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Economic Warfare: What kills the US Dollar & Inflation’s hold on Europe

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In the latest episode of “The Week Ahead”, Tony Nash, Michael Kao, Albert Marko, and Ralph Schoellhammer discussed the current market trends and key themes in the world of finance. The discussion revolved around three main topics – “What kills the US dollar?”, “DXY to 112? Turbulence Incoming”, and “Inflation’s hold on Europe”.

Mike started the discussion by talking about the symposium on the Great Power Competition with China and the US Dollar’s primacy in an era of economic warfare. He emphasized that the US dollar’s status as the world’s reserve currency is at risk due to the rise of other currencies such as the Chinese Yuan. Mike further elaborated on the factors that could potentially kill the US dollar, such as a shift towards a new reserve currency or the decline of the US economy.

Moving on to the next topic, Albert spoke about the DXY, which he expects to reach 112 in the near future. He explained that this is due to the strengthening of the US economy, coupled with rising interest rates and the anticipation of the Fed’s monetary tightening. However, he also cautioned that the markets are likely to experience turbulence due to the uncertainties surrounding the central bank policy and the geopolitical risks.

Ralph then focused on the impact of inflation on Europe. He pointed out that inflation in Europe has been rising at an alarming rate, with Austria’s inflation rate being 0.9% m/m and 11.2% on year. Ralph also tweeted about the rapid increase in bankruptcies, and how this could lead to a domino effect on the European economy. He predicted that the European Central Bank’s (ECB) decision to tighten monetary policy would lead to further economic challenges, especially in Q2 of this year.

Key themes:
1. What kills the US dollar?
2. DXY to 112? Turbulence Incoming
3. Inflation’s hold on Europe

This is the 54th 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
Michael: https://twitter.com/UrbanKaoboy
Albert: https://twitter.com/amlivemon
Ralph: https://twitter.com/Raphfel

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Michael Kao. Michael is @urbankaoboy on Twitter. He’s an ex-hedge fund manager and now he’s a private investor. We’re also joined by Albert Marko, who you’re well familiar with, and Ralph Schoellhammer, who is at Webster University in Vienna and he’s a political economics expert.

Tony

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So guys, thank you for joining us. We have a few key themes this week. First, Michael has written quite a bit about the dollar and about the kind of economic warfare happening now between the US. And China. So we’re going to take the other side of his typical argument and look at what kills the US dollar. We’re going to talk to Albert about dollar strength. He made a statement about the dollar going to 112 with some turbulence. So we’re going to dig into that. And then Ralph is going to talk us through inflation’s hold on Europe. So, should be a really broad macro conversation for us today, which I’m really looking forward to. Mike, you did recently attend this symposium on the Great Power competition with China, I think it was at West Point. And you spoke about US dollar primacy and an area of economic warfare, which must have been great. I missed my invite, but it must have been a great discussion and I think we’re all pretty jealous. I assume that much of the presumption or fears about the Chinese Yan, right.

Is that kind of what the basis was of this?

Michael

Yeah, I think generally when people are talking about threats to the US dollar system right. The most glaring contender is the Chinese Yuan, given all the scaffolding that they’re setting up with 60 plus odd bilateral swaps around the world and one belt, one road and all this stuff. Right. But anyways, if you want I can go. First of all, I love the fact that you’re forcing me to steal, man, the counter argument against my own thesis. Good. Which is great. Yes.

Tony

You’ve talked about the US dollar wrecking ball. Right. And you’ve really talked a lot about how the dollar has really kind of hurt some emerging markets. So I do have a chart of USD CNY, and we’ve seen the volatility of the CNY over the past really five years, ten years. And you know, part of my concern about the CNY is the PBOC.

And you know, we can talk about that in detail, but I’d really like to hear, what do you think? If the dollar was displaced, how would that happen? And we could spend days talking about this, but I guess in a summary conversation, how would that happen and what would be a potential other store of value that would be accepted globally?

Michael

Okay, so I was going to answer this question on different time scales, right? There’s short term and there’s longer term, but I believe where you’re going with this is a longer term time scale. Like what ultimately displaces the dollar as the global reserve currency. Right.

Tony

We can talk different timescales. I actually think that’s very interesting.

Michael

Right, well, look, let me dispense with the easy part first, which is the shorter time scale. I’ve been saying for a while now that I don’t necessarily think that we’ve seen the cyclical top in the US dollar in the short term just because I don’t think any of the competing regional blocks can outhawk the Fed. Or conversely, I don’t think the Fed is going to be in a position where it’s going to outdove the rest of the world either. Right. So either of those scenarios tell me that I think the US dollar is probably going to resurge. And so obviously the counter to that, what would have to happen for that not to happen? Well, I think that the US economy would have to suddenly take a turn for the worst and be in a much worse spot than the rest of the world. And the rest of the world would basically be able to become a much more hawkish visa vis the Fed. I see the exact opposite playing out in the short term. Okay, so now longer term and this is basically the topic of my paper, right? So I think the premise of my paper is that this notion that Breton Woods was basically this top down construct that it foisted a Trojan horse mechanism on the world where, hey, everybody, come use the US dollar because we’re going to be convertible to gold.

Michael

And then all of a sudden in 1971, nixon shocks the world and takes that gold tether away. But it’s too late. Everybody is stuck using a dollar. I call bullshit on that thesis because if you look at the Euro dollar, the rise of the Euro dollar banking system, it started happening probably 15 years before that.

Tony

And he was actually very popular when he did that.

Michael

Right? Yeah, well, it’s started happening by the way. It started happening the real catalyst to it first it was the failure of the tripartite agreement after World War II, which tried to stabilize the frank and the pound and the dollar exchange rates. But then in 1957, when Britain basically in a domestic flight against inflation, surprise, surprise, they they basically instituted capital controls. So there was a there was a tremendous global need for a liquid reserve alternative. And so the world actors on the world stage organically flocked to the US. Dollar. So the premise of my paper delves into what are if trust in the dollar already went well beyond its gold backing back then, right? What lent that trust? And so our paper posits that it rests upon national power. It’s a bedrock of national power. And I focus on three economic pillars of national power geography, which informs everything. But then geography also informs a country’s access to its natural resources and its industrial capacity. So in our paper, we talk about how, look, the US. It’s well known that the US. Is very, very naturally bowed with geographic assets that are really unparalleled in many ways.

Michael

And China is short a lot of those assets. However, because we have a federalist capitalist system, china is using essentially economic warfare to target that as a vulnerability, right? So they have unfairly competed and stolen IP in the world of semiconductors. Right. They’re trying very hard to replicate Taiwan success with TSMC. Fortunately the US. Controls critical choke points in that industry still. But yet, in that area at least, the US. Is finally starting to come around and make some very specific targeted export controls as well as changes to its industrial policy. The point here is that in that area alone, the US. Is starting to recognize the importance of reshoring and defending our flank from an industrial policy perspective. But when you compare and contrast that to oil and gas, which is the other critical supply chain where the US. Is currently the leading oil supplier in the world, and we are naturally long that natural resource, but because of blind devotion to ESG adoption and this erroneous assumption that an energy transition is going to follow Moore’s Law dynamic when it won’t right. Is going to leave us in a very dangerous lurch. I point out that there’s a real inconsistency there where we’re kind of shooting ourselves in our own foot when it comes to energy policy.

Michael

To answer your question, what has to happen for the US. To really lose its status? I started thinking. I said, well, number one, okay. Oh, the other thing is much ado has been made of the US. Weaponization and the criminal west seizure of Russian reserve assets and whatnot. Okay, well, look, I also point out in my paper that, yes, that should be a shot across the bow for US. Policymakers because, like the situation in the 1950s, right, it certainly creates an incentive for our adversaries to look for an alternative. But what are the alternatives? Because if you look at the eurozone, the yen, the pound. The euro is, frankly, the most successful challenger to the dollar to date. And yet, since its inception in 1999, us share of FX reserves has stayed constant 60%. It’s the euro that’s actually lost share. Now, the Chinese yuan. Here’s the problem. What has to happen for the yuan to supplant? The US number one, china would have to prove that it will be a better benefactor and more trustworthy sort of steward of the global commons than the US. I don’t see that happening in almost any circumstance.

Tony

So let me ask you just in that what allies does China have? Like, if China were to say, okay, boys, we’re going to war. Line up and let’s form a coalition, who would China’s allies be?

Tony

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Michael

Well, that’s that’s a really good question, because right now right now well, yeah, those those are the those are the two, right? And perhaps, perhaps Iran. Right? But, like, Russia is interesting because China’s relationship with Russia over decades and centuries and even centuries, certainly, right. Has been kind of a storied one. Right. I wouldn’t say that this dragon bear romance is necessarily that chummy, because, look, China is really happy that it’s getting big discounts to Russian euros, right. And that’s directly countered to Russia’s interest, I think this whole notion that right now they share a common interest in wanting to counter the US’s. Hegemony, but that is a very fragile bromance, to say the least. The other thing I was going to say is that the other thing that would have to happen for the US. To see dominance, I think, would be that the US. Willingly essentially becomes a vassal state to China and allows China to roll over. Basically, our interest in the Indopacific, that the US. Allows China to take over Taiwan and we just roll over and do nothing. I guess in a parallel universe, that could happen. I’m not seeing that happening.

Michael

I think that China’s significance alone, not just as an unthinkable aircraft carrier, potentially for China if seized, given its geostrategic position in the first island chain, but obviously Taiwan semiconductor alone is of critical significance.

Tony

Just to take the other side of that for a minute, you know, let’s also be very aware that, you know, the wars that the US. Has lost over the last 80 years have really been to China in Korea, to China in Vietnam. Right.

Albert

We didn’t lose those wars, Tony. Our military objectives were all met. We’re confusing the political opponent.

Tony

We lost those two wars. I mean, we had to negotiate the settlement, and the US lost those two wars. So the only people the US has really lost to over the last, you know, hundred years is the Chinese. And so, you know, I do sit with you and with Albert in terms of if things were to happen, you know, with the US prevail, I actually think they would I don’t think it would be a cakewalk, and I do think there are some scars there in Asia. Right.

Michael

I think you have to compare and contrast that to where the US. Was in World War II, like when Britain lost its hegemony, where the pound lost its hegemony is because the UK was in a very tough spot. It had essentially bankrupted itself after World War II and was completely beholden to the US. The US’s lend Lease program. Right. So the US essentially had all the cards. Now, here the two wars that you talk about. I agree with Albert. It’s not even close to the same thing. We withdrew, and it wasn’t a great withdrawal, but it wasn’t a situation where we had essentially bankrupted ourselves and we were completely dependent on the largess of somebody else. Right.

Albert

If I can interject Michael, we can.

Michael

Go on and on.

Albert

About to go back to Tony’s question, what would come next? I mean, theoretically, the United States would have to have some sort of societal breakdown. Our rule of law would have to break down, and we’d have to become a nonintervationalist nation. We wouldn’t be able to protect our interests globally at that point. Something could come along to dethrone the dollar. But even if we’re at that point, I think the next logical step of removing the dollar as a reserve currency would be an Anglosphere plus Japan digital currency, where regional players would secure their own interests in those regions and have a collective I mean, this is just theoretical and way out of our lifetimes, in my opinion. But I think it would be a step down to that first where our allies and the US. Would jointly have a currency block yeah. Running through all the scenarios, in my opinion, that would be the only thing that would take the dollar. That would be I mean, the dollar would still be a part of it, but it wouldn’t be the main part of it. It would be the sole unit polar one. But you could have an angle sphere plus Japan digital currency for just for trade settlement.

Michael

Now, you know what I think the highest probability sort of gray rhino would be out of all this. It would be that if China made overtures toward Taiwan and Taiwan willingly just say, Here, take me. Because I think last year, or maybe two years ago, I wrote a thread about this, how some of the older guard in Taiwan and you know this, Tony some of the older guards that are with the KMT, they really don’t like the DPP because the DPP wants to get away from the Chinese ancestral roots of the Taiwanese. So the old God doesn’t like that. And so what if China says, hey, we’re going to take you? And then what if Taiwan says, Here, take me to me? That is much more worrisome than an amphibious takeover of Taiwan, which I see is very low probability.

Albert

Yeah, exactly.

Tony

Yeah. I think that is the most likely scenario of the scenarios of China taking over Taiwan. Right. It’s a mutual but with the DPP in power and with DPP as a sizable political party there, it’s a north versus south issue for people don’t really understand. KMT is largely North, DPP is largely south, and DPP comes to power when their policies really align with people in the north from time to time. Right. And so that’s how the DPP gets into power. The DPP is much more nationalistic and independent than the KMT.

Albert

That would be pretty risky, I mean, for the United States if it didn’t intervene in some which way, because then you could talk about North Korea and South Korea unification and siding with the Chinese at some point, which is not out of the realm of possibility, in my opinion.

Tony

Right, okay. Can we agree? Is it eliminated for the next probably 2030 years?

Albert

Yes.

Tony

Do you think it’s eliminated, Michael?

Michael

I think so. I think so as well. I was on a different podcast earlier this week, and I keep alluding to this interesting podcast that Andrew Hunt out of the UK did, where he did analysis on 36 Chinese private banks. And his assessment is that there’s four there’s a $4 trillion liability gap that’s not captured in the in the balance of payments. China is much china is much, much more levered than the US.

Tony

Absolutely.

Michael

But but it’s but it’s hidden. It’s just pin behind the Opacity curtain. That’s exactly right.

Tony

Doesn’t look good. So if we if we push China out, say, 30, 40 years before they’re a contender, and they may not even be they may be too old by that time, because there really isn’t immigration to China right. Except for from North Korea and maybe a couple of other places. So we pushed China out. What about Europe? Will we have European decide for morale in 30 years? Will we have the demographic age of people who can actually work and contribute to the economy?

Albert

They don’t have a functioning military and solely reliant. Their banks are solely reliant on the US. At the moment. They’re insolvent, in my opinion.

Tony

So, yeah, that’s a good point. If you can’t defend yourself and if the demographics continue to get worse, they won’t have people that will defend the area. So if you can’t defend yourself, you can’t have a functional currency. Right.

Ralph

I guess that was a little bit an unintended consequence. And this is something Europeans hate to admit, but of course a lot of EU policy was kind of this dirty secret. The United States were constraining China and Russia, and the Europeans were trying to make deals with them. If you think back them in the entire Russian pipeline network to Europe, and I think with all of it also mentioned, kind of psychological effect was a certain form of infantilization. Right. This idea that military conflicts simply are a thing of the past in many ways, I see the biggest security risk for the United States. I don’t want to over dramatize it, but I see it almost more in Europe than in China or elsewhere, but not because of an actual military conflict, but the commitments to Europe for cultural and historical reasons that this is going to drag down American capacities. This is going to work out. But the European idea and we hear it again europe will now rearment the Titan vendors. They talked about the Germany. If you look at what’s actually happening, it’s just not happening because they know that the populations don’t really have an interest in that.

Tony

Yeah. Okay, so it’s not CNY. It’s not Euro. What else is a viable it’s not Japan.

Michael

Right.

Albert

This is what’s making me allude to the fact that I think that anglosphered plus Japan digital currency would be the only logical step. Next logical step. Just in my opinion. I just can’t see anything else out there. The Swiss francs is not big enough. The pound is not a relic of what it was without any actual alternatives that we can discuss. What’s out there? Nothing’s out there.

Michael

And by the way, all these, like, newfangled ideas of having some sort of pan global currency backed by commodities. But you know what? John made her. Cain’s backed the Bancorp during the battle for Bretton Woods. Harry Dexter White backed the unit. The SDR was tried and failed. The US. Dollar. Is that pan global currency?

Tony

Sure.

Albert

Yeah, it is. I keep arguing with these gold back currency people, and I’m like, what would stop me being the dictator of Albania, of spray paying some lead and saying, there’s my gold? But you can’t really look at it. You know what I mean? No nation gives you a transparent audit. So how could you even have a currency based on such a thing? It’s just silly to me, in my opinion.

Tony

Ralph, jump in.

Michael

Yeah.

Ralph

And I think one of the things this is what Mike did so well, I think in his paper that he presented at Westbourne, I think we have to look at kind of the structural conditions. And in many ways the United States has the occasional incompetent administration, but their structural is still more sound than any potential competitor, definitely more than Europe. And I think if one takes a closer look, they’re all structurally, at the moment, more sound than China. And in the case of a real conflict, I mean, these things really, really matter. And besides the rhetoric in America, we.

Tony

Expect our politicians to be dumb, and we just work around that.

Albert

Yeah, I mean, in a perfect world, the Pentagon would be working with the treasury to weaponize the dollar. I guess in the adversaries, I mean, that’s something the Pentagon has never really understood or really looked at, is like, you can place your adversaries in a certain position, being short commodities, short food, and you can really strain bingo, bingo.

Michael

By the way, that is the premise of our paper. Our paper is literally saying is literally saying that rather than rely on overt sanctions, that basically cause everybody to look for alternatives to the dollar. We’re at this really interesting macroeconomic window where a strong dollar policy inflicts asymmetric pain in our largest geopolitical adversary.

Albert

Yeah, it’s an absolute logical thing to do. And on top of that, not only can you use the dollar, but you can now use derivatives of the dollars, specifically grains. I mean, there’s only five companies in America that control the world’s grain. You can call them up and cause problems for the world or for China, for Russia, for any nation you really want to target if you really want to get down to that level.

Michael

And by the way, it also kills two birds with 1 st, right. Because it basically export our inflation problem because we are in a domestic fight against inflation.

Tony

Okay, that’s a great idea. Let’s do that. Great. Okay, so let’s just call this new currency TBD. How about that? Because I’m not really sure what to put in there. There are a lot of cheerleaders, as you guys have pointed out, trying to push other things forward, but I just don’t see the case for them. And outside of just suspending reality, I just don’t see the case for something else right now. I don’t say that as an American. I like, I’m not necessarily trying to kind of represent for the dollar. I just don’t see the viability of other options right now.

Michael

Yep.

Albert

I would be I would be the first one waving the red flags if there was an actual alternative out there.

Michael

Oh, there was one thing I was going to riff on. Albert, what what you were saying, or Tony, what you were saying in terms of, you know, our politicians being idiots and whatnot. So so my my view on that is that it’s because of the geographic endowments that the US. Has that’s enabled our federalist free market system to arrive and to survive. Because if you think about it, right, if you’re China or Russia with unbelievably shitty geography, it takes an autocratic system to try to hold that bucket of bolts together. To paraphrase Han Solo, why would you.

Tony

Want to own all that land if you’re Russia, why do you want to own the east? I don’t get it. It’s just hard to keep it all together. So that’s a great point, Mike. Okay, great. Hey, let’s go from talking to the dollar to talking about the dollar. Okay. You put a Tweet up earlier this week saying when the dollar started breaking upward, you talked about expecting Dxy to hit 112.

So it’s kind of we’re, we’re heading back to where we were last year, I guess. So can you walk us through that reasoning? And you talked about turbulence. Incoming. Can you, can you talk about what that turbulence is?

Albert

Inflation. It’s back again. And as much as the Fed doesn’t want to admit a mistake, they’ve absolutely created policies of mistakes and allowed inflation to rear its ugly head. I don’t want to leave it all on, all on the Fed. A lot of it has to do with Yellen’s actions and what she’s done with the dollar and then bringing it up and bringing it down. I mean, this goes to Michael’s point of the weaponization of the dollar is, you know, Yellen takes the TGA and she’s in charge of dollar policy. She can take the dollar up. And what she did, and it drove all the liquidity in Europe, back in Asia, back into the United States, which kept our markets propped up.

Tony

For people who haven’t watched this word, can you talk about what the TGA is?

Albert

And then if the treasury general account, she can use it in many ways, but basically it’s injecting liquidity into the economy.

Tony

And how much at what scale has she done over the past, say, nine months or something?

Albert

Prior to the midterms, she was doing about 160,000,000,000 a month.

Michael

Wow.

Tony

Okay, that’s a lot. When you say injecting, where was that going?

Albert

Well, I don’t know exactly where it was going. That’s not really clear. But she was absolutely using it and I’m sure it’s been dispersed throughout the economy and whatever sectors that she needed to send it out to to rally the markets. And she did a good job. I mean, the markets have stayed up here over 4000 for quite a long time and we don’t really deserve to be here at the moment. The problem that we’re having here now is as you rally the markets now, commodities start to rally. I mean, Europe was in a zombie status. China has been in lockdown for the most part. Yeah, I mean, they’re doing this, but as they reopen, inevitably inflation is going to come back. Wage inflation has been persistent. That’s not going to wave. I mean, I mean, honestly, the workers probably deserve wage inflation after 40 years of getting nothing. So, you know, I can’t really blame them on that aspect. But again, we’re, we’re sitting here with a hot PC PCE number today. You know, it looks like CPI is probably going to be sticky again next, next time around. And the Fed is going to be talking about 50 basis points when they, you know, previously the markets were calculating that we’re going to do a pause or a pivot in a later in the year.

Tony

That’s just not happening. A couple of meetings.

Michael

No. So I mean, this honestly feels like Q one of 22 to me. The whole setup right now feels like Q one of 22.

Albert

We’re right back where we started, Michael. Right back where we started. Because of Fed policies, they’ve done nothing to correct the situation with inflation.

Tony

Okay, so what’s going to happen to drive the dollar up? Yellen stops spending out of the TGA or doesn’t spend as much, or Fed policy, all the above. What happens to contribute to that?

Albert

I think it’s going to be a combination of Fed policy and then the ECB, the Europeans being hawkish themselves. But I think that we’re looking at 75 basis points, probably going up to five and 5.75 on the Fed funds rate by the end of the year, maybe even six. I don’t think they can go over that. But I mean, that alone should take the dollar up to 112. I’m sure they can, but taking the dollar over 115 to 120, you’re going to start causing massive problems. Rest of the world, you just start breaking things.

Michael

Can I ask Ralph a question?

Tony

Absolutely, sure.

Michael

So Ralph, I’m curious. I agree with Albert’s thesis. When I look at the inflation prints in Europe and in the UK, still so high, that gives me a little bit of pause right again on betting on the dollar continuing to rise, except when you look at the state of the economy. And so I’m curious how you see that, because I believe the last UK GDP print was very close to skirting the zero bound. So how much more can the BoE or the ECB really do?

Tony

Sorry, before we do that, let’s move into rough section, which is inflation hold on Europe, right? Which is exactly what you’re talking about. And so we saw Austrian CPI committed 11.2% year on year. When was the last time that happened, Ralph? I mean, what we’ve seen over the past few months maybe, I don’t know, 40 years ago or something.

Ralph

Oh, yeah, before I was born. And so this has been significantly long time ago. The problem is, despite what the ECB does for European politicians, it’s always the 1930s. So the answer, the economic problem is that it must be a demand side problem. So every time the ECB hikes rates, the government comes in with fiscal expansion. And Australia is the best example for this. Pretty much everything that would have been caused by higher rates has been softened by government spending and now expected government spending to happen in the future, which is they very slowly or not at all changed their behavior. So the, the idea to. Kind of, you know, pull money out of the system due to high interest rates is not working as as expected. I mean, we we saw it in Germany. It was when we met the last time, right? They said that there was actually slow growth in Germany in Q four 2022. Then they said that was a slight contraction of 0.2. Today we got the second revision. That actually it’s a contraction of 0.4. And that’s mostly because there was government spending. Otherwise it would have been significantly worse.

Ralph

And I think this is really the problem we are running into. So every time the ECB tries to high grade, governments will jump in with their own fiscal policies, trying to soften it. And what, of course, happens as a consequence, europe is losing its industrial base. So supply side politics, which would be necessary, they become more and more difficult. I mean, Tracy on the last weekend did a great job in kind of just listing all the aluminum smelters and all the heavy industry that has been closed down. We heard today that Germany’s chemical giant BASF is shrinking operations all over Europe. So at some point, you cannot just turn this back on again. So I’m very worried about the structural health of Europe, or even if we look at R and D and spending, right out of the top ten R and D spenders, there is one European company, which is Volkswagen, but all the other companies, most of them are American and some of them are Asian. But Europe is losing kind of connection to all of this just as a challenge to you guys. I mean, name one groundbreaking innovation or one groundbreaking area, and let’s say the high tech area where Europe or European nation was on the forefront in the last 20 years.

Ralph

Nothing comes to my mind.

Michael

Well, ASM Lithography.

Albert

Ralph brings up a great point, and one I usually harp on a lot is whenever you have political policies intermixing with economic policies, you have a problem because politicians want to get elected and their terms are a lot shorter than economic policies need. You know what I mean? That’s just the reality of it. I mean, the Germans, they say they’re tightening things up, but then they give 80% of their population, 80% of their paycheck to stay home. That’s not going to help.

Michael

And by the way, all this, right, all the slowdown in BASF and all that that you’re talking about, Ralph, this is with an extremely benign weather backdrop this year that enabled Ttf and NBP to collapse.

Tony

So huge benefit.

Ralph

I think there are two other very important issues that particular European politicians don’t get and that you and Mike had also talked a lot about, which is there is this weird idea that if Europeans and Americans stop drilling and supplying the world with fossil fuels, that somehow the prices will go down. But exactly the opposite is going to happen because we’re still going to consume it, we just no longer produce it, which is great for all the non European and non American producers. And the second part, what I think Europeans still don’t understand, is there is still this idea that the world will go back to as it was, let’s say ten years ago, like very early on. But even if there were, new should stop. Right? It’s obvious that there is a new kind of industrial policy happening that French showing that reassuring is going to happen and that will push upwards pressure on prices. And Europeans, at some point, they’re going to feel this. I mean, we see. With Germany, Europe is increasingly becoming a continent that has to import more and more, but everything we can export is becoming less and less.

Ralph

That is not a sustainable model unless we say we just become the world’s biggest retirement home tourist destination. But other than that, it’s really problematic.

Albert

That’s interesting because I remember Belina and I were talking about what Europe should do and it was definitely bring black your supply chains to Eastern Europe, north Africa, closer to home, something Europe can drive in investments and actually hold it close to close to their hand there. But they just have not done anything. They want to rely back on the old guard of let’s go to China and grab their market share. Meanwhile, Africa is sitting right there. That’s going to have a bigger population in the next 25 years than China and Younger and Hungary for innovation and products, but they haven’t capitalized on that.

Ralph

It’s like an inversion of the 19th century, right, when there was once a time where Europeans looked at the map and so everything is a potential part of the empire, not like they barely looked at the map at all. And I think it shows in their economic policies.

Tony

Yeah. Just going back over to what you were saying about the short termism of governments, and we see this, at least in the west, the bureaucracy is supposed to be the part of government that helps the office holders to see the longer term. But the quality of our bureaucracy has deteriorated so much over the last 2030 years that they just don’t care.

Albert

They don’t care. I put a lot of blame on social media right now. I mean, all these politicians get on social media and do catch phrases and this and that, and everything is in the real and now and immediate and so on and so forth, six months down the road. They don’t care. Simply, they don’t care.

Tony

Yeah. Ralph, one of the things that you tweeted out earlier, and I know Michael found this really interesting, was the bankruptcies in Europe. This was a Eurostat chart that came out looking at the rate of acceleration of bankruptcies across industries. Can you talk to us about that a little bit?

Ralph

Yeah, I mean, there’s a couple of factors not work. I mean, one is that a lot of these companies it’s kind of what happened in the financial sector during the Great Recession where you had these zombie banks. I think a lot of this is now also happening in the real economy and the industrial economy where many companies have been propped up during Cobit, they have been propped up by very low interest rates and this is now coming to an end. I can only speak for Austria, but there are many companies, of course, also have loans, some of them with not fixed interest rates. And of course they are squeezed now, so they have huge problems in refinancing themselves. And I think this is just the beginning. I don’t share the optimist. I’m kind of a little bit Albert here. Everybody who says that either inflation is going to be over, there’s no trustworthy indicator for me that inflation is ending anytime soon. And the second one is this idea and you mentioned this also, Tony, one of your tweets. I think the IMF forecast for growth in the Eurozone are too optimistic. I think that factors that are not yet calculated.

Ralph

Absolutely. And of course the big elephant in the room comes and go to mike, did you mention, is of course, energy. Like, everybody is like, oh, the energy crisis is over. But that’s only because elasticities in the energy sector are very low. So yes, if there is a lot available right now, it immediately affects the price. But there is no guarantee that it’s going to stay like this in the medium and long term. And if I look at European policy, I think that it’s going to get worse before it gets better seems more likely. And you see gradually signals like this coming from the International Energy Agency and from Goldman Sachs. So all of a sudden the optimists of two months ago say, well, it might be more problematic than we anticipated it to be. And one part of the story is something that also Mike mentioned. At some point, I think we have to say this also openly is this obsession with ESG and an energy transition that makes the promise that by 2030, 2035 the European economy is going to run entirely on renewables, which is an unrealistic. And we want to be more outspoken about it, which I think is a ludicrous proposal that cannot be fulfilled.

Michael

I call that the grativerse.

Tony

Yeah, we’ll all be driving.

Ralph

As a quick last point if we want to put real numbers on it. I mean, the German government alone, the Europeans spent almost a trillion dollars on energy last year. The Germans spent about $465,000,000,000 only on energy and all it got them was the declining economy by 0.4% in the first quarter. So what is their strategy if they want to do this again next year and we see it in the spread? At some point markets are going to look at Germany and say, listen, your reputation has been great for the last 40 years, but can you really still.

Tony

Deliver what what you germany’s got a lot of they’ve got a lot of capacity for fiscal spending. I just think they haven’t opened up as much as they need to yet. I mean, I think that’s part of.

Albert

Their they can’t they go into a doom loop of inflation.

Michael

What happens when Mother Nature doesn’t cooperate next time around?

Albert

Right?

Ralph

I think all of you are right. Tony’s right. I think there is still wiggle room. But what are they doing with the money? Right? Instead of making capital investment and saying, okay, we solve the problem, to do something they pretty much put it all into welfare checks, energy subsidies, but exactly. Encourage people to spend more and more products that are less and less available. So what’s the only thing you get? It’s inflation. I don’t know what the politicians are looking at.

Tony

Speaking of that, let’s talk about everyone’s favorite central banker, Madam Lagarde, and the choice that she has at the next meeting. She said earlier this week that they’re likely to raise by 50 basis points at the next meeting.

So what we’ve seen, the last two rate hikes were 50. We saw a couple of 75s in September and October. So there had been a hope like there was in the US. That things would not loosen or ease, but at least slow down on the rate hiking front in Europe. But with the pace of inflation, it almost seems like they don’t really have a choice, right?

Ralph

I would agree. Yeah, I think they don’t have a choice.

Tony

Okay, well, that’s it.

Michael

Well, I think they’re going to try. But what I really think reading between the lines of all the tough talk with all the world central bankers what I think everybody if you look through to their actions so far, I think everybody has been holding their breath, hoping that the Fed is going to engineer a global recession so that they don’t need to be the ones to have to administer the medicine. But the problem is, and I alluded to this in a thread a couple of months ago called geopolitical mosh pits, right? We’re in this every man for himself world where everybody’s got a domestic inflation problem. And so what the Fed does needs to sorry, the United States interests need to take precedence over necessarily worrying about other central banking interests and vice versa. But the problem is that right now the US economy is still humming along whereas the rest of the world’s economies are faltering pretty badly already. Your guess is as good as mine. I just think that Lagarde’s job is really tough because there’s no panned global bond market. Really. So she’s got this ridiculous Tpi mechanism where she’s trying to hold together sovereign spreads and the ECB’s sort of bond purchases as a percentage of GDP already at like 60% compared to the Fed at like 34% compared to japan at 120%.

Tony

Right.

Albert

I’m glad you mentioned that Michael, about nation states interest because it’s one of the things I harp on, especially when I talk to younger people and they ask me about geopolitics. The first thing you have to look at is a nation’s self interest and there’s no better time than right now to prove that example and you’re seeing it firsthand. All these nations, they have to have their own self interest that are before anything else at the moment.

Tony

And that’s normal, right?

Michael

That’s healthy.

Tony

I think that it’s so silly when we have to consider other people. Of course there’s a time for that, but it’s not right now. You have to really look after your own country, whether it’s India, Germany, US, China, whatever, it doesn’t matter. You have to look after your country first. Rough.

Ralph

But that’s the thing. Exactly what Albert just said and this I think makes it an even bigger ticking time bomb for Europe. You have notice absurd situation that politicians of member states of the EU, they want to continue to do populist economic policies while when they fail they can put blame on the Europe, on the ECB. So technically what probably should do before the next and out sort of a rate hike is to go out and say listen, cannot clean up the mess that you guys make in the domestic economic policies. And of course that’s not something that she’s probably going to say, but that’s really the dilemma. Data us almost have an advantage with the somewhat something that Albert is criticizing all the time, justifiably so with the kind of the chummy relationship between the Fed and the government. But at least it all happens within one state, right? It all happens within one country. And also going back to what Mike said about the federal structure. But in Europe, it’s kind of the worst of two worlds because the ECB tries to fine tune the economic problems via interest rates and the politicians that just go out and say, oh, I know you have to pay more on your loan, but here is an extra check for you.

Ralph

So you could almost say it’s like the nation states are mocking in the sense what DCP is trying to do.

Tony

Yeah, Mike, you said that Lagarde has a very hard job. I actually think it’s very hard because it’s very easy. There really isn’t a lot of choice there. It’s hard having the wherewithal I guess to go through with these things that are probably going to end up being.

Michael

Pretty painful, by the way, to steal man the other side a little bit. Okay, there are some that say that okay, well the Fed, because we have all these bilateral currency swaps, the Fed is going to take care of all its friends. Right. And so we actually saw a little bit about that. I wrote a thread last year about how, when the Yen, for instance, started its first approach towards 145 ish 140 ish I got some talk from a very well placed source that basically the Fed, in conjunction with the DOJ was allowing the BOJ to essentially buy us ten years to basically kind of paint a picture to stymie the depreciation and the yen. Okay? So then we saw this big risk rally. Remember when that happened and the yen corrected back? Well, then I get a call from the same source saying, you know what my people are telling me? My people at the Fed are telling me that, you know what? They can’t hold the line anymore. They’re going to basically stop. That’s when you saw the yen go to 150. Right now we’re in this sort of everybody calls it the transitory boldilocks, where things kind of came down and you’ve got Yellen’s games with the TGA, et cetera.

Michael

But I really think, and I think I agree with everybody on on this call, that all hell is going to break loose again when the dollar starts approaching 110 again. And this time maybe there won’t be that sort of bilateral help.

Albert

Yeah, michael is absolutely right. I heard the same thing about the Fed and the BOJ on top of that.

Tony

I thought you were a source, Albert.

Albert

Right, because I talked to you about.

Ralph

It a couple of times.

Albert

But they do the same thing with the Aussies and New Zealand and Canada. They give them marching orders, say, hey, we’re going to paint a picture over here, so gives us room to do something over here, so on and so forth. But like I said, that’s the Anglosphere and plus Japan. That’s why one of the things that led me to believe is like, next thing for a currency would probably be them. But they already work together as it is, whether the market knows it or not, they talk and they work together. Yeah.

Ralph

I think it very often comes back to this very point that this is something that Michael’s and I said before it’s that, of course, what underwrites the dollar as the global reserve currency and the most powerful currency is because the United States have the most powerful economy. Whatever problems they have otherwise, their economy in many ways is still the most dynamic and the most innovative. And this is what I interfere about. The European situation is we can criticize politics, we can criticize the ECB, but I think we also have to criticize European industry itself. Because like in Germany with heavy industry, they never say anything. Right? They could get together and say this. You hear occasionally a voice there and occasionally a voice there, but there is no concerted actions by representatives of the industry to do something about it. And my suspicion is because they kind of made it comfortable for themselves because they know they get government subsidies, they might have to produce less, but I’d rather depend on the biggest monopoly there is. The state than on those pesky customers or those potentially unsecured international markets. But that’s a very short time perspective.

Ralph

I mean, this is not something it can do forever. And again, the only reason why Europe could do what it did was because they could rely on the United States to provide with the bluewater navy to everything else. They provided the framework in which Europe could do what it did. But as this framework is changing, because Albert would never talk to me again, I’m not going to move all multipolar because you would because I don’t agree with that idea either. But it’s definitely changing, I think. I think Americans are becoming more sensitive to listen, guys, you have been pre writing for 60 years. It’s time to do something yourself.

Tony

Yeah, go ahead, Mike.

Michael

So, Ralph, you touch upon another theme that we raised in our paper, which was, again, it goes back to geography, right. Because the US has had these geographical advantages. It’s allowed its military strategy to focus outward on force projection and develop that blue water navy. Right? So when you compare that and compare and contrast that to China, right, where you could argue that they’ve got greenwater superiority within the first island chain by virtue of 350 vessels versus our 270, but the gross tonnage is one third that of the US. Navy. They cannot force project. And so if you talk about real force projection and geopolitical power right. Again, to steal man the other side, what would cause the US. To see the T hegemony? Well, it would be that scenario where China somehow decides that, hey, you know what? We are going to subsidize global maritime security for the good of the global commons. Do you see China doing that? I sure don’t.

Albert

Not for all of us to century. And it takes a lot of money to build up a navy. And then you need combat experience. And then on top of that, any kind of conflict in Taiwan or the South China Seas shuts down their ports. China cannot afford to shut down their ports. I was going back and forth with Elbridge Colby about this. He’s a military guy, and I love the guy. Right. But when you have to look at the economic aspects of it concerning the dollar and China’s food insecurity problems and their economy in general, if they invaded Taiwan and shut down those ports and their economy collapsed, she would be dead in 30 days.

Michael

There’s a little issue of China having to import 80% to 90% of its crude, all of which pretty much come through the Strait of Malacca.

Tony

Yeah.

Albert

I mean, so but this is this is something that it’s really important for you to talk to the military and get that USD thing out there and talk about commodities and talk about the economic ramifications and say this is a significant deterrence for China to invade. This is a significant deterrence for any nation to really go after because there’s just no money around. The economies are really weak. So it’s a great thing that you’ve done.

Michael

Thank you. I hope you guys enjoy the paper. Yeah, sorry.

Tony

Just going back to what you said, Mike, about China not having the blue water navy, really, to protect trade and waterways. They have tried that with the Belt and Road. It’s been less than a decade, but it’s kind of been a failure since the start of it.

Michael

The thing with belt and road, right? If you think about what it is, they are expending tremendous amounts of national treasure to recreate what the US. Is naturally endowed with.

Tony

Right. Yeah. It’s very inefficient.

Michael

It’s very corrupt, and they’re failing at that.

Tony

I start with those. When I was trying to put in a tendering system for the Belt and Road transparency, I asked them, how much are you comfortable losing to corruption? 20%, 30%, 50%? People just shrug shoulders. Nobody wants to even look at those basic transparency issues, much less understand that that spending is incredibly wasteful just for some sort of desperately seeking some sort of relevance with third tier countries. Right. I mean, no offense, they’re great people and all that stuff, but they are not necessarily economic powerhouses, and they’re not necessarily strategically placed. So it’s a big problem, and corruption is a big problem in those places. So not only are they going to have to buy off Chinese industry to go in these places to build, they’re going to have to buy off the officials in those countries to get the infrastructure done. Okay, guys, let’s bring this back to Europe. Since Europe is kind of our last group. Ralph, I get the sad sense that when Mike talks about dollar resurgence and Albert talk about dollar resurgence and inflation is pushed on the rest of the world and these sorts of things, europe and European industries show this as well.

Tony

Europe isn’t really a growth engine, of course. Right. So is Europe the worst place of the regions in the world generally, when we see a dollar resurgence and inflation and kind of these coming headwinds? Probably not.

Ralph

I mean, I remember I asked all about this, I think almost a year ago, once on Twitter. I think that the ties between the US. And Europe are still so strong that I could imagine that the US. Would be willing to adapt their policies in a way to protect Europeans from the fallout that will find some ways to support them. Okay, I think that, again, maybe I’m putting too much hope in the US. Maybe this is wishful thinking on my part, but I think that these ties are still strong. I think this is the US. I think they still view Europe as part of the national interest. But spoke to be very clear, I’m glad of I mean, something that bothers me, really, is I think the best thing Europe could do would be to place itself as Athens to America’s wrong kind of place I can feel to the strongest player on the block. But don’t try to be as again, Albert, we’ve discussed it many times to participate in this fantasy of the new multipolar world where you will balance the US in a quasi agreement with India and China. This is all fantasy.

Ralph

None of this is real. When push comes to Sharp, I think the US are still the best bet for the Europeans. But to be kind of a psychological problem in Western Europe, I think this is another thing.

Tony

Of course.

Ralph

I think the Eastern Europeans, particularly Poland and others I think are much more willing to attach themselves or kind of align themselves with the US. I think Western Europe and it’s mostly cultural, psychological that they still wish to be kind of a counterweight potentially to the rude Americans and the alcohol.

Tony

We’re definitely rude. We’ll take that. Okay, guys, we’ve been an hour, so I appreciate all of the thought you put into today. For everyone watching, please don’t forget about the promo. The Friends of Tony for promo promo 1st 25 subscribers. Guys, I really appreciate your time. Time. Have a great weekend. Have a great weekend. Thank you very much.

Michael

Thank you for doing this.

Ralph

Thank you.

Categories
Week Ahead

Crucial Insights: Productivity Problems, Fed Outlook, & Germany’s Industrial Downfall

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

In this episode of the Week Ahead, Tony Nash is joined by Mike Green, Tracy Shuchart, and Sam Rines to discuss key themes including Productivity, Inflation & Secular Stagnation, Fed Outlook, and German Gas Issues.

Mike begins the discussion on Productivity, Inflation & Secular Stagnation by referring to his newsletter “ProcrastiNation” and explains the concept of Total Factor Productivity growing by constant amounts instead of constant rates, which may lead to secular stagnation. The team also reviews a chart from Natixis, which shows a bump in per capita productivity, followed by a sharp fall. The team discusses whether this productivity rise/fall is due to the boost of government spending and the blurry visibility of hours worked during the pandemic. The discussion also touches on how this impacts inflation and what measures could be taken to fight it.

Moving on to the Fed Outlook, Sam notes that the Fed isn’t letting up on inflation fighting and has been working on a delicate trajectory to achieve it. Sam talks about what he’s currently looking at and what’s changed since he first spotted this in Q2 of last year.

Tracy leads the discussion on German Gas Issues, highlighting that Natgas in Germany has been a significant topic since Russia invaded Ukraine. Tracy refers to a chart that shows how industry in Germany started curbing production during the first spike of TTF nat gas. The team also notes that capacity utilization has not come back at all, not just in Germany, but also in the Euro area as a whole.

Finally, the team discusses their expectations for the week ahead. Overall, the episode provides a comprehensive and insightful analysis of the key themes in the week ahead.

Key themes:
1. Productivity, Inflation & Secular Stagnation
2. Fed Outlook: What’s changed?
3. German Gas Issues

This is the 53rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mike: https://twitter.com/profplum99
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and today we’re joined by Mike Green, who is the chief strategist at Simplify Asset Management, and Tracy Shuchart from Hilltower Resource Advisors. And Sam Rines from Corbu. So we’re going to start off today getting a little bit nerdy. We’re going to talk about productivity, inflation and secular stagnation. There’s a great piece that Mike wrote a week ago and I want to dive into that a little bit. Next, we’re going to jump into the Fed outlook with Sam. He’s been very consistent with his view on the Fed for the past probably nine months. And so I want to really see what’s changed with the Fed outlook. And then we’re going to look at German natgas issues with Tracy and kind of how that story is evolving. So guys, thanks so much for joining us today. I really appreciate the time you’ve taken to talk with us.

Tracy

Thank you.

Tony

CI Futures is our subscription platform for global markets and economics. We forecast hundreds of assets across currencies, commodities, equity indices, and economics. We have new forecasts for currencies, commodities and equity indices every Monday morning. We do new economics forecasts for 50 countries once a month. Within CI Futures, we show you our error rates. So every forecast, every month we give you the one- and three-months error rates for our previous forecast. We also show you the top correlations and allow you to download charts and data. CI Futures is available for $50 a month, $75 a month or $99 a month. You can find out more or get a demo on completeintel.com. Thank you.

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Tony

So Mike, I want to talk about your newsletter, really stellar newsletter on productivity and inflation. You called it ProcrastiNation. For anybody who hasn’t signed up for Mike’s newsletter, I would definitely recommend it. Do you mind walking us through that kind of at a high level? And why is that important, particularly right now?

Mike

So this is going to be an interesting part of the discussion. I’m obviously interested in Sam’s take on it as well. And can you guys hear me clearly? I just realized I took off my headset. So as long as you can hear me clearly, we’re good. The dynamics of what is actually going on, are we experiencing a slowdown in productivity growth or is our model of productivity broken?

And therefore we’re effectively trying to push on a string to get all sorts of things fixed that may actually be we may be damaging them in the process of fixing them is really kind of the core point that I was making. And there’s this question about how do we measure productivity growth? How do we think about it? The traditional model of what’s called the Solo swan framework is that productivity growth is a compounding feature.

I able to produce 1000 this year. Next year I’m able to produce 10% more. So 1100 the year after that, 10% more twelve whatever it is, 1221, et cetera. We can continue that process as we go through an exponential series that grows in a manner and suggests that we should be experiencing something along those dynamics. That model is increasing. And what we have seen against that is a slowing of the rate of growth that we measure as productivity or as total factor productivity. Effectively, the inputs that we’re putting in are separated. Let’s ignore the inputs and we’re looking at how much more effectively we’re using those inputs in each period.

It’s generally thought of as the technology component. The evidence is growing that our models for how to measure this and how to think about this are flawed. In other words, it’s not a compounding feature in the sense of multiplicative. It’s actually an additive feature. In other words, if executed properly, we can see our wealth or our income levels grow by a fixed amount each year, right? So if we start at 1000, the next year we grow by 100. The year after that we grow by another hundred. Year after that we grow by another hundred, et cetera. And every once in a while, technological innovations emerge that combinatorially change that and can lead to a step function increase in that. So wealth can begin growing by a differential amount. If you measure those data series, one that is compounding exponentially, one that is compounding in what’s called an additive fashion, at least initially, they’re going to look very similar, right? So 1000 plus 100 plus 100 plus 100 looks an awful lot like 1000 times 1.1 times 1.1 times 1.1 for a certain number of periods. But they very rapidly begin to diverge. If the model that you’re trying to pursue is this multiplicative one right, and this is hyper nerdy, I understand all this, then it means you’re going to try to force all sorts of things through and more importantly, you’re going to actually start budgeting around that dynamic, right?

Well, we expect to be this much wealthier in the future, right? We’re going to see this dynamic. Anyone who’s gone through life, and we all have to do that. You’ve gotten your first job. Your very first job leads to raises that are very rapid as you demonstrate competence. And then you can kind of budget off of that. You can budget off of, okay, well, my income is going to grow at 10% a year. But you rapidly discover somewhere in your 30s that that starts to slow down, right. And you suddenly discover that things stagnate. Well, the whole point is that you’re supposed to live within your means and slowly accumulate savings till that you end up okay. But if you budgeted off the constant increases in income, you’re going to really struggle.

That’s effectively what we’re experiencing as a nation. We budgeted off the idea of nearly unlimited and trend growth. And now it actually appears that that model was wrong. And so the answer is, do we try to bang our heads and do more of the same or do we actually start to embrace that maybe a different model is operating this and what are the implications for that? The most important one is if we try to believe in a multiplicative model and the reality is an additive model, then things like inequality really begin to matter. Because if you have the upper income classes or the elites of society taking a higher share, eventually it means that the absolute numbers that are available for everybody else begin to fall. I think there’s a tremendous amount of evidence that’s what we’re seeing we’re seeing genuine dissatisfaction rising amongst the lower income communities. Or more accurately, if I really want to address it, it’s the center of the distribution that’s really being hammered to this framework. We’re more than happy to basically buy off the very low end. We’re more than happy to encourage the very high end and say, boy, you guys are really a gift to society.

It’s those in the middle that are increasingly getting hammered by this situation and by this philosophy.

Tony

Okay, so let me ask you a quick question on that. When you say a constant rate of growth or relatively constant rate of growth, you’re talking about a real rate of growth, not a nominal rate of growth, is that right?

Mike

So I just want to be very clear. We’re actually not talking about a rate. We’re actually talking about a quantity.

Tony

Quantity.

Mike

So instead of our income growing by 5% a year, you should think about our income growing by $500 or $1,000 a year. And that’s going to continue. Now, naturally that leads to slower rates of individual growth, exactly as I described for an individual.

I start off my career, I get a 10% raise off my $35,000 1st starting salary. Wow, that’s fantastic. I make $3,500 more. By the time I’m 50, I’m making $150,000. I don’t get a 10% raise, but I get a $5,000 raise. Should I be unhappy with that 5000 versus the 3500? No, the 5000 by definition is more, but it’s still a slower rate of growth.

Tony

Okay, so let me kind of try to take this a little bit more. I don’t know, I guess theoretical when we have more theoretical than me, let me try a hypothetical situation here. If we have an inflation rate 7%, okay, and that’s goods, that’s services and so on, and then we have a super core inflation rate that takes out energy and food and a lot of other things that supercore is really telling us the price of services, wages, if we really boil it down. Is that right, Sam? What is supercore telling us?

Sam

Supercore is sticky, right? And it’s sticky because wages tend to be sticky.

Tony

Right.

Sam

You don’t give to the point Michael made, you tend not to give somebody a $350 raise and then take that raise away. You leave them at that and then you slowly pick them up higher or you fire them.

There’s kind of two options. You either keep giving them pay raises or you get rid of them.

Mike

The problem with trying to cut pay, right, except under extraordinary circumstances, is it’s a signal to the employee that they’re less valuable.

Nobody wants to hear that and then show up at work the next day.

Tony

So if we’re not seeing productivity raise, say, multiplicatively or on a percentage basis, then when we see excess inflation like we do today, there really isn’t a way for people in the middle, as you say, the top end keeps what they have. The bottom end is subsidized, but there really isn’t a way for people in the middle to keep up. Is that what you’re saying? Since that super core is constant.

Mike

Correct. This is actually really kind of the key component that I would highlight, and it’s why inflation feels so bad to those in the center.

Again, at the low end, we subsidize it, we inflation adjust, and we say it’s going to rise at a rate. The inflation rate is 5%. We’re going to adjust Social Security by 5%. We’re going to adjust Snap by 5%. That person in the middle, though, can only if they’re subject to these rules, which, as I said, increasingly appear to be true. Their increment of productivity is not a percentage. Just imagine yourself on an assembly line. It is implausible that you are going to become 5% more productive every single year, your entire career. That’s just a simple reality. And I produce 10,000 tubes of toothpaste as a single worker today. As I go through my career, I get more productive, but I don’t get 5% more productive every single year. Otherwise I’d be producing basically all the toothpaste in the world as a single worker by the end of my career.

It’s not entirely true, but you understand the illustration. What is entirely plausible is, is that I’m able to produce 100 more tubes of toothpaste each year because I figure out new ways of doing it. That’s a decreasing rate of growth perfectly matched by the data series we have in terms of things like productivity over time in a career. My initial steps into my career, my productivity rises very rapidly. Later in my career, my productivity growth slows down even though my absolute productivity is higher.

When you have a rate like inflation, that’s hammering. That because it is a rate that is being reduced. It means that I’m experiencing a real loss of income and purchasing power. My productivity is less valuable. Under that framework, my living standards fall. It matches perfectly. If we had a rate based dynamic, we really wouldn’t care.

Theoretically, we could just say, well, inflation is a truly pass through experience, but it’s not.

Sam

Thank you.

Tony

Okay, great. So let’s take this a little bit to kind of productivity. I saw this chart this week from Natixis, which is a European research firm. They’re a great team of smart economists. And so I’ve got it up on the screen. It’s in your packet, Mike. Looking at per capita productivity, which is economic output divided by hours, worked as a basic rough formula for productivity, right. So we see a bump in productivity than a sharp fall. Is this a real productivity rise or fall? Is it more of a boost of government spending and blurry visibility on hours work during the pandemic? What does this mean and how does this fit within the kind of constant rates discussion that you’re observing?

Mike

Well, I would actually highlight that this is almost a perfect illustration of that type of phenomenon. It’s something that we’ve seen since the 1990s, which is the reality is that adding additional workers to the process doesn’t simply increase the output by the number of workers.

The production process is inherently limited in finance terms. Effectively, the beta of an additional worker is always going to be less than one.

So when I add new workers, I’m going to end up lowering my productivity. When I add hours to the day, I’m going to end up lowering productivity. When I remove them, I’m going to raise productivity if the system does not operate under this phenomenon in which each incremental worker or each incremental hour has the same contribution.

It’s a great description of what’s going on. And by and large, what we’ve seen in 22 is no tangible increase in outputs relative to an increase in the inputs, which is what you’re showing on. And it takes this dynamic.

Part of that, by the way, I do think is actually measurement. How do we properly measure how many hours somebody working from home is working?

Am I spending my time working? Am I spending my time running the vacuum cleaner? Am I spending my time experimenting with keto recipes?

You all know the answer for me on that last one. So that has been a consistent pattern. I’m not entirely sure I completely agree with the way that natixis frames it, although I do think that that is the direction that we’re headed in. The Fed is on this path that I think is fundamentally flawed, where they’re effectively saying, okay, let’s really raise the costs of increasing production. Let’s really raise the costs of holding incremental inventory. Let’s make it increasingly difficult for companies to finance themselves. And off the back of that, we should expect to see a dramatic increase in production and a fall in inflation. Makes zero sense to me. But they’re doing what they’re doing.

Tony

So they’re effectively trying to force productivity improvement, at least in theory, by making the cost of that worker higher.

Mike

What they’re attempting to do, that’s a way of thinking about it, right. They’re trying to force a reorganization of society so that it is, at its core, more productive. That would be great if human beings were widgets. But one of the most interesting things about what’s going on right now is that this recession looks radically different than prior recessions that we’ve had. Traditional recessions target the cyclical worker, the person on the assembly line, et cetera. We’re still recovering from the depths of the Cobin crisis. On the production front, we’re producing less than 15 million vehicles. On the automotive side, we still have shortages of houses, we still have homes that are currently under construction from the last boom, et cetera. We haven’t seen the impact of those falling off yet. This cycle is very different. We’re firing people that have college degrees for the first time almost in history, without a meaningful slowdown in the rest of the economy, we all experience this. There’s shortages of housekeepers and low end workers, people that are willing to change bedpans in an environment of COVID In a nursing home, you can’t find those people, right? But you can find plenty of college educated French medieval literature majors.

Now, what good are French medieval literature majors? I’m not entirely sure, but we stole those signals from the market a long time ago through our system of student loans. And now, of course, we’re dealing with the ramifications of it in the Silicon Valley environment, where Google basically was trying desperately to hire anybody to conceal their innate levels of profitability and avoid things like antitrust actions. They brought in all sorts of workers who are very marginal contributors, primarily contributing of various TikTok memes in terms of how their pictures are taken. But the workers being laid off at Google make $275,000 a year on average. Stop and think about that. That’s a lot of money. That’s a great job, right? You know what the unemployment benefit is in California? The maximum unemployment benefit? I’m guessing Sam knows this off the.

Tony

Top of his head, like $1,500 a month or something?

Mike

No, it’s $13,000 total. Okay, so somebody who gets fired from a $275,000 a year job is supposed to immediately go and file unemployment claims so they can generate a $13,000 benefit over 26 weeks. When, by the way, if they just wait a year, they could actually file in arrears and get it as a lump sum payment that would help to pay for a flight to Hawaii. A vacation in Hawaii. They don’t know how to do this. They don’t know how to tap into the market. They have no idea how those systems work. In contrast to the traditional cyclical employees, when they lose their jobs, have the number taped to their refrigerator.

Tony

So I had dinner with a technology recruiter last night. He told me that for tech jobs in New York, for every tech job that he sees, there are 3000 resumes. For every tech job. He said it’s terrible in New York. I can’t imagine. Silicon Valley is much different. But he said there’s so much slack in the tech workforce in New York. That they get 3000 applications for every job that’s posted. He said, Honestly, I can’t go through all of them. I go through about 800 of them. I can’t look at it anymore.

Mike

Your brain fries on that.

But now the flip side of that is, of course, what we’re supposedly receiving from the Fed surveys of job openings and labor turnover of the jolt surveys and suggest, wait a second, there’s two jobs available for every unemployed worker. How do we possibly get to the 3000 applicants for every job if there’s two jobs for every unemployed worker? It’s just the data is a mess.

Tony

It’s a mess.

Mike

Yes.

Tony

Ba is not going to get that accurately. They’re working on a methodology that’s probably two decades old. I haven’t looked into it for a long time, but you guys would know more about that than I would. But I assume that their methodology is.

Mike

They took a terrible methodology and they made it much worse with the introduction of the birth death adjustments in 2012. So now they basically just assume that jobs are being created.

Tony

That’s good. Okay.

Mike

Yeah, I know. It’s great.

Tony

We have an economy based on assumptions, okay?

Sam

It’s why you just jump to the Indeed data and call it a day. That’s what I do.

Mike

You do what? I’m sorry.

Sam

I just look at the indeed.com data. That’s the only one I use.

Mike

Even the Indeed data, though, you have to recognize the dynamics of share gain.

Mike

So you have to make some adjustment for the fact that increasingly people are finding their jobs on Indeed.

Sam

Exactly. Yeah, you do. But it’s at least a little bit better because it’s at least real jobs being posted.

Mike

And the response rates, by the way, to the jolts data is like, it’s just so bad at this point. It’s fallen from Sam again, sam probably knows the data better than I do, but I believe the response rates for the jolt going into the global financial crisis were north of 65%. Today it’s below 30.

Sam

Yeah, it’s gone down about 50%, give or take count.

Tony

So the response rate to the jolts data you mean the companies who are responding to the surveys for jolts data?

Mike

The companies that are responding to the surveys for jolts data has fallen by around 50%, among other things. That’s because the bls continues to rely and this is true for the household survey as well.

They continue to rely on things like landline surveys. You will not get a call from the bls on your cell phone. This is a legacy from the dynamics of cell phone calls used to cost the receiver, so you used to have to pay if somebody called you. Therefore, they would never call a cell phone because people would be like, hey, there’s a survey. They hang up. Now we don’t have anybody with landlines anymore.

Tony

So, Sam, does your company have a physical landline?

Sam

I have never had a landline in my life.

Tony

Tracy, does your company have a physical landline?

Tracy

That would be no.

Tony

Mike, does your company have a physical landline?

Mike

We do not.

Tony

Neither does mine. So I know we’re probably outliers, but still, we’re in small, mid size companies, and none of our companies have a landline. So blsba would never survey us.

Mike

They would never survey us. And the methodology is that we are presumed to have the same behavior as those who answer their phones.

Tony

Yeah.

Mike

It’s just a mess. That is a technical term for what happens when you go through transitions and you have far too much dependence on accuracy of data.

We’ve tried to fine tune the system to the point that it’s not meaningful anymore, using that system to establish monetary policy of unprecedented levels of intervention.

Tony

Okay, so, Mike, let’s go to the conclusions of your newsletter. What does this mean for inflation? What does this mean for how you view our ability to fight it?

Mike

Well, again, I was saying this I say this over and over and over again. We’re a narrative based species. We have to explain everything. One of the narratives that we have deeply accepted is the idea that anything the government does is bad.

And so we basically have gotten to the point where our conclusion is, elon Musk is a more talented individual than Mike Green, therefore, he should pay less taxes, or certainly shouldn’t have to pay taxes on surplus through a higher progressive rate, et cetera. We want to keep the money with those who have demonstrated productivity. It’s not working. It’s the easiest way to put it.

What we actually know is that any one individual has a combination of luck and skill in their individual career. How that gets compensated, how that gets rewarded, is completely context dependent. If the world was back in the 19th century and we were reliant upon various forms of 18th century, we were reliant on various forms of physical strength, tracy’s role in the economy would be radically different today. Radically different than it is today.

Mine as well. Instead of being a giant forehead on a TV screen, I’d probably be slaving away in a coal mine somewhere. Our ability to raise individuals to that capability and to allow them to participate in the system is really what’s a question. And we’re just doing a terrible job of incorporating people into that system. We’re increasingly saying the only people that matter are the Elon Musk, peter thiels, sergey brin’s of the world, and we should want them to continue to bestow their capabilities upon us. Again, that’s part of the reason for highlighting the productivity dynamics. There’s no evidence that that’s actually true. So what we’re doing is we’re taking away from people who could be contributing to society at a lower level, but their aggregate contribution is like a bunch of ants.

I mean, each individual ant can bring something to the table. Even if they don’t get to be the queen, we’re disregarding them, saying that they don’t matter, reducing their role and their compensation in society, encouraging them not to participate. I think that sits at the core of the challenges that we face right now.

Tony

That’s a tough one, especially given where our infrastructure is today. Sam, what thoughts do you have on that?

Sam

I’m pretty much right there with it. I do think that there’s a significant amount of problems and it’s very problematic when the call it the lower quartile of the income spectrum and the middle in particular begins to see a real wage go negative and go negative in a meaningful way and they generally don’t see a way out of it. What’s also interesting is that we’re relying on cpi numbers. We talk about supercore, we talk about core services, ex shelter, et cetera, et cetera. But when the middle is actually looking at what their wages are going to, it’s predominantly the things we cut out, right? It’s shelter, oil and food that’s a significant portion of their income. So while it’s always entertaining and it’s always kind of a good thing to look at the underlying metrics on inflation, it is not the real world experience. The easiest way for me to feel good or bad in the morning. Well, not necessarily me because I’m in Texas. So the bigger the number on the gasoline board, the better off I am. But for the vast majority of Americans, that’s not true to me. There’s a significant longer term issue here when the consumption metrics are highly reliant on the bottom 50% and the bottom 50% is getting eaten away.

Tony

Yeah, sounds pretty dire. I hope it’s not really that dire. And Mike san Francisco Fed. I think you should go. Sam, Dallas Fed, I think you should be there and you guys should solve these problems.

Mike

I will tell you, I spent a significant amount of time last two weeks ago at the New York Fed and the answer is really quite straightforward. It is an orthodox institution that is extremely captured by the idea that the cost of money is ultimately the determinant of inflation and they’re not prepared to consider anything else. So the solution is the beating shall continue until morale improves.

Tony

Great. And I guess the real question to be a realist is how do you game that?

Mike

Right?

Tony

I mean, that’s the question for all of us and that’s why we talk about this every week, is how do you take that view and how do you game that to make the best of your income?

Mike

So the quick answer is that you do the best you possibly can to engage in the equivalent of Dumer prep. It’s not to stockpile canned food and pasta, it’s to basically remove yourself from a situation in which you are dependent upon the impact of the Federal Reserve. So the Fed is pursuing a model that is going to raise inflationary pressures that is going to lower economic activity. We’re all caught in the crossfire of that. That means that our incomes are going to be negatively affected in real terms. Our capacity to service debt is going to fall in the future. And therefore you want to reduce as much debt as you basically do the exact opposite of what we’ve been encouraged to do for the past 40 years. 40 years. You do everything in your power to reduce debt, reduce dependence on the system, and create put yourself into a situation in which you’re effectively benefiting from the higher interest rates. Meaning you’re holding cash.

Tony

Yeah. Very good.

Sam

Okay.

Tony

Thanks, Mike. There’s a lot to think about there. And again, anybody who doesn’t get mike’s newsletter, I would encourage them to look for his substac and subscribe his. So thank you for that, Sam. Let’s look at the Fed outlook. Given the kind of doomer Fed close out that Mike just gave us, let’s look at the Fed outlook and look at what’s changed. So back in July of 2022, you presented in your newsletter, you said peak inflation and peak hawkishness dominate the narrative. Following the fomc meeting. This was the Fed meeting in, I think it was late June, early July. But it’s you said that the fmc has tunnel vision on inflation, and the end of the tunnel is not visible. So this was, you know, almost a year ago, nine months ago this past week, you said very similar, you said until price over volume and the consumer breaks, it is still 25s for life.

So you’ve presented a very hawkish outlook for the Fed over that period. Well, not very relatively. I’ll say hawkish. So as far as I know, I don’t know, you’re the only person who’s got it consistently right. And you’ve been pretty flawless.

So the Fed isn’t letting up on inflation, and they’ve been working a pretty delicate trajectory.

Mike

Right.

Tony

I mean, they really went hard on seventy five s, and then they pulled back to 25s. What are you looking at now? And what has changed since Q 222 since you spotted this last year?

Sam

Yeah. So not much has changed. We can start there. Okay, good. Not much has changed relative to what we were thinking, that we were well above where the street was at that point for the terminal rate. And we continue to see twenty five s and those 25s continuing for the foreseeable future.

Mike

Right.

Sam

And I do think that it’s highly dependent on two things. It’s highly dependent on where inflation actually comes in, and it’s highly dependent on where wages and the consumer end up. And when you look at the data and to michael’s point, looking at the data that’s being printed off, the inflation report, the employment report, et cetera, there’s a lot of noise in those systems. So instead of doing that, I basically just go through earnings reports constantly as they’re released and take it as. These management teams tend to have a pretty good idea of where they’re going to set price, where they’re going to set wages, and what their input costs are going to be. When you look at companies from pepsi to coca cola, nestle, hershey, all of their pricing is going up and they’re going up significantly.

Tony

What’s the magnitude on average?

Sam

810 percent, 12% on average. It’s low teens in terms of year over year pricing. pepsi said they were mostly done pushing price, but that means that they’re still pushing price to date. Texas roadhouse, of all places, said they were increasing their menu pricing 2.2% in March. They saw their commodity prices increasing for the year 5% and their wages going up 5%. So that’s kind of one little I call it a cog in the system.

Tony

It’s interesting you mentioned Texas roadhouse. So we had retail sales, restaurants went up 25% year on year, right. How does that stop? I just don’t understand. How does that rate of growth stop? What does it look like from your.

Sam

Perspective in terms of the year over year numbers? I mean, the year over year numbers were somewhat skewed because of omacon last year, right. So you had some audies in the data going in to the retail sales report on a year over year basis, but on a month over month basis, they were very, very strong. And one of the things that another one of the great points that Michael made a moment ago, it’s really interesting when you look at the dynamics of income to start 2023, social Security payments increased by 8.7. That’s 70 million people that just got in a nearly 9% raise in January.

Mike

Right.

Sam

So that money is hitting the system. That’s somewhere around $120,000,000,000, and the marginal propensity to consume on that is extraordinarily high. The average dollar coming in the door on Social Security is going to the bottom half the income spectrum and mostly skewed towards the lower half of that half. That tends to get spent, and it tends to get spent very quickly. So that’s high powered automobiles directly into the system. Well, it’s a lot of eating out at restaurants, right? It’s a lot of cracker Barrel. You look at cracker Barrels earnings, their wages, et cetera, walmart raising their wage, a lot of middle America, particularly at the bottom, is beginning to see some pretty significant pay raises. And those pay raises go straight into the economy. They don’t go into savings, they don’t go into 401k, they don’t go into the stock market. They go straight into spending. And they tend to spend on, well, gasoline, groceries, eating food out, and to a certain degree, shelter.

Mike

Right?

Sam

So these these numbers are more than likely not one off type deals, right? We’re more than likely going to continue to see significant surprises to the upside. I mean, there’s, there’s some I think it was Texas roadhouse as well that said that their January was up in the mid 20s on a year over year basis. This type of dynamic, and I think it’s really interesting following on from mike’s portion, it’s a really interesting dynamic because if you don’t have inflation crack, the Fed is going to continue with these 25s for the foreseeable future. And right now we’re sitting at a terminal rate that’s 5.25 to 55. And they’re going to continue pushing those further. If you continue to have these data points, and it’s really hard to see when the data points are going to crack, you can kind of moving away from the restaurant and retail for a moment. John deere is mid teens on pricing for the year. Those prices aren’t going down so that’s farmers are going to see their equipment become more expensive. You’re going to have food becoming more expensive when you eat out. You have food at grocery stores becoming more expensive.

To michael’s point, it’s probably not going to solve the problem by increasing interest rates immediately. And you haven’t seen a crack in construction because of the massive backlog, because we didn’t have lumber and we didn’t have piping and we didn’t have concrete, et cetera. You still have construction jobs, you still have oil field jobs, you still have all of the stuff in the middle of America, and you’ve had a few thousand people get laid off in tech.

And they all got six to twelve months giant packages to go find another job. So they’re not going to hit the jobless claims for at least six to twelve months from when they got laid off. They’re all sitting pretty, they’re all going on vacations, they’re all spending money. So again, it’s one of those where the economy still hasn’t cracked and the Fed is going further.

Tony

Yeah. I just want to be clear. I know we’ve talked about this before, but I want to make sure that my understanding is still correct. The Fed is not trying to get pricing levels back to 2019. No, we’re just trying to get them to stop rising.

Sam

Correct. Yes. Well, they would prefer to have disinflation. Right. They want to get back to a 2% run rate, but no, they’re not trying to get back. They’re not trying to go deflationary.

Mike

Trying can I just toss something into sam’s point picture of North American tractor sales?

The really critical point is that we’re talking about price increases, dramatic price increases in tractor sales, even as tractor sales themselves are, give or take, 40% below the levels from 2008.

This is insane. This is clearly market power that is going through. The tractor industry is basically divided into two players, deer and agco, neither one of which, both of which have signaled we’re no longer going to compete on price. We’re going to basically try to load everything up and produce at a minimum level. These are monopoly and you know what I mean? oligopolistic. I’m sorry. Pricing patterns where you produce well below the marginal demand because you’re effectively trying to maximize your margins.

So we’re seeing this over and over and over again. That’s why we have the ftc. That’s what we should be going after in terms of the behavior of individual companies. We should be penalizing them. We should be working to introduce new competition into these spaces, et cetera, and we just refuse to do it. We’re terrified that in the process of harming these individual national champions like deer, that somehow we’re going to create conditions under which we all collapse into the proverbial flames of hell.

The second component is that Sam hit on this dynamic of somebody who has Social Security just experienced a 9% raise. They actually experienced far more than that because remember that those who are collecting Social Security tend to be amongst the class of individuals who have accumulated a degree of savings that they had anticipated living off of for the rest of their lives. Suddenly, their checking accounts or bank accounts have gone from yielding or their money market funds have gone from yielding zero to yielding four and a half to 5%.

If I have $100,000, that’s $5,000 of incremental savings that I’m receiving. I have a million dollars. That’s $50,000 that I’m receiving. And by the way, my propensity to spend that is dramatically higher because it’s income, not principal. Now, I actually am much more comfortable spending that than I would have been spending $50,000 before.

So everything that we’re doing in, like, the last desperate act of the boomers to totally screw us all is basically handing money to old people at the expense of young people who are going to lose their jobs.

Tony

I think that’s worth repeating. And we’ve talked about that in a couple of other shows. Not that directly, but say that again. So the government is handing out money to old people at the expense of younger, more productive workers who are losing their jobs.

Mike

Correct. It’s just that straightforward.

Tony

Yeah. Okay, great. Okay, so, Sam there’s a lot to digest here, guys. It’s not pretty. It’s not a pretty episode. So, Sam, tell us about what does the Fed look like over the next three or four months? It’s 25, as far as you can see. But it’s that simple.

Sam

It’s that simple. And it’s that simple. It really you only have a couple more prints of data before of data that matters before the Fed meets and redesign plot. I mean, that’s it’s. It’s 25s for the next four for the next three meetings. Okay. Then there’s the possibility of a pause, but I would be short the possibility of a pause there simply because, to reiterate what Mike said, again, it’s a pretty orthodox place.

Mike

Right.

Sam

They’re going to continue raising rates until inflation breaks because that’s what they believe will occur.

Tony

But I think June by June will have had the base effect of crude being in $130 a barrel, right?

Sam

Core Services, Ex Shelter doesn’t have oil in it. They don’t care.

Mike

They don’t care about that. But that actually is a really critical point. And forget the year over year comparisons because nobody actually does that, right? Nobody sits down and does their budget and says, gosh, oil was $130 this time last year. Now it’s only $80. Therefore I have more money to spend. They experience it immediately when they go to the gas tank and they go to fill up their gas. Their gas tank. A year ago, they were filling it up for $100. Now they’re filling it up for $60, money that has gone back into the economy from the period of June and contributed to the perception of rebound. That, in turn, is now theoretically feeding the inflationary concerns. We see this in consumer sentiment surveys that are heavily dependent upon gasoline prices, like the Michigan survey, et cetera. The minute gasoline prices bottomed or peaked, they began to experience improvements in sentiment even as the underlying conditions have deteriorated.

Tony

Okay, tracy, I want to bring you in here because I always get complaints when you speak last. So tell me your thoughts on that in terms of oil consumption, as far.

Tracy

As oil consumption in the United States.

Tony

And the impact on inflation, how do people experience that and what impact do you think that has on how the Fed acts?

Tracy

Yeah, absolutely. I completely agree with Mike. What it comes down to is what are the prices at the pump for the actual consumer, right? And that gives you extra, theoretically, or what’s envisioned is extra spending, right, extra spending money. Because you’re not paying $100 anymore, as he said, for that example, you’re paying $60. So now you have more excess cash to, I don’t know, go out to dinner. But that’s kind of like a theoretical situation. And the thing is that I think that when we are talking about gas prices and when we are talking, we really need to see longer term results for this. I think it’s premature to say we’re seeing excess spending in this area because gas prices are down this month because they fluctuate so much because gas has been very volatile since 2020. And so I think there needs to be a lot more long term data that is focused on this, which we’re probably not going to get from the government. But I think that would be beneficial into seeing how exactly does this over the long term reflect consumer spending habits.

Tony

Great. Okay, that’s hugely useful. Sam, back to you just to wrap this up. And you’ve had this concept of hawk grackledove, right? And for those who don’t understand, a hawk is obviously hawkish Fed. A gracklish fed. And Sam, correct me if I’m wrong, is one that kind of is talking out of both sides of its mouth, just making a lot of noise where they’re not entirely sure which direction they’re going to go. And then you have a dovish Fed, which is obviously dovish. Right. What data are you looking for or what behavior are you looking for? For the Fed to really swing kind of gracklish.

Sam

I do think the Fed is gracklish at the moment. The Fed went grackle when it went to 25 because that gives them wiggle room on both sides. It gives them the ability to both push the terminal rate higher, push terminal rate lower, much more data dependent. In terms of every you put in another 25 if you put up 400,000 jobs. If inflation comes in high, you put up another 25 basis point hike. If it comes in low, you take it out. That’s really what the Grackle is.

Sam

It’s when they talk a lot and don’t really give you any incremental information. Right. Last year, they were just pure hawk. It was every single time they open their mouth, they seem to just be hawk. Now it’s, well, maybe we wanted to go 50, but we went 25, but maybe we don’t have to go any further, which is what we’ve seen over the last week. Yeah, they’re grackles.

Sam

To reiterate this, and I think I said it here, I might not have the Grackle is the most annoying bird in the world. They are loud, they fly in groups, and they scream all the time. And at least in Texas, you can’t park your car under a tree for a long time. It’s just the worst thing ever. And it’s pretty easy to understand a Dubbish Fed. It’s pretty easy to understand a hawkish Fed. It’s very difficult to understand a Grackleish Fed. And that’s where I think we’re at right now.

Tony

Okay, great. So just more to come there. We’re waiting and seeing we’re going to see at least three more, then more to come. Yeah, that’s the story. Okay, thank you, guys. That’s great. Let’s move on to tracy, who everyone’s been waiting for, of course. And so, tracy, I’m responding to, we sent out a tweet asking for questions, and one of our regular viewers, Daniel Cook, said, how is industry in Germany coping with the nat gas situation today? So I want to bring in some of those questions pretty regularly.

And you sent me a couple of charts. The first one is on ttf netgas, so can you talk us through that and what’s happening in markets with ttf natgas?

Tracy

All right, so I feel like this is a total switch from what we’ve been talking about.

Tony

Absolutely, it is.

Tracy

We’re switching to Europe right now. Right. I hate to add to the non pretty situation, but this episode is going to continue with the non pretty situation.

Tony

That’s okay.

Tracy

I think that there has been irreparable damage to industry, and not only Germany, but in the Euro area as a whole. I sent you that ptf chart because I wanted to point out that in fall of 2021 is when we had that very first spike, right? And that’s when we really started seeing industry having to pull that. That is in particular in smelters glass companies and chemical companies. I just want to run through very quickly kind of a timeline of the biggies that happened. And this will make more sense later. Why wouldn’t do this? But so in October of 2021, nystar, which is one of the largest zinc companies in the world, they cut zinc smelting production by 50% in three top European smelters. December of 2021 started the aluminum smelting horrible problem, which dunker K Industries in France. My French is terrible. So I know a million people will say that’s not how you pronounce it. But anyway, which is the largest aluminum smelter in France, curved output. Then you had followed by romanian aluminum producer alto slatina. They started a program of total closure due to high energy prices. By May of 2022, aluminum production flies more.

July of 2022, almost all of European smelting production is offline. September 2022, that starts the glass industry. So you have French glass maker derelict stops production entirely.

Tony

Sorry, let me stop you. So with the aluminum smelting so if it’s not being done in Europe, where is it being done?

Tracy

Tell me. I was getting to that. Well, since you asked, ironically, it’s Russia. Of course it is, because ironically it’s Russian. What happened is that the EU actually sanctioned Russia aluminum imports in April of 2022. But there was a clause in that particular sanction agreement that said you can get an exemption of products from Russian origin to be imported if you can get a special permit.

Tony

Of course, europeans always circumvent their own sanctions.

Sam

Always.

Tracy

So long and short of that is, within six months, EU imports, Russian aluminum surged over 70%. So that happened back to my timeline. So Bass, after cutting production throughout the entire year, in October of 22, they announced permanently they were downsizing their factory in Germany as far as production and labor is concerned. And then in November 2022, they announced their largest service treatment treatment site in China. So long and short of this is that when you look at these industries, right, you have to look at especially smilting and glass in particular, these blast furnaces. You just can’t turn them back on, right? They take months and months to get them the proper temperature again. And if you look at if you revisit that ttf graph, you can see there’s been no relief for these industries to be able to get back online. So you can assume that’s gone because now it’s been over a year, right? And so people have already I mean, even Europe has already sourced other people outside of Europe. So these industries are not coming back.

Tony

So can you talk us through capacity utilization and how the industry is not going back has impacted capacity utilization? Because the capacity utilization is a measure of the capacity that is still there, right? Not the capacity that’s online.

Tracy

Right. What is still there. And so what we see in the graph that I sent you is Germany. But really, if you look at the Euro area as a whole, that graph looks exactly the same. And what we’re seeing is that even though Nat Gas prices has limited I can’t speak to that either. It’s limited over the last six months. We’re still seeing utilization down. These industries are not coming back.

Tony

In other words, where are they going?

Tracy

They’re being outsourced everywhere else. In fact, Europe has a big problem with regulations and red tape, which has been a huge pitfall for companies. And so oh, you know, companies have been looking elsewhere, for example, China, the Us. Mexico, South America, and realize they’ve been dealing with this since the first spike in fall of 2021. And so they’ve had plenty of time. And now, I know the EU has been very vocal about the Us. Inflation Reduction Act and worried that it’s going to incentivize business to leave the EU for the Us. Which is a concern. I understand that. But I guess I would say the essence of the debate has been this in face of the $369,000,000,000 worth of tax breaks and subsidies set aside to boost green technology and energy security in the Us. How can the EU maintain a leading position in clean tech industries moving forward? The problem is that they’ve taken six months to talk about this without doing anything. It’s all been talked. And so companies have already been looking elsewhere outside of Europe. So, unfortunately, I think what this is going to lead to is kind of a deindustrialization of not only Germany, but the Euro area as a whole.

Tony

Well, that’s pretty dire. So you say it’s going to China, Us, mexico and parts of South America. I assume that’s Brazil? Maybe.

Tracy

Yeah.

Tony

So that’s a net positive, I guess, for North America.

Tracy

At least it is for North America. Europe is running very scared right now. Right. Again, they’ve been having meetings for the last six months, but the problem is that they continuously drag their feet on making decisions. And when you drag your feet that long, you give companies ample time to make other plans.

Tony

Right. Okay. So how does this end? If if we had Nat Gas stay at low levels for three years, do you think that manufacturer would would come back?

Tracy

No. Back to Europe? No, I think they’ve already made once you’ve already made other plans, and you already left. And we’re talking about companies that have literally shut down things permanently.

Tony

So parts of Germany become western Pennsylvania.

Tracy

Yes, but again, I don’t want to be a doom and gloomer and say it’s totally in German manufacturing, but I will say that I would keep a close eye on that, because I think that you’re going to see, I think Germany as an industrial powerhouse is going to not be over the next ten years wow.

Mike

Tracy, when you say over the next ten years it’s not going to be a powerhouse, is that because the cost of producing, you’re saying effectively is so high that they’re no longer going to be able to compete?

Tracy

Correct.

Mike

Is the flip side of that just that the cost will go up because the world needs their supply?

Tracy

Well, that’s a twofold question. First of all, we’ve already seen industry already close there permanently, such as basf, just the largest chemical manufacturing company in the world, basically has already decided to leave Germany. Not entirely, but they have decided to pare down their manufacturing process and their labor in Germany and look elsewhere. And I think that it’s going to continue to happen because I think if you look at Germany or EU in particular, there is a lot of bureaucratic red tape there and a lot of things. And until I think that Europe really addresses that issue, more and more companies are going to be encouraged to go other places where perhaps that rig tape is not so difficult. In addition, it’s a lot cheaper as far as labor, et cetera.

Tony

Wow. Okay, so how does the German market what can they do to cope with nat gas prices just in terms of the day to day consumer?

Tracy

Well, obviously nat gas prices have come way down since the peak in July of 2022. But I don’t think that is completely over with. I think the market is a little complacent right now because prices have come down so much because the German government has been asking for people to cut their consumption not only on the consumer side, but on the industry side as well. And so we’ve seen a 30% decrease in consumer industry consumption due to a lot of initiatives that they’ve asked for.

Tony

While increasing their coal consumption and shutting nuclear.

Tracy

Yes, I think it’s a difficult road. I don’t think Europe as a whole is out of the woods yet as far as natural gas is concerned. We talked about that last week a little bit. But as far as industry is concerned, I am really worried because I think the signs are all there, that we are at least starting to see the deindustrialization process of airport, which would be mark a significant change in industry, particularly for Germany.

Tony

Wow. Okay. That’s something to really think about, something we want to keep an eye on because I’m very curious about that. Okay, guys, thanks for a real downer of a show. That’s awesome.

Sam

Wages were going up. That’s not all bad.

Tony

This has been great. Look, we’ve been a little more thoughtful today, I think, a little more kind of looking at kind of the whole context rather than just the markets. And I think that’s great. And I think what’s interesting to me is there’s not a lot of focus on this in the day to day hype cycle that we see. Of course. Right. But these are things that we have to look at within the context, not necessarily within the decisions that we’re making every day. And so I really appreciate this Mike, I really appreciate between you and Sam, your newsletters have such deep thought in them and application to what’s going on today as well as say the medium or longer term. It’s just fantastic to get that. Having said all that guys, what’s on your mind for the next week? So tracy, let’s start with you the week ahead, what do you have coming up next week?

Tracy

What do we have coming up next week? I think next week, I think honestly it’s going to be more of the same. I think we’re going to see a lot of volatility in markets, especially looking at obviously commodity markets are kind of my focus. I think that you are going to see that. I think everybody should keep an eye on the dollar, particularly if you are trading commodities because we are sort of seeing a technical breakout of some sorts looking at the daily charts. So keep an eye on the dollar and then again I still expect volatility to continue in the commodity markets. With conflicting news on a higher dollar, china reopening Russia export. They said they were cutting five hundred K million barrels per day starting in March. But then they just said this morning that their butt they’re keeping exports the same. Crude oil markets didn’t really like that.

Tony

Their natural production is down 20%. So of course they’re going to cut $500,000 for domestic consumption. Are you still there tracy? Okay, Sam, what are you looking for in the week ahead?

Sam

I’m basically just kind of listening to whatever. I don’t really think there’s that much that’s all that interesting coming out next week. Maybe jobless claims will be interesting, unlikely, I don’t know. Honestly, it’s just a lot of chop. It’s all about waiting. It’s kind of like waiting on godot except you just sub in China for godot, wait for them to reopen, wait for them to actually make a move on the stimulus. Some announcements that actually makes sense in terms of how they’re going to stimulate, et cetera, et cetera. So right now I think it’s a waiting game and sitting on your hands is probably the most intelligent thing to do through the job.

Tony

Yeah. China is going to announce rail stimulus like they have for the last 30 years. I can guarantee that’s part of the mix. Okay, thanks for that. And Mike, how about you? What are you looking at for the week ahead?

Mike

Well, we have the traditional data dynamics like tracy, I’m very closely watching the Us dollar, but more importantly I’m starting to watch the credit events that are beginning to pile up. So you had brookfield walk away from two buildings last week. You had Standing file for bankruptcy today as fuel pump manufacturer has been in business continuously for 150 years citing unsustainable levels of debt repayment from buyout done with cerberus. This is the waiting the higher for longer framework. The continued tightening of liquidity is the equivalent of a distributive top in equity terms. Right. You have to wait and it’s going to happen. You’re going to see the distress begin to mount and the Fed will ultimately manage to crush demand because they’re creating an incredibly compelling reason for those at the high end with true discretion, right? I mean, remember the low end, that bottom 50 percentile that Sam and I are highlighting in terms of the consumer, they don’t really have a choice about discretionary spending. They basically don’t really have any savings. And so when they’re faced with a loss of real purchasing power, as we’ve seen over the last year, they originally kind of that second quartile turns to credit cards and other mechanisms to allow them to continue to purchase goods and services in the hopes that things are ultimately going to get better.

Mike

We’re now seeing those hopes begin to run out. The additional space on their credit cards is becoming exhausted. Unlike the old and the extremely wealthy, they don’t have significant quantities of cash in bank accounts or in money market funds. So they’re not benefiting from the increasing purchasing power. They’re beginning to falter. We’ll see the signs of that. My expectation is sometime in the next quarter.

But it is a waiting game right now, right? And until the Fed begins to see the evidence that it’s mission accomplished in hammering the demand side of the equation as compared to the supply side, which is really what they’ve hit so far, my guess is that they’re going to continue to proceed. The words we’re getting are the equivalent of subprime is contained, even as those of us who are following it closely fully understand that sub prime is a critical part of the stack and was never really the problem to begin with.

Tony

So what you’re all saying is kind of take a deep breath for now.

Mike

Take a deep breath and be prepared to hold it as we submerge. My advice.

Tony

Okay, it’s good to know. Guys, thank you so much. This has been a real kind of wake up. So thanks very much. I really appreciate this. Have a great weekend and have a great week ahead. Thank you.

Sam

Thank you guys.

Mike

Thank you.

Categories
Podcasts

BBC: How are sanctions affecting Russia?

This podcast is owned and originally published by BBC here: https://www.bbc.co.uk/sounds/play/w172ydqbbld0z8y

The BBC’s Business Matters podcast covers a range of topics, including the positive economic signs in the US, the Russian tech brain drain, and the potential for a new plug to be the secret to a green transition.

Guests Emily Eng, NPR’s Beijing correspondent, and Tony Nash, founder and CEO of the financial forecasting platform Complete Intelligence in Houston, provide their insights on these topics.

They discuss the impact of economic sanctions on Russia and how the country is responding to them, including increasing exports to China and reducing its crude oil supplies by 500,000 barrels per day to push up prices.

The conversation also touches on a controversial proposal by the European Commission to seize Russian assets to help rebuild Ukraine.

Additionally, the podcast covers the announcement by the US federal government that all new garages and four courts built in the country will have to include charging points for electric vehicles and its potential impact on accelerating EV adoption.

Transcript

BBC

Hi there. Welcome to Business Matters. My name is Ed Butler, and today, despite all the political rows we’ve been hearing about a potential debt default, there are more positive economic signs from the United States. This week, we read the tea leaves with a former presidential economic adviser and hear about the new incumbent in that job. Also, we consider the Russian tech brain drain, and why a new plug could be the secret to a green transition.

Emily

This will definitely help accelerate EV adoption. Charging is one of the things that really does stand in the way of someone’s decision about going electric.

BBC

All the latest on electric vehicles in the States coming up in the show, and I’m going to be joined throughout the program by two guests on opposite sides of the world. Emily eng is NPR’s Beijing correspondent, although she is based in Taiwan at the moment. Hi, Emily, can you hear us?

Emily

Yes, I can. Good morning.

BBC

Great to have you on the show. Tony Nash. He’s the founder and CEO of the financial forecasting platform Complete Intelligence in Houston, Texas. Hi, Tony.

Tony

Hi, Ed. Thank you.

BBC

Great to have you both with us. Tony Nash this is obviously a function of, to some extent of the economic sanctions that we’ve been talking about, those applied against Russia. I mean, the funny thing about this is to some extent Russia hasn’t done that badly in the last twelve months, at least initially. I mean, that’s what the headline data is telling us. You look further into the future, I mean, are you seeing a kind of more serious decline potentially with Russia now because of what’s been applied against it?

Tony

Sure, there are a couple of things to look at. First, in the four weeks in January, Russia exported more crude oil than during any four-week period in 2021. So they are recovering their export capacity to places like India, China, parts of Africa, and other places. So, you know, it really hasn’t necessarily hurt their crude exports. When you look at imports, they’ve really substituted, say, the west for China. Their imports from China have grown by, I think, $8 billion a month. It’s got to be more than that, but I saw some numbers recently, but they’ve substituted imports from China. So in terms of trade, they’ve really turned eastward and southward instead of westward, which is just a natural response to sanctions. So where they’ve hurt is domestically in terms of things like industrial production of, say, machinery and domestic goods outside of, say, coal and oil and gas.

BBC

What the west, of course, has tried to do most recently is apply these caps on Russian crude exports. Now you’re saying that they’re getting around those or are they simply selling a larger amount of crude but at a lower price?

Tony

They’re getting around them. They haven’t hit the price cap yet. The crude is trading, or what has been trading at, I think, a $20 discount to the price cap. So they’re not even hitting the price cap. There’s a $20 discount to Euros crude. What Russia on its own, announced last week is that they’ll reduce their supplies by 500,000 barrels per day. So Russia is, on its own, taking barrels off the market as a way to push up crude prices. So the volume and the price caps really aren’t having an impact necessarily on crude itself. Of course, the Russian economy is being hit. Of course the isolation, of course other things are impacting Russia. I’m not trying to say that there are no impacts at all, but in terms of that natural resources, trade, and some of the import substitution, they’re actually doing okay.

BBC

Yeah, import substitution. This is the thing, and it’s a fascinating subject, actually. I was suddenly trying to dig into this, and it’s really complicated. But Tony, one last tantalizing thought on this. An element we understand, what Bloomberg is reporting that may be part of these new sanctions from the EU is to force banks to report more information on what Russian central bank assets they are actually holding. Because of course, the EU and other countries want to know how much has been frozen in Western bank accounts that used to belong to the Russian state budget. Now, this is seen possibly as a first step towards a controversial move touted by the European Commission, not just to freeze Russian assets, but to actually seize them, to use them to start rebuilding Ukraine or to at least pay Ukraine back for the damage that’s been caused. I mean, gosh. Do you think that that could be something we’ll be looking at in the next few weeks?

Tony

I think as a threat, I guess useful as a threat, but as an actual policy, I think it would be very difficult to execute and justify. Usually, these things are seized for years or decades. Sorry, frozen for years or decades, not necessarily seized. So I think that could be a very problematic policy to carry out.

BBC

Because it would set precedents.

Tony

Yes, that’s right.

BBC

For western countries, I suppose. Okay.

Tony

And the banking system that supports Russian assets or sovereign assets, would be dangerous for people like Russia going forward.

BBC

Tony Nash, thank you for now but stay tuned to this because this is big news. If you’re a car owner who wants to buy an electric vehicle, maybe you’ve got an electric vehicle already, especially if you’re in the US. The Us federal government has said that from now on, all charges that are used in the garages and the four courts around the states must be American made and have to be usable for all-electric vehicles. That means that Tesla, which has had most of the existing charging points, they have to carry, adapters, allowing other cars to use them. I spoke earlier about this with Alexis and John of Business Insider in Detroit. Well, Tony Nash, there you are in the big oil state, famously, there Texas. How is EV adoption going in the States?

Tony

It’s great. I’m sorry. It’s great. A lot of my neighbors have EVs, and I think it’s probably not as dense as, say, San Francisco or something. But we do have a lot of EVs here in Texas.

BBC

You’ve got a lot of territories to cover, though, don’t you? I mean, if you’re a driver. We do, and I have an electric vehicle. Every time I’ve gone 100 miles down the road, of course, I’m starting to sweat at the thought that, you know, at some point I’m going to have to refuel, otherwise I’m going to stop on the highway. Tony Nash are you confident that the move to electric vehicles is going to move as fast as some politicians, I suppose particularly politicians in Europe, are saying that we can sort of phase out the internal combustion engine in the next few years and rely entirely on electric vehicles? It’s going to require an awful lot of infrastructure. An awful lot of rare earth. Exactly, that’s right.

Tony

A lot of infrastructure. I mean, I understand the aggressive plans, but I just don’t think it can happen on that time scale. So it seems to me that maybe add ten years to it and sure, that makes sense. And to be honest, ten years in terms of adoption, in terms of building this stuff is really just the blink of an eye. So sure, I think it’ll happen, but I think it’s going to take a bit longer than people right now believe.

BBC

Right, it’s going to take longer, but that’s going to leave, I guess, a lot of politicians with egg on their faces, isn’t it?

Tony

That won’t be the first time. Quite true. Especially American politicians. Won’t be the first time.

BBC

Quite true. evelyn professor Jason Furman. Tony Nash, obviously he’s speaking in an upbeat way. He’s a supporter of the Democratic cause. Are you sensing a slightly kind of warmer, more positive mood in the US right now over its economic performance?

Tony

I think the mood is tentative because inflation is affecting everything. So if we look at that retail sales number, if you look at it in inflation-adjusted terms, we actually saw a decline of retail sales by 2.3%, and it was the fifth consecutive year-on-year decline. So five months in a row we’ve seen negative retail sales if we adjust for inflation. So I think inflation really covers everything. One of the things that the professor said that I’m not really sure is right is he says the White House can’t do anything about inflation. So we have Janet Yellen, who is a Treasury Secretary reporting to the White House, who is spending $140,000,000,000 a month from the treasury general account, and it’s offsetting all of the work that the Fed is doing. So the treasury is actually putting $140,000,000,000 into markets every month to keep markets booming. When the Fed is raising interest rates and selling off its balance sheet. So the US Treasury is actually and literally offsetting all of the good that the Fed is trying to do.

BBC

It’s interesting because we got Lyle Brainer coming from the Fed right this week to the White House as an economic advisor. You’re seeing that the political executive and the Fed are basically in conflict.

Tony

Absolutely. And Lail Brainerd is very smart. She’s fantastic. But she is very much a dove. She’s very much a loose monetary policy believer. And so what Janet Yellen is doing at the Fed in terms of pumping money in through the treasury general account, Lail Brainerd would be an absolute supporter of. And so we have to be very, very careful of inflation. All of these stimulatory activities really hurt your average worker. So there’s a concept called core inflation which really takes out everything energy, food, and so on and so forth. And really all it’s reflective of is service industry wages. Okay? So what we like to see is a headline number which will say 6% or something and what we’ll talk about is a core number which may be 1.2%. All that really means is that your hourly workers are being squeezed by inflation. So when the headline exceeds the super core inflation rate it just means that your hourly workers are being squeezed. And so it’s a really tough environment for wage workers.

BBC

Okay? It’s a tough environment. The bigger issue perhaps. Meanwhile, Tony, we still have this debt default issue, don’t we? We’ve been hearing about it in the headlines. Yet another cliff edge approaching in the United States. The wearyingly inevitable to some people kind of confrontation between Republicans and Democrats in Congress.

Tony

Yeah, I think what’s happened is the US has not actually had a budget for years and my understanding is what is trying to be negotiated is for the US to actually start doing an annual budget again that gets approved by Congress which is their constitutional role. One of the other items that I know are under discussion is this Treasury general account issue. Kind of profligate spending from the treasury to support markets. So there are some issues. It’s not just about the full faith and credit of the US. Of course, nobody wants the US to default but we’ve had some pretty ugly spending patterns for the past well as far as I can remember and I think some of that is just being discussed to come under control. So the US won’t default but it’s going to take some time to come to an agreement.

BBC

Yeah, indeed it will. We’re probably just going to be talking about it for weeks and weeks and weeks.

Tony

Well, I don’t think people realize there are thousands of protests in China every year. It’s not rare to have protests in China. Some of them are local workplace protests. Some of them are bigger. There was a protest east of Wuhan a few years ago about the location of I think a plastics factory or something like that. And there was one in Guangdong about, I think, an incineration plant or something, probably four or five years ago. But there are thousands of protests in China. It’s good that this is happening, and it’s a good discussion to have, and it’s good that Western media are able to view it. So every society has protested and every society has disagreements, and China is no different. Yeah, but there are older people, and even during the COVID lockdowns, the aunties in the buildings were yelling at the people, bringing food to them, and yelling at the police. So there is a difference in the age population in China. So I just don’t find any of this surprising, whether it’s a protest or a deference to old people.

BBC

What are they yelling down at the government? I mean, is this an escalation in the sense of the language, perhaps the boldness of some of the protesting and the way it’s being put?

Tony

They’re not saying, down with the CCP. Right? So if Beijing will let local governments take the flak for local issues, that’s not all that abnormal. It’s not a daily occurrence, but it’s not all that abnormal. If they were shouting down at the CCP, of course, that protest would have been squashed, but local governments and local government officials always take the hit for these types of issues. That’s normal in China.

BBC

Okay, Tony and Emily and Tony Nash, I suppose workers, you know, if they did kick up a fuss, for example, at a handful of Starbucks stores, they are still, particularly they’re still potentially vulnerable to just being fired, aren’t they? I mean, how protected are they from that kind of retaliatory action if they were to try and organize just on a shop-by-shop basis?

Tony

Yeah, I honestly don’t know. I think that would have to do with the contracts they negotiate. As your guest said, unionizing is one thing, but getting a contract is a whole different level. So I think her interview is very interesting. And what’s really interesting to me is what is leading to this desire to unionize. People obviously don’t feel like they’re getting fair pay and fair benefits, and that’s something that really needs to be looked at across companies.

BBC

Yes. And that is what seems to be a legacy of the pandemic, partly, wasn’t it? People went home, they were kind of laid off or furloughed for often long periods, they reflected, and there is a kind of militancy that seems to have left as a legacy.

Tony

What’s interesting to me is Starbucks is supportive of this, but they’re also the company that people want to unionize under. Right? And so they have the orientation toward doing that, but they’re not providing on their own the benefits and the pay that would keep people from unionizing. So I just think it’s an interesting circular discussion. Tesla is a different story. They’re an auto company in different parts of the country, automakers are highly unionized. So I don’t think it should be any surprise to Musk that that’s happening in Taiwan.

BBC

Thank you so much for all your thoughts, your words, and your wisdom. And to Tony nash there at Complete Intelligence in Houston, Texas. My name is Ed Butler.

Categories
Podcasts

BFM 89.9: Should The Fed Have Gone For 50bp?

This podcast was originally published on https://www.bfm.my/podcast/morning-run/market-watch/us-retail-inflation-feds-higher-rate-hikes-tech-sector

The Morning Run podcast by BFM 89.9 featured Tony Nash, CEO of Complete Intelligence, discussing the state of the US economy, market movements, and supply chains. The podcast began with a brief overview of the previous day’s market performances. The key US markets had ended in the green, while all Asian markets were in the red, except for the FBMKLCI, which was up by 0.3%.

The podcast host then discussed with Tony the state of the US economy. The US retail sales in January increased the most in two years, and the home builder sentiment rose in February by the most since 2020. Meanwhile, US inflation rose by 0.5% in January. According to Tony, these indicators suggest that there is still demand, and consumers are still willing to spend. Companies are able to raise prices pretty dramatically, resulting in more revenue and faster growth, even if the volume of sales is slightly lower. Tony believed that the Federal Reserve will continue to raise interest rates. He felt that the Fed should have kept the foot on the brake a little more in the last meeting when they hiked by 50. He thinks that the interest rate will remain at 25 for the next three meetings, but the question is how much beyond that will they raise it.

The podcast then moved on to discuss company performance, particularly in the tech industry. Cisco delivered strong results and beat street expectations, suggesting that companies still have money for capex. Tony believed that companies are having to build out more robust technology infrastructure for their existing operations, which is good for tech infrastructure companies like Cisco. However, there is a divergence in the tech industry, with old tech like HP Enterprise and Cisco doing better than new tech like Apple and Amazon. Companies like Apple, Amazon, and Meta suffer on the ad side because there is a growing supply of ad space, but there are not as many ad dollars, and companies have generally less to allocate to marketing on a proportional basis.

Finally, the podcast touched on supply chains. Tony believed that supply chains have generally recovered, partly due to the falling demand. However, there are still challenges, particularly with logistics and labor shortages. Companies are looking at how to reduce supply chain risks and increase resilience, including reshoring and nearshoring. Tony believed that the current supply chain challenges could last up to two years, and he recommended that companies should develop more robust supply chain strategies.

In summary, Tony Nash shared his insights into the state of the US economy, the tech industry, and supply chains during The Morning Run podcast. He believes that there is still demand in the US economy, with consumers willing to spend and companies able to raise prices. The tech industry is experiencing a divergence between old and new tech, with old tech companies doing better. The supply chains have recovered, but there are still challenges, particularly with logistics and labor shortages. Companies should develop more robust supply chain strategies to increase resilience and reduce supply chain risks.

BFM

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

BFM 89.9, 7:05 A.m. On Thursday, the 16 February you are listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen. Now, in half an hour, we’re going to move the proposal for Petronas to be publicly listed in order to pare down national debt. But we are going to kickstart the morning as we always do, and it looks like it’s going to be a glorious morning with a look at how global markets closed overnight.

So all key US markets ended in the green. The Dow was up 0.1%, S&P 500 up 0.3%, NASDAQ up 0.9%. In Asian markets, they were all in the red, except for our very own FBMKLCI. The Nikkei was down 0.4%. Hang eng down 1.4%. Shanghai Composite down 0.4%. The Straits Times Index down 1.1%. But the FBMKLCI, it was up by 0.3%.

So for some thoughts on what’s moving markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, US retail sales in January jumped at the most in two years, and home builder sentiment rose in February by the most since 2020. While US inflation rose by 0.5% in January. What do all these indicators tell us about the state of the US economy?

Tony

It says that there’s still demand. It says that consumers are still willing to spend and that people really aren’t slowing down. We’re seeing things like price over volume. Meaning as we see more companies report, their earnings reports, they’re able to raise prices pretty dramatically, say, eight to say 12%, generally with a volume decline of, say, one to 3%, meaning the number of sales. Okay, so these companies are choosing to raise their prices and have fewer sales, but it results in more revenue and faster growth. So consumers are willing to pay more. They’re just buying slightly less of things.

BFM

And Tony, taking all this into account, what do you think the Federal Reserve will likely do next?

Tony

Yeah, they’re going to continue to raise. I do think that Powell missed a trick in hiking 50 in the last meeting. I do think they probably should have kept the foot on the brake a little bit more as a transition from 75 to 25. But I think for 25, it’s kind of as far as the I can see right now, at least while the current pace of the economy holds up. So, you know, we’ll certainly see 25 for the next three meetings. The question is, how much beyond that will we see it?

BFM

And Tony, are you in the camp where I have seen more economists raising their forecast for US GDP growth? I see numbers jumping from 1% to 2% for the first quarter. Are you in that camp?

Tony

Our view has been 1.4 this year, so it really hasn’t changed.

BFM

Okay.

Tony

We do reforecast each month.

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BFM

All right. And then looking at some results right. Old tech, Cisco delivered really good numbers, beating street expectations with strong spending on tech infrastructure, suggesting that companies still have money for capex. Is this indicative that actually companies are doing better than we expected?

Tony

Well, I’m not sure it means companies are doing better because earnings generally are on a slowing trend. But I think what it means is that companies are having to build out more robust technology infrastructure for their existing operations. And that’s good for the tech infrastructure companies like Cisco. So we are at the emergence of a new tech cycle with generative AI, there’s a ChatGPT and so on. So companies are going to need more robust infrastructure to deal with that.

BFM

But then we also notice there’s a divergence right when it comes to results. So old tech like HP Enterprise and Cisco doing better versus new tech like you see results being soft from the likes of Apple, Amazon. Will this divergence continue?

Tony

Well, I think when you look at things like Apple, Amazon, Meta, these sorts of guys, part of their revenues are ad revenues. And what’s happening on the ad side is we have a growing, say, supply of ad space with different companies coming on, like Netflix offering ad models. So there’s more ad supply. There are not as many ad dollars out there, or even if you assume the same ad dollars. With inflation, people are having to make trade offs. Companies are having to make trade offs, so they have generally less to allocate to marketing on a proportional basis. But there’s more ad supply out there. So many of those tech companies where ads are a part of their revenue mix, they’re suffering on the ad side.

BFM

Turning our attention to supply chains. During the Pandemic, the world faced a series of supply chain stresses made worse by the Ukraine conflict and China’s sporadic lockdowns. Do you think that global supply chains have recovered? Are they functioning better now? Or do you still see some kind of rocky road ahead?

Tony

I’d say generally supply chains have recovered. Part of that is demand falling. So we had in the port of Long Beach, we had the volume declined by about 28% in January. So the volume of imports have have actually gone down year on year on the west coast of the US. So the demand there is slowing. We’ve seen one of the indicators is headcount cuts. Guys like Federal Express or FedEx and UPS are cutting headcount. FedEx has announced about a 10% workforce cut, which tells me those are usually the guys who see the supply chain issues first and the guys who see the slowdowns first as well. So if they’re cutting staff, it tells me that some of these things are really slowing down.

When we look at delays at Chinese port, for example, they’re about half the time of what they were about a year and a half ago. So they’re not really bad at all. And then when we look at, say, freight that’s waiting on ships that’s down dramatically to, say, Q1 of 2020 levels before all of the COVID stuff set in. There’s a great just for your listeners, keel. The Kiel, K-I-E-L, I think in Germany has a great indicators on supply chain delays. So I would recommend you guys to check that out.

BFM

And Tony, ASEAN is a key player in this global supply chain. Which countries in this region are likely to be major outperformers in that regard?

Tony

Well, you guys know Malaysia is seeing more inward investment, especially around electronics, so I wouldn’t be surprised if we saw some upside in Malaysia. I know the expectations for Malaysia aren’t as aggressive as, say, Indonesia or Vietnam, but it’s possible that Malaysia overperforms those expectations. Indonesia, I think there are a lot of expectations on indonesia’s outperformance partly on AG prices, but also partly on movement of some manufacturing to Indonesia, which has a pretty low base. And then Vietnam, of course, you know, we’ve seen blistering growth in Vietnam. We expect that to continue as people look for a substitute for Chinese supply chains.

BFM

And Tony, are you still a bull on energy stocks? Because if you look at the sector, it’s the worst performing in the S&P 500 today and also for the month so far. We see energy stocks all coming under pressure, I think in part due to all prices stagnating and weak earnings from some of these companies. Is it time to buy or is it time to just step back and say, hey, maybe I should cash in my chips?

Tony

Yeah, I think you have to look at the different segments of energy. So, for example, oilfield service providers, we’re starting to see upstream, meaning people who take oil and gas out of the ground starting to spend on development outside of the US. So some of these oil and gas services providers, it’s a very interesting space to look at right now because we haven’t had CapEx in so long in oil and gas. And as we get that, we could see some of these service providers do really well. In terms of oil price. I do think that we do see upward pressure. I don’t think anybody really expected that to hit in Q1, but as we end Q1 and go into Q2, we do start to see that. And I think we do see I don’t think we see two or $300 crude oil this year, but I think low 100s, 110s, high 90s. I think those are definitely within possibility and likelihood.

BFM

Tony, thanks very much for speaking with us today. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Ending the conversation there with just a projection on how oil prices could be trending later on this year.

Yeah, so I think we’ll have to watch this space. But I want to focus on one of the names that I mentioned earlier on, which is Cisco. Right. So their results came out. In fact, it went up 8% after market hours trading because the street was really impressed with the numbers. Apparently the earnings, the last time we saw this kind of level earnings was in 2013, and that’s like a long time ago. So a lot of attention on Wall Street has been on what I call the new tech. So Amazon, meta, Apple, Microsoft, even on some level. But there’s a little bit of a shift. And I think what these names are showing is that, hey, there is still spending out there.

Yeah, I think the CEO actually said that the public sector business performed stronger than expected as compared to historically. While in the service provider category, some customers are adjusting to better delivery of the company’s products into the environment. In terms of the guidance for the next quarter, Cisco is guiding adjusted earnings of 96 to 98 cents to share and revenue of roughly about 14.25 to 14.5 billion dollars.

So currently the street doesn’t really like this name that much because there’s only 14 buys, 15 holds, and one sell. Consensus target price for the stock is $53.83. Like we say, it was already up 8% after market hours, right. I won’t be surprised. After these set of numbers, we will see quite a number of upgrades on this name because the company is already suggesting on giving guidance a more positive one.

That’s right. Their guidance is more positive for the next quarter. But turning our attention to other earnings report we have, the Canadian ecommerce platform Shopify. Shopify, in contrast to Cisco, didn’t have such a great report. They reported a loss of $623.7 million in the fourth quarter after adjusting for stock based compensation, gains on investments and other costs. The company reported earnings of 7 cents a share, down from adjusted earnings of 14 cents per share in the holiday quarter.

And revenue came in at about $1.73 billion, up from $1.38 billion. And the analysts on average expected an adjusted loss of a penny a share on sales of about $1.65 billion. The company said Black Friday sales rose close to 20% last year from 2021. And this year is working to recover from a misplaced bet that the Pandemic Field search in online shopping would become more permanent. Although he’s cut jobs, raised prices, and expanded offerings to merchants.

19 buys, 25 holes, five sells. Consensus target price for the stock, $46.48. Actually, the current share price is already above that, to $53.39 year to date. Actually, the stock is up 53%, but I think came from a very low base because 2022 was very painful for them.

All right, 07:17 A.m.. We’re going to take a quick break, but we’ll come back and cover more top stories in the newspapers and portals this morning. Stay tuned to 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.

Categories
Week Ahead

Inflation 2.0, Bullish Metals & Oil, and Russian Supply Caps Discussed

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The Week Ahead with Tony Nash brings together experts Tony Greer, Albert Marko, and Tracy Shuchart to discuss the key themes affecting the markets. In this episode, the focus is on Inflation 2.0, Market Chaos, and Russian Supply Caps.

Albert Marko leads the discussion on Inflation 2.0, and explains his view that inflation will re-accelerate this year. He talks about how various factors such as the Federal Reserve, a potential recession or slowdown, and war could impact his thesis. He also mentions the upward revision of December Consumer Price Index (CPI) and the upcoming release of the January CPI.

Tony Greer then takes the lead on Market Chaos and explains why he is bullish on metals and oil. He discusses his views on copper and explains his outlook on crude oil, which he tweeted about in January.

Tracy Shuchart focuses on Energy and the Russian supply caps. She talks about Russia’s announcement to cut production to 500k barrels per day and what this could mean for crude quotas and price caps. She also discusses the impact on natural gas.

Finally, the experts provide their expectations for the Week Ahead.

Key themes
1. Inflation 2.0
2. Market Chaos: Bullish Metals & Oil
3. Russian Supply Caps

This is the 52nd 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
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl
Tony Greer: https://twitter.com/TgMacro

Listen to this episode on Spotify.

You can also listen on Apple Podcast using this link.

Transcript

Tony Nash

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. And today we’re joined by Tony Greer. Tony is with TG macro. He does the morning navigator newsletter. He’s an OG with RealVision and he’s just very, very popular and we’re really lucky to have him today. We have Albert Marko, of course and Tracy Shuchart. We’re very fortunate to have both of them today. So thanks guys, for taking the time to talk with us today. I really appreciate it.

Tony Greer

My pleasure. Thanks for asking.

Tony Nash

Great. So we’re going to start today with Albert. We’re going to be talking about inflation. Albert, you’ve said several times over the past several months that we’re going to have kind of a re-acceleration of inflation this year. And we just had an upward revision of the December CPI. And of course, we have another CPI, the Jan CPI is out on Tuesday. There was a viewer question talking about kind of your Inflation 2.0 thesis.

Can you talk us through that? What are you thinking of when you think through that and when do you think it’ll materialize?

Albert

I’m looking at multiple variables at the moment. Russia probably reactivating some of the military operations in Ukraine, which I think we started to see the last couple of days a little bit. We have China reopening. The Europeans have been in a zombie state, so they’re technically reopening, so their demand is coming back. All that’s going to be inflationary, in my opinion. But the biggest factor that I see has been Yellen’s use of the TGA to offset QT.

Tony Nash

What’s the TGA?

Albert

Well, the treasury general account. So she has a big slush fund of money where she can place wherever she wants. And what that’s been doing has been helping rally the markets purely out of political reasons. And when you have a net zero quantitative tightening cycle, it’s like, what do they expect that to happen at the moment?

Tony Nash

Let me back up just for people who aren’t… So we had a Fed meeting last week. They raised by 25, they’re continuing QT incrementally. Right. And so what you’re saying is that Yellen is offsetting that QT with spending from the TGA?

Albert

Yeah, it’s exactly what I’ve been saying. I’ve been at this for quite a long time. She’s gone hog wild on the treasury bills in the recent months and that’s pretty much the reason we got a stock rally. You’re looking at the duration of liquidity, which is very, very important and nobody really wants to talk about that at the moment. So I mean, these stock rallies have gives a perception of a solid market and overall economy aiming to help the Biden administration for purely political reasons. Right. And this revision, yeah, it was revised and people think it’s an incremental revision, but it’s a 33% rise and CPI from the for the previous data, so it’s not incremental whatsoever.

Tony Nash

Yeah, month on month it’s, it’s a little bit elusive for people to understand how big of a revision this is. Whenever economic data come out, anybody who follows me knows I always say wait for the revision. Right. Especially with OECD countries, wait for the revision because they hide stuff and they leak it out in previous data, other things. And so, as you just said, Albert, there was a 33% revision in the December CPI. That’s massive, right?

Albert

Yeah. Wage inflation is spiraling out of control. We have not just the United States, but now you have the Bank of Japan reporting more inflation from their side. In fact, the Australians did the same thing. They’re having hot CPI numbers. I mean, if we have a hot CPI number coming Tuesday, I mean, it’s just not going to be pretty for equities, in my opinion. And I think that’s why Jerome Powell would soft last week, just because he sees the data and he knows what’s coming.

Tony Nash

So what is a hot CPI number to you?

Albert

I think anything above what the consensus is, whether it’s even 0.1 or .2, anything that’s sticky in the core CPI is going to be hot.

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Tony Nash

Tony, you’re wincing there. Why do you do that?

Tony Greer

No, I mean, I was hoping for a specific magnitude, you know what I mean? As a trader, I’m like, how much higher is he expecting? And he was anything higher and I was like, 8%, 9%, 10%, what do we like? That’s all. I’m very interested. I think he’s on the absolute right track.

Albert

It’s hard because the VLS has been using different calculations and methodologies to calculate CPI. They just changed the way they weigh it, so they’re trying to keep it within a reasonable amount. But when you’re looking at fertilizers and fertilizer companies like Mosaic, and then you have nat gas spiking and then wheat spiking today, either that’s Russia ramping up military affairs in Ukraine, or there’s a hot CPI number coming, my opinion, or both.

Tony Nash

Okay. How much of a factor is like the earthquake in Turkey? Or is any of that a factor?

Albert

That’s a huge factor, Tony, because that’s going to start cutting off, that’s going to start up cutting oil supply, and that’s one of the prime components of inflation. And I’ll let Tracy get onto the details of that. But that’s one in many variables that we’re going to start looking at.

Tony Nash

Okay, when you say inflation 2.0 is coming, are you looking at say, Q2 or something when that will kind of reemerge or what’s your timing on that?

Albert

I’m thinking Q2 at this point. Originally I thought it would be in September or October, but I think the timeline definitely come faster.

Tony Nash

Okay, so what’s driving that is largely kind of energy and ag? Is that..

Albert

Energy, ag, and specifically just the market just being just rallying relentlessly, it just won’t go down. And that’s spurring commodities. Copper, oil, you name it, wheat, grains, everything.

Tony Nash

Okay, if I understand you correctly, just to reiterate what you said. We have more money going into the money supply because of the spending from the TGA that’s offsetting QT. And that money in the money supply is going to people who are driving up commodity prices, driving up equity markets, and potentially driving up real estate. Right. Because we saw some real estate numbers this past week that were not discouraging. Right. I mean, real estate isn’t dying like many people thought right now. And mortgage rates are generally kind of going down. So it seems like we have money going into those things, which is kind of the opposite of what the Feds here are trying to achieve.

Albert

Yeah, the mortgage rate ticks down just a little bit and all of a sudden the spurs on buying. So everything that the Fed has been trying to do is just not happening. Labor, housing, stocks, everything, literally everything.

Tony Nash

Okay, and so how much longer can Yellen use the TGA, does she have unlimited capacity there?

Albert

No, she doesn’t. And Congress can definitely put on oversight on that. But she started off in… Well started off, but she had about 160 billion per month just prior to the midterms. But now she’s down to about 50, 60. Yeah, but that’ll get replenished in April when the tax money comes in for the use.

Tony Nash

Okay, so it will be muted in Feb-March. But she can go guns blazing again in April.

Albert

And this is part of the negotiations with the budget, with the Republicans and the Democrats is trying to limit what she can do with the TGA at the moment. They won’t say it publicly, but they’re certainly trying to.

Tony Nash

Okay, very interesting. Okay, so for those of you guys out there, check out the treasury general account and just see what’s out there, I think that would be really interesting to look into. Okay. Anything else on this, Albert? Is inflation 2.0? Is it going to hit the US or hit, say, Europe or Asia or where do you think?

Albert

I think Asia and Australia is up first for inflation and then leaking over the United States. Obviously I don’t think we’re going to see 9.9 prints on the CPI, but steady 6-7. We definitely see that.

Tony Nash

Okay, great. All right. And then do you think that tapers off in say, Q4 or something like that?

Albert

I think so. I think it’ll start tapering off again. I think it’s going to be in a cycle.

Tony Nash

Okay, great. All right, so we just put out our I just tweeted out our Complete Intelligence CPI print expectations for the year and we think on average we’re going to be about 5.3% for the year. So we’re probably a little bit below your expectations. All right, Albert, thanks very much. I really appreciate that.

Albert

Thanks.

Tony Nash

Tony, let’s move on to you. When we spoke before this discussion, you talked about market chaos like you enjoy it. Are you having fun with this?

Tony Greer

Yeah, I am. This is the kind of trading that benefits, a more active trader, I think, like me, and somebody that’s not afraid to get flat things and take advantage of what looked like absurd price opportunities in the immediate term and things like that. So, yeah, I’m having a good time with this, Tony. I really am.

Tony Nash

That’s great. Can you talk us through kind of… You seem to indicate that you’re pretty bullish on metals and oil, so can you help us through that? And let’s look at metals first. I’ve got a chart for copper up and that price has obviously come down recently. But why are you so bullish on metal? Is copper included?

Tony Greer

Yeah. So let’s go right into it, Tony. The copper is definitely included. What got me so bullish was last year, I remember spending the whole entire second half of 2022 watching copper pound 6500 on the LME. Right? And for me, that equates to the 2017 and 2018 peak in copper, from which point it failed and faded lower and then traded down below 5k during the lockdown. So we saw the big spike to 11k, where everybody thought copper was going to the moon.

Tony Greer

All of that was essentially the lead in to the Biden Administration. That was the lead into the Biden administration. The pivot to electronic vehicle was that big copper rally to 11k and it consolidated there for the entirety of 2021. Then in 2022, copper backed off and pounded the highs from 2018 at 6500, held, and got back up above its moving averages. So when you see that and it coincides with another fairly tight physical market, another backward dated commodity, another commodity where inventories are nosediving, so you’ve got the supply side really on your side. The sort of argument against that is that China is storing and taking a lot of copper off of inventory.

Tony Greer

And my response to that is if they’re taking it off inventory, they’re probably not going to sell it anytime soon, so I don’t have to worry about it. That’s kind of the sort of one basic slant of my metal bullishness, right?

Tony Greer

And the other side of it I have in my mind, I’m fairly convinced that the dollar is going to be on a path lower this year. If you notice last year, she peaked at the Bank of England intervention when the guilt market came apart, and then she formed a lower high when Dollar-Yen got to 150 and the Bank of Japan showed up and said, “hold on, hold on, hold on. You guys kill it.” You know what I mean? That was an absolutely inexplicable FX rally that people haven’t seen in decades.

Tony Greer

So with those two central banks at the top, Tony, a curl down below the moving averages, and coincidentally, with the backdrop of two stories, number one, central bank digital currency story seems to be gaining traction. Whether we like it or not, whether it’s good for us or not, I feel like we’re going to have those and that’s going to detract from the purchasing power of the dollar again.

Tony Greer

And then you’ve got the story where it seems like Russia, Saudi Arabia, China, the rest of the BRICS are very interested in starting their own commodity markets, priced in their own currencies.

Tony Nash

Don’t get Albert started on that.

Tony Greer

Yeah, exactly. I was going to say, I don’t know if that’s a fair topic for discussion and maybe he may be a perma petrol dollar and that’s fair too. I don’t know. But I see that as a story, as sort of deteriorating credibility in the dollar, certainly. And that’s just the way I’m leaning. And it’s not something my money is where my mouth is. The dollar for me is a barometer that tells me how much wind am I going to have in my commodity sales. So I do not have any risk on in the dollar.

Tony Nash

Okay, we should actually come back and talk about that at some point in detail. Sorry, Tracy. You were saying?

Tracy

I was going to say we should also factor into this conversation the fact that we’ve had the lack of capex in the mining industry as far as the metals are concerned. That is equal to the same lack of capex that we’ve had in, say, the oil industry. So that definitely factors into the situation as well when you’re trying to transition to EVs, EV charging stations and all of these metals, even windmills as far as copper is concerned, et cetera. The mining industry again, I don’t know how you feel about that, but I just want to kind of throw that in there.

Tony Greer

Couldn’t agree more.

Albert

The only thing I have to say about the dollar moved down and up is I do agree with Tony that I think the dollar will probably go down a little bit, probably 97, 98. Right. But unfortunately, if inflation comes back, they’re going to have to use the dollar to kick it in the rear so we could see a 97-96 and then go right back up to 105 as they try to fight inflation again. It’s certainly possible. This is going to be a topsy turvy of a year no matter which way you look at it, whether it’s going to be dollar up, dollar down, commodities up, down. It’s just going to be all about the Fed and what intervention they do with inflation.

Tony Greer

It’s nonlinear chaos. Right. The curve.

Tracy

Yeah.

Albert

But this is great for a trader, for a trading. You want to see volatility.

Tony Nash

Very good. Okay, Tony, let’s let’s move into oil then. You’re also seem to be very bullish crude and and we have a tweet from you from Jan. 17 talking about crude going through its 50 day moving average and so on and so forth, talking about some serious muscle in crude markets. So can you talk us through that as well?

Tony Greer

Yeah, so that’s strictly a technical look. And to me, oil continues to make bottom formations and fail. Right? That’s what it keeps doing. We keep seeing an inverted head and shoulders, and then it kinda break the moving averages, and then we see another inverted head and shoulders. That’s even shallower than the last one because they can’t pound it any lower, and that can’t break the moving averages and we back off. And now we’ve got another situation where we’ve got another pattern that’s extremely bullish, where we just had the recent low fall between the last two lows, Tony.

Tony Greer

And that’s a little bit of tea leaves, but that formation is called a wiggle, and we haven’t traded lower since we put in that low. That was between those two lows, if you notice. And so now we’re attacking the 100 day moving average. I mean, this could be it. I walked into this year saying technically, I’m not going to miss out on the trade where crude oil goes through the 50 day, the 100 day, the 200 day, and keeps going, right? That’s the trade I’ve got a bullseye on. And if I have to stop myself out of it ten times, I’m going to be in the 11th time, I can guarantee you. So that’s how I’m looking at the world.

Tony Greer

From the supply side, the driver to me has been gasoline demand. Quite honestly, gasoline demand globally is sort of everybody’s concerned about the recession now. Not concerned about recession. I’ve traded through dozens of recessions and I have noticed that many of them don’t put a major dent in gasoline demand. So I feel like we’re set up for that type of move again, where we have steady gasoline demand. We’re able to keep this crack spread elevated at a $30 to $50 level, where they used to be eight to $12. Right. That’s the margin that a refiner makes for splitting barrels of crude into jet fuel and diesel. So with that crack spread and remaining elevated, the rest of the curve remaining backwardated, although that’s another trip that’s going to be non linear and wacky. But with inventories largely diving below five-year average inventories across the board, the demand for diesel, the demand for jet fuel. Demand for diesel was last year. This year, it seems like demand for jet fuel is really coming back quite a bit. So I just see a great supply side story, a fairly good demand side story, and I see resource nationalism everywhere I look, and that’s generally positive for crude oil.

Tony Greer

So when you line all of that up, the stars align with the technical picture. When we do eventually go skipping through those moving averages, the stage is set for it not to come back. I don’t know if that’s going to happen, but as a trader, I’m going to put my chips in that circle and see what happens.

Tony Nash

Sounds very solid. Tracy, I see you agreeing pretty violently. What else do you have to add there?

Tony Greer

Yeah, I want to hear what you’re adding, Tracy.

Tracy

No, I absolutely agree. When we talk about the supply side and the demand side, we really have to take a look at China. And I know we keep talking about the China opening story, but if we do really look at mobility data and I posted a couple of charts on this today, mobility data is up. Right. And then you also have what I think is more important is if you look at flight data and jet fuel demand, which is up once again, because we know that for Chinese New Year, we had a lot of domestic demand increase, but what we’re really looking for is international demand increase. Right. And so we’ve recently seen China flights to Hong Kong increase in full because that flight pattern was shut down. And so I think this is going to be a major forecast, and we have to realize that China has been drawing down on their stocks locally. Right? And so eventually they’re going to have to rebuy on the international market. If they’ve been depending on the stocks that they accrued since they’ve been shut down over the last year, if they’re pulling down those stocks. China is one country that is not the US.

Tracy

Let’s put it that way. They do not want their SPR to go to zero, all right? They really depend on this. And so because they’ve had to draw down on their domestic stocks, I would be looking for them to start buying on the international market again, especially when they’re getting really cheap crude oil right now from Russia. They would start buying.

Tony Nash

When do you think that is?

Tracy

I think now. They are buying now. I’ll post some charts on Twitter again, but according to Bortex data, there is a lot of seaborne crude going to China right now. We know that they get a lot of natural gas domestically through pipeline, and they’re expanding those pipelines, but realistically, crude oil is still seaborne, and so we can track that.

Tony Nash

Okay, interesting.

Albert

Yeah. Tony a lot of people sit there and criticize it like, well, China has been open and they’re not doing anything, and blah, blah, blah. But it’s not a black or white thing with China. I mean, they’re staggering their opening. They’re not dumb, because if they open just full speed ahead, they’d have a commodity inflation issue even worse than the United States would. So they are buying. And I agree with Tony with the oil bull market case, and I agree with Tracy. The supply side demand side is heavy. The Chinese are reopening and buying still. And I think oil goes to minimum 110 this year. Minimum.

Tony Nash

I love it when ours says, I agree with Tony because I’m not used to hearing that. But I know he’s talking about you, Tony Greer.

Tony Greer

That’s fine looking, Tony. Beautiful part. Yeah. The beautiful part about this market, Tone, is that you can find the opposite side of your trade. You just got to open your eyes and ears, right?

Tracy

That’s what you really need to do, because if you have a thesis, you really want to hear the opposite side. Right?

Tony Nash

Tell me about that. What is the downside thesis for oil? What is that downside thesis?

Tony Greer

Drill, baby, drill.

Albert

That’s not politically viable.

Tracy

Which is not going to happen. Which is not going to happen.

Tony Greer

Right. So that’s why you say you can get annoyed at what’s going on or you can make moves in the market, right. You can buy the energy complex and buy oil because that’s the direction it’s naturally going to go if they’re going to try to put this electric vehicle squeeze on by 2030. Right? I mean, that’s almost necessary. And almost the necessary trade is for the Bloomberg Commodity Index to go up 40% from here. If we’re going to fill all these orders to build battery packs and battery power all over the world.

Albert

The only the only other downside for oil is if the government starts playing around in oil futures and trying to sell it down just to keep it relatively safe on the inflation front, which they did.

Tony Greer

It was remarkably effective. It was remarkably effective. What they did with the SPR, you have to say, whether we like it or not, they knocked 30, $40 off the price.

Albert

It wasn’t just the SPR, though. They were sitting there selling down in oil futures in the market.

Tony Greer

They have a president’s working group that’s allowed to do that. I’m sure they are.

Albert

They do.

Tony Nash

Free market capitalism. You got to love it, right?

Albert

Yeah.

Tony Greer

Well, free market, political-driven capital.

Albert

Well, this is what Tony was mentioned this is what Tony was talking about when he said nationalizing commodities and whatnot. Of course they’re inflationary effects, but the governments only care about short term. What’s going to make my voters happy for the next election in six months? That’s all they care about.

Tracy

It’s kick the can theory, right? The Fed does this all the time. We see central banks do this all the time. Why not governments, right?

Tony Nash

Yes. Okay, guys, let’s move on to crude oil, specifically. Tracy, on Friday, we saw Russia announce plans to cut production to 500,000 barrels a day. Brent rose on the news. And I’m really curious. What is Russia producing right now? So are they at that volume capacity? And what does that mean for the crude quota and the price cap?

Tracy

Well, Russia is already producing at their quota according to the OPEC. The thing is, their OPEC quota and I won’t get into the logistics of this, but their OPEC quota is a lot of condensate oil, not straight oil. But aside from those details, we have to go in fact, Russia Euros is trading literally between $40 and $45 right now as we are speaking today on Friday. The the what date is this? I just want to make sure some people the 10 February. And so I think that you have to you know, I think what Russia is trying to do right now is try to bump up the price of oil for themselves, because I think if oil prices are higher for them, even though they are supplying less, they’re going to make more money regardless. I also think that this puts a thorn in the side to the west, because they’re trying to bump up oil prices. When Western nations are trying to push down oil prices. Right. They don’t want to see inflation go higher. And energy is a big part of that, even though central banks don’t realize that. But we have to, you know, it is a big part of the inflation factor.

Tracy

And so what I think they’re trying to do is basically say, I’m going to be a thorn in your side. We’re going to kick up oil prices. I’m also going to benefit myself because oil prices are going to go higher for me. And maybe they reach the cap $60. They’re well below then. You know, they’re still making more money with reduced volumes.

Tony Nash

Okay, so Euro trades at $20 discount, right, at this point.

Tracy

To the price cap.

Tony Nash

Right. But who are they hurting, aside from, say, India and China and a few other countries that are their traditional allies?

Tracy

Well, even if that price went up of your rails, at this juncture, China and India are still getting great deals, right? At $60 a barrel, you’re still getting a great deal. Right. You’re $20, $30 below what Brent and WTI are trading at. And so I don’t think that really matters to them. As far as am I going to lose China and India as customers, I don’t think that’s even a concern of theirs because they realize that their oil is trading well below everybody else.

Tony Nash

So I guess if they’re going to have the same customers, the China India customers generally, why does it matter? Aside from… Why does it matter to Brent that Russia has raised or capped off their production? If it’s going to go to the same markets anyway? I’m just curious. Why does it matter to the non-Euros crude?

Tracy

Because you’re taking barrels off the market, and that is the only thing the market looks at. How many barrels are you taking off the market? If you’re taking 500,000 barrels per day off the market, then these other that’s 500 barrels per day off the market.

Tony Nash

Sorry, what do they have said this before? What are they producing now?

Tracy

They’re at about 10.5, but again, that includes condensate. It’s not exactly 10.5 million barrels of oil per day.

Tony Nash

Okay.

Albert

Basically, how’s the earthquake in Turkey affecting things on the supply side?

Tracy

All right, so if we look at saline ports, we’ve taken 8885 barrels per day off the market as well. Almost a million barrels per day off the market from that specific port. That specific port was supposed to be down for two to three days. That’s looking like a lot longer at this junction.

Tony Nash

Okay.

Tracy

That’s also affecting global markets.

Tony Nash

Okay. So between Russia and the Turkey earthquake, there’s a real impact on markets?

Tracy

Absolutely.

Tony Nash

Okay.

Albert

And of course they’d probably take advantage of it. Yeah, that’s the way things work in that part.

Tony Nash

Of course. Of course. Tracy, we had some viewer questions about natgas. There were probably four of them on Twitter. What new insights do you have in natgas over the last couple of weeks?

Tracy

Well, as far as natgas is concerned, everybody’s asking when is this market going to bottom? Right? Because it’s been just a disaster since summer. We’ve seen like over 40% decline and in my opinion, really what we should be looking at right now, I think we’ll probably consolidate down here for a while. I think what we should be looking for is going into summer because what I think it’s going to happen is that we’re going to see China demand increase because they’re coming back online and cargoes that were bound for the EU will probably go to China now. They’ll outbid the EU because EU is basically full at this juncture, right. So they don’t really need the cargoes. Those cargoes can move to Asia. But during the summer, what we may see happen is increase. And we got very lucky with the EU as far as winter was concerned. And what I think will happen is during summer, if we have a particularly hot summer, air conditioning rises, that means nat gas increases. And so what I think we could see is somewhere this summer we see an increase in prices again because you have to realize that last year EU still had 50% of their capacity filled from Russia before everything went offline. That’s gone.

Tony Nash

Right.

Tracy

I would be looking towards, more towards this summer if you’re looking for kind of price increase. And generally right now I think that we’re probably going to see some consolidation down in this 2, 2.50 area, which is where it’s traditionally traded.

Tony Nash

My neighbors in Texas need more money, so let’s get that pumping.

Tracy

But the thing is that at this, the producers in Texas that their costs are higher, that production is going to drift if we stayed up long enough. So you have to think about that as far as production is concerned anyway, I mean, we are in surplus right now, but that may not last forever.

Tony Nash

Great. Okay. Very good. That’s really good. Thank you for that. Hey Tony, what does next week look like for you? I know we’ve got CPI coming out. What are you looking at for the week ahead?

Tony Greer

I’m thinking like Carl icon, to be honest with you. Tony. No, I’m serious. If you saw his options play, I guess he’s got, I guess it’s 5 billion notional of options that are struck at 40, 50 for next Friday. If you ask me, he’s looking at number, he’s looking at a couple of things. He’s looking first at I think the bond market, the credit markets in terms of the bonds and break evens in terms of yields and break evens trading higher in the last week, they have both vaulted off of the lows. So there’s been a clear turnaround in market based inflation perception. So I think that he sees that and looks on the calendar and sees CPI and PPI next week, knows that inflation is not linear in any direction and maybe is making a bet on and maybe it’s just a hedge, but maybe investing that money on the idea that we have an upside surprise in any of the economic data. The bond market tanks, stocks tank. If rates go higher, they’re going to mash big tech again and he’s probably going to be in the money and his 40-50 puts.

Tony Greer

So that’s how I’m looking at it. I’m looking to see if my portfolio of trades that I’ve got on can weather that type of storm and if I’m out of the way in certain places, if I should join him in certain places. That’s the way I’m thinking about next week, man. I’m trying to stay alive.

Tony Nash

Sounds very exciting. Tracy, what are you looking for next week?

Tracy

Continue, obviously watching the commodities markets, metals, energy, watching China data, the mobility data, flight data, see how this is moving along and we’ll see how that.

Tony Nash

We see a higher CPI, what does that do for crude prices, do you think? Do you think there’s a direct impact?

Tracy

I think you’re going to see crude prices go higher, yeah.

Tony Greer

Tone, what, the dynamics…

Tracy

Counterintuitive, right?

Tony Greer

Yeah. It’s kind of like the market speak to each other, right. Like a dynamic that we definitely saw along the way of the commodities rally as rates went higher last year. Right. Call it the whole period going into the Russia Ukraine invasion, right. It was oil straight up, but it was kind of like the credit market. I called two year yields last year the bat signal, and I named them that because they were getting out ahead of commodity inflation. We were having weeks where the bond market was getting shellac and there wasn’t much going on in the commodity markets, but all of a sudden they would pick up at the end of the week. And I think it was a lot of the time, like the bond market signaling inflation here. The commodity markets are going to go up. And I think that that’s kind of a sort of a cadence that established itself. And so it’s going to be really interesting to see how that unwinds.

Tony Nash

Fantastic. Okay. That’s a really great explanation, Tony. Thank you. Thank you so much. I really appreciate your time. Thanks so much. Have a great weekend and have a great week ahead. Thank you.

Tony Greer

Thanks for having us. Be good. Bye.

Tracy

Thank you.

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Elon Musk’s Tweet Saga: Impact on CEO Communications and Investor Relations

This video is a segment from a BBC TV interview. The full show is not yet available online as of the time of this publication.

The video discusses the recent lawsuit against Elon Musk regarding a tweet he made regarding taking Tesla company private. Tony Nash is being interviewed by the BBC to discuss the impact of this lawsuit on CEO communications and investor relations.

Tony mentions that many legal experts believed that Elon Musk was going to be found guilty for his tweet. He considers the tweet to be stupid, but not intentionally misleading. However, the impact of the tweet was damaging to shareholders.

Tony says that the share price of the company has risen over the last four years, despite the lawsuit, and the plaintiffs in the lawsuit were not able to prove that they lost billions of dollars.

Tony also mentions that the SEC has fined both Twitter and Elon Musk for the tweet. He says that this enforcement of regulatory laws will change the way that CEOs communicate with the public, especially in tech companies. CEOs may become more informal in their statements, even if their claims may not be true. This will make it more difficult for investors, who will have to be more cautious and do their research before making any decisions.

Tony mentions that the outcome of the lawsuit shows that executives can be more careless in their communications going forward. He says that while $40 million fine is not a significant amount, it may still lead to a reprimand from the SEC. He advises investors to be careful and do their research before taking positions in the market.

Transcript

Tony

I know a lot of legal experts thought that he was going to be found guilty. It was a stupid tweet. I think he would take it back. He wouldn’t admit that, but I think he probably would if he could do it over again. But I think it does make the landscape pretty crazy going forward where executives can say things publicly that they would be very careful of saying before. So if you’re an investor, I think you now have to look at the formal declarations, regulatory filings to find out real information. Musk has just made this an incredibly informal way of talking with people.

BBC

So you think stupid, not intentionally misleading, but it proved very damaging, of course, to the shareholders?

Tony

It did. The share price has done very well since 2018. So I don’t know what these guys were investing in to lose billions of dollars, unless it was some sort of exotic maybe option or something like that. The shares have risen over the last four years. If those plaintiffs, some of the statements that they made said they were trying to look out for their well being, these sorts of things, well, the share price has delivered over the long term. So the SEC has fined Twitter and Musk. So in terms of a regulatory environment, that’s been enforced. But did they prove that they lost billions of dollars? Obviously they didn’t because this was a jury trial.

BBC

Do you think this will change the way that Elon Musk tweets, or will it change the way that other CEOs tweet in future?

Tony

Sure, I think the voice of the CEO now can get more informal and I think especially in tech companies, I think you’ll see CEOs becoming very informal and making claims, even if they can justifiably say, “well, I thought that this was going to happen.” Right. And this is what Musk defense as well. “I reasonably thought this was going to happen, but it didn’t happen, so oh, well.” I think especially in tech, you’ll see CEOs make claims that may or may not be true, but they’re leading in that direction. So investors are just going to have to be much more wary and they’re going to have to do their research before they make take positions in markets.

BBC

But surely now that Elon Musk has done this and he’s had this, I mean, it’s a reprimand, isn’t it? It’s a public reprimand. Even if he was found not guilty, people will have to be very careful. They won’t have the same defense because of what has happened to Elon Musk here.

Tony

Right, they won’t. And again, I think it’s from a regulatory perspective and from, let’s say in investor relations or communications perspective, it all of a sudden it’s the Wild West kind of you can kind of say what you want. You can kind of say, I think we’re going to go private at a certain price, and if it doesn’t happen, you just kind of shrug your shoulders and go, well, it didn’t work out. And again, you may get a slap on the wrist. $40 million isn’t really a slap on the wrist, but you can get a slap on the wrist from the SEC. But investors again, investors have to be very careful, and investors have to do their research before taking positions. And this is really what the basis of the lawsuit was about. So those executives, I guess, can be a bit more careless in their communications. I guess that’s what it tells me with the finding of the suit, is executives can be a bit more careless with their communications.

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[BFM Market Watch] Is The Market Behaving Rationally?

This podcast was first and originally published on the BFM: The Business Station podcast with link here: https://www.bfm.my/podcast/morning-run/market-watch/us-markets-meta-chevron-fed-rate-hikes-equities-market-rally

The CEO of Complete Intelligence, Tony Nash, spoke about the recent financial events in the market. In regards to Meta, Tony mentioned that the worst for Meta’s share price is over, but job cuts are still to come. Although Meta beat revenue estimates, ad impressions rose by 20%, but the price per impression fell by 22%. Tony also discussed the recent Fed interest rate hike by 25 bips, which was expected and the market welcomed it. Tony says there are likely to be at least two more rate hikes before the current tightening cycle is over. He also mentions that the market is excited but will take a closer look at the statement once they have a better understanding.

Tony also mentioned that there is some irrationality in the market because corporate earnings have been disappointing, but investors are bought off by the stock buybacks. The oil companies, Chevron and Exxon, made windfall profits due to cheap oil and fat refining margins. The refineries were operating at 94% capacity and have crack spreads and refining margins way above normal. The oil and gas companies have not invested in infrastructure since 2014, due to governments and media bullying over ESG and cost. The only option for them is to return the profits to shareholders through stock buybacks.

Transcript

BFM

This is a podcast from BFM 89.9, the business station. BFM 89.9. Good morning. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. It is 7:05 A. M. On Thursday the 2 February. We were off yesterday because of Federal Territories Day, but we are back to bring you through the rest of the week. In half an hour, we’re going to discuss the probability of a Trump 2024 presidential run. But as always, let’s kick start the morning with a recap on how global markets closed overnight.

BFM

All US markets ended higher as the market shared the Fed’s 25 basis point rate increase. The dollar was up marginally by 0.2%, S&P 500 up by 1%, and the Nasdaq was up by 2%. Asian markets, they were all in the green. The Nikkie was up by 0.1%. Hang Seng was up by 1%, Shanghai Composite up by 0.9%. The Straits Times Index, it was up by 0.4%. But the FBMKLC, it was closed for Federal Territory Day

BFM

As mentioned and for some insights into what’s moving markets this morning, we’re going to be speaking to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. Now, markets rallied on the back of the Fed, raising interest rates by 25 bips. But before we get into that, I would want to talk about some of the corporate earnings that we saw overnight, namely coming from Meta. The markets were also quite happy with what came up there, up 18% in after hours trading on the back of better than expected sales, do you think this is the worst over for Meta?

Tony

I do think the worst in terms of share price is over. I don’t think their job cuts are over. I think they’re learning how to operate in this environment. So the last two to three years has been pretty easy for a tech company as people were kind of trapped inside and didn’t really have a lot to do. They looked for things online and ad revenue was great for Meta and ad driven companies, but what we saw in there, although they beat revenue estimates, they beat their guide by almost 3%. They announced a $40 billion share buyback, all that’s great news. And the stocks up almost 20% after hours. But keynote in their earnings release, Ad Impressions rose by 20%. Remember, they’re an ad driven business. Ad Impressions rose by 23%, but price per Impression fell by 22%. So they’re not able to push price. They’ve had to drop their price and raise their volume, which is the opposite of what we’re seeing with a lot of retailers and other firms in the US where they can actually push price in light of and accept lower volumes at higher prices.

BFM

And Tony, as expected, the Fed raise rates by 25 bips. Was this in line with what you were expecting, and are we close to the end of the current tightening cycle?

Tony

Yeah, you know, I think pretty much everyone expected 25. There was a slight chance of 50, but everyone pretty much expected 25. The market welcomed it very happily, and they’re still thinking there’s only one rate rise left. But Chair Powell made it very clear that there are a couple of more rate hikes to get to that level we think is “appropriately restrictive.” Those are his words. So we’re looking for at least two more rate hikes before this is over. And the Fed is also going likely to accelerate their quantitative tightening. Okay? So that’s taking assets off of their balance sheet, which is basically hoovering up the money supply in the US. So the market will get tighter. And do we think we’re at the end? We don’t think we’re at the end. The interest rates aren’t the only tool they can use. So the market’s very excited right now, almost a relief. But I think as they look through his statement in detail, I think they’ll take a second look at expectations.

BFM

So let’s build on that. Tony, so you’re basically saying that because when I look at how markets have performed on a year to date basis, S&P up 7.5%, NASDAQ up 12%, this very much on the back of the Fed, going from a hawk to a dove. Do you think that there is some irrationality there?

Tony

I do, actually, because, you know, if you look at corporate earnings announced so far, they’re very disappointing. And so investors are expecting easy conditions to return so that underwhelming earnings are acceptable. So what did Facebook have to do? Their EPS underwhelmed by like 55%. Okay. They had to issue $40 billion in stock buybacks. So investors are basically bought off, and that’s why the stock is rising. But many other people reporting are not seeing the sales that they expected or didn’t see the sales they expected in Q4. And their costs, meaning the cost of employees and raw materials, these sorts of things. Cost of employees are up. Raw materials are down slightly, definitely year on year, but certainly quarter on quarter, they’re down slightly. But earnings are not what people had hoped for. And that’s the real problem we’re seeing in market. So the earnings picture is not reflecting the valuation picture.

BFM

Okay, so that may be the general picture, but if we zoom into oil companies or the two largest US oil companies, Chevron and Exxon, they made more money in 2022 than ever before, posting record earnings in their latest results. How are these windfall profits achieved? And I guess how sustainable is this going into the new year?

Tony

They were largely achieved on the back of cheap oil through the SPR releases and very fat refining margins. So we’ve had refineries in the US operating at about 94% capacity, which is way over what they’re designed for. And we have crack spreads and refining margins way above what is normal. So those refineries are booking profits at a record pace. And so what do they do? If you’re an oil and gas company and the government keeps bullying you over ESG and Cost, and media keeps bullying you over ESG and Cost, oil and gas companies have not invested in infrastructure in upstream or midstream since at least 2014. So if they invest in that, they’re going to be punished. So what do they do? They return it to shareholders. So you have a $75 billion buyback, because that’s really the only option they have. Otherwise, they’re going to get punished by governments, they’re going to get punished by media, and they’re going to get punished by investors. So they have to do this.

BFM

Okay, but let’s talk about OPEC Plus because there was a meeting, and I want to talk about oil prices, because the OPEC Plus Committee has recommended keeping crude production steady as the oil market awaits clarity. What does this then mean for prices? If I look at WTI, currently $77 a barrel, down 4.5%. What’s your view, Tony?

Tony

Well, I think OPEC is taking a lot of the excitement in markets for the past couple of months has been China opening. Ever since December, right? China is going to open and save us all. And that also hit crude markets. People looking at crude prices and going, oh, gosh, China is going to open. We’re going to see jet fuel and gasoline, petrol and other fuels consumption rise dramatically. Well, the opening has been slower than people expected in December, and it’s still not happening at the pace that many Westerners expected. And so I think OPEC is looking at crude consumption and draws from storage and saying, we just need to hold off on raising our level of production. We’re in a good zone with the price right now. We don’t see a dramatic impact. We expect recessions in the west, and we expect China to come back online slowly. So we’re not going to increase production right now. And so I think that’s the prudent thing to do. If I’m an oil producer, that’s what I’m doing, because I want demand to lead production increases. I want to see that people are going to use what I’m going to pull out of the ground, and I want to see pricing pressure before I agree to drill more.

BFM

Yeah, but, Tony, at the same time, what’s interesting to me is the US. Now, during the summer season, President Biden released its reserves, right? Because pump prices were just really very high. Doesn’t this change the equation? If I’m American now, wouldn’t I want to rebuild my reserves at this current level?

Tony

Well, yes and no. The SPR release was really done to get prices down for the US Midterm Elections. That’s really all it was about. Now the SPR is depleted dramatically, so the buying that will have to happen to refill the SPR will put upward pressure on prices. So I think we have to be really careful. If China is, let’s say in March, they start to come aggressively back online and the US starts buying to refill the SPR in Q2, then that’s an accelerator for crude prices in Q2and Q3. Right. So will Biden then beg OPEC again to raise their output? Maybe. China has already forward bought a lot of its crude supply. So if the US is going to choose to refill the SPR at elevated prices, it’s really not the brightest move.

BFM

Tony, thanks very much for speaking to us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets, commenting there on the earnings report of Apple, if not Apple, I’m sorry, Meta. That just came overnight. Apple is to come. So we’re going to be watching out for that before the week ends.

BFM

Let’s turn our attention, though, to what’s happening over in India, where the Adani saga has really taken attention by storm. Gautam, Adani’s flagship firm, called off its 2.5 billion US dollar share sale in a dramatic reversal yesterday as a route sparked by US short seller Hindenburg. Research criticism wiped out more than $80 billion off the value of the Indian tycoon stocks.

BFM

And the plunge accelerated after Bloomberg News reported credit Suisse Group AG has stopped accepting bonds of Adani’s Group of companies as collateral for margin loans. Adani Enterprises was offering shares to investors at $38 to $40 a share, but the stock closed yesterday at $26.13, which is 31% below the bottom price of the pricing range.

BFM

I think let’s take a bit of a step back, right, in terms of how important Adani is to the Indian economy in its way. They are like one of the major producers of energy, and then we’re talking about cement. They are such a huge conglomerate and their fortunes have been really tied to the rise of Nadira Modi. Right. Because the two, the Adani and Modi, are supposedly very close. And so when Adani came back with this 413 page objection, the allegations are all untrue. He also Adani took the step of saying that you’re attacking India as a nation. And then Hindenburg said, look, this has nothing to do with nationalism. Right. You’re just a company where we are not comfortable with your numbers. And then it’s this back and forth. And what was amazing was the share sale was almost going to happen. And the economists reported this is allegedly that the five largest and richest families in India were going to bail this company out by participating in the share sale, but now it’s not happening.

BFM

That’s right. I mean, that came as a big surprise, the fact that they managed to get buyers who were willing to buy these shares at such a high price compared to what the market was having. So, as mentioned, you said, Jensen, they would be buying it at a loss. But yeah, Adani said that the company’s board felt that going ahead with this share issue would not be morally correct because of that big gap in what the prices are being sold for now.

BFM

Yeah, but it was really amazing. You will never get a scenario similar in, let’s say, in America, where the richest families bail out another rich family. Right. So that’s what the economists point out, that doing business in India is very, very different. But the share price, of course, down 45% on a year to date basis.

BFM

I really wonder what they can do to build up to the levels that they were before. I mean, maybe it’s not going to happen again. So something to watch, for sure. This has taken everyone, really by surprise. The twists and turns in the saga at 718 in the morning. We’re going to take a quick break and we’ll come back with more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.

BFM

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.

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[From BBC] IMF Predicts Slowdown for UK Economy in 2023: An Expert Analysis

This podcast is owned and originally published by BBC Radio 5 Live – Wake Up to Money: https://www.bbc.co.uk/programmes/m001hn77

BBC

BBC Sound Music Radio Podcasts wake up to Money from BBC Five Live hello, welcome to Wake Up to Money, where the International Monetary Fund has given its assessment on the global economy. On the British economy. It’s not great news for the UK, lagging behind its peers, the IMF says, set to be the only country of a group of advanced economies to shrink this year. We’ll have a look at the detail on that.

BBC

Have a look at this breaking news this morning. First, though, just in the last few hours, we’ve got this detail from the International Monetary Fund, this global financial body that over the years, we’ve talked about the IMF bailing out certain countries that are in financial disarray, puts out its advice and its forecasts and analysis about global economies all the time. Its sort of aim is to try and have a bit of economic stability globally. And so it has its world economic outlook, which is closely looked at every three months it forecasts growth, it looks at how countries have been performing. Its forecast for growth in 2023 have actually been revised upward slightly around the world for every major, what we call G7 economies as well, these advanced economies, often those leaders of those G7 countries get round the table, don’t they, and have conversations and try to come to agreements about things.

BBC

Every country in that group has had its forecasts uplifted for 2023, except the UK. It had previously forecast a bit of growth for the UK, but now sees our economy shrinking by 9.6% in 2023. Despite this, the chief economist at the IMF has said that the Treasury’s policies are on the right track. It’s not just, of course, about forecast for the year ahead. Just seeing front page of the Guardian this morning, where this story makes the headlines there. They highlight that last year in 2022, the UK economy actually grew more strongly than the IMF predicted. So we grew up 4.1% over the year than the 3.6% it had been predicting just three months ago. We got Tony Nash with me. Chief economist at Complete Intelligence, based in Houston in Texas. Tony, thank you so much for being with us this morning. Good morning to UK time. Good morning.

BBC

Tony, let’s talk globally first about the IMF’s views on the world economy. Why has it changed its thinking so much since just a few months ago?

Tony

Yeah, there’s a view from the IMF that inflation has really turned over, that we’ve crested with inflation and things are starting on the downside. I guess the caution that I would put on that view is that goods inflation has likely peaked, but services inflation with wages rising still, we’re not necessarily out of the woods yet with services inflation. So I think there are a few more headwinds in some of these economies than the IMF has really thought through.

BBC

And when you look at effectively the rankings that the IMF put out there in terms of who’s growing, how quickly, who’s bouncing back stronger from the depths of pandemic, all of that kind of thing. Where does the UK rank in that now when you look at those tables?

Tony

Yeah, well, I think the IMF generally, they got the US right. They’re right on our forecast. Asia, they’re about right with China coming, with China opening up. I think Europe, they’re a little overly optimistic on the EU and I think the UK, they’re a little overly pessimistic on the UK. It’s a tough environment in the UK, very tough politically. Inflation and wages are serious pressures on everyone. But I do think that this IMF report for the UK, I believe, has relied heavily on the Bank of England’s assessment of the economy in November, which the bank has said that they were overly negative in that assessment and that they’ll likely upgrade their view in their next meeting. So I believe that this IMF report relied on that assessment from the Bank of England.

BBC

Which is why it’s always important to see how these forecasts actually play out at the end of the day. We’ll know that in about a year’s time.

BBC

Tony, just the mood generally of investment from businesses, from governments around the world and consumer confidence, our keenness to spend, do you notice that changing in different parts of the world now, compared to how you might have thought we were all behaving a few months ago?

Tony

Oh, absolutely. I think with interest rates rising, I think people are thinking twice, businesses are definitely thinking twice before making investments and before spending money. The UK has been a country in Europe that has not invested as much in terms of capital investment as other countries in Europe. And so I think this is probably hitting British companies harder because they haven’t invested in the fixed assets that they’ve needed over the last several years. And now when they need the production capacity, because typically investment equates to production capacity, if they haven’t made those investments with low interest rates over the past several years, it’s going to be even harder to make those investments with higher interest rates, so they have to pay more for people. So that’s the real dilemma that I think we’re seeing, especially in UK business trade offs.

BBC

Tony, thanks so much for the snap analysis there on that report coming from the International Monetary Fund. Tony Nash, chief economist at Complete Intelligence. In Houston. In Texas.

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