired power plants and that plan is still in place. So they still want to double their gas fired power plants. And of course the question is where’s the gas going to come from? Now, the quick answer is always it’s going to be US LNG, but I think this is just going to be an affordability problem at some point.

Ralph

The Germans spent $440,000,000,000 only for energy related matters this year, just to give you a comparison, the entire EU spent $700 billion as the so called relief package for COVID. So just to give you a dimension, we are just talking about Germany here, so this is not sustainable. That’s 12% of their domestic industrial output, so they cannot do this forever. And secondly, kind of the more geopolitical thing, I think they prefer close cooperation with Russia than being dependent either on the US or being dependent on Italy or Spain and these areas where LNG would also come through. So I think that on the medium to long run, if there isn’t a window of opportunity to reopen the gas flow from Russia, which is of course still going on, to other pipelines, I think they will jump on it. And the last point, which I find quite intriguing, because everybody says Nordstream Two, Nordstream One, that was sabotaged by the Americans, but apparently, if you look at it, one pipeline of the Nord Stream Two net is still operational. So to me this looks more if I would speculate, but of course I’m speculating here is that the Russians say, no, we cannot destroy Nordstream One.

Ralph

We leave a bit of Nordstream Two in place because then we have to start at some point Nordstream Two and then kind of when this is already happening, we just also start Nordstream One again once it’s repetitive because that was always in place. So I think the underlying energy outlook is still the same and I think as soon as there is a ceasefire or something, this is going to happen. At the very last point, we talk a lot about gas, but of course there’s still the unanswered diesel question when it comes to energy between Russia and Europe. So, as I said, I think if there is a chance to re engage in the energy market with the Russians, I think Germany primarily, but I think other Europeans as well would be very happy if they could re engage in this area with Russia.

Tony

Perfect. I’m going to stop you real quick and I know Ross has to jump in a couple of minutes. Ross, what thoughts do you have on that, on Germany’s dependence on Russian gas?

Ross

I think it’s obvious if you work in the commercial world, if you deal with German companies, whether it’s a buyer or a seller or supplier, whatever it may be. I do think you’re seeing a play out the clock scenario here. There is obviously positive alignment at a global scale between Russia and China. And there’s disagreements or things where maybe one surprises the other with some of their behaviors, but in general they’re positively aligned. Major German manufacturers doubling down in China is actually an adjacent indicator. Russia is still the cheapest source of natural gas that Germany itself can get its hands on. And it’s not I say this somewhat facetiously, but also sincerely, it’s not like the Germans and the Russians don’t have a history of secret relationships or conflict benefit maybe them or conflict. So I do think that as long as there is a strategic alignment on a long term basis of Germany and through infrastructure and through relationships that have really been built deeply since the end of the cold war connection to Russia, I think it would take a lot to really completely sever that completely. Because on a long term basis, if they don’t have replacement energy capacity, which they don’t not at this point, germany would stand to be tremendously disrupted by that.

Ross

I don’t think they’re going to let it happen, not for NATO, not for the EU.

Ralph

And maybe to add something, since Ross is still here as a supply guy, the other thing is even the idea they would have to double their renewables, including wind and solar. And the problem is, wherever they can build those wind turbines, they cannot get those transmission lines built basically from the north to the industrial heart or in Bavaria, for example. On one hand is because the lines are too expensive and too long at the moment. And the other thing is nobody wants them in their neighborhood, right? Nobody talks about this. So on paper it’s easy to build them, but every little municipality, every local politician says, sure, you can make those transition lines, but not here. And then this has basically been on ice for a long time now. So as Ross also says, I think at some point it’s either continue spending oodles of money, which at some point I think will just get too expensive, or find ways either openly or secretly, to increase imports in the energy sector from Russia.

Tony

Ross, I know you have to jump. I just want to thank you for your time. We’re going to continue the conversation, but I look forward to having you on again. Thank you so much. Thank you very much.

Ross

Thanks gentlemen.

Ralph

Thanks Ross.

Tony

Ross, one of the things you said was that Germany would rather source gas from Russia than from southern Europe. Can you help us understand why that’s the case?

Ralph

Yeah, because I think this is one thing that has been overlooked in the entire debate when it comes to the Russian position. Let’s also Twitter a little bit for the French position that a shift towards the east in focus both economically and politically is not in Germany’s interest. So as many I say now fantasizing. But I don’t mean it in a disrespectful way of a new kind of Baltic Polish Ukrainian alliance under the military protection, let’s say your military cooperation with the UK and the US. That is not something that Germany is particularly interested in because they want to remain the major power in Central and Eastern Europe and a new formed bloc with 44 million Ukrainians is not something that they are particularly interested in. And the same is true with kind of shifting the energy focus, let’s say towards Italy or towards southern Europe. It’s the same thing. I think this is not the kind of power shift that they want to see. And just as a quick add on to this is often forgotten, germany together with the Czech Republic as a smaller player, particularly France, they have been the major electricity exporter in Europe.

Ralph

They in some cases quite literally had the hand on the light switch and I think this is also something that Germany doesn’t want to lose. Now, I don’t know to what extent they are aware of this themselves, but I think if you look at German behavior towards Ukraine, towards Russia in this entire conflict, even now, at the moment, right, where they say, yeah. We might deliver Main Battle tanks if the US delivers them first. And if the Polish deliver them first, then maybe we’ll do it as well. I think this hesitancy is not just facetiousness on part of the Germans. I think it is kind of being concerned that the power could shift further towards the east into this kind of Polish Baltic Ukrainian new power center and it would be economically weaker but it’s already militarily potentially significantly stronger. So I think Germany is playing a kind of geopolitical game here that is not we can have a moral debate whether we agree or disagree but I think from what they are trying to accomplish it’s at least partially understandable and it’s a truly last point. There was a moment if they would have really kind of switched entirely their energy policy in February continuing the nuclear power plants and shifting other areas, I think then it would have been credible that they say they want to kind of emancipate from Russian energy, from Russian gas but they didn’t do anything of that kind.

Ralph

So this is why I think that on the long run, on the medium to long run relations between Russia and Germany will improve, whatever that means for other players.

Tony

I think it’s so interesting that the Polish Baltic Ukrainian that is such an ancient political entity from centuries ago, right? And so it’s just interesting that these things are coming back. But I want to push a little bit harder on that. As much as you say they would rather source from Russia than from southern Europe, why are they so hesitant to source gas from southern Europe? Because it’s a part of the EU, it wouldn’t be a political kind of lever that the south would pull.

Albert

It would be Tony. It would be because the Germans have Spain, and Italy is indebted to Germany a significant amount of money. Right. So that upsets the political dynamic from the Germans being able to counter the French and what are they doing within the EU? So you have a political economic dynamic here where Germany just does not want to give money back to the Italians in the space.

Tony

Okay, so what you’re saying is Germany would rather empower a hostile Russia. I would rather enrich a hostile Russia than give up the political power that they have over the south by giving them money. They would rather have the thumb on southern Europe and control them politically than actually help enrich their fellow Europeans. I wasn’t aware of this.

Ralph

I used to do this 20 years ago.

Tony

I don’t as much anymore.

Albert

I would do the same thing because Russia is not in my political sphere, and there is little to zero chance that the Russians are going to attack NATO lands. So from the German perspective, I get cheap power from Party A, and I still control Party B and C over here under my thumb. Why would I change that dynamic? I would never do that.

Ralph

The German area or the German sphere of interest that they are interested in is central. It’s Europe. Whether it’s the European Union, they don’t really care what’s going on in further to the east or, for example, between Russia and Ukraine, which they have shown quite openly up until February. I think Albert is precisely on the money here. So this was a very good deal for Germany.

Tony

Wow. Just another reason for me to think that the EU, as I’ve thought for the last 30 years, is just a cynical political grouping rather than a functional union.

Albert

It’s very nation states have their own interests at heart. Always first and foremost, before you want to talk about globalist or community.

Tony

Sure, yeah, absolutely. Okay, guys, this has been great. Can you just before we kind of end this, can you guys help us think? What are you looking at, let’s say for the rest of January, kind of the week ahead, the next couple of weeks ahead? What are you guys looking at with, say, ECB or Fed or markets? What are the things that are on your mind right now that you’re looking at for the next week?

Albert

I don’t know about the next week. I think Opex is next week, so it’ll probably be pretty muted before the Fed in February. But honestly, I’m looking at Russia whether or not they desire to have a new surge into Ukraine, albeit a smaller one, more tactical. But they need a win for the PR before they actually try to come into actual peace negotiations, because it’s just not sustainable, what they’re doing right there right now.

Tony

So do you think there will be peace negotiations, say, in March, April, something.

Albert

Like that, as plausible at least June, July, maybe?

Ralph

June, July.

Tony

Okay, ross?

Ralph

I’m kind of looking at the German economic numbers at the moment because they have all been very celebratory, because in the fourth quarter, apparently it grew by 1.9%. My suspicion is that these numbers were particularly pushed because Germany was simply pumping so much money into the economy. This is something oliver, you mentioned this a couple of times on your Twitter feed as well. This is something I don’t think enough people talk about that whatever the ECB does, a lot of this is going to be offset by European programs of pumping money into the system via alternative means. So kind of the celebratory mood that now it’s, I think, just 7.7% inflation and not 10% inflation, I think that’s just going to be temporary. And the same is about economic growth. So this idea that there will not be, as I think Goldman Sachs said, and a couple of other economists as well, that there will not be a recession in Europe next year, I’ll be very surprised. I prefer not to be that one, but at some point I know Albert has said something similar ones, but I’m growing increasingly suspicious of these numbers because they don’t add up with anything.

Ralph

When you talk to people in the industry, when you talk to the banking sector, they tell you it’s not all doom and gloom, but it’s definitely not. That all. Next year we’re going to grow beyond our expectations.

Albert

The celebratory chance for the Europeans right now completely missed the fact that they are dormant. They’re in a zombie state. There’s nothing going on in Europe at the moment. So once they start kicking things back up and manufacturing and demand inflation is going to go right back up to where it was a year ago.

Tony

I never trust a preliminary economic data release. Never. Always wait for the second or third revision. So when markets move on a preliminary release, it’s moving on the belief that other people have expectations around it. Right? And so it’s just this reflective, expectations based move rather than based on the numbers themselves. And I always will often say this on my Twitter feed wait for the revision. Don’t trust the initial preliminary data release because it is PR. It’s nothing more than PR. Maybe it’s directionally correct, maybe, but those preliminary releases are PR. So on that optimistic note, guys, I want to thank you for your time. This has been fantastic. We’ve had such a great, deep discussion. So thanks very much. Have a great weekend and have a great week ahead. Thank you.

Albert

Thank you, Tony. Thanks, Tony.

Ross

Thank you.

Podcasts

No Letting Up on Fed Rate Hikes

Post author By admin
Post date January 10, 2023

This podcast is originally published at https://www.bfm.my/podcast/morning-run/market-watch/fed-rate-hikes-oil-price

The minutes from December’s FOMC meeting have been released. Tony Nash, CEO of Complete Intelligence gives us his insights on what this means for the pace of rate hikes in the US. He also gives us his views on the oil prices as black gold has fallen by 9% in the last two trading days.

In this episode of BFM 89.9’s “Morning Run” podcast, hosts Shazana Mokhtar and Wang Xiao Ning recap how global markets closed overnight and provide insight on where they may be heading. They also interview Tony Nash, the CEO of Complete Intelligence, to get his thoughts on the state of international markets and trends to watch for in 2023.

The hosts turn to their interview with Tony Nash, who is on the line to discuss the Fed’s intentions on rate hikes and the impact on the dollar. Nash mentions that the Fed’s notes from the December FOMC meeting clearly communicated that there is no expectation for a rate cut or pivot in 2023, as no participants anticipate it would be appropriate to begin reducing the federal funds rate target in 2023. Nash also notes that while markets ended higher, people will realize that there will likely be a number of 25 basis point hikes in 2023 to ensure that inflation subsides.

Wang Xiao Ning then asks Nash to explain what’s happening with the dollar, as it gave back half of Tuesday’s gains despite the hawkish FOMC minutes. Nash explains that it is not only the Fed that is affecting the dollar markets. He adds that treasury actions and hopes for a stronger China also play a role, as well as concerns about China’s slower opening, which has hit the dollar as there were hopes that an accelerating China would help to strengthen US exports and economies around the world.

The hosts then ask Nash to share his outlook on some of the trends that have dominated 2022 and how they might play out this year, specifically the Ukraine conflict and its impact on agri and metal commodities. Nash explains that if we assume no major escalation, no major drought, and a relatively status quo war continuing, he expects wheat prices to rise by 15% to 20% between now and Q2 2023, however he doesn’t expect wheat to show any rise by the end of the year and expects slight down pricing. Additionally, he expects industrial metals prices to drop as a result of the slower China open and recession expectations around the world, while oil is expected to remain relatively stable.

Overall, the podcast provides a good overview of the current state of global markets and insight into what may be coming in 2023. Tony Nash provides expert analysis on the Fed’s plans for rate hikes and the impact on the dollar, as well as trends to watch for in commodities such as wheat and industrial metals, and the ongoing conflict in Ukraine.

Transcript

BFM

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

BFM

The World Market Watch is brought to you by CIMB Preferred.

BFM 89.97 06:00 a.m. on Thursday 5 January 2023. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wang Xiao Ning taking you up to 10:00 a.m. This morning. But as always, let’s kick start the morning with a recap on how global markets closed overnight.

WXN

Oh, it was a much better day in the United States because the Dow was up 0.45%, and SP 500 was up by 0.8%. NASDAQ was up by 0.7%. Meanwhile in Asia, a bit of a mixed day. Nikkei was down 1.5%, Hang Seng was up by a whopping 3.2%. Shanghai was flat because it was only up by 0.2%. Same for the Straits Times Index. It was down 0.1%. And our very own FBMKLCI was down by 0.3%.

So for some thoughts on where international markets could be heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. And a happy New Year to you. Now, we’re going to start with what news is coming from the US. The minutes from December’s FOMC meeting were released last night. Did they give any clues to the Fed’s intent on rate hikes in the coming weeks?

Yeah, the Fed notes are communicating that hopes for a rate cut or a pivot are over-enthusiastic. So the minutes, and this is a quote from the minutes they say “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” So there isn’t a single one. Even the doves who are on the Fed are not thinking about pulling back rates in 2023. So I think markets ended higher. But I think as that settles in, I think people are going to realize that we’re going to see a bunch of 25 basis point hikes going into 23 to make sure that inflation subsides.

WXN

Okay, but Tony, help me understand what’s happening about the dollar because the FOMC minutes were more hawkish, yet the dollar gave back half of Tuesday’s gains. What’s going on here? It’s rather strange, isn’t it?

It is. I think well, if you see, sorry to say here, I think what’s happening is there’s treasury action that is reducing the dollar value. I also think that we’re not necessarily seeing the full impact hitting the dollar markets. Now, if you look a DXY, that’s mostly looking at the Euro values, of course. Right. So we’ve seen the Euro strengthen and the pound strengthen. So I think there is concern about China’s opening slower that’s also hitting the dollar because there have been hopes in the US that an accelerating China would help to strengthen, say, US exports and economies around the world. So that could be hitting the dollar. Other mechanics are happening, but I think generally it’s not necessarily the Fed that’s hitting the dollar today because I think these are just, I guess, forward-looking expectations. Nobody thought there would be a rate cut, say, in the next three months. People have really all been talking about it, say, in the six-month horizon or longer. And what you’re seeing in dollar markets isn’t necessarily reflecting Fed comments because it’s kind of long-term.

And let’s take a look at some of the trends that have dominated 2022 and how that might play out this year. If we look at the Ukraine conflict, it caused massive supply shocks for Agri and metal commodities when it began last February. What’s your outlook for those same commodities as the war drags on into 2023 with really no foreseeable end in sight?

Yeah, if we assume no major escalation, no major drought, those sorts of things. So a fairly status quo war continuing, we do expect things like wheat to rise to go into Q2. We expect a 15% to 20% rise between now and, say, sometime in Q2. But we don’t expect wheat by the end of ’23 to show any rise. We expect a slight down pricing in wheat by the end of the year. Industrial metals prices, because of the slower China open and because of recession expectations across the west, there is a feeling that industrial metals won’t necessarily come back in ’23. So, again, it’s a fairly moderate outlook for industrial metals. If central banks were to change their course, that would, of course, change the industrial outlook and the consumer spending outlook. But as things look now, they don’t necessarily look either industrial metals or AGS don’t necessarily look to accelerate as they did in, say, Q2 or Q3 of ’23.

WXN

Okay. The other thing I want to look at is oil prices, because on a year-to-date basis, if we look at brand crude down 9%, WTI is down 8%. That’s quite a shocker, considering it’s only 5 January. Can you help us understand what’s driving this weakness?

Yeah, again, there’s been a lot of expectation that China opening rapidly would have an impact on things like jet fuel, petrol, on crude oil. And as we see that openings slow down because of rising COVID cases, there is fear that the demand side of the market won’t necessarily come back. There have also been some pieces here in the US. Come out over the last, say, a few days talking about the demand. Expectations for crude have been a little bit exaggerated. And today there was a prominent investor out saying that he expects crude to fall pretty dramatically this year. So, you know, I think what we’ve seen over the last, say, six months are expectations that going into ’23, we would see a shallower recession and we would see supply side factors that would push crude prices up. I think right now, you’re seeing investors take another look at that and question that hypothesis.

A spike in oil prices would negatively affect a lot of oil-importing countries in Asia, like Japan. With the Japanese currency already under severe pressure, would this be the last straw that breaks the yen’s back?

Well, I don’t think so. No. I think our outlook at Complete Intelligence is for crude to hit about $100 by, say, April. Certainly in the second quarter. I don’t think $100 or say $130 crude would hurt Japan. The BOJ and the Finance Ministry have plenty of resources to deal with. One hundred dollars to one hundred and thirty dollars crude oil. If we were to see something like $300 oil, which would be extreme and very much outside of our view, that would stress not just Japan, but it would stress a lot of countries, not just in Asia, but across the world.

WXN

But what’s your outlook for the Japanese economy, though? Because if you look at them as a country, the first time you’ve ever seen inflation rates rise, the Bank of Japan has taken a slightly more hawkish tone. So what’s your outlook for their economy?

Well, yeah, I think that move in Japan, the slightly more hawkish tone was more about preparing for the next BOJ head instead of a dramatic policy change. So there was a little bit of preparation for the next person so that they could maybe change the policy slightly hawkish if they wanted to. So in general, for Japan, in terms of growth, we see the first half around one and a half, one to one and a half percent. But in the second half, we see it slowing slightly to, say, just over 1%. So in general, look at about a 1.41.31 .4% growth in 23 in Japan. So it’s not a stellar year, but it’s not a terrible year either.

Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks and for the year ahead, covering things like the Fed interest rates, oil price trajectory, as well as the outlook for the economy in Japan.

WXN

Yeah, well, the year started quite rocky, especially for oil. But I do keep hearing more and more analysts saying, look at the commodity space, especially when it comes to the metals because China is reopening. But even on a year-to-date basis, metals, actually most of them, are still down. The only ones that are up at the moment are nickel and gold, which is just up. Nickel is up 3.5%, while gold is at 1.6%.

So if we take a look at some of the other headlines that have caught our eye this morning, I see that Salesforce is planning to cut jobs by 10% and close some offices after rapid pandemic hiring left it with a bloated workforce amid an economic slowdown. They hired too many people, and now they need to cut jobs to maintain their bottom line.

WXN

Okay, so let’s remind everybody, what is Salesforce? They are a cloud-based software company. They were one of the winners during the Pandemic. It was a work-from-home kind of champion. But since then, their share price has come under a lot of pressure. And I think the question is, this type of company, were they too aggressive when times were good? And the answer is yes. But it looks like they weren’t the only ones, right? Because Amazon also did it. There’s now job free. There’s no more hiring. When it comes to Microsoft, it’s the same at Meta. So I think all these technology companies are kind of looking ahead and saying, hey, the outlook isn’t so positive. So the one thing we can control is our cost. And in the US, actually firing people is extremely easy. There’s hardly any legislation or protection. So that’s what they’re doing.

And a question I think everyone’s asking is, when will these job cuts start to affect the unemployment rate in the US? And that’s when we start to see the unemployment rate go up, inflation goes down. I think that’s sort of where the Fed will then maybe start to look at reducing its rate hikes or starting to cut interest rates again.

WXN

But the point is, there’s always a lag effect, right? And the question is, how long is this lag effect? And then by then, would the Fed have been overly hawkish? Would it have raised rates by so much that it has paralyzed the economy? So that’s, I think, the challenge that the Fed is facing now.

Indeed. Indeed. All right, 717 in the morning. We’re going to head into some messages and when we come back, we’ll continue looking at the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9, the World Market watch, is.

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Brought to you by CMB Preferred moving forward with you, visit cmbpreferred.com for their preferential services beyond banking.

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You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same, download the BFM app.

Week Ahead

The End of the USD Era? How Natgas Prices, The Fed, and a Multipolar World are Changing the Game?

Post author By admin
Post date January 7, 2023

⚠️ The Inflation Buster Sale is extended until Jan. 7th only! Learn more: http://completeintel.com/inflationbuster 👈

Natgas is down 63% from its high in late August. The average price before Q2 ’21 was $2-3, so we only have 7% more to fall to below $3. While we saw Natgas rise – along with every other commodity – in 2021, prices had begun to fall until Russia invaded Ukraine.

Russia and Ukraine are still at war, but we have this issue with the restart of the LNG terminal. Tracy Shuchart tells us what’s behind the fall in Natgas prices and what she’d look for before expecting prices to stop falling.

The Fed pivot has been wishful thinking for quite a while and Sam Rines has been repeating this for months or so. As the Fed’s minutes were released last week, Sam pointed out that NO MEMBER saw the need for a rate rise in 2023. He stated many times that the Fed has been very clear about its indicators. We see this so often that it seems obvious. Why is this so difficult for some people to see? Sam Rines explains that in this episode.

This week, Sam also made the point that the Fed is maybe “stuck in the middle”. Literally, employment in the middle of the US could be a factor that keeps the Fed from slowing down. Sam explains why the middle is so important.

We’ve seen a lot of chatter in research notes, op-eds, and tweets over the last week stating that the future is a multipolar world. This seems largely based on a call for the decline of the USD and the rise of the petroyuan, etc. Albert Marko walks us through this.

Key themes:

1. Natgas sub $3?
2. The Fed Pivot is Dead
3. Multipolar, Post-USD World

This is the 48th 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
Tracy: https://twitter.com/chigrl
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. This week we are joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thank you guys for taking the time to join us this week.

It’s been a pretty volatile short week, and there are a number of things we’re talking about. First is Natgas. We’ve seen Natgas come off pretty dramatically this week, and we’re going to talk to Tracy about whether or not we’re going to see Natgas below $3 soon. Also the Fed pivot. There’s been a lot of statements from the Fed, and Sam’s covered that in detail, so it looks pretty dead. But we want to find out from Sam what’s going on. And we’ve also seen a lot of coverage of or a lot of commentary about a multipolar world in the last week or two, which sounds like 2006 era rhetoric or something, but we’re seeing a lot of that kind of rear its head again, and we want to talk through that with Albert. Thanks, guys. Tracy, let’s jump into it with with Natgas. Natgas is down something like 63% from its high in late August. I’ve got a price chart on the screen right now.

The average price before Q two of 21 was in the two to $3 range, 260 or something like that. So I only have 7% more to fall below $3. So we’ve seen it rise with every other commodity in 2021. But of course, with Russia invading Ukraine, we saw that spike up. So Russia and Ukraine are obviously still at war. And then we have this issue with an LNG terminal in Texas with Freeport. So we’ve got that story from Bloomberg up on the screen right now.

Can you tell us what is behind that Nat gas price fall, and what are you looking for in that market for that to stop?

Tracy

Well, first, again, Freeport, since you already put that up right, which went down in August, and people have been waiting for that facility to reopen because it’s an export facility. What happens is that since that facility is shut down, that landlocked US. Nat gas or that pushed downward pressure on US. Nat gas. Originally they were supposed to reopen in October. Then it was November, then it was December, and now it’s mid January. So that does contribute to a lot of problems. We’re also seeing warmer weather right now in the EU, and stocks are full in the EU. This market has become very complacent. That said, if we’re looking forward, there is a cold front coming in, I think January 22 to the EU. It’s supposed to be really cold for a few weeks. So what traders will be watching is to see how much does their build bring down during that time. But again, yes, the markets have become very complacent. They think that they’re indicative that this crisis is over, but that’s not necessarily true. We’ll have to see this winter how much stock is brought down in Europe due to cold weather.

Tracy

And you have to remember that in 2022, half of their storage came from cheap Russian gas pipeline. Right. So looking forward to when we have to refill this, they’re going to have more expensive LNG coming in, and that takes longer and it’s more expensive. And then we look at US. Export capacity. It’s still not built out enough for the contracts that we actually signed with the EU. So that may put pressure on US. Nat gas, but that would put upward pressure on European nat gas.

Tony

So does that pressure, does it drive the price up or does it just hold the price steady? Is there a mean reversion at some point where we go to, say, 260 or 270 on average and kind of some of these weather issues and Restocking just kind of maintains it? Or do you expect things to go back up to $9 or whatever?

Tracy

I think we could see a spike. Again, there’s a lot of mitigating factors in this market right now, and we really have to see how much is pulled from storage in Europe at this point. And hopefully Freeport is supposed to open mid January. We’ll see if that happens.

Tony

Okay.

Tracy

But that would really leave a lot of the downward pressure on prices in the US. Market because it would open us up to being able to export that.

Tony

We also saw the Japanese buying a US. Nacas company this past week. Right. Can you talk to us a little bit about that?

Tracy

Yeah, which makes sense. I mean, Japan has been one of the largest natural gas importers in the world, and they’re very concerned right now about energy security, as most countries are, particularly in Asia. They’ve had some problems with their deal with Russia because they have a joint project together, and due to sanctions, there are some problems involved in that. And so I think that was a very smart move, again, for Japan to kind of secure energy. I mean, they’re looking forward, much more forward than I would say Europe is.

Tony

Okay. Very good. So it sounds to me that there’s not really anything decisive coming up in the near term to change the direction, but the magnitude may slow.

Tracy

Is that yeah, technically speaking, we are very oversold at this point. That said, what we really are going to have to be looking at, or what traders should be looking at moving forward is do we have this reopening of Freeport mid January and this cold front coming in? If it does, traders will be looking at how much draw is is going to happen in in Europe or Bill stock? Okay.

Albert

Not to mention, Tony, that planting season for 2020, late 2023 and 2024 is coming up in Fertilizer. You need that gas fertilizer. So that’s that’s something else to look at. I’m not sure exactly how much it weighs on it or a bullish case from that gas by any means, but something will keep your eye on.

Tracy

Right.

Tony

But we have had some fertilizer volatility over the past couple of years, right? Oh, yeah. Russian invasion.

Albert

Yeah, I’ve been a big mosaic fan, which is a phosphate play, but also nat gas is the other component on the other side for the fertilizers that they use.

Tony

Great. Tracy, what’s your thought on fertilizer?

Tracy

Yeah, absolutely. I mean, I think we’ve seen that obviously pull back, but we’re heading into planting season again starting in the spring. So again, that’s going to be another factor as far as not gas is concerned. And the fertilizer analysts that I’ve talked to say they expect another price spike coming into about March.

Albert

Yeah, I believe also there’s going to be a price spike on the fertilizer front because the soil that the farmers haven’t used can’t sit as from what I’m told, can’t sit around not being used for too long. So 23,024 they’ll have to be replanting, those fields.

Tony

Interesting. Okay, well, good to know. Thanks for all of that. So let’s move on to the Fed. Sam, you’ve put out a few notes this week about the Fed and the Fed Pivot. Obviously, you’ve been saying for about nine months that the Fed Pivot is kind of wishful thinking. You’ve said it over and over and over again and there haven’t been hasn’t been a lot of kind of listening to it or people really haven’t heeded that necessarily as we see kind of run ups and and hope that we’ll see a pivot. But Fed minutes were released this week and you pointed out no member saw a need to raise rates in 2023. So that from your newsletter is on the screen right now.

So you’ve stated many times that the Fed has been very clear what their indicators are. And honestly, we’re seeing what you’ve said many times, that it’s vu and nominal wages. So vacancies and unemployment as well as nominal wages as well as core services, excluding shelter inflation.

And those have been very clearly stated by the Fed chair in his briefings. So why is it so difficult for people to see these things that seem to be very clearly stated by the Fed?

Sam

It’s personal preference. Right. The presuppositions and the initial conditions that you want based on the way you’re positioned. Right. So our brains really like to be correct. So if we can convince ourselves that the Fed is doing the wrong thing and should do something else and ignore the Fed will do something different, then it makes us feel a little bit better. So I think that’s part of it. But I do think that there’s something to be said for when no member of the FOMC sees the need to cut rates in 2023. That should be heated. That’s a pretty one sided trade. And you listen to some of the members of the Fed this week, bostic, who could be considered one of the more dovish individuals. He was still somewhat indeterminate between hiking 25 and 50 at the next meeting. When the most dovish member that I can kind of come up with or one of them doesn’t know if they’re going 25 or 50, that’s, that’s problematic. Right? That’s, that’s something that I think people are somewhat ignoring, particularly market participants, is that the Fed is not the Fed is not pivoting towards being dovish at this point.

Right. That the narrative that they have put out for the last six months has not changed. It has been very consistent and it has been very clear that vacancies to unemployment is a problem because one, when you poach people, you have to pay them a lot more money. So instead of call it the ADP report is really intriguing because they release what the pay rates are for people who aren’t switching jobs. It’s somewhere in the seven percentage range and the people who are switching jobs are getting 15% pay bumps. So the differential there is somewhat stark and somewhat shocking. I think that is somewhat underestimated by people when they look at what’s going on in the labor market. We have had a very good year for job creation and we just finished it off with a number that was well above expectations. And, you know, you can kind of nitpick and say, well, the average hourly wage was only up 30, basis points 0.3%. And you know, that’s that’s a positive for the Fed. Well, yeah, it’s only going to be up .3% because the vast majority of jobs were created in lower paying industries.

When you create jobs in leisure and hospitality, those are below the median. So you’re going to drag down the wage growth just naturally on that front. So I think a lot of it is going to be evolutionary for the Fed, right. They’re going to have to evolve their rhetoric at some point, but they’re not going to do it yet and they’re certainly not going to do it before the February FOMC meeting and they’re probably not going to do it until after the March 1. And that to me is probably not priced in at this point. And what’s really not priced in is the Fed just not really caring about the data until sometime in early 2024.

Tony

So you mentioned that in one of your newsletters, I think it was yesterday, talking about on Thursday most recent employment report. You talked about the Fed being stuck in the middle and literally you put some maps, which I put on screen.

Employment in the middle of the US could be a factor that keeps the Fed from slowing rate rises or at least from kind of pivoting. So why is the middle so important? We get so much coverage of what’s happening in Silicon Valley or New York or whatever, but why is the middle so important? And why is the Fed paying so much attention to the middle?

Sam

Sure, so the regions to the west were the only ones that lost jobs, according to the ADP report, which is pretty interesting. And the rest of the country made up for it and made up for it in spades. So while all the tech layoffs get a lot of headlines, you never really hear about the opening of XYZ plant in Kentucky or Tennessee, or the building of a plant in Tennessee, right? Those don’t get the headlines that Facebook laying off a few thousand people get. Quite frankly, who cares about a bunch of people getting laid off from Facebook? They probably shouldn’t have had jobs in the first place. Even say I’ll say it about alphabet. I’ll say it about all the tech companies. They overhired and they overhired in the wrong area, and now they’re laying them off. I mean, that’s what happens. It’s called the tech cycle. It’s not that difficult. But middle America is more than making up for it, and it’s making up for it in spades. And I think the Fed actually might be getting caught by the middle of the country. And it’s kind of the revenge of middle America, right?

Middle America always takes the brunt of the BS from the coast in terms of being dominated on monetary policy, being dominated on economic policy, and now they’re the ones kind of driving the ship. And I think that’s really underestimated within people’s frameworks that when we’re isolated to New York and California and see people getting laid off, that doesn’t really matter to the Fed as long as it’s being made up for by people in the middle. And people in the middle are making more money and they continue to spend. And there’s a lot of states in the Midwest and call it just flyover states. There’s a lot of states with a two handle on unemployment. A two handle. So if you want to hire people in middle America, guess what? You’re going to have to pay up if you want to hire a tech worker on the West Coast. Maybe you don’t, but that’s what’s going to get the headlines. But you’re going to have to pay up in the middle.

Tony

Well, you may not have to in terms of the rise on the West Coast, but the wages there aren’t necessarily coming down, are they, on the West Coast?

Sam

No, they’re not coming down, but it’s all about wage growth at this point. As long as you have a pretty sharp deceleration, you have some people on the market to hire. That’s important, right? Nevada and California have two of the highest unemployment rates in the country.

Tony

So is it fair to say that the middle is not say perfectly, but in some extent kind of catching up with the coast in terms of, say, real wages or something or no. No. Okay, so it’s still pretty cheap, but still just wage growth. Okay, very good. What else are we missing? Because look, you have been consistent on all of this. And you have for anybody who’s either listened to us or read your stuff for the last nine months could have seen this play out pretty much exactly as you’ve laid out. So what are people missing? I think the Fed has been fairly boringly, consistent, and you’ve said they would be, and that’s what’s happened. So are there any lines to read between that we should be looking at right now?

Sam

Yeah, so I laid it out about a week ago that I think what you really want to look for is the Fed going from a hawk to a grackle, hawkish to grackleish. And if you live in Texas, have lived in Texas, grackles are the worst birds ever because all they do is squawk. They wake you up and you can’t shoot them. They’re not like dubs, so play that all the way through there. But Grackles are an incredibly annoying creature. And when the Fed goes from being pure hawkish to really starting to grackle up its communication, squawk, squawk, squawk. You have no idea what they’re looking at. You have no idea what the metrics are. That’s when they’re getting ready to pause and pivot. And frankly, we have seen none of that right. Until the Fed process is not hawk to dove or dove to hawk, it’s dove, grackle, hawk, hawk, grackle, dove. And until they really begin to confuse their messages, they’re not changing shape. That we simply haven’t seen them begin to change shape. I do think that sometime this year, probably in the call, it the May to June time frame. That’s when you’re really going to begin to see the Grackles come out.

And a lot of confusing language about what they’re watching. A lot of confusing talk about the balance sheet. A lot of confusing talk about the future, the path of Fed Funds rates. And that’s really when I’ll get a little more bulled up on a Fed pause in the length and the structure of the potential to pivot. I don’t think there is a reasonable case to be made at this point. The Fed is going to cut in 2023. If there is a credible argument, it’s that the Fed breaks something and has to cut a lot. Right. So it’s it’s a little bit of a call. It a convex play here that if the Fed does cut, it’s not it’s not cutting 50 basis points, it’s cutting two or 300. And if and on the other side, you know, if nothing bad happens or nothing very bad happens, the Fed is just going to hold it there. So I think there’s a little bit of skew here.

Tony

Great.

Tracy

Okay, thank you. I have one question. Yesterday we had, like, Fed george came out and said the Fed, quote unquote, Fed, still has a lot to learn about how balance sheet policy works. Can you explain that to the audience? And would that not be one of your grackle birds? What is it called?

Sam

No, I think it was actually George just being honest. I think we had this convers we had this conversation a few weeks ago, Tony and I, with a guest that the Fed really doesn’t understand or doesn’t have quite the concept to pinpoint exactly how much tightening or additional tightening to Fed funds. Quantitative tightening does that’s, that’s what George was getting at. She’s a little bit behind the curve there. The Fed does have a proxy rate that I pointed out earlier this week in a, in a note. The Fed has a proxy rate that they publish that’s sitting at about 6.4%, give or take. So it’s about a 260 basis point spread, 2.6% spread to the current Fed funds rate. I think that’s something to kind of pay attention to, is that the Fed does have measures. I think it’s more that if you’re out there talking all the time, it’s difficult to get into the math.

Tony

They’re not stupid, they’re just annoying at times.

Sam

Exactly. They’re not stupid. They’re really not stupid. They know how tight they are. They know they’re sitting at about six and a half percent, 6.4% on an overall tightening basis. They don’t care that’s number one. They don’t care that it’s that tight. Number two, they’re going to continue to do it until they actually achieve their mission. Right. And it’s a multipronged process. And as long as markets seem to be fixated on what’s going on with the Fed funds rate and not going on with the entirety of tightening, that’s going to continue to be an issue for them. Like today, when everybody’s like, oh, look, we printed 223,000 jobs. Maybe this gives them reason to pause because average hourly earnings didn’t go up that much. Guess what? I mean, you can’t rip markets 2% and have financial conditions loosen like that and have the Fed go, yeah, I think we’re accomplishing our mission. Inflation is still high and unemployment is at 3.5%. Yeah, it sounds like a great time to pivot. Yeah, that’s the dumbest thing I’ve ever heard.

Tony

Right? Yeah. Okay, that’s great. Speaking of stupid not you, Sam. Albert, let’s talk about multipolarity.

Albert

One of my favorite.

Tony

Yeah, so we’ve had a lot of op eds and research notes and tweets over the past week or two stating that the future is a multipolar world. And this seems to be based on a lot of talk about the decline of the US dollar or the rise of the petrieon or something like that, around Chinese crude purchases from the Middle East or whatever. So, Albert, you put a series of tweets out, which I’m showing right now on screen about this very diplomatic, as you always are.

So can you walk us through this and help us understand what’s going on? And I’m going to try to play devil’s advocate as you lay.

Albert

No, that’s fine. I mean, you can play devil’s advocate if you want, but when it comes to multipolarity, it’s not simply a financial or economic thing that you need to look at. There’s multiple variables, including legal frameworks of the nation that is the currency issuer, the military strength of the reserve currency issuer. There’s multiple, multiple variables for it. And for some reason we have these economists that come out and say, oh well, the petroleum is coming into effect and that’s going to destroy the petro dollar and therefore the dollar is going to fall and blah, blah, blah. I’ll let Tracy get into the petrowan stupidity, but the dollar is simply the lifeblood of all trade in the financial system. You’re talking about for me, it’s like taking out your blood into Transfusion and putting in Mountain Dew and saying, oh yeah, everything’s healthy, you’re going to be fine. The whole system is raring to go. It’s a dumb argument. It just boggles my mind how people can sit there and even claim multipleity when there’s literally no alternative on a global scale for anyone to be thrown.

Tony

So let’s take this bit by bit. Okay? So a lot of these people are saying that the CNY will become more powerful partly on the back of crude coming out of the Middle East and crude coming out of Europe that could be denominated in CNY. Okay, so let’s take that. Tracy, can you talk to us about the Shanghai benchmark for crude? How successful has that been?

Tracy

Not at all. Even the futures market hasn’t been successful.

Tony

What percent of world order oil, just as a wild guess, do you think is traded on the Shanghai benchmark?

Tracy

2%.

Tony

2%. Okay. And it’s been around for how long? Two years?

Tracy

Yes. And if you look at their futures market, which has been around since 2016, we’re still only saying that domestically traded, you’re not seeing big players come in and hedge like they do with WTI or bread. So that aside, China came to Saudi Arabia with a suggestion after this new summit, the latest summit that they just had, and said, yeah, we would love for you to we could trade this on Shanghai and this could be traded in yuan. Saudi Arabia still has not yet come back with an answer. And so everybody jumped to conclusion saying it’s a petrol. Saudi Arabia is giving up dollar denominated oil. This is not true. I’ve talked to a lot of people in Saudi Arabia about this. I’ve talked to a lot of journalists. I actually had a spaces about it. So this is not true. And even if Saudi Arabia did decide to sell some oil in yuan on the Shanghai exchange, for whatever reason, all that would happen is they would be paid in yuan and instantly changes into dollars. Nobody wants you.

Tony

Wait a minute, let’s dig into that. Why does nobody want CMY?

Tracy

Well, because it’s not globally traded like the dollar is. Everybody wants dollars. People don’t want you on it.

Tony

Not freely convertible.

Tracy

Right. At all. Right. And especially if you’re in a merging market with USD denominated debt. You on. Nobody wants you on. Nobody wants you on. Right. And it’s not really free floating, right?

Tony

It’s not at all. We talk about crude and the ability for the Chinese purchase crude. We talk about their currency, CNY. But behind the CNY and the lack of convertibility is the PDOC, right. China central bank. So ultimately, if you trust a currency, you ultimately trust their central bank. So is there a basis for people globally to trust the PBOC? That’s a sincere question. It’s not a cynical question.

Tracy

No, I think people are not trusting central banks anywhere, but especially in China right now. People don’t believe what’s going on in China right now. People haven’t believed the data in China right now. And so, again, there will be a small amount of oil traded globally in yuan if China wants to do so and another country chooses to do that. Right? Russia has india was brought up for them, but that’s a very small 1% to 2% of globally traded oil, which is certainly not going to put the U on in a position to overtake the dollar in traded markets.

Tony

And something I’ll point out is the PBOC has literally, at times, used numerology to determine their benchmark rate. Okay? For people who go down this path, that the CNY is a rising currency. If you’re going to trust a currency, first of all, it has to be convertible. But second of all, you have to trust the central bank. And you can’t have people using numerology. I know we all complain about the Fed, right? But at least there’s a standard approach and there is a level of transparency as to the way decisions are made, right? Everybody knows what the Fed says, what minutes are released and all that stuff. But when you have a central bank that has at times and it’s rare, but at times use numerology by raising by anything that ends in eight or whatever, something like that, I mean, this is just stupid. And it’s not a credible central bank when those sorts of things are happening. Okay, let’s go on to multiplarity, to have defense. Okay? So is there a defense to enforce decisions that are made? So does China or whatever other multipolar places that these people are talking about have the ability to enforce their decisions overseas?

Albert

No, none. None whatsoever. I mean, even to take the Saudis as an example, right? The Saudis rolled out the red carpet for the Chinese, and the Petrowan argument started coming out all over research papers. But what will happen when Iran decides to press the Saudis once again in Yemen, or just through airspace violations and threatening missiles? Do you think that Riyadh is going to run to the Chinese? Are they going to run to Moscow? Or are they going to call up the Pentagon and say, hey, we need more, you know, Patriot missile batteries, you know, we need your support.

Tony

You tell me why. I think I know the answer, but I want to understand why.

Albert

The US. Has the most advanced military hardware there is on Earth by far.

Tracy

Right?

Tony

But why would they not call, let’s say the Chinese.

Albert

Do you want an effective defense system? What are the Chinese have for defense system? Are the Chinese able to put Chinese troops to defend against Iran if something happens or against the Yemenis? I mean, they failed in every single aspect of China.

Tony

Just some basic questions. Does the PLA have the logistical capability to get their resources to Yemen if needed?

Albert

Zero. They couldn’t even invade Albania if they wanted to. That’s how ridiculous it is.

Tony

I’m sorry.

Albert

How are you going to move 250,000 troops across the world, right? You have no ability. The Russians can’t even barely invade Ukraine. That’s on their border, and we’re sitting there talking about multipolarity. For an example, is the United States took out Manuel Noriega. That’s because he was in the Panama Canal area and he was screwing around. If that situation happened, do you think the Chinese or the Russians did hop on over there and take it out? They cut it.

Tony

Noriega fell out of a building, which is plausible.

Albert

Well, that’s the Russian way to fix things. But, I mean, this is just a silly conversation. I have no idea where this multiplarity is coming from unless it’s investment banks putting their analysts out there to help their clients get out of gold or get out of crypto or something. We know with the whole death of the dollar thing coming, what are we.

Tony

Missing on multi polarity? Is there something that we’re missing from this discussion on either side?

Sam

I don’t think we’re missing much. I mean, there’s always the want for multipolarity if you’re not the United States, right? Everybody wants it, but to the point. You have to have a credible currency, you have to have an open account, you have to be willing to have a deficit, trade deficit, period. And you have to have incredible military and defense. And guess what? In this world, the only country that ticks those boxes is the US. And if Europe ever got its act together, maybe it could have the military part, but that’s it. China simply does not have the capability to be a global offsetter to the US dominance. That’s simply what I would call fantasy, at least for the foreseeable future. Could it become one down the line?

Tony

Maybe.

Sam

We were all concerned about Japan 20 years ago. Look how that worked out. Then we were concerned about the Euro. Look how that worked out. I mean, it happens. Yeah, it happens on a cyclical basis. Every 20 years, we come up with a new thing to be concerned about on the multiplayer front, and every single time, nobody has the willingness to do what the US does. Somebody call it the exorbitant privilege. Right? It’s not. It is. Actually a pretty big load to bear, particularly on the military and spending front. So I think that’s wildly overlooked. And I think the other thing that’s overlooked is oil for dollars will persist for a meaningful amount of time. Nobody wants oil for Trinkets.

Tony

Right?

Tracy

And another thing I have to mention, does China even want to open up enough to be the world? They like to be shrouded in kind of secrecy, right? And they have to be secret. Whatever. If you’re world current reserve currency, you have to be completely open to the world, and they don’t seem to like that.

Tony

Well, part of it is they don’t want to be embarrassed. They don’t want to be seen to be making a mistake. It’s easier to point out other people’s mistakes. If they had transparency and they made a mistake, it’s embarrassing. If you remember, in 2015, they tried to devalue a little bit, they messed up and they way overshot, and it was really embarrassing. And then they did nothing for, like, four years. So they don’t want to be embarrassed. That’s a huge issue.

Albert

These are all complexities that have to be taken into account. And like Sam said, there’s only one nation at the moment that ticks the box. And listen, I’d be the first one to throw out warnings, red flags. If there was a competitor stepping up in the US’s shadow, they’d be the first person to say this, but just not right now. None of the components are there at the moment.

Tony

Right? And I mean, having said all this, I don’t want this to sound super pro American. Like, we’re all Americans, and I think we can all agree that the US is kind of a lumbering idiot around the US at times. Well, this is not trying to say raw, raw US. We’re just saying the Pragmatism of the moment is this.

Albert

Yeah, there’s so many different details that have to be looked at. And I spoke with Mike Green on this in our podcast and our spaces. It’s like the United States has water, has geography, is isolated from the rest of the world, has a military, has this, has that. It’s nothing to do about RA America. It’s just the way things have been laid out at the moment.

Sam

We’re lucky in that.

Tony

So if anybody’s watching and has a counter argument, please let us know. Honestly, we want to hear it and put it down there, and I’ll try to talk to Albert and see if he can come back to you. You may be careful what you wish for, but we’ll try to get Albert to come back to you. But let us know seriously, if there are valid counterarguments that encompass all these issues, just let us know in the comments, and we’d love to engage. So, guys, thank you very much. Really appreciate your time and all the thought you put into this. And have a great weekend. Thank you.

Albert

Thank you.

Sam

Thank you.

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