Month: June 2023

“The Week Ahead” episode combines the wisdom of Tracy Shuchart, Chris Berry, and Corey Lavinsky, as they explore peak oil, battery technology, and biofuels. Tracy shares insights from the recent IEA study, predicting peak oil around 2028. Though oil demand may decline, it won’t vanish entirely. The talk shifts to electric vehicles (EVs) and Tracy’s reminder that their power source in China is still primarily coal, underscoring the significance of considering the energy mix behind EVs.

Transitioning to EVs poses challenges, particularly with grid infrastructure. Tracy stresses the need for substantial investment in grid systems, particularly in the United States, to support the surging demand for EVs. China and India boast differing grid systems with potential for growth, albeit with their respective hurdles.

Chris Berry adds his perspective, emphasizing the crucial role of raw materials in battery production. Securing a sustainable supply of lithium, cobalt, and graphite becomes vital to meet the surging demand for EV batteries. The hurdles of domestic sourcing and the time required for new mining operations are discussed.

The episode unravels the complexities surrounding the energy transition and the multitude of factors shaping the energy sector’s future. It highlights the need for a holistic approach that encompasses technological advancements alongside infrastructure, grid systems, and raw material supply chains, all critical for sustainable energy solutions.

The episode further delves into battery metals’ impact on battery affordability and supply chains. Chris discusses the price volatility of battery metals, particularly lithium, and their limited influence on battery economics. Lithium prices fluctuate significantly but constitute a small portion of the overall battery cost. However, the concern lies in potential price hikes of metals like nickel, which could disrupt supply chains and pose challenges for automakers and battery manufacturers. Managing price volatility necessitates battery chemistry innovation and metal substitution.

Regarding lithium sources, Chris clarifies that lithium is not scarce and can be found in multiple locations, including North America. However, refining processes, mainly conducted in China, pose supply chain bottlenecks. The urgency to secure raw material access surfaces, exemplified by General Motors and Ford investing heavily in lithium projects. Partnerships between American and Chinese companies underscore automakers’ concerns about potential supply shortages and the need to secure critical metals for battery production.

The discussion discusses the conflict between climate goals and the North American mining permitting process. Tracy highlights the protracted and burdensome permitting process, hindering climate goal attainment. Chris raises the issue of coal’s use in nickel production for EV batteries, contributing to carbon footprints. Environmental impact considerations extend to mining, refining, and transportation within the supply chain. Alternative solutions like lithium-ion battery recycling and direct lithium extraction are explored, yet acknowledging their own CO2 footprints.

Shifting gears, the dialogue focuses on refining’s role in corporate mining investments. While Liontown concentrates on mining, Lithium America’s plans include refining. Presently, China dominates the lithium refining industry, with most raw materials sent there. Chris mentions upcoming lithium refineries in the United States, aiming to lessen reliance on China. The discussion culminates with Tony suggesting using biofuels for transporting lithium, potentially mitigating the CO2 footprint.

In another segment, Tony engages Corey in a conversation about biofuels and the recent EPA announcement on biofuel mandates. Corey reveals that biofuels are derived from biomass or organic matter, predominantly ethanol in the United States. Biofuel sources range from corn, sorghum, and sugar cane to biodiesel derived from fats and recycled oils. While biofuels presently represent a small fraction of diesel and aviation fuel markets, their growth prospects are promising.

The dialogue explores biofuels’ potential in aviation and the challenges posed by electric-powered long-haul flights. Corey highlights biofuels’ remarkable growth in the United States, propelled by the Renewable Fuel Standard program, which has fostered ethanol and biodiesel production expansion.

The EPA’s biofuel mandates encompass various categories like renewable fuels, biomass-based diesel, advanced biofuels, and cellulosic fuels. Corey discusses the reduction in proposed mandates for corn-based ethanol, causing discontent among biofuel companies. Biomass-based diesel mandates exhibit sluggish growth, despite substantial investments in renewable diesel and sustainable aviation fuel facilities.

The episode delves into biofuels’ current state and future prospects, specifically focusing on ethanol and sustainable aviation fuel (SAF). Tony initiates the conversation, underscoring conventional fuel production’s plateau and potential Midwest disappointment due to sluggish biofuel requirements. Corey envisions a reduced demand for ethanol in gasoline-powered vehicles due to increased electric vehicle adoption. However, he views SAF production as a promising opportunity for the industry. Corey highlights ethanol’s potential as a SAF feedstock, enabling aviation decarbonization. Tracy raises concerns about SAF’s cost for consumers, prompting Corey to mention existing SAF mandates in Europe and planned future mandates in the United States. Limited SAF availability stems from technological development and the absence of past SAF mandates. Corey predicts increased SAF production as airlines enter offtake agreements with renewable fuel producers.

Lastly, Tony moderates a discussion with Chris, Corey, and Tracy on near-term opportunities in battery metals, biofuels, and oil. Chris emphasizes battery technology advancements, specifically advancements in cathode and anode formulations. He spotlights the intriguing investment potential in the refining aspect of the battery supply chain. Corey accentuates ethanol’s utility as a sustainable aviation fuel (SAF) feedstock and outlines federal and state incentives propelling SAF facility advancements. Tracy highlights how some traditional oil refining companies invest in biofuels, noting that oil and gas industries differ from mining metals, oil, and gas. She reveals that many oil companies remain unaware of alternative energy sector developments, allocating funds to avoid falling behind. Chris adds that historically, oil and gas companies hesitated to invest in battery metals due to the limited market size, but changing political dynamics are now driving exploration into such opportunities.

Key themes:

1. Peak Oil in 2028

2. Batteries

3. Biofuels

This is the 70th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Chris: https://twitter.com/cberry1
Corey: https://twitter.com/biofuelslaw

Transcript

Tony

Hi everyone, and welcome to The Week Ahead. I’m Tony Nash, and today, we’re joined by Tracy Schucart from Hilltower Resource Advisors, Chris Berry from House Mountain Partners and Corey Lavinsky from S&P Global.

Tony

I want to take the opportunity really to talk about energy. We’re going to talk about peak oil with Tracy. We’re going to talk about battery technology and battery minerals, metals with Chris Berry, and then we’re going to talk about biofuels with Corey. So really excited about this show so we can get really deep in one sector.

Tony

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Tony

So guys, thanks. I’m really excited about this show.

Tony

Tracy, I want to talk a little bit about peak oil. There was this IEA note that came out last week saying that we’ll see peak oil around 2028.

They said demand for the chemicals industry will continue to drive oil demand, but demand for transports will shrivel. That was their wording. So 2028 is pretty soon, and it seems like a really quick time frame to change oil consumption. So can you talk to us a little bit about this IEA study and just tell us what some of the key takeaways are?

Tracy

Yeah, absolutely. So first, IEA estimates that global demand reaches 105.7 million barrels per day in 2028. That’s up 5.9 million barrels a day compared with 2022 levels. But really what they said is growth is to flow from there, not decrease. So it’s just the rate of change or the rate of growth is to decline is what they are saying. So they’re not actually saying that peak oil demand. That said, like all of the other forecasts, I do think this is wishful thinking more than anything. And they did, as you are correct, they did include a caveat which included biofuels, petrochemical feedstocks and other non energy uses, which is up to a broad interpretation really, if you kind of work through this report, the only expected growth decline is in Europe and the United States and with increases elsewhere led by China and India. And given that if we look at this study, europe has 742,000,000 people, that’s 9.27% of the global population. North America has six, 4 million. That’s 7.55 million portion of a global population. So really that’s not a lot as a whole, considering there are 8 million people on the planet and many of which are in emerging economies where fossil fuels are necessary to reach levels above poverty.

Tracy

I mean, if we look at Africa, for instance, we have 600 million people alone in that country without electricity, and they’re going to need fossil fuels for a very long time. In addition, again, I can bring up China and India because both of them are expected to increase their consumption. Even if, adding in renewables, their consumption is set to increase together, their population is much larger than Europe or the United States.

Tony

Okay, great. So it sounds like it’s really a both, and it’s not just kind of fossil fuels or, say, renewables, it’s a both and kind of way going forward. But it doesn’t sound like oil is going to collapse in 2029 or anything like that.

Tracy

Correct.

Tony

Okay, so they talked a bit about transports and how much are EVs impacting the expectations around Ice vehicles. So you talk about India and China as being the big growth vehicle. So are EVs, let’s say, in India, going to displace ice cars?

Tracy

Not at this juncture. Not even close. And yes, in China, it’s huge growing industry. However, that’s not their main driver, because if you look at what is powering, their ice vehicles is coal because coal is their main power source. And so you have to take that into account when you’re looking at these things. Oh, yeah, China is the biggest growth in EVs. But what is powering the EVs? Where does that electricity come from? That electricity is basically still coming from coal, along with a mix of hydro, natural gas and crude oil. If we look at the United States, as far as feasibility is concerned, biden administration says he wants 50% of US EVs by 2030. We’re currently at 12%, and we don’t even have the chargers or the grid to even support this. So I have to still go ahead and say a lot of these initiatives are fantastic, but realistically, in seven years, it’s just physically impossible to get to 50% EVs even if people were forced to buy them. Right.

Tony

So we look at guys like Ford who’ve talked about losing billions of dollars this year, and they lose tens of thousands of dollars on every vehicle. And Chris, I want to get into this a bit with you in a second, but we’re not close to that goal yet and it seems very difficult. I want to go back just a second and talk about grids. So, Tracy, again, you talked about India and China. And can their grids sustain the EV growth that’s expected in those countries? Because we have difficulties with grids here in the US. Right. Sustaining. EV. Plugins. So is it first of all, can we hit that here in the US by 2035? 50% just on the grid alone? Second of all, what about India and China? Do they have the grid that can sustain EV growth?

Tracy

Well, we’re talking about two different grid systems, right? If we’re talking about the US. Or we can even include EU in this scenario is that we have particularly aging grid system, right? So really, to realize the goals and I’ll just use the United States as an example, to transition, we’re going to need to build we’re going to need to add over a million miles of transition lines, which first of all, there’s no money in the budget for that. Nobody wants to do that. We’re already hitting over 70% of our current lines are more than 25 years old, and the rest are well into their 50 year timeline. So we have to completely redo our grid system to meet these 20 30, 20, 35, 20 50 goals. And simply no government wants to spend that. And it’s just not in the budget for that right now. So, realistically, it’s just impossible for us to really get there. Now when we go to China and India, right, they’re more of, well, India is an emerging market. I can argue that China may or may not be anymore, but that’s besides the point. But they can grow their grid system because it’s not as advanced or not as mature as our grid systems are.

Tracy

And so, sure, they can add a lot of capacity as far as renewables is concerned, but that doesn’t mean that they’re giving up their power mix. I mean, coal is still really huge in India and China, so it’s natural gas. Hydro is really big in China, which is renewable. It’s easier to transform a country’s grid that is just not aging like ours are.

Tony

Yeah, I would add that I think a lot of the regulatory environment here in the US. Makes grid build out a little more difficult. Maybe Chris or Corey, you guys know more about that. But in China, it’s pretty straightforward. I think they can really build their grids out wherever they want in India, actually, from a regulatory perspective, really complicated. So I think it’s not that easy in India to build out new power lines, to take new real estate to make that more robust. So some of these things, I think, are going to be difficult. I think people will innovate the way around it. I don’t know how they’ll do it, but I think it’s going to be difficult to build out that infrastructure in some of these places. Chris, do you have any thoughts on that?

Chris

Not so much on the infrastructure side. I mean, I certainly agree that that is a limiting factor when we talk about electrification. Whether or not it’s a million miles or whatever it is you use, just from an EV perspective. I mean you use four times as much copper in a single electric vehicle that you do in a traditional or comparable internal combustion engine car. And so my angle on all of this really comes a little bit less from not so much the policy side of the infrastructure side, but where are all these raw materials going to come from? The lithium, the cobalt, the graphite and I’m happy to get into that here in a couple of minutes. I know that’s kind of the topic here, but the infrastructure is certainly, maybe, in my view, a secondary limiting factor or a lack of the infrastructure. But in my view, before we even start thinking about, okay, where are we going to build these lines or the charging stations, or what have you? Where are we going to get the millions of tons of lithium or millions of tons of copper. If we’re talking from a domestic perspective here, when it takes ten plus years to build a brand new mine in the United States, So those, I think, are some of the initial issues.

Chris

And again, we can get into some of those details for sure.

Tony

Great. Okay, let’s do that. Let’s jump there. Tracy. Thanks for that, by the way. Chris, obviously, batteries are a growing share of energy for transports, and you talk about the availability. I also want to talk about the affordability of some of those battery metals. So can you talk us through where, I guess prices first, before we talk about supply, where have those prices been? We have a chart showing nickel, copper, coal, and lithium.

Where have those prices been? How does that impact the overall battery prices? And I guess most importantly, what’s impacting the way companies are investing in their supply chain? So I guess let’s talk about price and availability at the same time. That would be really interesting.

Chris

Sure. I think when you think about the price impacts of the battery metals on lithiumion batteries, it’s a relative discussion. In other words, you sort of need to think about what has gone on with lithium, what has gone on with copper, nickel, cobalt, manganese, graphite, sort of the big Six, as I like to call them. And in the chart that I had sent over from Bloomberg, basically what it does is it looks at what I call the Big Four. Big four battery metals. And I stretched the chart back to early 2018, and the reason why I did that was that was the peak of the last battery metals cycle. And so it just gives you, as the viewer here today, an idea of what I think we’re just seeing, the tip of the iceberg of which is battery metals, price volatility. And there are a number of reasons for that that we’ll get into. But I think, again, we could spend all day long talking about specific metals. Lithium is clearly the bell of the ball, for lack of a better phrase. That’s the one that gets all the press. And there are reasons why you have seen so much lithium pricing volatility.

Chris

Again, back in early 2018, what we call battery-grade lithium carbonate hit a price of around $24,000 a ton, up from historically, around $6,000 a ton. And then things kind of went to sleep. The cycle ended in 2019. COVID came and sort of froze everything or allowed everything to restart, I guess, depending upon how you think about it. And then, as you can see from the chart, things have absolutely exploded. Lithium went from about $8,000 a ton to a peak of about $85,000 a ton, and then crashed down to around 22. And now it’s sort of on its way back up. It’s at about $45,000 a ton on a spot price basis today in China.

So to your point, Tony, what exactly does that do? Okay, well, the interesting to battery economics, the interesting response there is with respect to lithium, it really doesn’t affect battery economics all that much. Okay? The price of lithium in a full electric vehicle battery, really, even at a price of around $80,000 a ton, was about maybe twelve or 13% of the cost of that battery. So not enough to really make these automotive manufacturers say, wait a second, this isn’t affordable, or this is unaffordable.

Chris

The issue is, and this is what purchasing managers at Ford and General Motors and Tesla and BMW are all worried about. The issue is what happens when lithium price goes crazy. Nickel price goes to $100,000 a ton. Everything sort of goes up in the air. It’s very, very difficult to manage. So what that has forced automotive manufacturers and battery manufacturers to do is really innovate, I should say, around battery chemistries, and think through, okay, what is truly irreplaceable, what can be substituted, and quite frankly, the only metal here that can’t be substituted without making some very, I guess, significant issues with respect to performance is lithium. Okay? You can use less nickel, you can use zero cobalt again, et cetera, et cetera. And so, from the standpoint of mobility, again, whether or not we’re talking about cars, trucks, buses, scooters, I don’t think anything is going to challenge lithiumion from a market share perspective for the next ten to 15 years. Okay? It’s a much more interesting conversation when you think about what we call long duration energy storage. So putting batteries in with solar farms and so on and so forth, there’s a lot of competition over there, and again, a lot of it has to do with price and performance.

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Chris

Go ahead. Sorry.

Tony

Yeah. With lithium, we hear maybe I’m misunderstanding, but like China and Chile or something, are the two big sources of lithium. Is lithium in other places? And what other places are there? There’s this perception that it can only be sourced from a limited number of places. What are the bottlenecks there?

Chris

So the bottlenecks are in the upstream, in the mining and the refining. And so lithium can be found either in traditional hard rock sources, primarily in Western Australia. There’s a lot of it in Africa, too, and then traditional Brine sources. You may have heard of the Lithium Triangle, which is, if you’re looking at a map of South America, where Bolivia, Chile, and Argentina sort of converge, there’s an awful lot of lithium. About 50% of global lithium comes from that part of the world. So the interesting thing about lithium is that it’s not rare at all. Again, you could actually extract lithium from seawater if you wanted to. I wouldn’t recommend it because it’s very difficult and costly. But my point is, lithium is not rare. The issue with China, and China isn’t even a major lithium mining source at all. They only produce around 13% or mine, I should say around 13% of lithium globally. And just for the sake of perspective, today lithium is about a 900,000 ton per year market, okay? So compare that to copper at 24, 25,000 tons a year. Excuse me, but the issue is the refining. In other words, taking that raw material, whether or not it’s in the form of liquid Brine or the hard rock concentrate and producing, converting it into what we call battery grade lithium salts, either carbonate or hydroxide.

Chris

Now, about 65% of that happens in China, okay? And then as you go further down the supply chain, when you think about the cathode of the battery, so nickel, manganese, cobalt, lithium, iron phosphate, these different chemical formulations, about 65% to 70% of cathode is produced in China, about close to 100% of the anode. The other side of the grephidic side of the battery is produced in China, and they also have a lock on battery production, overall cell and pack production. So this is one of the things that I think the Inflation Reduction Act is designed to try to counteract over the course of the coming years. But again, coming back to my original point, if we do want to compete with China and sort of level the playing field, the one thing that really isn’t addressed in all this legislation is where will the raw material come from? There is no sort of streamlining of mining permitting or anything like that in the Inflation Reduction Act, and that is one pretty significant limitation, quite frankly.

Tony

So are there lithium sources in North America? I mean, would it be possible to mine it in North America, 100%?

Chris

Absolutely. Again, lithium is not rare. I live in Washington, DC. Now. I used to joke when I lived in New York, I could get a shovel and go to Central Park and start digging, and eventually I would find trace elements of lithium.

Here’s a perfect example. And this is maybe a good way to tie in what corporate America or the OEMs are doing. And so, look, the automotive manufacturers, Ford, General Motors, just to use them as an example, finally woke up, I think, and realized, okay, we are going to have to produce electric vehicles whether we want to or not, regardless of the economics, to Tracy’s point. And so they should have been making multimillion or multibillion dollar investments in supply chain development 5, 6, 10 years ago. And so they’re just doing that now. And got a couple of examples. So General Motors has agreed to invest about $650,000,000 in, I should say, a development stage lithium project out in Nevada run by a company called Lithium Americas.

And so, again, I’ll just cut right to the chase. The bottom line is the lithium that is being produced today is pretty much spoken for. Okay? The question becomes, if we are going to get to 50% EV penetration or anything even remotely close to that by 2030, you need to be making those upstream mining investments today to try to accelerate that.

Chris

And so the interesting thing about that General Motors example is that that mine probably won’t even be in production before 2026. And so it just, I think, speaks to the desperation on the part of General Motors to say, listen, we are willing to pay a very large sum today in this high risk mining environment for the chance to negotiate for offtake by 2025 or 2026.

Tony

Okay, so looking at this graphic, you’ve got Ford with Lion Town. I guess that’s a lithium investment as well.

Chris

Yeah, Liontown is a development stage hard rock lithium mining company development, meaning they’re not in production yet. But again, I think it just speaks to maybe I don’t want too much hyperbole here, but the desperation or the focus on the part of these automotive manufacturers, they finally woke up, probably again, five years too late, and realized, hey, we have a raw material problem. We can get our hands on the intellectual property to build batteries or build gigafactories or what have you. And of course, you’ve got the Department of Energy and the Inflation Reduction Act providing a pretty strong tailwind there. But what good is building a gigafactory or a recycling facility if you don’t have the feedstock for it? And so, again, there are nuances here that we can get into in terms of accessing that feedstock. But all of these players that you see on the screen, again, see a lot of General Motors and Ford and LG Chem there. They’re just very concerned right now about raw material access. And again, it goes beyond lithium. I mean, you can see in the lower right hand corner there ford Valet and Hawaiia Cobalt. Interestingly enough, you’ve got an American automotive manufacturer entering into a multibillion dollar nickel sourcing deal with one of the largest Chinese cobalt players in the world.

Chris

So it just, again, is a sign of, I think, how worried these OEMs are about. They see the tea leaves or the winds shifting or whatever the phrase is, and they don’t want to get left behind.

Tony

Right.

Tracy

I had a question.

Chris

Sure.

Tracy

Okay, so we already know that we have a permitting process problem here in North America. It’s not only in the United States. Canada is facing that same issue as well, where it takes ten years to even get the permit, basically. And so in what ways or how do you think that climate goals are in conflict with sort of this process? Right? We already know we need these metals. We already have this red tape that already existed before. This is like an old problem. Right. And so now we have these climate goals, which is adding to the problem. How do you see this panning out?

Tony

Basically?

Chris

Yeah, no, it’s not a comfortable conversation, quite frankly. And I’ll just give you a perfect example. I mean, when you had talked earlier about China and coal growth to feed the grid, indonesia is going to be one of the largest nickel producers. They already are one of the largest raw nickel ore producers in the world today. They’re expanding capacity there dramatically. And in terms of what is the energy source to build these mines and operate these mines, it’s coal. So all of this nickel that is going to go into these millions and millions and millions of electric vehicle batteries is going to be coal fired. And so you have to take to your point with respect to climate goals and thinking about how green the process is. You have to take that into account. And that’s kind of the uncomfortable part of the conversation. And so a lot of my inbound calls coming from investors are, we understand, like, there’s commodity price risk, there’s ESG risk with mining. Mining industry, quite frankly, doesn’t have a sterling reputation when it comes to hitting things on budget and on time. And so what else is out there?

Chris

What else could feed or should say plug any kind of structural gap in metals demands, number one. And number two, do so in such a way that you hit these ESG goals, which again, are very, I think, fluid in some ways. And so I do a lot of work in lithiumion battery recycling and do a lot of work in a certain type of lithium extraction called direct lithium extraction. Again, don’t want to get too much into the weeds today, but even those processes have their own CO2 footprints. And so, at the end of the day, I sort of look at this as, like, the paradox of green growth, which is everybody wants to decarbonize, and we want to have clean cars or a clean grid or whatever. It is. But there is a price to be paid to get there in the first place, and you’re just not going to do it through recycling or innovating with battery technologies. It’s going to take a lot more raw material, and that is going to have kind of a basic carbon footprint that needs to be accounted for.

Tony

Hey, Chris, before we move on, when you talk about these corporate investments and supply chain investments, it looks like a lot of this stuff is on the mining side. Are these say lithium America’s. Lion town. Are they refining as well, or are they only mining?

Chris

Excellent question. Liontown’s intention is just to mine. Okay. Lithium america. It’s an interesting question because neither of them are in production today. And so we just have to rely on their feasibility study and their stated plans. So lion town is a hard rock asset, or they’re developing a hard rock asset in Western Australia. Their initial intention is just to mine the concentrate, the hard rock concentrate. Where will that go to be refined into battery grade salts? It’s going to go to China, probably.

Tony

At least initially, like we’re going to mine it here, ship it to China, have it refined and send it back.

Chris

This is the issue with well, again, the fact of the matter is the Chinese has spent the last ten or 15 years building a consolidated lithiumion supply chain. I’m not saying it’s going to take us ten or 15 years, but we have the mining issue to think about. We have the refining issue. And to be honest, you could get a lithium refinery here in the United States. And there are actually perfect example, tesla and Corpus Christi, they’re building a lithium refinery company here on the slide, piedmont Lithium. They’re actually building two lithium refineries, one in Tennessee. Again, the source of the feedstock is kind of an open question there, but nevertheless, these companies are going to build these refineries in the next three or four years. It’s much easier to permit midstream to downstream portions of the supply chain than it is the mine. But, yeah, again, think about a lithium molecule, right. Maybe it comes it’s mined in Western Australia, it’s concentrated there. It goes to China, where it’s turned into battery grade salts. Maybe it then ends up in Japan, where it’s turned into cathode. Maybe then it goes to Fremont, California, where it’s put into a Tesla.

Chris

I mean, the journey of a lithium molecule has a rather significant CO2 footprint associated with it. And again, this is, I think, what, the inflation reduction act. And a lot of this legislation, this kind of near shoring or friend shoring legislation is designed to do is to minimize the CO2 footprint. But, yeah, it’s kind of a long winded answer saying some of these guys are going to refine and some of them aren’t. But at the end of the day, for the foreseeable future, everything’s going to go through China.

Tony

But if that lithium was transported with biofuels, Corey, it would really help that CO2 footprint.

Corey

Right. Nice segue, the same thing.

Tony

Thanks, Chris. Thank you. I really appreciate it.

Tracy

That segue was excellent.

Tony

Corey, hey, thanks for joining us. There was a big EPA announcement on biofuels this week, and I want to understand what all of that means. I’m not an expert here at all. So can you please tell us what is a biofuel?

Corey

Sure. A biofuel is a fuel that’s derived from biomass or organic matter. The most common ones in the United States are ethanol. Ethanol is about 98% of the gasoline in the United States has ethanol in it. It’s mostly made from corn or sorghum. In the United States, it is made from corn and wheat. In Canada, it’s made from sugar cane. In Brazil and other areas of the world. Other biofuels that are common are biodiesel and renewable diesel, which are substitutes for diesel as well as sustainable aviation fuel, which is a substitute for jet fuel.

Tony

Okay, so when we hear the words biomass, what does that mean?

Corey

Once again, I’m just re saying organic material, organic plants. Biodiesel is also made from fats, recycled oils and greases. Those are the soybean oil, veggie oil. So that’s kind of what we’re talking about.

Tony

Okay, great. So when you talk about things like biodiesel or aviation biofuels, how much of, say, biodiesel in, say, North America or Europe, or how much of diesel in, say, North America or Europe is biodiesel?

Corey

I would say about five to 7% of the total diesel pool is biodiesel. Renewable diesel. It is a growing percentage primarily because with this EPA announcement, there’s mandates that require refiners and importers to use the fuel, as well as states with low carbon fuel standards that have increasing targets that require increased uses of these fuels.

Tony

Okay. And aviation fuel, bioaviation fuel, how much of the market is biofuel?

Corey

Next to nothing. And that’s where the big opportunity is. I think right now it’s like less than one 10th of 1% of the total jet fuel pool is sustainable aviation pool. And I think production in the United States was less than 16 million gallons last year. When we’re talking about targets of like 3 billion by 2030 and 35 billion by 2050, we’re talking minuscule mounts at this time.

Tony

Okay. I think it’d be much more comfortable in a biofuel powered jet than an electric powered jet at this point. I don’t want to get to that 300 miles limit and have the jet engine just stop.

Corey

That’s very common. I don’t think anybody wants to fly from Los Angeles to Singapore in an electric jet, but maybe if you’re hopping from island to island, then you would be comfortable with those smaller ranges.

Tony

Okay, so can you also tell us on these general segments that you’ve talked about in terms of biofuels, how quickly are they expected to grow? Generally like 400% a year or 20% a year.

Corey

No, I mean, the renewable fuel standard is what jump started the industry. Right? So ethanol was used as an oxygen for gasoline was basically like a 4 billion gallon per year. Industry in the United States. Then the Renewable Fuel Standard came out 2005. It’s been around for around 15 years or so or active. And during that time ethanol has gone from 4 billion gallon industry to a 17 billion gallon industry. So there’s already been the extensive growth for ethanol and biodiesel. Right now there seems to be a transition where more of the construction is going into renewable diesel and SAF. Those fuels can be produced from the same facilities. Like you said, it’s such a small percentage of the total jet fuel market that there’s an increased focus now on decarbonizing it. So if we have over 10% of the gasoline pool that has ethanol, around 5% to 7% of the diesel pool has biodiesel and renewable diesel. Now we’re just kind of making that transition of why is such a small percentage in aviation. And so the Biden administration has had setting these goals of production targets as well. As I know that Chris mentioned the Inflation Reduction Act a few times, that there are incentives for SAF that are better than some of the other fuels.

Corey

There’s higher blending credits for sustainable aviation fuel. And then in 2025, when there’s a new clean Fuel production credit in the Inflation Reduction Act, SAF has preferential treatment as well, where it gets a higher credit. So that’s the tool being used by the government to jump start SAF, just like ethanol and biodiesel were jump started with the onset of the Renewable Fuel Standard program.

Tony

Okay, great. So I understand those are all basic questions and most viewers are probably way beyond me in their understanding biofuel. So thanks for doing that. Can we walk through some of the EPA information that came out yesterday? You sent this great table, and if you could walk us through what that stuff means, I’d appreciate it.

Corey

Sure. Okay, so the intent of Congress was for refiners and importers to use a growing amount of biofuels each year. And there’s four separate categories that are depicted on the chart to the left that they need to blend a certain amount of renewable fuels, they need to blend a certain amount of what’s called biomass based diesel, which are the diesel replacements, a certain amount of advanced biofuels and a certain amount of cellulosic fuels. And what Congress did is that they would set a mandate and every year EPA would look at it and adjust it based on the available domestic supply. The mandates were set by Congress through 2022. And this has really been the first set of mandates where the EPA was setting mandates without the guidance of Congress. And essentially the only guideline that they had was try to keep up with the congressional intent. And essentially the congressional intent was for mandates to get higher and more stringent every year. So if we look at the chart, you can see how volumes are constantly going up a little bit. If we focus on this table, one of the takeaways from the announcement was a lot of biofuel companies were unhappy with it.

Corey

There was a proposal in December of last year followed by a public comment period and taking them about six months in order to finalize these mandates. The ethanol industry got a number less than what was proposed in December. So if we look at the conventional biofuels column of that table, we can see that about 15 billion gallons was basically reserved of a category that corn based ethanol can satisfy. The proposed volume was 15.25 billion and it was reduced to 15 for 2024 and 2025. So the ethanol industry is very upset about that. The higher the mandate is, the more than the greater likelihood there would be higher blending. The ethanol industry wants to move up from the standard of E Ten. The vast majority of the fuel in the country is E Ten, and they are pushing to have more E 15, E 85 and other higher grades. And part of the Inflation Reduction Act too was giving half a billion dollars in order for service stations to update their equipment, update their infrastructure, to enable them to sell more E 15. In terms of the biomass based diesel column, that’s something that you can see that it gets progressively higher each year for the mandates that were set for 2023, 2024 and 2025.

Corey

But it’s growing at a very slow pace and it doesn’t mirror the amount of investment that has been going into the sector. There’s already enough reduction right now to satisfy the mandates in 2025 and hundreds of millions of dollars are going into converting existing oil refineries to produce renewables. So we have renewable diesel facilities being constructed, we have sustainable aviation fuel facilities being constructed, and the actual capacity is going to be way higher than these biomass based diesel mandates, which has upset a lot of companies because historically, the EPA usually has looked at the availability of supply as the guide for setting these mandates. And when these mandates are considerably less than what they expect supply to be, then that has upset a lot of people. And the cellulosic biofuels, there was going to be a really big change in 2023, 2024 and 2025. The EPA was going to include EVs in this renewable fuel standard program. EVs do reduce emissions and they aren’t allowed to generate compliance credits like all these other fuels. And they had proposed a system or proposed regulations that would allow EVs to generate credits under the Renewable Fuel Standard and they were quite complicated.

Corey

The only companies that would be able to generate these valuable Rins are valuable credits known as Rins were EV manufacturers and there was just great opposition to it during the public common period. So the EPA punted having EVs generate these types of credits. So the cellulosic fuels are basically very small amounts of liquid biofuels coupled with biogas.

Tony

Interesting. Okay, so you covered this already, but I’m very interested to see that 15 billion gallons of conventional fuels just kind of plateau. And there must be a lot of disappointed people in the Midwest of the US. About that. And it does look like things are slowing down in terms of biofuel requirements. Maybe too much is strong. But is there more capacity than needed today, or is it just the investment that’s going in? Is planning to have more capacity than is outlined in these regs?

Corey

Well, it depends what type of capacity you’re looking at. If you look at just individual fuels, ethanol, if you kind of look ahead, if you look in the medium term and we’ve been talking about EVs during this discussion, that it’s clear that the increased penetration of EVs is going to take a lot of gasoline powered vehicles off the road. And when you take millions of gasoline powered vehicles off the road, there’s going to be less on road demand for fuel ethanol. So we’re going to reach that stage of what are you going to do with all that ethanol. We have about 17 billion gallons of capacity. So this is where sustainable aviation fuel is a godsend to the industry because one of the technologies that’s being developed to produce SAF is using ethanol as a feedstock for SAF. We talked at the beginning of how veggie oils can be used for biodiesel and corn and sorghum and wheat can be used to make ethanol. Right now they’re developing technology where actually ethanol itself can be used as a feedstock for staff. And once again, when there’s going to be massively declining demand for on road ethanol, the prospect of using ethanol to make something that could help decarbonize the aviation sector is extraordinarily exciting for the industry.

Corey

And also, it’s not a one to one ratio. It takes about 1.7 gallons of ethanol to make one gallon of SAF due to density issues. And so SAP is really opening up a tremendous opportunity for domestic and domestic ethanol producers and also imported fuel.

Tony

Go ahead, Tracy.

Tracy

Sorry, I had a question. So we’ve seen a lot of the aviation industry kind of push back on this state, saying that we can’t do this right now. This is going to cost us a lot of money. We’re going to have to pass these costs on to the consumer. So how do you look at this as far as I mean, obviously this is in the invancy stage, but how do you see this panning out? How long do you think this is going to take until this becomes like a viable fuel for aviation where it doesn’t cost us another $200 per flight to pay for?

Corey

Well, look, there’s already countries that mandate SAF in Europe. France mandates AF Norway and Sweden mandatesf. Already the EU directive is going to institute mandates starting in 2025. So it’s a real thing in Europe right now. Right now, once again, construction is going on. We have very minimal SAF production right now there’s a SAF producer called Montana Renewables in Montana that’s operating. And we have a lot of big facilities that are going to be coming up soon in California, in Georgia, and elsewhere. I’m seeing differently. We’re talking with airlines and more. The public press releases, they say they’re excited about it. They’ve entered into offtake agreements with these renewable fuel producers. They’re part of airline associations that have specific targets. Many of them have targets of 10% SAF by 2030. Whether or not anybody believes that’s Achievable, they may say something as the time comes closer where perhaps they take the position that it’s not feasible because staff is too expensive and consumers are unwilling to bear the added expense. But I think that many airlines are looking towards decarbonization efforts and they’re waiting for the staff to be produced. It’s behind schedule. There’s supposed to be a lot more availability of sustainable staff by now, but they’re waiting for it and they have offtake agreements for when it comes.

Tony

Why is the availability not there?

Corey

The development of technology. And frankly, when we look at the mandates, when I said, hey, there’s mandates for advanced biofuels and biomass based diesel and ethanol can satisfy one of the categories. There isn’t a mandate for SAF. Had there been a mandate for SAF when the Renewable Fuel Standard was amended in 2007, then we would have seen technology being kick started. And back then there’s been over ten years of trials and testing and test flights. Everything would have been accelerated had SAF been a mandated fuel. So right now the Biden administration, they have a target. They have what they call a grand challenge for a certain amount of production. 3 billion gallons of production by 2030. And once again, they’ve had provisions in the Inflation Reduction Act which will support this program, such as blending credits and cleanfield production credits that are pro staff.

Tony

Tracy, I’m sorry, I didn’t mean to interrupt you. You were starting to ask a question.

Tracy

No, you actually almost asked my same question, just rephrased a little bit differently.

Tony

Okay, very good. So in Corey, it also sounds to me like on some level, and I don’t think this is fully level, but it almost sounds to me like biofuels is kind of seeding, say automotive to EVs. Is that fair to say or not?

Corey

There’s no seeding going along.

Tony

Okay.

Corey

SAP is like perhaps a backup plan or the way they’re looking at the future. The ethanol industry right now is trying to make sure that fuels have higher blends. And actually last year there was record sales of E 15. There’s record sales of E 85. Ethanol has been selling at a lower price point than petroleum based fuels. So when you blend, there’s a better economic incentive to blend. So E 15 was selling at a much cheaper price point last year, and E 85 in California was selling up to like $2.50 less a gallon than the normal E ten. So a lot of people, when times are tough and the economy was bad, a lot of people saying, look, I heard that my car can accept E 15. I could fill up my tank for $6 less. And they gave it a shot and the cars didn’t fall apart on the side of the road. So you had essentially a lot of millions of new customers who tried these higher blends for a first time because they didn’t really understand them that well. They saved some money and now we got some new adopters of this fuel.

Tony

Okay, interesting. I’m going to ask both you and Chris the same question about your respective areas of expertise. So what should we be looking for when evaluating companies that are well positioned in biofuels? And Chris, I’ll ask you the same thing about battery metals, but what should we be looking for with those companies?

Corey

The companies are leading the carbonization efforts. One thing I didn’t really focus on is a lot of the new renewable diesel and SAF producers are going to be traditional oil refiners, refiners like Marathon and Chevron and Philips 66 and CVR and HF Sinclair. These are companies that are taking existing facilities and converting them to start processing renewable feedstock in order to produce renewable fuels. They’re making this transition from the old oil stuff and they’re producing these new fuels. And now they could use and they could blend these fuels into their existing petroleum based products. But that’s what we’re seeing. We’re seeing decarbonization efforts and a lot of these big oil refiners that are doing the energy transition and moving towards renewables.

Tony

Great. Chris, how about you? What should we be looking for when evaluating companies that are well positioned in battery metals? What are the main things that you’re seeing?

Chris

Yeah, I mean, look on the upstream with respect to the raw material. I think as I look at specific companies, the whole lithiumion supply chain discussion has this huge geopolitical component to it now. And so when I think about assets, mining assets in particular, I think what I’m looking for first are companies that have what I would call geographic and geologic diversity. Companies that may have lithium assets in Western Australia and in Chile or just different parts of the world. That way if you have an asset in a country and all of a sudden they wake up one morning, the government says, hey, you know what, we’re going to look at those royalty numbers again. Or no more exporting of raw. Well, look at Indonesia, right? I mean, twice in the last eight years they’ve banned raw exports of nickel anyway. So geologic and geographic diversity, number one. And then number two, producing battery metals, in other words, hitting that spec. I’ve talked a couple of times about battery grade lithium carbonate or cobalt sulfate or whatever it is. That is not something that’s easy to do. And while the know how is out there.

Chris

You want to find those management teams that I always like to say they have the right blend of sort of financial markets, acumen, how to raise the capital and manage the balance sheet and manage the capital structure, but also how to produce these chemicals. Because what we’re going to be doing if we are going to get to 50% Ed penetration or whatever the number is in the future, we’re going to be going after lower grade, lower quality assets. And those are more problematic in terms of hitting that battery grade spec. So, again, it’s geologic and geographic diversity, number one. And number two, it’s just management teams that have that technical capability to produce these materials of scale.

Tony

Yes. And I’ll ask you both the same question as well. What do you see as the best near term opportunity, Chris, around battery metals, around that supply chain? What’s the biggest near term, say, three to five year opportunity in that area?

Chris

I think from a higher risk tolerance perspective, I look a lot at battery technologies and so innovations around different cathode formulations. In other words, either using an equivalent amount of lithium or nickel or what have you, and increasing energy density. So I look at a lot of different cathode and anode technologies on the anode side of the battery, really interested in what we call silicon anode technology, which is effectively doping that anode with silicon. And that can increase the energy density up to around 30%. Okay. So you can drive 30% further, charge a little bit faster. So I look at a lot of those types of opportunities. Again, kind of alluding to or going back to what we talked about earlier, the refining aspect of this whole theme and this whole thesis. I mean, Elon Musk will tell you that he thinks that the bottleneck is in refining of these materials, and I think he’s partially right. I think, again, it’s also just getting your hands on the feedstock in general. So building out that refining capacity again, to your point, over the next three to five years is a really interesting place to be as well.

Tony

Right, okay. Corey, how about you in biofuels? What is the biggest opportunity in the next three to five years?

Corey

I’ve already mentioned it. The biggest opportunity is the use of ethanol as a feedstock for SAP.

Tony

For aviation fuel.

Corey

Yes, I’m sorry, I’ve been saying SAP. SAP is short for sustainable aviation fuel. That seems to be a great opportunity. We have once again, they generate Rin credits that can be used for the federal Renewable Fuel standard. They’re beneficial for these state low carbon fuel standard programs like in California, Washington and Oregon, and they’re developing state credits that are incentivizing it as well. So if you there’s a SAF purchase credit in Washington state and Illinois now where they’re adding on tacking on additional incentives to sell staff into those states. So I think ethanol to SAF and the advancement of the construction of these facilities is quite exciting to the industry.

Tony

Okay, thank you. And Tracy, let’s end up where we started out on oil. We’ve talked over the years about the lack of investment in the upstream, in oil and in the downstream in oil and gas. Right. And it sounds like battery metals and biofuels are getting a lot of investment. So are these large energy firms, are they taking funds that could be put into the upstream and substituting them into biofuels and battery materials? Or is it not substitutional? Are they just not doing that capex on energy upstream and they see this as a completely different thing?

Tracy

Well, there are two totally different things when we’re talking about mining for metals and mining for oil and gas. But if we look at the biofuel side of it, of course there are a lot of refiners that have allotted a lot of money to changing over, particularly California to changing over. Some of their refineries to include biofuels. Marathon is one, valero is one for a couple to look up. I definitely think that this industry is they’re not aware of what is happening and where this industry is going. And so, again, like I said, in particular, if we were looking at the refining industry, there are a lot of traditional oil refining companies that have already allotted a lot of money into biofuel technology and refining biofuels because they don’t want to get left behind.

Tony

Great.

Chris

Sorry, Tony. Just as an example of an oil and gas company looking at the battery metals is exxon. There was a story in the Journal a couple of weeks ago about how they’re looking at getting into the lithium production business and the smackover formation in Arkansas. The reason I think why a lot of these oil and gas players have shied away from battery metals or diversifying away from their business from a capex perspective is quite simply because most of the battery metals markets are too small. I mean, I mentioned that lithium is a 900,000 ton a year market that’s I don’t even know at elevated prices, is it 20 billion a year or something like that in revenues? I mean, that’s probably the capex budget for one of these super majors in a specific year. So the battery metals have never really moved the needle from a financial perspective for these guys and that’s one of the reasons why they’ve steered clear of it. But again, with the way the political winds are shifting, you’re starting to see the exxons of the world say, hey, we’ll give this a closer look. So I don’t know what’s going to come of it, but it’s something that is interesting.

Tony

Great. Okay, guys, this has been really helpful for me, really educational, informative for me. So thank you so much for spending your time. Thanks so much for helping us out with this. Have a great weekend and have a great week.

Corey

Ahead.

Tony

Thank you.

Tracy

Thank you.

Chris

Thanks you me out.

In this latest episode of “The Week Ahead,” Tony Nash hosts David Cervantes, Albert Marko, and Tracy Shuchart to provide valuable insights on a range of topics, including recession indicators, China’s economic challenges, the natural gas market, and Europe’s energy supply problems.

Challenging Prevailing Narratives

David Cervantes sets the stage by reflecting on his accurate recession call made several months ago and his process of questioning prevailing narratives. He emphasizes the importance of construction activity and employment data when analyzing the correlation between the housing market and recessions. His research process involves independent replication of economists’ work to understand the underlying factors and ensure a comprehensive perspective.

Commercial Real Estate and Economic Impact

The panelists discuss the role of commercial real estate in the broader economy. David explains why it is not a major factor in the economic cycle, highlighting the strength of the construction industry and the scarcity of contractors. By shedding light on the limited impact of commercial real estate, the conversation emphasizes the need for a holistic approach when assessing economic trends and potential risks.

Tech Job Losses and Economic Outlook

Tony and David explore the current state of tech job losses and its implications for the overall economic outlook. David counters concerns with data, citing payroll and continuing claims data that do not support the narrative of significant job losses. The conversation also touches on the trend of individuals turning to do-it-yourself solutions for home repairs, adapting to tasks they would otherwise hire professionals for.

Factors Affecting Hypotheses

While acknowledging the potential risks to his recession hypothesis, David dismisses concerns about a credit contraction in the banking sector. Structural changes implemented after the global financial crisis provide safeguards against such an event. The conversation also explores the possibility of energy shocks and their potential impact. Falling oil and gas prices are seen as beneficial, but the panelists discuss how energy shocks could still play a role in shaping future economic scenarios.

China’s Economic Challenges

The discussion shifts to China’s current state, its economic challenges, and the implications of US economic officials’ actions. Panelists express concerns about China’s lack of movement politically and economically, despite slight retail sales growth. They delve into the influence of interest rates, inflation, and China’s desire to avoid becoming like the Soviet Union or Japan. The participants draw parallels between China’s situation and Japan’s experience in the 1980s, highlighting the complexities and geopolitical considerations at play.

Geopolitics, Governance, and Natural Gas

The panelists delve into geopolitics, governance, and the natural gas market. They discuss China’s fear and arrogance regarding its future and Japan’s bureaucrats apprehensive about following the path of the Soviet Union or China. The conversation also touches on China’s challenges, including demographics, environmental issues, and water scarcity. Differences between the US and European markets are highlighted, with a focus on Europe’s energy dependence, climate concerns, and political decisions impacting market volatility.

Europe’s Energy Supply Problems

The discussion highlights the supply problems in Europe related to air conditioning demand during summer. While Europe is not a major consumer of air conditioning compared to the US, increasing temperatures lead to energy supply drawdowns. The panelists highlight the impact of low water levels in rivers like the Rhine, causing difficulties in transporting crude and gas products to Europe. The water scarcity issue extends beyond northern Europe, affecting the Mediterranean region as well.

Energy Costs and Industrial Dynamics in Europe

The conversation explores the impact of high energy costs and environmental policies on European industries. The participants discuss the relocation of companies to countries like China and the US, which offer lower energy costs and potential incentives. Deindustrialization in Germany and other EU countries leads to the loss of market share. The participants also touch upon Europe’s approach to energy policies and the potential regrets that may arise in the future.

The latest episode of “The Week Ahead” provides invaluable insights into key economic topics shaping our world. The discussions on recession indicators, China’s economic challenges, the natural gas market, and Europe’s energy supply problems offer a comprehensive understanding of the complex dynamics at play. By challenging prevailing narratives and encouraging critical analysis of data and methodologies, this episode serves as a guiding light for navigating the ever-changing economic landscape. Stay tuned for more thought-provoking conversations that empower us to make informed decisions in an interconnected world.

This is the 69th 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
David: https://twitter.com/pinebrookcap
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Trascript

Tony

Hi, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by David Cervantes, Albert Marko, and Tracy Shuchart. Guys, thanks so much for joining us. Been a really interesting week with the Fed meeting and with it seemed like a reacceleration of markets.

Tony

One of the things I really wanted to talk about and I’m so pleased to have David today is his no recession call, or at least not right now call. This is something he did six, seven, eight months ago, and he’s been very consistent since then. So I want to dig into that. I also want to talk about China. We’ve had a lot going on in China with the upcoming blinken trip and some Chinese economic data and other things. So I want to talk with Albert about that. And then we want to talk a little bit about Nat Gas. We’ve seen a bounce in Nat Gas over the past couple of days, and Tracy’s obviously the expert there, so I want to get her thoughts on that as well. David, thanks for joining us. I know this is your first time, and and I promise you’ll, you’ll emerge unscathed afterwards.

Tony

We’re were you called a recession back in on November 14 of 2022. I couldn’t find an earlier time that you did that. But if you look at the tweets we’ve got from the 14th, you went into kind of a fair bit of detail on why you called that.

And you’ve been very consistent since then, as we’re showing, kind of in this first series of tweets, you’re talking about really, as you say, in plain English, why you changed your view, and then you reinforced this on January 6, and then you’ve been very consistent since then, despite a lot of pushback. ‘

And so I really admire that. And I think all of us here have some pretty non consensus calls pretty regularly. So I think that’s a great call. But what I really want to learn about is your process because we have a lot of kind of retail investors who watch us. And so can you talk to us a little bit about your process and how that process fed into this recession call? Because I think people underestimate having a consistent process.

David

Yeah, sure. Well, first of all, thanks for having me. Really excited to be here. I’ve been following your work for a while, you and Albert and Tracy, the rest of the whole team. So I’m really pleased to be here. Just getting back to the question of the process. Look, we’re all reading the same information, have access to the same media set and tools. So the question is, how do you step out of that and develop views that may run counter to that? And if they do, are they right or are they wrong? So just as a general matter, I like to just question the implicit and explicit assumptions that underlie the thesis or the dominant narrative. So it’s not so much drilling into the numbers as it is to understanding the argument, the logic, and just kicking the tires and seeing if it makes sense. So back in October, I don’t know if you saw this tweet, but back in October I said, hey, I’m going on a recession watch. One of my indicators flipped yellow, and that indicator is the, I call it Wrap real average weekly payrolls for non managerial employees, basically the vast majority of W two wage earners.

David

So that kicked off in October. And the indicator rule is as long as we’ve stayed positive year over year, we’ve never gone into recession. It’s an indicator that has a 100% batting average in the post war period. So that flip yellow. And at that point, recession hysteria was kind of peak. The 210 yield curve inverted back in July in October, 3 month ten year, which is kind of the gold standard that inverted as well. And oh my God, we’re going to go into recession. But as with anything, I had to check what was the dominant narrative that was feeding this. Well, the big narrative obviously was the rate hikes. But housing, it was like all of a sudden the bull market and housing came to a stop. House price appreciation stopped, sales volumes tapered off and then eventually being a turn down. So a little light bulb, my head went off and it was, oh my God, it’s housing. So I started digging in. Look at Ed Lemur’s work. He’s an economist who coined the phrase the housing cycle is the business cycle. Read his work and then I basically replicated his work doing it.

David

I did it myself. So instead of just taking what he said as a fed out complete, I said, you know what, I’m going to rebuild this model on my own and really get into the weeds and see if it clicks. And it did. We don’t have to go into the model process. But what I came to learn was that seven out of eleven post war recessions originated in the housing market, okay? And specifically, it wasn’t just house prices or house sales volume. It was construction activity and construction employment. And it wasn’t just the employment at a level, it was the volatility of that economic activity. So I basically wrote this paper for myself just as a thought exercise, and I basically had a predetermined thesis. The housing market will once again be ground zero for a recession. And as I was going through that process, I was looking at the data, I had an insight, and it’s no the housing market. If we have a recession, it won’t be because of the housing market. And the reason was housing construction and housing employment were very robust for a variety of reasons. One was all the stimulus money that got pumped into the system, people were still buying houses, rates were obviously on the move up.

David

But when you need a home given the structural home shortage in this country, you make whatever trade off you have to make to house your family. Even if you move somewhere else, you buy less house, pay more interest and buy less house. Whatever you got to do. You need a roof over your head, and you’ll do it. So I didn’t see the typical causes of a housing downturn to be in the works. And then we got the big inflation pullback in the November report of the October data. And if you recall, after that report came out, we had a huge short squeeze. We were up, I think, 2% on that day. And that raised took my yellow flag on the wrap, real aggregate payrolls back to a green. So between the inflation story supporting aggregate payrolls and coming to the conclusion that the housing sector would in fact not be the cause of a recession, the ODS were that we would not have a recession. When you have a seven out of ten being in the housing market I’m sorry, seven out of eleven and the remaining four well, if it’s not from housing, then your ODS are just less.

David

And between my indicator and I use a variety of indicators, but that was the one that was most prominent between that indicator and what I saw going on in the weeds of a housing market, not sales, not volume, but an actual economic activity that rolls into GDP accounts, if you recall. Prices and sales don’t. They might benefit the buyer and seller, but they don’t roll into GDP accounting. Construction activity does. Employment activity does. And that was moonshotting. That was doing great. So I said to myself, we’re not having a recession. Obviously, I continued to monitor the data, but that was the basis of the call.

Tony

Great. I love you understand the initial conditions. You understand the prevailing narrative. You understand the data I see regularly on your feed where you kind of question the data. You understand the details of the data. You did more research on your own to identify where we actually are, and then you changed your view. So I think it’s easy for us on Finn, Twitter, whatever, to see what the prevailing narrative is and be panicky about. We have to position a certain way because of where the narrative is. But I like the way you kind of pulled apart from that and you really looked at the underlying data and then came up with your own hypothesis. It’s fantastic. And I like the way you continually re change that. We don’t talk about that enough. We’re kind of talking about what are people doing in markets, what’s happening in markets? But going back to these principles and coming up with your view and having that being a rolling view, right? You’re not stuck in that. Sure, of course. No, you’re checking your views as new data come out.

David

I’m sorry, Tracy. Go ahead.

Tracy

I wanted to ask you about what your thoughts were on commercial real estate, because literally, if you go on FinTwit right now, everything is you are all going to die. Commercial real estate is going to crash. We have nobody going back to work in office buildings. New York. You’ve got New York. Even you’ve got San Francisco. That’s a whole different story. So what are your thoughts on that as far as how it factors into this real estate narrative?

David

In terms of the economic cycle, I really don’t pay a whole lot of attention to the commercial real estate part. And here’s why. The construction activity of the actual building of a construction of a building does feed into GDP accounting, but what we’re seeing now is a collapse in commercial real estate prices. And some people are going to take their lump. There will be some tiers, there will be some PNL losses. As long as it doesn’t feed into the credit markets and into the broader economy. As far as the cycle goes, I think it’s for the most part, not an issue. Investors will get burned, someone will get hurt. But in terms of GDP accounting, I just don’t see it really being a factor. Now, again, I mentioned actual construction. So fine, maybe new building development takes a pause, but we have record amount of money going into other types of non residential construction. Back in May, we got some data for the April release on non residential construction, and these numbers were completely off the charts. I have some threads up. I can’t recall them right now. But the idea was that with the Onshoring and the IRA, the Inflation Reduction Act, we’re going to see a lot of infrastructure, a lot of money pumped into infrastructure development.

David

And I think that’ll fill the hole that’s being left by any development in the commercial real estate space.

Albert

That’s interesting because a while ago we noted that when we’re talking about layoffs, one of the most robust sectors was the construction industry, specifically housing. We mentioned that verbatim. We’re like, where are all these layoffs? If we’re going to a recession, where are the layoffs in that sector? They just weren’t coming.

David

That’s right. So one of my recessionary indicators is the thumb rule where you basically get a 1% I’m sorry, I believe it’s a 0.5% increase in U three within six months of its most recent peak. And then there’s other recessionary studies, but my basic metric is 1%. If we see a 1% loss of non farm payrolls and employment, basically 1.6 million jobs, that’s where you start getting recession. Not just recession vibes, but it’s pretty much you’re into recession because history has shown it doesn’t stop at 1%. Once you have 1% job losses, it keeps going. But the question in my mind is what’s going to trigger this employment extinction event? What’s the economic media that’s going to come out here? Have you tried hiring a contractor? Have you tried getting someone to fix anything? Good luck. I’m looking personally. We’ve got three bathrooms to do. In our best case scenario, they’re going to be done in the spring. Okay? That’s our best case scenario. Between backlogs and supplies and just bodies that can hold a hammer and use a drill, they’re just not there. The bodies aren’t there. So what’s going to trigger the employment extinction event?

David

It’s not going to come out of construction. It’s not going to come out of any other sector that would have that much of an impact.

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Tony

So when we hear about tech job losses, you’re not really all that worried about that.

David

Just on the numbers alone. The answer is no. If you go back to weekly payrolls, you go back to continuing claims. It’s just not there. It might make it for a great headline, but we’re not seeing the numbers. Obviously, weekly payrolls have softened a little bit, but the four week moving average is still well within my comfort zone. My comfort zone is when we see the four week moving average break at 330,000 and we’re, I think right now at 245 or something like that. So we’ve got a while to go.

Tony

And your answer on hiring contractor David is I’ve been watching a lot of YouTube videos, so for anybody who follows me on Twitter, I replaced my wife’s brakes last weekend. So that’s an incredible amount of trust from her to allow me to do that. But I think people are coping. They’re trying to cope to figure out how to do things for home repairs and for their car and other things when you can’t find I kind of joke about the brakes thing. I was just more curious about how to do it. But I think a lot of people are trying to figure out how to do it on their own because they don’t want to wait for seven to nine months to get something done right. And mean, that’s just that.

David

But I mean that’s for planned things. But you also have unscheduled things. What if you have a broken window or you need locksmith? I think is pretty easy. But something that happens and your HVAC goes down in the middle of winter, your heating goes down, what do you do?

Tony

Yes, very expensive. Okay. So if you just take a different position and let’s say there were something to happen in the next, say, three to six months to break down your thesis, what could some of those things be? Because a lot of people out there going, oh, this can’t continue to happen, it’s not this strong, things are going to break down. What could it be to break down your hypothesis in the next, say, three to six months?

David

I think the problems that we saw in the banking sector, if they were to expand and roll over into the general economy and really cause a credit contraction, but we’re just not there. I mean, part of that is just structural. After the global financial crisis, all the rules were rewritten the banking system and the economy had somewhat of an existential moment. The adults in the room said, never again, we’re just not going to allow this. We’re going to rewrite the rules. So now you’ve got the two big to fail banks that control most of the credit in radiation. A lot of some credit is local, particularly construction. Construction lending, real estate lending is very local. But for the most part, the credit flows that drive the economy come from the g SIBs. They’re too big to fill banks. So it’s out there as a possibility, but I see that more of as an economic meteor. Can it happen? Yes, likely. I don’t place high odds in it right now, is the answer. Okay, so that’s one area of concern though. Things did get a little dicey back in March, but it seemed like it’s contained for now.

David

I know that’s a four letter word after 2008, contained, but I think that’s where we are now.

Tony

Okay, so we could see a gradual deterioration in economy, but you’re not really seeing any near term shocks. That’s a question statement. Yeah.

David

I think the other shock could be obviously an energy shock because that energy is very inflation is very energy sensitive, and Headline in particular. So if you recall back to 2008, we were looking at $140 a barrel oil. That was, I think, the primary catalyst for a policy mistake with the ECB when Trisha raised through Europe into a double dip recession. I’m sorry, not double dip. First step was in 2008, the second was in 2011. But oil was really the catalyst. So we’ve been lucky where if you look at the price of oil and gas, they’ve come down significantly. I know Core is separate from that, but headline has been helped tremendously by a fall in gas. So if we have some geopolitical event or some kind of energy disruption, that could be another factor, I think.

Tony

Yeah, I think you’re right. I mean, geopolitical events, these are things that really can’t predict. Even geopolitical forecasters, it’s really hard for them to predict this stuff. Right. Except Albert, of course, because he’s got a great record. But I don’t know of anybody else who really predicts them as well as Albert. Okay, David. Thanks so much. For that. It’s an incredible call you made. You’ve stuck with it even when it was really not popular. And so I really wanted to highlight that and really underscore, how did you come up with this? And I think I’m hoping people look at that and really kind of check their initial conditions and look at their assumptions and then really run their own data, because we can’t take it from social media. We can’t take the narrative from other people. We have to check this stuff out on our own.

David

I think that’s absolutely right. I could have taken the Lemur study at face value and just gone with it. I think forcing myself to replicate the study made me get into the weeds and understand everything that I had to understand to make the call.

Tony

And every time you dig into methodologies, you find flaws and you find things where in some cases, it’s more detailed and effective than you assume. I love tearing apart methodologies so you understand that stuff. So that’s great.

Tracy

Okay.

Tony

Thank you for that. Hey, Albert. Let’s move on to China. China kind of seems to be in a little bit of kind of an inertia state. I mean, there’s just not a lot of movement. There’s not a lot of movement politically. There’s not a lot of movement economically. We saw the kind of sputtering restart in Q One. They’re still kind of not moving that much, although we saw retail sales grow, like, 14% or something like that. Although, admittedly, it’s on a closed economy. But we have things like youth unemployment over 20%, which should terrify the Central Committee. And we have this Blinken trip coming up this weekend, which I don’t really understand the point of this. And we have things like China’s foreign minister. We’ve got a story on screen where China’s foreign minister pretty much spanked Blinken on Wednesday before the trip, saying that the US.

Needs to change and other things. So, first of all, I know there’s a lot to cover here, including the plunging CNY. But first of all, is there a point to Blinken’s trip to Beijing this weekend?

Albert

I mean, in Blinken’s mind, there might be, but not in anybody else’s. He’s not going to be meeting with anyone of significance. I mean, she certainly will meet with him, and I don’t even think the foreign minister might meet with him. They might give him to, like, a third or fourth string official just for photo ops, but that’s about it. Blinking has shown that in the foreign affairs world that he is a lightweight and destructive to the United States interest. So I don’t care, and I don’t think anyone else in the world cares about Blinken’s visit to China.

Tony

Right. And I just want to kind of direct people back to, say, 2021, when he went to Anchorage and we were talking about this, and he really didn’t look strong in that meeting. He really didn’t look like he was carrying a potent message then and again, the the foreign minister kind of spanked him in front of everybody, and he really hasn’t come back from that. He’s tried to take a hard line on things like Taiwan and other things, but he’s really looked more like an academic than a secretary of state.

Albert

Is that fair to yeah, that was intentional. I mean, the Chinese tested him and he failed, and he never recovered, and nor will he recover. He’s failed pretty much everyone in the world. So, like I said, besides Blanking, there’s a lot of things going on in China right now.

Tony

He’s done well in Europe, though.

Albert

Yeah, well, I mean, it hasn’t blown up yet, so I guess that’s okay to say.

Tony

Right? We don’t know. Right? Exactly. Okay. So I wanted to cover that off really quick, just in terms of what to expect from the blinken trip. Maybe there’s some surprise, but I don’t have huge expectations because I don’t think the purpose is clear, really, to anybody. As we look at China on the economic front, they’re desperately trying to get things back on track after that slow reopening. And we spoke in December and agreed that it would kind of sputter, and that’s what we’ve seen happen. As I said, retail sales came in strong. Youth unemployment is pretty terrifying, and we see the PBOC coming in with kind of a small loosening.

But why has China been so slow to act? And what moves do you think Xi’s regime can do to accelerate things?

Albert

Well, they’re right now facing an economic warfare against the United States. The Federal Reserve, with Powell and Yellen at the treasury and some of the blinking officials, along with Wall Street, have a concerted effort to push China down for political and economic reasons. How are they doing? Well, because they’re keeping rates up so high right now, 4.5% on the tenure is game over in China. I’ve been told by analysts in China and Singapore that it’s game over. They certainly weren’t ready for 6% Fed Funds rate, which everybody in Wall Street is talking about right now. And I think that’s absolutely coming. We’ve talked about it on this, that 6% should probably be where they stop, and it looks like it’s going to right now. The Federal Reserve with Yellen can keep us here at 5% rates for the long run, maybe two years, keep the economy between zero and half percent growth, and maintain where we are right now. And hats off to David that saw this data well ahead of anybody else in terms of keeping a recession away from the political scene here in the US.

David

Can I jump in there on your point, Albert, about the US. Economy? The strength, I think, is being underestimated, underappreciated. So going back to the housing call, I looked at fixed residential. I went to the GDP, national accounts line by line, and fixed residential investment was the catalyst for it. Was net GDP subtracted from GDP in 2022 in late winter early spring I did a thread discussing fixed residential investment. My hypothesis was that we didn’t need it to get better. We needed to get less bad. And if it got less bad, given the resilience of the economy, that could potentially moonshot. Things fair enough. Q one GDP comes out. We were expecting I believe -0.6 subtraction GDP and we got -0.4 so there was a marginal less bad, marginal improvement and I think that’s going to continue. And if that continues, I do think that this whole idea we’re going to cut rates that gets kicked out farther than we think. So I’m just trying to go back to your point that this economy is going to run a lot hotter than people think rates will stay higher and that’s going to put the pressure on that you were discussing.

Albert

Yeah. Let’s be clear here. Four and a half percent on the ten year and 6% Fed fund rates means that all the money in Asia is going to come right back into the United States, which is bullish for equities. And we can discuss about what that really means for the market, I mean, for the economy overall, but that’s what’s going to end up happening. And from their perspective, it’s better for China to defend themselves from going over in the abyss than actually take on the United States globally. And that’s the general thinking right now. When it comes to inflation, they got it somewhat handled because they have a team that deals with commodity inflation in the futures market.

Tony

Chinese or the American?

Albert

No. The US. Has a team of like two dozen guys that handle this in terms of commodities in the futures market. And it’s under the whole national defense sort of mantra. But with inflation somewhat in the four and 5% area and wage inflation gaining steam, that keeps the populace at least at bay and not have pitchforks and torches coming for congressional members.

Tony

When you say economic warfare, is that intentionally against China or is it something where US. Economic officials are really just trying to keep the job market in a good position and put a damper on inflation? And then a secondary effect is the impact on China.

Albert

I’m 50 50 on that one. Right, because it’s certainly directed towards China. But Yellen knows that if you attack China and Asia in general, all that money comes right back into the US. Economy and the US. Market. It’s a little bit of 50 50 from my perspective.

Tony

Okay so from your perspective what can China do to all these headlines over the past couple of weeks talking about China needs to rally they need to circle the wagons and figure out what they’re going to do with their economy. What can they do just spend more money domestically build more bridges and high speed rail and all that stuff or.

Albert

Devalue the one that’s the only option to do it. That comes with other ramifications that a little bit over my pay grade, but that’s their only option is to devalue.

Tony

Well, it’s domestic inflation in China. Right? So they’re going to goose their exports to compete with Japan and Taiwan and Korea. But that comes with more inflation at home. Is that fair?

Albert

Yeah, it is. But inflation there is kind of tame. They have control over the economy more so than anybody else does. So they can tame inflation, at least on a numbers basis of what they put out, because we all know that data. That data is all the time inflation.

Tony

Data in every country. There is no country inflation data is accurate.

Albert

Yeah, of course. Even in the United States. I mean, they manipulate things with unemployment, inflation data and CPI all the time. But it’s interesting you mentioned Japan. This is eerily similar of what Japan went through in the 80s.

Tony

Tell us more about that.

Albert

No, I’m just relaying what I’ve been discussing with clients and friends in Wall Street, and this is exactly what the Japanese had gone through in the they’re pushing it onto the Chinese. The Chinese could have an inflation problem. Their growth is stagnant at the moment. Their demographics is not that great, and they’re fighting against the juggernaut in the United States.

David

China looks at the past 25, 30 years and they see two things that they don’t want to be. They don’t want to be the Soviet Union and they don’t want to be Japan. And I think both those things terrify them for a host of reasons. But those two things are the third row that they want to stay away from.

Albert

Yeah, that’s exactly right. And that’s why I’ve always dismissed any kind of Taiwan invasion, because that bring back the Soviet mentality of taking on the United States geopolitically. They don’t have the money for it. Let’s just be honest. They don’t have the money or even the nerve to do something like that. And when it comes to the Japan comparison, they really don’t want an economic collapse of their manufacturing sector.

Tony

Right.

David

David. What?

Tony

You mentioned about the Soviet Union in Japan. That’s absolutely true. They’re terrified of that. But when you talk to their bureaucrats, particularly, they’re also somewhat arrogant about we won’t be that because we’re different. And so there’s kind of both arrogance and fear about becoming either one or both of those. And it’s kind of weird because they’re moving in the direction of both. They’re going to fight really hard not to become one or the other. And I’m not saying they will, but I think that the possibility of that is becoming more real by the quarter, let’s say.

David

I think that’s right. China’s biggest problems are problems that they can’t resolve through war or through geopolitics, whether it’s their demographics and their birth rate that’s falling off a cliff, whether it’s water, their environmental issues are horrific. The Gobi desert. Continued when I was in Beijing, back when I was in graduate school, living in Singapore. Took a couple of trips to Beijing. There are always sandstorms in Beijing because the Gobi Desert is encroaching upon Beijing. It’s just one environmental catastrophe after another, going back to water. This is why they got their eyes on the Himalayas, for that Himalayan clean water source, which, aside from food, you also need for manufacturing. And I think this is where the United States has a huge geopolitical edge. We are very geographically advantaged versus most of the world, if not the entire world. Our water resources. We got the Great Lakes. We have the watershed that goes through the Appalachian Mountains, the watershed that runs through the Rockies. We have all these massive watersheds that we could leverage off of for both food and for manufacturing. China does not have that, not even close.

Tony

Well, and as China tries to take the Himalayo Mountain watershed, they’re upsetting everyone in India. And all of those tensions taken together are just a nightmare for China. China as a governance subject is incredibly difficult. I think most people on this side of the world look at China and believe it’s this monolithic government, and Xi Jinping makes a decision, and then it happens. It’s not that way at all. It’s just chaotic. And so, given all of these challenges they have, as well as the challenges within governance, it’s incredibly, incredibly difficult for them to tackle one of these, much less the gamut of all the challenges.

David

They have their governance. Really, the basis of governance in China is patronage, whether that patronage is family or whether it’s friends or political cronies, but it’s patronage. So the things that make governance good, such as competitive politics, don’t really exist in China. Obviously, the Communist Party’s monopoly on political power. But without that kind of competition, you have a lot of patronage favor occurring that might not lead to optimal outcomes. And then you magnify that across the country, different levels municipal, provincial, national it’s just like a real cluster bomb of bad governance and bad incentives.

Tony

Oh, it’s a competitive political environment, all right. But if you lose, you die. Like, literally.

Albert

I’m glad David pointed out all those things. Very few people actually in the financial sector actually take into consideration all these other things like water, fresh food, defense, and all these other components that make a superpower what a superpower is. I mean, all we’ve been hearing is that China is the next superpower. It’s taken on the United States, ABC and D reasons and so on and so forth, but they completely forget that they don’t have any kind of arable land at the moment to feed themselves. They’re in a battle with India, which is a nuclear power, for God’s sakes, for water that supplies a billion people on one side and a billion people on the other side. And these things are not to be taken lightly. I mean, you can’t just gloss over these things and say, oh, well, China is just going to take over Taiwan and US can’t do anything about it, and so on, and they’re going to move into Africa and South America and this and that. It’s far more complex and the details that they but actually pointed out, it’s spot on.

Tony

Great. Okay, guys, thanks for that. Tracy, let’s move on to natgas because we’ve seen some real interesting activity in natgas over the last couple of days. We’ve seen an interesting bounce. And so you put out a tweet on China’s natgas traders this week, surprised by the bounce in the market. So that’s very interesting to me. It looks like they were caught off guard.

We saw natgas up 9% this week.

But if we put that in context, that’s kind of a slight rise. It’s not like it’s completely market changing. What are your thoughts on this? And are we finally seeing some strength come back into the Nat gas market?

Tracy

Well, I mean, to be honest, this is a non sequitur for the US. Market. At this juncture. We’re going to have to see major drawdowns in either Asia or Europe to really get this market going. Yes, we saw a bounce, but if you look over the long term out to the US nat gas futures markets when this contract started, we’re still in that same long term trend that we have started in since 1996, when this contract started. So we’re still in that very comfortable zone in the US. Where we’re one dollars, $3. We have seen spikes over the last 30 years, but we’re still in a very comfortable zone just because of the amount of natural gas we produced. Yes, we did see a spike in prices in the TTF contract, which is the European contract that was due to Norway. Norway had to shut down one of their processing plants. And then we also had that news that the Netherlands was shutting down their largest natural gas field, but we did see price rise 70%, but it came back down 20%. I think that altogether, if we look at this Nat gas situation altogether, I just don’t see still at this juncture where we’re going to see natural gas prices rise.

Tracy

The United States, if that’s where we’ll be looking at Nest, has nothing to do in the immediate term. Let’s just say that because we’re just still producing a lot of natural gas, and even though we’re exporting to other countries, we still don’t have those long term contracts. We still are spending money building out export facilities in the Gulf. The United States in particular is a very different situation than we would see perhaps in Europe right now. And so I think looking at their particular situation, we’re going to see higher volatility in those kind of markets. Because if production goes down in one country or is mitigated in one country, they’re going to see a price spike. Unlike the United States, if we see, say, the permian doesn’t produce as much as they usually do on one week, that’s really not going to change the overall situation in the United States just because of the amount of natural gas reproduces the whole. So if you’re looking for this bump in natural gas prices in Europe and in Asia, I don’t think that’s really going to manifest itself exactly right now in the US.

Tony

Okay, so let me go back to something you said. Why are the Dutch shutting down the largest field in Europe?

Tracy

Well, because without I don’t want to.

Tony

Make no, just be yourself.

Tracy

Say what the situation is. The climate activists are saying this is causing earthquakes and everybody’s dying. And we all know kind of where the Netherlands is kind of down as far as if we look at the farmers and what they’re looking at as far as shutting down farming and fertilizer production, ammonia, et cetera. So I think this is, again, without upsetting anybody, I think that this is just another step where we see a little bit of hysteria that kind of causes a backlash as far as what we’re looking at as far as energy security is concerned. And actually, if you go to Hilltower Resource Advisors, one of our analysts just posted a great post on that.

Tony

Okay, great. Hill Tower Resources. Advisors. Right.

Albert

Yeah. These are just born from bad political decisions for politicians in Europe trying to safeguard their seats and their parliament. That’s all it is. They cater to the Green parties and they come up with bad economic policies.

Tony

Okay, go ahead.

Tracy

Sorry. What I’m thinking is I’m addressing this towards you, Albert, actually, because you just brought this up, is that if we’re talking about do you think that with elections coming up, that we’re going to start seeing a backlash? Because we just saw like, say, the Green Party in Germany fall from 22% to 14% over a very short period of time. So do you think with upcoming elections we’re going to see sort of a change in stature of these parties because they’re going to lose votes?

Albert

It depends. It depends on the country and the situation and the parliamentary makeup of each of the countries. Let’s just take Holland, for instance, one of my non favorite countries in the world. But Root has a liberal majority in his parliament. For him to stay in power, he needs that liberal majority. So in order to keep those seats, he’s going to have to cater to those people, and that means more Green initiatives to the extreme. Now, of course, if the economy starts to tank and inflation takes hold in Europe and the banking sector starts to falter, those are scenarios where, yeah, it could tip a lot of elections over back to the right. But the problem is the European elections and the way they do their government is a parliamentary system. So they don’t necessarily need to win the majority for their party. They just need to have a coalition that takes a majority.

David

Albert, what impact do you think going on? What Tracy mentioned and this whole topic of Green politics with the war in Ukraine and Russia, I think it’s the energy dependence that Germany in particular saddled itself with with respect to Russia that just kind of blew up in their face. And that has implications for a lot of the Green policies that were championed, namely getting rid of nuclear. So do you have any insight on how the war is impacting? Is there going to be a revisit of these green policies to maybe not repeat the same geopolitical mistake or experience?

Albert

Well, that’s going to really depend on what happens in the winter of this year. They had a mild winter, so it kind of eased up on the pressure that the European politicians had to deal with. But let’s just be clear that Europe is, like I’ve said, for weeks now in a zombie state in terms of their industrial output. Right now, they’re not really working. There’s not very many things being built over there. They have a drought that’s still pretty significant in Europe and actually getting worse. So that’s going to affect the shipping, like Tracy mentioned, I think, like six months ago up the river of the Rhine. They can’t ship materials back and forth because the water levels are too low. So there’s a lot of things that have to be taken into account. So it’s not really, let’s wait and see how the winter goes and then we can readdress what policies they’ll probably have to look into concerning green initiatives.

Tracy

We’re already seeing problems as far as supply is concerned with summer coming along. Right. Although Europe is not a big consumer of air conditioning like the United States is, we’re still seeing a large drawdown because temperatures are over 20 C there. We laugh in the US. I know, but that’s a big deal for them. We’re seeing this in the UK, we’re seeing this in summer is just really starting. And again, I think I mentioned this and everybody was skeptical about it. I mentioned this on this podcast months ago, that we should look to summer because air conditioning would be a big drawdown for this. And I saw a lot of the comments saying, but they don’t have a lot of air conditioning. It’s not like the US. But yet we are seeing this happening. So I think we need to pay close attention to this. I think right now, especially again, we’re seeing a drought again. So from Rotterdam to Germany, we’re going to have a problem on the Rhine again this year that’s going to mitigate heavy vessels that carry crude and gas products to Europe. People don’t understand when water levels are low, you can’t have those heavy vessels coming.

Tracy

So this is what we had. This is part of the problem that we had summer of 2022. And this looks like this might be a problem again.

David

I was visiting family in southern France last summer. I was in Provence just outside of Avignon, and the Roan was really low. There are parts of the Roan where you could basically flatbed looking some boats that were just on their side. So this water crisis is not just in northern Europe, but it’s also on the more Mediterranean south as well.

Albert

Italy’s had a big problem, too, with water levels. I think the Pole was showing, like, historical markers from, like, four or 500 years ago of droughts. It’s a problem. And the mild weather kind of mitigated how much pressure the Russians could really enact on the energy market. But they get a cold winter and the Russians want to get nasty. Look out for Europe.

Tony

Yes. So, Tracy, if they can’t transport product by river, do they transport it by rail or truck or do they just not transport it?

Tracy

Well, what they do is they have to take that product and put it into lighter vessels. In other words, through there you can’t get an apple. You got to go the smallest. They start taking that product, they’re not going to let people go without energy. So what you have to do is you just have to start putting that project into smaller vessels that can transverse that river.

Tony

Okay.

Albert

If it’s not lighter vessels, it’s actually one third of the cargo capacity to keep the boat lighter and afloat higher. But that increases the cost of shipping.

Tracy

Which increases inflation, which also creates another problem. Exactly.

Tony

Okay, then just kind of final question is I’m really interested in this closing of the field in Holland. And I know that sounds a little bit pedantic, but it kind of reminds me of the reactionary close of the nuclear stations in Germany in 2012. So are we watching Europeans do things that they may regret in 5678 years and then reverse trend on this stuff?

Tracy

Well, absolutely. All you have to look at is the deindustrialization that is happening exactly right now in Germany and then take that model and place that across every country in the EU that is following those exact same protocols. Right. And we’re seeing that we’re seeing chemical production flee to China.

Tony

Yeah, you’ve talked about BASF and other.

Tracy

Companies that have so we’re seeing all these people go to other countries that are much more amenable to this kind of business because it’s too expensive.

Tony

So when you talk about these guys moving, is it the access to energy? Is it the kind of environmental arbitrage they can go and do things in China environmentally, is it a number of things. Is it wages?

Tracy

It’s a number of things. It’s the cost of doing business as far as energy is concerned because obviously, industrial manufacturing, et cetera, is very energy intensive. So it’s the cost of doing business. They asked companies to limit their energy use 15% last winter. That hasn’t been lifted yet. And it’s costing them ten times the amount that they were paying before. So of course, they’re leaving to other countries that may incentivize them. And that’s not only China. This is what Europe is also worried about is that industry is going to move to the US. Even, right?

Tony

The Inflation Reduction Act.

Tracy

Well, yes, which is reduction, which is not reducing any sort of inflation, but it does provide incentives to companies to move over to the United States if they want to because they get a bunch of tax credits. Now, that doesn’t influence us as taxpayers. But as far as business is concerned, if you’re looking to pay less, your options are China and the US. Mexico mexico is great, but that’s a whole nother subject.

Tony

Love to dig into that at some point. So let me ask one final question of all you guys. Albert talked about how us Officials, Fed, treasury are either directly or indirectly conducting economic warfare on China. But as we’ve talked about with Europe, they’re a little bit handicapped with their drought and their electricity prices and power and all sorts of things. And we have the economic policies of the US. Is that same kind of economic warfare kind of activity is that also impacting Europe in either a direct or indirect way? And how do the Europeans feel about that?

Albert

Of course it is. I mean, the Europeans, let’s be clear, it’s really Germany and France and maybe Holland, but they’re the economic engines of Europe. And right now they’re so blinded to where they think that China is the only emerging market share that they have available to them, which is just incorrect. But that’s their goal right now, is to safeguard that market share in China by any means necessary. And that means it’s going against the United States, which they’ve been clearly vocal on for the past six months or so.

Tony

David, what do you think about that?

David

Yeah, I don’t have any real insights into that. It’s kind of above my pay grade.

Tracy

I don’t want to speak for the people. And all I can say is what we’re seeing in companies within countries is that we are seeing transverse from obviously we’re seeing industry move from Europe to China and to the United States. Again, I don’t know how these people in these countries feel about this. I can only speak to what we are seeing business wise and trends.

Tony

We are seeing great guys, thank you so much. This has been really fantastic. David, thanks for joining us for the first time. I appreciate that. Hope we can ask you back. And Albert, Tracy, guys, thank you very much.

Albert

Have a great week and a great weekend.

David

Thank you. Thanks for having me. Take care. Have a good weekend. Bye.

Be a smarter trader/investor with CI Markets. Learn more: https://completeintel.com/markets

In this episode of “The Week Ahead,” Tony Nash hosts guests Doomberg and Albert Marko to discuss two key topics: stagflation in 2024 and the ongoing clash between Binance and the SEC.

Tony highlights the survey results showing significant concern among respondents regarding stagflation. Albert discusses the impact of economic and political policies on persistent inflation and believes that the stagflation argument may be more of a “stagflation light” scenario due to the resilience of the service industry and ongoing market rallies. Tony adds additional points, including the IBD economic optimism index remaining below expectations and signs of cracks in the middle-class economy. They acknowledge that inflationary pressures, rising prices, and elevated interest rates contribute to declining optimism and a challenging economic landscape.

Doomberg provides insights into the counterintuitive inflationary effects of rapid interest rate hikes and discusses potential impacts on oil prices due to changes in the US shale industry and rising housing costs. He suggests that global stagflation in regions like China and Europe could have a spill-over effect on the US economy.

The conversation also covers arguments against deflation, with Albert highlighting wage inflation as a factor preventing deflation. They discuss the challenges of US debt, the impact of inflation on household costs, and potential signs of deflation in the commercial real estate sector.

Shifting to the energy sector, they discuss the potential impact of stagflation on energy, mentioning challenges faced by the oil industry if prices fall below $65. They highlight the tight supply of oil and gasoline, contradicting claims of low demand, and discuss the role of electric vehicles and the divergence between physical and paper markets.

In the cryptocurrency industry segment, Tony and Doomberg address the legal issues surrounding Binance and Coinbase. They discuss accusations of unregistered securities and criminal activities by these platforms. They emphasize the potential consequences of disregarding rules in the cryptocurrency industry and the need for stronger regulatory action.

The discussion concludes with a focus on the recent actions of the SEC in relation to the cryptocurrency market. They discuss the challenges of regulation, the susceptibility of the regulatory apparatus to corruption and political forces, and the erosion of trust in the SEC. They also highlight the need to address pump-and-dump schemes and the potential expansion of investigations into the venture capital space.

Key themes:

1. Stagflation in 2024
2. Binance & the SEC

This is the 68th 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
Doomberg: https://twitter.com/DoombergT

Transcript

Tony

Hi, everyone. Thank you for joining us on the Week Ahead. Today, we’ve got a couple of great guests. Today, we’ve got Doomberg. We’re going to talk in detail about crypto and Binance and a lot of the crackdown from the SEC. We’ve got Albert Marko. We’re going to talk about Stagflation and expectations for 2024.

Tony

So, guys, thanks for joining us. I think we’re going to go a little deeper into these two areas than we normally do on our topics.

Tony

So, Albert, let’s start with you for Stagflation in 2024. I ran a quick survey last week and I know this isn’t super scientific and whatever, but I was really surprised that Stagflation had such a large showing in the responses.

Can you just help us understand why people are thinking that? And what is your view on Stagflation inflation deflation in, say, late 2023, going into 2024?

Albert

Well, I’ve been a proponent of inflation being sticky and staying elevated for quite a long time. I mean, the political policies, economic policies, have not fixed anything in the past two years. So, in my view, inflation just will stay elevated for quite probably next two, three years. The problem with the Stagflation argument I have, it’s more like Stagflation light, in my opinion, that we’re going into late 2023 and into 2024. The issue is unemployment. Sure, we can discuss the BLS manipulation of unemployment and job numbers and so on and so forth. However, the service industry is just banging hot still. It’s not coming down. It’s partly affecting inflation. Dewensberg is also going to throw in there some inflation comments, but the problem is now we have the treasury and the Fed shifting from tech stocks to growth stocks and pushing that up. And they’re pushing inflation and they’re pushing the market to rally. It’s hard to have a full Stagflation argument going forward when just unemployment is just not anywhere where we need it to be to see an actual recession.

Tony

Yeah, those are good points. Let me throw a couple of other things at you. We have this IBD economic optimism index that came out this week, showing the optimism is well below expectation. It’s at 41.7. Of course, that’s an arbitrary index, right? But on a relative basis, it’s not picking up.

So we’re seeing employment officially looking pretty good, but we’re seeing optimism kind of flatline, even as other things kind of we see interest rates come up, we see the banking crisis hopefully getting resolved, all this other stuff, but we don’t really see optimism picking up, even as wages have continued to rise at least slightly. We also see Cracker Barrel, which we’ve talked about several times here.

And Albert, I just want to acknowledge you’ve been very persistent on your view of inflation, even when it really wasn’t popular. You’ve been very persistent on that. But Cracker Barrel is a pretty good bellwether for what’s happening in the heartland of the US. So for people not in the US. This is kind of working class, middle class place that people go to eat and cracker. Bell had a lot of pricing power over the past, say, 18 months, when wage pressure, when when direct cost pressure and other things would really hit them, they would add that to their costs and they had double digit price rises in 2022 and it really didn’t impact their volume.

Tony

But now, based on their most recent quarterly report, they’re saying they’re seeing a meaningful traffic decline which negatively impacted their sales and profits. And they talk about their traffic being down as well. I hear what you’re saying about jobs, but I do think we’re starting to see some cracks in the middle of America where we just didn’t see that before. Say two months ago, the middle of America appeared to be super strong and we’re seeing some of these telltale signs that there are some cracks.

Albert

Yeah, of course. Inflation is such a headwind right now for normal people, you’re still paying 20, 30% more for items. On top of that, wage inflation is forcing companies to increase prices on products continuously. And let’s be real, once you increase product prices, you’re not bringing them down. You might bring them down 5% to be competitive, but they’re never coming back down to pre COVID levels. That’s just the fantasy. It’s simply not going to happen. So that’s most likely why we’re looking at this optimism trending down and on top of that is like the rate, the rate staying elevated, which I still think we’re going to go to 6%. Fed fund rate is also inflationary.

Tony

Yeah. Doomberg, what’s your thought on this?

Doomberg

Yeah, I think if you think about counterintuitively, and I should say in full disclosure, I first came across this concept reading Luke Roman’s work, great stuff at Force for the Trees. And he, of course, was quoting others. And that’s the way content works. You consume a bunch of it and distill it and create your own thoughts. But there are actually three reasons why the speed and heights with which interest rates have been risen to are actually counterintuitively pretty inflationary. One, we’ve never raised rates at this speed with this much debt before, and so the interest payments are actually just a different form of fiscal stimulus. Now. That stimulus goes to a different audience, wealthy investors, upper middle class and beyond. But still, with $32 trillion in debt and another couple of tens of trillions to be added in the next few years, a post debt ceiling deal, when you are at 5% interest, that becomes a pretty big slug of fiscal dollars going out the door into the economy. And that in and of itself is pretty inflationary, especially if you don’t trigger sort of the economic slowdown that you would want in order to beat back the forces of inflation.

Doomberg

The second reason why elevated inflation interest rates is actually pro inflation is the oil patch. So we all know that easy money and low interest rates caused a lot of sort of uneconomic projects to be funded in the US shale and shale has been responsible for 90% of the world’s growth in supply in the past decade and a half, and that’s coming to an end. And if we see production, particularly in the Permian Basin, begin to roll over as the best fields get exploited and there’s not as much cheap easy money to fund the incremental drilling project, we could see upward pressure in oil prices despite a potentially slowing economy. And then the third is actually this impact on housing. So you have all these people sitting on mortgages that are really attractive and so they’re not going to sell their home. If you’re sitting in Florida and you have a 3% 30 year fixed mortgage, you’re not putting that house on the market with mortgage rates at 7%, which means the incremental supply of housing is just not there. And so home builders and new housing costs are just skyrocketing. And that’s a big measurement into inflation as well.

Doomberg

And the only other thing I would add is this talk about whether the economy is slowing. Is this sort of the US. Participates in a global market and and the US. Might be doing well because of its relative energy advantages. But if you look at places like China and Europe, we are seeing pretty significant slides of stagflation on the global scale. And at least some of that will leak back into the US. As well. So that’s the only thing I would add to the great points that Albert was making.

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Tony

Okay, so guys, why are we not hearing more? Like, why do you think deflation is not going to happen? Help me understand the arguments against deflation.

Albert

I go right back to wage inflation. I just can’t see as long as wages are coming down and unemployment isn’t really skyrocketing, I don’t think we even have a chance of disinflation or deflation or whatever, any kind of negative inflation. To go back to what I’ve said previously before, it’s like, hey, to get back to pre COVID levels, we need negative CPI prints.

Doomberg

That is simply not happening.

Albert

We’re nowhere near such a thing. So, I mean, all these CPI perks that are ongoing, just like Doomberg said about the housing market. And as I was pointing out towards unemployment, where do we see deflation even coming here. I can’t even make an argument for it.

Doomberg

Yeah. The only thing I would add is you would need a real substantial slowdown in the economy and perhaps even a popping of the everything bubble. But even then, imagine a world where the Fed has to monetize all the incremental debt. Like, we just look at the spending and the interest payments on the debt and the entitlements alone. We’re getting to the point where if we weren’t the reserve currency, you’d be sort of staring in the face of a typical emerging economy debt spiral. At some point, when you’re spending hundreds of billions of dollars a year just in interest payments, and then you have all these programmed entitlement increases that are tied to inflation, a lot of these promises aren’t monetary. They’re actually like the physical delivery of goods, these entitlement spending. And so it’s a real I don’t know how we get out of it.

Albert

Yeah. The benefit that we have being a reserve currency, there’s absolutely no competition in the world to hold us accountable for our misgivings. They can do whatever they want. It’s bad in the long run, but I don’t think that any of us will be alive to see it. But at some point, just like you said, the chickens have to come home to roost.

Tony

Okay. And again, I’m sorry to push on this, but if we take that from the national, say, accounting and monetary level down to, say, a household, okay, we have inflation that’s really risen, what, 20% over the past two years. Right. Things are generally is that fair to say, Albert? Say 20% higher over the last two years?

Albert

Yeah, absolutely.

Tony

Some cases more, but on average, probably 20% higher than two years ago. We haven’t really seen 20% pay rises across the board, necessarily, although we’ve seen some decent pay rises in pockets. We have household costs. Like the cost of buying a house is at. These interest rates are pretty expensive for, say, middle class and entry level people buying their first house. I hear the argument many times that people who are locked into a low interest rate, so they’re not going to move unless they have to. Right. But if people are so leveraged up, will we not see people refinance in order to tap that equity and that will cycle into higher interest rates or higher mortgage rates for those people? Do we see that as happening as a way for people to tap more equity to alleviate some of the short term credit?

Albert

No, I don’t think we’re going to see that only because I think the Fed and the treasury made it explicitly clear to a lot of the banks to stop doing stop lending. The credit tightening cycle is certainly upon us, and they’re really wise to that little game.

Tony

Okay. And then I saw an interview with somebody, I can’t remember who it was, saying that, really, housing has a lot of room to run given where interest rates are. Is that realistic or is that a silly argument? I mean, I just you know, I live in Texas where housing is doing continuing to do really, really well. I know on the coasts housing has taken a significant hit, but it’s relatively small in terms of the run up that it’s taken over the past couple of years. So is there room to run in housing in the center of the US or maybe in Florida?

Albert

I don’t think so. I live in Florida myself and the cash buyers are starting to disappear. Without cash buyers, I don’t think this housing market really has too much more run on. Just the interest rates are astronomical. I mean, I went to go buy a lot close to my house and they were asking for like 9.2% interest rate and I just simply not going to do that.

Tony

Right. What do you see?

Doomberg

Well, back to this. Where could we potentially see signs of deflation as long as we’re talking about real estate? I think if we look into the commercial real estate sector, it’s a completely different story. And as people are working from home and they’re not going back to the office, there’s a wave, and I mean a wave trillions of commercial real estate loans that need to be rolled over that are basically underwater. The equity tranche is effectively wiped out even if they haven’t marked it yet. And this is going to put a lot of stress on regional banks in particular because they do most of the heavy lifting in this sector. And so if you’re looking for the seeds of a potential deflationary crisis, once we get through this pulse of inflation, I think a good place to start would not be in the housing market, but in the commercial real estate market. And this has obviously been on everybody’s radar for a long time. And so then one wonders, maybe it won’t be that bad because if everybody knows it, it can’t be important. But at the same time, it does sort of have that feel of between Bear Stearns and Lehman Brothers back in the day.

Doomberg

That was an awfully long time in hindsight, and it feels like it was a week when you look back a decade plus later. But the pin on this CRE grenade has been pulled and one wonders whether that grenade is a daughter alive.

Tony

Yeah, so let’s talk that through. So, CRE, you say regional banks will be hit, but who does most of the investing in commercial real estate?

Doomberg

Well, I mean, where does the potato end up? Right? And so a lot of these things are securitized and so on, but people are chasing yields. So it’s pensions, it’s the Blackstones Fund, which has obviously been gating, was a real sign. It’s been gating outflows for several quarters now. And the trot on the bank, as one would say, it doesn’t seem to be abating anytime soon, the whole consequences of Zerp has to be manifested somewhere. And when you take Zerp plus COVID lockdown, plus a complete reorientation in the way the vast majority of America works, then you have because this is a really big part of the sector. And so I think something like 55% of all CRE loans in the country are underwritten by regional and community banks. And this is really the role they were meant to play in our society. We wrote a piece on this several months ago called Regional Fallout. And if we lose the regional banks, which is why this little mini crisis that we’ve gone through was so brought with peril, in our view, for the US economy and potential source of sort of a deflationary type recession.

Doomberg

If small banks stop lending, the economy stops working. It’s just that simple. Like, JPMorgan Chase is not doing the hard work underwriting risk assessment that small businesses need. We have a banker for the Doomberg Project. This person exists. They’ve come to our office before we launched. They understand the timing, the flow, and the size of the cash that’s coming in from our business. They’ve done their personal know your customer AML. We would never get that with JPMorgan Chase. We would be sent to a call center or an algorithm would randomly shut our account down without any appeal. And if you take away, like, the local car wash, the construction company, the plumber, the electrician that needs to finance some working capital, they’re not going to get the attention from a JPMorgan Chase that they will get from their local community credit union, for example. And if all of these smaller regional banks are on the hook for these loans that the old expression I first heard from Kyle Bass was a rolling loan collects no loss. If they can’t roll these loans, they can’t refinance these buildings, these construction projects, and they have to take the hit.

Doomberg

These leveraged regional and community banks could be in a world of hurt.

Tony

Okay, so that’s what happens then potentially is a credit crunch based on community banks, right? And then that hits small businesses and they’re the major employers and then correct, have to reduce headcount. And that’s the fall on of the CRE debacle right now, just to add.

Albert

A little bit to the regional bank issues, a lot of them issued out SBA loans for COVID, and those loans are now starting to start to get paid back. But these small businesses can’t pay those back because I mean, they’re talking about up to $2 million piece. Those come as a wave and start defaulting. The community banks even have a bigger problem to deal with.

Tony

Okay, so that’s interesting. So the impact on small businesses could actually be CRE to regional banks, to small businesses could actually be a trigger that could start the stagflation wave.

Doomberg

This is why we keep a close eye on the Blackstone B REIT or whatever they call it. We wrote a piece on that a while ago and Blackstone came out and made all the typical sort of denials that you would see, of course. And we have great properties and the market just doesn’t understand us. And yada yada. I think the market understands exactly what’s embedded in that portfolio. And they did again, they marketed this retail with and it has pretty severe lockup and people see the losses coming and are trying to get out. And so quarter after quarter you’re seeing these redemptions. This feels like two Bear Stearns hedge funds has a certain feel pattern repeating itself in eight here and we shall see. I don’t know what the solution to that is. I mean, there’s an awful lot of dead money walking in that space, an awful lot of hesitancy to mark to market the true value of the underlying cash flows corrected for probability of default. Big city politics. Not to get political, but a lot of people just aren’t going to San Francisco offices anymore. They don’t want to run the gauntlet of homelessness and mental health issues that you have to see every day when you go from your home to the office.

Doomberg

And why would you when you could do all your work from home? And so this is a real sea change and we’ve not yet swallowed that pill and we don’t really have a good recent history of taking the L at the national level. We extend and pretend everything. We just keep sticking fingers and holes in the dike and trying to keep all the water back and at some point something’s going to break.

Albert

Yeah, speaking of that, one of my base cases is another economic back coming in the fall. So I would look to probably see Congress address this issue before it gets out of control.

Tony

So you think there could be another package in the fall?

Albert

Oh, yeah.

Tony

So commercial real estate hits regional banks hits small businesses, and then there’s another commercial package in the fall to alleviate some of that problem, which then becomes.

Doomberg

Really inflationary because it’s very clear to the market then that we will just print our way through everything and we will basically go through the self default route of inflating away our debts.

Tony

So we have the Stagflation blueprint. To me that sounds like the Stagflation blueprint right there.

Doomberg

Yeah. So the counter is we had 40 year epic bull run in bonds. Right. And that was pretty deflationary. We went around the world and found cheap labor and we financialized everything and we hollowed out US manufacturing and the US military has decided that that’s probably not good for national security. And so if that 40 year run is over and we are going to do a lot of reshoring or safe shoring or moving things to allies out of the sort of cheaper labor, that in itself is both inflationary but not necessarily sort of feeding the recession narrative. And so you have to sort of balance the flows here, like the different forces and the flows. And I do think that you could see significant inflation without necessarily a strong US recession if the forces of reshoring outweigh any sort of crises that we might be able to paper over in the regional banking sector. And so this is sort of the ultimate challenge with trying to analyze these things. Which of these forces will, when you square them all up, which one will be the sort of determining one? Because we are if you just look at the reshoring of manufacturing, the numbers are pretty strong in the US in the past 18 months, and that offsets some of the sort of the declining forces that might traditionally signal a recession.

Doomberg

A lot of these indicators that we’re looking at that we’re used to seeing, of course, were born and worked in a different regime. And if that 40 year regime truly is over, then some of these indicators might not work.

Tony

Yeah. So I would recommend, if you guys haven’t read it, and if yours haven’t read it, there’s a book called The Price of Time by Edward Chancellor. It was recommended to me by somebody who is really knowledgeable. I’m about two thirds of the way through it. It is a fascinating book, and this time is never different, and that’s the main lesson. And we see central banks go in, try to intervene, try to alleviate things, and there’s always some sort of fallout. So, Dubric, as you say, if this is the end of the 40 year cycle, there’s going to be pain. And if CRE is acute enough so let’s say 30% of the value has fallen out of CRE, that’s acute enough to cause some real pain, right?

Doomberg

Yeah, just to give that chance for a plug. Actually, I heard him on the Grant Williams podcast discussing that book. It was a really great episode. And I agree wholeheartedly. It’s a fantastic book to read.

Tony

Great. Maybe I’ll see if he’ll come on our little podcast. That would be amazing. Albert, can you talk us through a little bit of the impact on energy? If we’re in a stagflationary US economy, what do we see with energy?

Albert

Energy is complex, Tony. It’s really complex. I mean, under $65 becomes problematic for the oil industry in the United States. They’re not going to produce. And that, again puts the oil back, parts of oil back up over $80, which is where the Saudis want it. But of course, the United States, the Biden administration, certainly doesn’t want to see that because it’s inflationary. It’s really a tough call with the energy sector in this. It really is. I mean, I could see this going to stay in here at 60, $70 for six months, or I could see it going to $100 pretty quickly.

Tony

Yeah. And what’s also interesting is the refining activity in the US. Refineries that are almost 96% capacity utilization tracy talked about that this week earlier. And so we have some of these refineries down for maintenance, but going into potentially hurricane season at 96% utilization, there’s really not a lot of movement or flexibility there for gasoline and other distillates. Right. So we had our first tropical storm of the season off of Florida this week. So if that turns into a hurricane, or if something soon turns into a hurricane hits Louisiana and Texas, we could have some real spikes in gasoline in the US. That could really aggravate at least the perceptions of inflation, if not inflation itself.

Albert

Yeah, the oil and gasoline supply is so tight. I have an oil brokerage firm, and we’ve been running around the globe to try to find supply, and it’s tight. Forget about what people are trying to tell you about the Saudis or the OPEC is hurting because demand is not there. That is absolutely not the case. The demand is extremely high and the supply is very tight.

Tony

Yeah. Jimberg, what are your thoughts on energy and stagflation?

Doomberg

Yeah, I would say the world was saved from an energy catastrophe with the unusually warm winter in the Northern Hemisphere, and in particular in Western Europe. And I don’t know how the weather patterns with Al Nino foretell what the next winter will be like, but it does seem like our leaders, especially in Europe, are learning all the wrong lessons. They’re confusing good fortune with good strategy. Prices are really low right now. The wind is at their sails, pun intended. They certainly seem to be heading into this winter with far more confidence than we think the facts on the ground would warrant. To the question about refiners, we wrote a piece one of the big ironies, of course, is that a lot of this Russian oil is flowing to India, which then gets refined into gasoline and distillates and finds its way to the US. And relieve much of the diesel crisis in the Northeast, for example, that was beginning to break out. US. Refining capacity at 96% is mostly testimony to the fact that we’ve not built a new major one in 40 years. You just can’t get them done anymore. And so we’re going to rely more and more on imports.

Doomberg

I would say just back to this whole concept of electric vehicles putting oil out of business and such nonsense. I mean, that gasoline is just one important cut of a barrel of oil. But we’re still going to need diesel, we’re still going to need jet fuel. And ultimately, this is byproduct economics. And so if the price of diesel skyrockets, and that makes the price of gasoline cheap because refiners have to keep operating, then somebody will pick up that gasoline in a developing world. It’s a global market. It trades, and it’ll all be used. And so every drop of oil needs to be used. That’s why our roads are paved with asphalt. That’s all byproduct economics, and ultimately we’re not going to be kicking our oil habit anytime soon. So as it pertains to Stagflation, I think the move by the Saudis was interesting. Proactively cutting a million barrels a day of production. One wonders whether their fields just don’t need a rest anyway. A lot of OPEC has been stretched to their main capacity here, and they’ve never really been able to operate at their allocated production levels anyway. But I do think there is a big divergence growing between the tightness in the physical markets that Albert’s referring to and then the complete pessimism in the paper markets.

Doomberg

Gold investors are rolling their eyes and seeing this play out again. And now you have to be careful that you don’t need to look for conspiracies everywhere in the market. But the Saudis are certainly convinced that the price of oil needs to be higher. Well, they needed to be higher for their own internal domestic needs. And in fact, I would say the equilibrium price that keeps the shale patch doing well and Saudis and OPEC happy is around $85. Brent 82, $83. WTI we’re about $10 below that today. Again, as I would say, the shale patch has gotten more disciplined. They’re not chasing growth for growth sake, they’re focused on cash. And so I do think that there’s sort of a natural range bound sort of sweet spot for oil in that with, with a median around 80. And that’s probably where we’ll end up.

Tony

Very good. Okay. Still higher than today. So it doesn’t help that stagflationary discussion. Okay, good to know, guys. Thank you very much. Let’s move on to Binance. I know there was a lot of movement in crypto this week with, you know, Binance and Coinbase and, and other things happening from the SEC Doomberg, you put out an intentionally seemingly nonspecific tweet about Binance, and I’m curious what your thought is about Binance, about the CEO, Zhao Chungpeng or CZ. Can you tell us kind of what’s happened there?

Doomberg

Sure.

Tony

Dig a little bit more into Binance and Coinbase. It doesn’t really seem like they’re exactly the same issue. I want to understand some of the accusations that they’re operating as an illegal exchange, this sort of thing. Let’s really dig into that and figure out what’s really happening there.

Doomberg

Sure. Let’s partition the discussion into sort of two categories. One, the whole question around whether crypto tokens are in fact unregistered securities. And then two, beyond that, Binance and FTX are being accused of basically running what amount to criminal enterprises where they’re commingling customer funds, enriching themselves, lying about their internal controls, and so on and so on. I would say Coinbase is not accused of doing any of those things. Right. Coinbase is a US based exchange that trades in the public stock market. We have no position in Coinbase, just FYI, but they do stand accused of trafficking in unregistered securities. And we’re putting out a piece on this on Friday. It’s pretty. Clear cut if you read the filings and so I wouldn’t commingle the fraud. The Sam Bankman freed CZ accusations of fraud which make the accusations of them trafficking and unregistered securities almost quaint in comparison. But the unregistered securities question is a life or death situation for Coinbase. And I do think when you read the filings these things don’t. How we test would indicate that Salona is a security like money was raised in exchange for tokens. The value of those tokens depends on the work of others.

Doomberg

It’s a common enterprise. They illegally, I think, listed them on these exchanges both domestically at Coinbase and offshore on FTX and Binance and pick your favorite. And these coins were picked up by venture capitalists for twelve cents and twenty five cents and they sold them out at $250 to unsuspecting retail. When it comes to the SEC, the brightest of their red lines is you do not sell unregistered securities to unaccredited investors. They stand at the gateway between the private and the public markets. And anybody who spend any time in venture capital knows that you don’t get to monetize on the back of retail without running the gauntlet of the registration process of the SEC. And they cleverly figured out that they thought that they’d invented the cheat code. We’ll call it a token even though it acts an awful lot like a stock and we’ll have a lockup period, but it’ll be a year. It’ll be this simple agreement for future tokens. Matt Levine put out a great column on Wednesday. These are stocks. They’re essentially very much analogous to the equity tranche in a company and a bunch of vents of capital, including a bunch of very high profile ones, not only dumped these tokens for thousandfold returns on the backs of retails, they went and filmed themselves on podcasts bragging about it and laughing about it.

Doomberg

It’s really amazing to me and I do think the thrust of our piece is venture capitalists should know better, they should have known better, they knew what they were doing. The SEC has been paying very careful attention and now that look, you have a motivated enforcement agency that is being openly disrespected all over FinTwit, all over YouTube, all over social media. They have the power of the subpoena. Sure, maybe there’s a few Republicans have been bought off to sing for the industry and even a commissioner or two, but Gary Gensler knows the crypto space well and we have, so we call it the Doomberg test. Is the underlying activity legally dubious? Check. Are you making a stupid amount of money off it? Check. And is the government therefore going to be paying attention to you? Of course, like you don’t get to cross that red line. In my mind the how we test is definitive and Bitcoin is not a security ether. Different story. But the rest of these tokens that basically found lawyers to advise them on how they could technically not make it the same as an initial Coin offering, but in reality, they really didn’t change that much.

Doomberg

They invested in a common enterprise in the hopes of making a profit on the work of others. That is a security. All of these tokens are securities. Coinbase for listing them, I believe, is in big trouble. There’s also another thing here. It’s not just a question of securities itself. These exchanges were actually operating as exchanges, custodians and clearing houses all at the same time. And that’s a big no no in the US. And so there’s far more legal jeopardy here than the market is pricing. And it’s shocking to me. The most shocking price on my screen today on my Bloomberg, is Coinbase bonds. I can understand equity, I can understand the reddit crowd and trying to generate a short squeeze. Coinbase is the most highly shorted stock on interactive brokers. That’s all fine. If AMC can go to where it went, then Coinbase can stay here. Even though their entire business model has been effectively declared illegal by the SEC. Why the bonds aren’t acting is a real mystery to me. These things are still priced at a pretty reasonable 15% yield is distressed, but you would think that the bond market would be sniffing out that the SEC is serious about this.

Doomberg

People just don’t read the complaints. Like, if you read the Binance complaint, it’s not like it’s 130 pages. It’s a bit of a heavy ask in today’s hyper short attention span environment. But just go and find the Binance complaint and read pages 88 to 92, four pages on why Salona is a security. It’s just so clearly a security. And they listed them knowing that the SEC was basically telling them, hey, guys, you got to clean this up. These things are securities. And so it is a real mess. And I think it’s going to become political, it’s going to become ugly. But again, the bifurcation here between the question of what’s the security and the question of fraud, I want to be very clear. There are serious accusations, compelling accusations of fraud at Binance that don’t exist at Coinbase. But Coinbase’s entire business model has effectively been declared illegal by the SEC. And to us, that should matter.

Tony

Yes. So everything you’re saying, I think both Albert and I, probably through different processes, but have been very vocal about this for the past couple of years. My biggest question or biggest statement has been, this is not a currency. These things are called currencies. They’re assets and they’re securities. Right. And so I haven’t understood it from the I feel like I’ve understood it, but I haven’t really understood how people could call them currencies or tokens when in fact they really are Securitized assets. Right. And so that seems very simple to me and I’m just surprised how long it’s taken the SEC to get here. But they’re a bureaucracy. It takes some time. This all makes sense. I don’t understand how they got securities lawyers to sign off on this.

Doomberg

Well, it’s a funny thing about lawyers. So in my corporate experience, we come at this from the corporate side, not the finance side. And I had a couple of decades in corporate America in various roles and a couple of expressions that were always near and dear to me, to my heart. Lawyers advise and leaders decide. But the second is there’s a vast difference between having a case and having an argument. And the lawyer will tell you you have a case right up until trial, at which point it magically becomes, oh, we have a pretty good argument. And look, lawyers are in the billing business and so they will give you advice and they’re fully protected by their own sort of insurance and they’re just doing their best as professionals. But if you could find a lawyer to basically tell you just about anything and it’s amazing to me, it’s just again, the Doomberg test is it probably illegal and are you making a ton of money at it? You got a problem to brag about making a billion dollars like who did on what podcast? It’s just really amazing to me that people would be so and just.

Doomberg

Even the CEO, brian Armstrong. Let’s circle back to Coinbase here. Their stance towards the SEC boggles the mind. They’re going to walk into the SEC and dictate to them how they need to change their regulatory framework to make Coinbase work. When the SEC again, I’m old enough to remember when people were afraid of the SEC, like getting a subpoena from the SEC was a BFD. If the SEC doesn’t drop the full hammer and looks like they are on these people, we need to see DOJ raids at this point in my mind, or else people are just not going to respect the SEC and we’re going to basically have a free for all.

Albert

Why should they respect them when Elon Musk is out there?

Doomberg

Ridiculous. It all starts with SEC middle words, Elon. In my view, that was the moment Jay Clayton really said all this in action and Gary Genzler is trying to sort of close the barn door. But yeah, like pumping dogecoin. Everybody knows what’s going on when he changes the Twitter to the doge. Right. The Winklevoss twins. Like all this mania that we saw, we all know what we’ve all been around. We’ve been around market cycles. And the reason we can avoid such traps is because there’s nothing of economic value occurring at the center of these things that would justify anywhere near the types of prices that we saw on the screen. And people should know better, right? And look at this. It matters. The reason why the US has deeply liquid really well functioning markets is because the world assumes the rules will be enforced. If we’re going to dissolve into a casino where how much money you spend coinbase literally threatened the SEC in a response by saying, if you sue us, you will face a well resourced adversary that will fight you all the way to the Supreme Court. Can you imagine the stones it would take?

Doomberg

And by the way, when Coinbase became public, they didn’t do an IPO in the traditional sense. They did a direct listing. And it was basically insiders selling in to create the float. And Brian Armstrong owns $130,000,000 home. Like, he’s not a sympathetic defendant here. And why the government took so long and why they don’t take the steamroller out and just make examples of some of these people is baffling to me. Maybe it’s coming, but, man, like, when I was in corporate America, you got a note from the SEC, the hair on your back stood up. Everybody stood at attention. You stood in line and you did what they told you because the two otherwise was the end of your career. And you could look at jail time. I mean, selling unregistered securities to millions of US investors is the brightest of red lines at the SEC. Everybody knows it could be. It should be. And we’ll see if Gary Genzle has the political wherewithal to see this through. If he doesn’t, the other side of it is going to be pretty ugly.

Tony

Doom do you think the SEC is just trying to give people time to get out? I’m baffled by why this took so long, but do you think they’re just trying to signal to markets, hey, you really need to get out of this. You really need to get out of.

Doomberg

This, or is the market’s not listening? Right? I would say let’s put this in the proper political context. The amount of money that FTX and others in the industry have spread around Washington, DC, is really one of the challenges with our political system. Like, you can become too big to regulate who’s going to step up to Elon Musk in this environment. One of the reasons he bought Twitter, I believe, is to become politically unregulable. He can’t regulate the man. He’s got the giant megaphone and he’s doing some things well. It’s not a conversation about elon, but the regulatory apparatus in the US is susceptible to corruption, is susceptible to political forces.

Tony

This is new information.

Doomberg

Doom this is, yes, breaking news, the more corrupt Washington becomes. But there’s a cost to that. Again, the US markets are the US markets for a reason, which is compared to all the others. The SEC was a cop on the beat that people trusted. And if that erodes away, imagine a world where the definition of security is so stretched and abused that something like a crypto token is not a security man. All bets are off, right? I don’t know. The investor protections are a key part of the efficiency of the US capital markets. The US capital markets are a key part of the reason why the US economy was as strong as it was for many decades. We are really eroding the core here. If we let huxters and fraudsters take over the reins and run the show.

Tony

Yeah. So I remember running around China in the late, early teens, 2000s, early teens, and I’d go into all the brokerage houses. They would say, hey, we want you to teach us about financial innovation. And it was just shocking to me. Like, they weren’t even trying to build credible markets. They wanted to incorporate some of the things that the US was doing before the financial crisis and then even after. And what it makes me think of, and I’m curious of your thoughts on this anybody who talks about, say, doing an ICO or something related to, say, finance like activity, they immediately start talking about Singapore, and they immediately talk about the regime in Singapore and the financial innovation in Singapore, these sorts of things. What do you think about those types of jurisdictions where this stuff is really encouraged and they’re trying to cultivate these types of securities?

Doomberg

There are no financial innovations. First of all, every scam is as old as history. And look, financial innovation is a euphemism for “let me launder money.”

Tony

Absolutely, yes.

Doomberg

That’s basically what it comes down to. Kycaml exists. And look, we’ve been critical of the US Treasury and the if Soren and Ben Hunt’s model on that, and they do go too far sometimes. But you’re talking about places like Dubai. Okay, what’s going on in Dubai? I wonder? Why is Dubai suddenly the headquarters of crypto Singapore? The amount of money, illicit money, flowing around the world is huge. It’s staggering. And our friend Markahotis would say the rise of these offshore crypto exchanges came in the aftermath of the collapse of wirecard, which was facilitating an awful lot of money laundering. He would say crypto is a money laundering scandal with a crypto wrapper. And we would tend to agree. It’s just undeniable that trillions of dollars of illicit money flow around the economy today. And crypto was a convenient way for a lot of that money to be moved instantaneously. I mean, there is no real innovation in trying to hide money from governments. You might use a bit of technology and put a technical wrapper on it to add fuel to the pump and dump fire, but money is money. Money laundering is money laundering.

Doomberg

I could create a really fast-growing financial services company, just give away easy terms. There is no new tricks in the finance world. There is no such thing as financial innovation. They’re just new tools and tricks to circumvent the rules that everybody knows and should be playing by.

Albert

This is all music to my ears as I’ve been screaming at the top of my lungs for years about these pump-and-dump. I have taken so much flak from people with the “stay poor” comments. This is just absurd. I mean, everything that’s happening in the crypto space is absolutely absurd. Newsroom is right. It’s like the SEC has to drop the hammer here. They got to really hammer some people and throw them in jail. Take their money, throw them in jail, just take their firms, collapse their firms. Something’s got to happen.

Tony

That’s a good point. Albert, how far do you think this goes? I mean, do you have high-profile billionaires who get ensnared in this without naming names? No, you don’t get high profile billionaire. So do you get celebrities who’ve been ensnared in this? I think that’s already happened a bit. But does that become more widespread?

Doomberg

Yeah, sure.

Albert

You’re going to have some scapegoats out there, a couple of middle management guys, some Shaquille O’Neill and whoever else is in trouble with the FTX pumping and dumping advertisements. Yeah, you’re going to have those people. But the guy sitting at the top lined Washington’s pocketbooks and campaign finances, and they’re not going anywhere. Simple as that, right. They get tipped off. They get protection from the DOJ, Biden’s DOJ. The Democratic donors are fine. It’s as simple as it is. The Republican donors just didn’t play this game at the moment, so they really don’t have that much to worry about. But everybody else, they’ll be fine in Santrope and San Barts and whatever.

Tony

So, as usual, it’s the second 3rd, 4th tier of people. Of course you go to jail.

Albert

Of course.

Tony

And if you’re not American, it helps to facilitate that as well.

Albert

Of course. Living in Singapore, Dubai, Monaco, all these other areas. Gibraltar. Name your small little enclave of financial services providers.

Tony

Doomberg, what do you think about that? How far does this go?

Doomberg

I don’t know. We’ll see. That’s the piece we’re putting out. I think it’s very possible that it goes into venture capital.

Tony

I hope so.

Doomberg

And there’s some big names and some big firms. They all knew what they were doing. They did. And if that money wasn’t coming in from VC, none of this would have grown to this level. And so I think exchanges are just the first domino. It depends on the politics of it. Venture Capital. Silicon Valley bank collapsed. A lot of their behavior over that weekend is also being scrutinized, I think. And of course they’re trying to blame it all on short sellers. But in reality, we all know what really happened. And so it’s no coincidence in our mind that Silicon Valley Bank was among the early failures here because they were, of course, knee-deep in all of this crypto financing on the venture capital side, signature and silvergate coming thereafter too. So we shall see that the piece we’re putting out is sort of planting a flag that this could spread to the VC space. And if I was in the VC space and had participated in these, I’d be lowering up.

Tony

Oh, absolutely. And donating.

Doomberg

Yeah, well.

Albert

Throw some money around, right?

Tony

Exactly. Protect yourself. Albert, thank you so much for this. This has been really informative, guys. Please look out for Dunberg’s piece. And there’s a lot more to come on this, so thanks, guys. Thanks so much for your time, and have a great weekend and a great week ahead. Thank you.

Doomberg

Thank you.

Be a smarter trader and investor with CI Markets. Learn more: https://completeintel.com/markets

In the latest episode of The Week Ahead, Tony Nash leads an insightful discussion with industry experts Tracy Shuchart, Markets & Mayhem, and Albert Marko.

One of the key themes explored in the episode is the low crude prices and the upcoming OPEC meeting. Tracy Shuchart analyzes the factors contributing to the downward pressure on crude prices, despite expectations of a seasonal increase. She highlights recession fears and limited market participation as major factors hampering the rise in prices. The OPEC meeting, scheduled for June 4th, becomes a focal point of discussion, particularly in light of Russian overproduction. The experts discuss the potential outcomes of the meeting, including the possibility of production cuts and their impact on countries like India that heavily rely on affordable Russian crude.

Mayhem delves into the issue of U.S. Treasury debt issuance and its implications for market liquidity and financial conditions. The recent passage of the debt ceiling prompts an exploration of the upcoming $1.2 trillion of U.S. Treasury issuance. Mayhem provides insights into the expected timing of the issuance and its potential impact on the markets. The experts also touch upon the decline in investor home purchases, questioning whether the rise in interest rates is the sole cause or if other factors are at play. They contemplate the extent of this trend and its potential future implications.

Albert Marko leads the discussion on the changing dynamics of the Middle East and the implications for the United States. The UAE’s withdrawal from a maritime agreement with the U.S. serves as a catalyst for analyzing the broader challenges in the region. Tensions with Saudi Arabia, Qatar, and Turkey, coupled with evolving U.S. policies, shape the geopolitical landscape. The experts emphasize the need for the U.S. to build strong relationships with important countries like Turkey and Indonesia without excluding other global powers. They acknowledge the complexities of navigating the Middle East and stress the importance of long-term efforts in rebuilding relationships.

As the episode concludes, the participants share their expectations for the week ahead. They look ahead to the OPEC meeting and its potential outcomes, considering the impact on global energy markets. Additionally, they discuss the upcoming Federal Reserve meeting and the decision on interest rates, offering diverse perspectives on whether a rate hike is imminent or if the Fed will adopt a more dovish approach.

Overall, this episode of The Week Ahead provides listeners with a comprehensive overview of crucial economic and geopolitical developments. The insightful analysis and diverse viewpoints offered by the experts shed light on the intricacies of global markets and highlight the challenges and opportunities that lie ahead.

Key themes:

1. Why is crude so low? (and OPEC)
2. UST Tsunami
3. Middle East (UAE)

This is the 67th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon
Mayhem: https://twitter.com/Mayhem4Markets

Transcript

Tony 

Everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we are joined by Markets inMayhem, Use, macro analyst and trader, of course. We’re also joined by Albert Marko and TracyShuchart. We’ve got a wide variety of items to cover this week. The first is why is crude so low?I’ve been talking with Tracy about that all week and trying to understand those mechanics a littlebit better. And obviously we have an OPEC meeting coming up, so we want to talk throughwhat’s going to happen there. I want to talk about the UST, US Treasury tsunami that’s coming.We’ll talk to Mayhem about that and understand some of the implications of this tighteningactivity that we see, particularly on things like real estate. And then we want to talk about theUAE and I guess the broader Middle East with Albert, some of those relationships seem to bespoiling a bit with the US. And so we want to understand, is this kind of finally the Middle Eastpivot to Asia or is there something different going on? So guys, thanks so much for joining us. Ireally appreciate your time. I know it’s very valuable. 

Tony 

Tracy, let’s start off with you. With crude. Why is it so low? We saw things really head down fora couple of weeks. We saw things start to perk up on Thursday and so far they’re doing well onFriday. So what’s happening with it? You hit the 60s, it’s back up above 70, I believe, right now. So what factors are keeping crude down at a time when we’d think seasonal factors would reallystart to push crude prices up a little bit? 

Tracy 

Yeah, absolutely. I mean, really, it’s the broader macro environment. What you have here is thatglobal supplies are tightening, right? We are draining global supplies. Iran’s done dumping theirfloating storage. So markets should really tighten up here this summer, particularly with the newOPEC cuts, the voluntary cuts that went into effect this month. But there’s still these broaderrecession fears. You wouldn’t think at that looking at the market right now, but there’soverwhelming thoughts of there’s still these recessionary fears. We had terrible manufacturingdata come out of the EU this week. We had terrible manufacturing data, one of the data sets inChina that really set the tone at the very beginning of the week when we saw that dive down into67. US. Manufacturing also contracting a bit as well. And so I think that traders are looking atthose numbers and spooking the market. We also have the participation in this market is done.There is no participation in this market. 

Tony 

Basically, you say participation, you’re talking about trading volume. 

Tracy 

So open interest. 

Tony 

Open interest. Okay. 

Tracy 

Right. So open interest. There’s just not really a lot of open interest. Most longs have exited themarket. And it’s not that really shorts are adding. It’s that nobody’s engaging in the market. Andso there’s just really a lack of interest right now in this. Even though fundamentals are still tight,it’s just this economic macro backdrop that’s really kind of pushing people away from. 

Tony 

Okay, so I’ve seen some people talk about like a bull whip effect. We saw things fall so far withthings like the unemployment data coming out on Friday being above expectation. Could westart to potentially see some sort of bull whip whip effect where we see crude rally on a notablebasis? Or will it take a lot more than something like that? 

Tracy 

No, I think we absolutely could. First of all, we just started having these OPEC cuts right, inMay, even though we haven’t really seen Russian exports up until this month. I think I imaginethat it would take like a month or two really, for those cuts really to filter into the fundamentalanalysis. I mean, OPEC is looking at by the end of June, we’re looking at a 2.3 million barreldeficit keeping these cuts online. So I think that as these markets tighten, people will not be ableto kind of ignore that any longer. 

Tony 

Okay, very interesting. 

Albert 

Real quick, what about a cap on Russian seaborne exports or existing cuts going mandatory forOPEC meetings? Is that possible? Either one of them? 

Tracy 

Yeah, absolutely. I mean, I think there’s a lot up for the discussion in the OPEC meeting. I thinkthey’ll focus on compliance. So anybody that’s been over producing will have to stopimmediately. I’m not sure that they’re going to make additional cuts just because those cuts arejust now starting to filter in again, it’s only been a month, and so really, that hasn’t really filteredinto really into the supply side situation. I’m sure that Russia will get a talking to because I thinkthat even though they have cut some production, they said 500K, it’s about 300K. Their exportsstill have not really gone down. That said, over the last couple of weeks, according to Bortexadata, we are starting to see those exports come down a bit. 

Tracy 

That again, I’m sure they’ll get a talking too, but I think it’s too early to really to make additionalcuts. That said, OPEC is known for surprises, and so you don’t really know 100%. I wouldn’tcount it out 100%, but I would lean towards probably no change. 

Tony 

So they’re meeting on the fourth. You don’t think there’s going to be a change. But you do thinkthey’re going to focus on compliance by Russia. So OPEC is pretty patient with their memberstates, right, generally. And it sounds like Russia has really had its run. They’ve overproduced. Alot of the stuff is going to places like India. So once that Stern talking to happens, and if Russiadecides to comply, what happens to places like India? And Saudi has been importing Russianbarrels too, right? 

Tracy 

Yeah, they’ve been importing Russian diesel and then selling their higher priced diesel to Europe.Obviously, if oil prices go up, obviously that’ll put some pressure on, say, India and China buyingreally cheap barrels. But Russian oil is still trading at a large discount to Brent as it is, and OPECreally wants to see at least Brent in that range. And so I think they’re going to try to manipulatethe market, but oversee the market so that they can get those prices that they need. If you look atkind of the OPEC nation’s break even, fiscal break evens, they’re all in that $70 to $80 range. Soreally they want that $80 to $90 range. 

Tony 

I love that you said OPEC isn’t manipulating the market. I think that’s great. What do you say?I’ve seen a lot of people over the past couple of weeks say, look, OPEC only controls 30% ofglobal markets, so they don’t really have control over crude prices. What’s your response to that?Is that true? Are they immaterial? 

Tracy 

It’s OPEC and OPEC plus, right? Between US. Russia and Saudi Arabia, we’re the top threeproducers in the world. And so that is quite significant because a lot of these other countries,there’s a lot of countries producing oil, but in much smaller amounts, by far, those are the threelargest producers. And so they can with the plus part of OPEC, it is easier to manage the market,especially when shale is not really a threat to them anymore, because our production isn’t reallygrowing at this point. They don’t have to worry about Shell going crazy overproducing andbringing oil prices down. 

Tony 

And we know there’s a floor to shale, right? We know there’s a floor of 65, 60, whatever to shale.Right. So if they can be prepared for that, which we’ve seen over the past couple of weeks, thenit’s not really as far as it goes, but it’s kind of as far as it goes on a sustainable basis. 

Tracy 

Right. 

Mayhem 

Tracy, does it seem like the oil markets, if there was a pretty meaningful disruption to supply, orif the Chinese reopening story really does start to take shape, that this tightness could lead to apretty significant rebound in price? If there’s any catalyst on either side, a disruption in supply oran increase in demand, it kind of seems like we’re priming the pump, so to speak. 

Tracy 

Oh, absolutely. 100% agree with that. And what’s interesting is, though, we have seen theproperty sector and manufacturing in China is still horrible. Right? Or manufacturing lesshorrible. But we did see them come out overnight and talk about how they want to try torevitalize the property sector. That did give oil a little boost. But also interesting, China has beenimporting a lot of crude. In fact, our all time high was just in April at 16 million barrels a day,which is huge. And so even though their imports keep increasing, there’s still this overwhelmingsentiment that’s weighing on the markets, particularly with what is going on economically withinChina. 

Tony 

Very interesting. Okay. It seems to me that tell me if I’m wrong here, but we’ve kind of seen Iwouldn’t say the absolute floor, but at least temporarily, we’ve hit where we’re going to hit andthings may muddle around for a while, but generally there’s an upside expectation for crudethrough the summer. 

Tracy 

Yeah, I think that we will see that. I think, yes. Again, those cuts filter in. We’re going to seemarkets significantly tighten over this summer. 

Tony 

Great. Okay. Very interesting. Thank you for that. And so speaking of tightening mayhem, let’stalk about US. Treasuries. You put out a piece, I think, a week ago or so, maybe less than thatabout no, a few days ago, I’m sorry. About now that the debt ceiling has moved forward, we’regoing to see $1.2 trillion of treasury debt issuance. So can you talk us through that and help usunderstand how that will impact markets, what’s the timing of that expected and so on? 

Mayhem 

Sure. So the first thing is going into this year, treasury Secretary Yellen issued a warning in midJanuary saying that they were reaching the statutory limit to what the US. Could borrow withouta change in the debt ceiling. And so at that point, issuance of debt for new debt was suspended.And it was only debt that was being refinanced that continued to be auctioned off in the market.So we still saw treasury auctions, but they weren’t nearly the same size. And with TGA accountspending into bank reserves that helped to add some fast moving liquidity. We also had positiveboosts from central banks like the People’s Bank of China and the bank of Japan, adding inaggregate a pretty significant amount of liquidity, more than offset QT by the Fed and later bythe European Central Bank that started in March of this year. So now we’re getting to the sort ofother side of this where the treasury general account is essentially drained. There’s less than, Ithink at this point, $30 billion in the account. So it’s very crucial that they do pass the increasessigned in and that they move forward with everything. 

Mayhem 

I never thought a default was a risk, but there’s a lot of kabuki theater that happens around here.And the one thing I just wanted to say as I get into the next part is that when people start saying adefault is imminent or if we reach this date, a default is going to happen and it’s just sort of cutand dry. That’s never been true because the executive branch has the authority to delegate whichpayments are going to be prioritized, and they can continue to do that with debt repayments oninterest in maturing bills and otherwise. But on the other side of it, they can shut down thegovernment furlough workers, defer payments. The whole idea that we were ever going to have adefault was a bunch of noise. And it was really more about what potentially happens at the otherside of the resolution of the debt ceiling, which is all but inevitable. Right. And it’s good wedidn’t have it shut down because that would have been a drag on the economy if it lasted a while.Government spending has been pretty important to GDP the last two quarters. And so avertingthat shutdown is constructive. 

Mayhem 

But what it means is that over the next, say, five weeks or so, there is about 700 billion of billissuance that needs to happen before we end out the second to last quarter for this governmentbudget. And then we also have by the end of the fiscal year, which is September 30 for the USgovernment. There’s a total, including that 700 billion of 1.2 trillion that needs to be issued. Now,it sounds like a lot because it is, but it really wouldn’t have been as much if we were issuing itstarting in the beginning of the year, right when we started to run into that ceiling. 

Tony 

Okay, so let me just stop you there. So 1.2 trillion by September, what is the typical run rate over,say, a four month period? Is it close to that? Is it 1.2 trillion? Is it 500 billion? What is the debtissuance on a normal run rate? 

Mayhem 

There’s nothing normal about the times we’re in. So there are a lot of good historical analogues tolook at. We can look at last year and say for the last quarter of the year there was about a halftrillion dollars of issuance, I believe. But at the same time, that was when a lot of spending wasbeing kicked up significantly, right? This was when there was funding necessities for the Chipsand Science Act and the Inflation Reduction Act, whether it’s ironically named or not. And a lotof that stuff started to come online and then interest expenses are coming up too, because the Fedis doing QT. And that means that the interest free kind of borrowing that the treasury was able todo, where the Fed would buy at auction, they were the biggest buyer. And when they did, theypay back the interest at the end of the year minus any Fed expenses that’s over while interestrates are also rising. So interest rate expense is set to hit over a trillion dollars. That’s anotherreason that debt issuance is increasing, to be able to offset that. We’re essentially paying off theinterest on our debt by issuing more debt in an environment where rates seem set to stay high forsome time. 

Mayhem 

So I think that all that being said, on a typical four month basis, it would be much more, I wouldsay, average to see 100 and 5200 billion, maybe 250 if it’s heavy spending. But we’ve also seenthat over time, all and this kind of goes back to the debt ceiling. Should we even have one? Allthat we’ve ever seen with our debt is that it goes up. And the debt ceiling, if you look at it overtime, especially the last, say, 25 years, it’s more like a debt elevator doesn’t really stop any of thefrivolity or any of the excess or any of the pork barrel spending. So I would say that there’s noreal normalcy we’re in this post COVID era. There was helicopter money, there was so muchspending. They’re continuing down that path. It takes $1 of you get one dollars of GDP growthout of every $4.5 of government debt incurred. Right. So it’s not a very efficient way. But back toyour question, what does it do to the market? What does it do to the economy? So this ispotentially a liquidity sponge. It really depends on how the plumbing of the markets handles it. 

Mayhem 

There is some chance that if the rates on the bills are high enough, that it could tempt somemoney out of other sources. So it’s not as big of a liquidity sponge. Maybe if we see rates onthose bills getting closer to six, six and a half percent, you start to see some money coming out ofreverse repos. You start to see some money coming out of some of the equity accounts as peopleare looking for that sort of ongoing great rotation into fixed income and out of equities that we’veseen as a bit of a theme. But I think if it’s not as tempting, it does have the potential to start topull liquidity out of bank reserves. Either way, it’s going to have that impact. It’s a question as toscale of impact. 

Tony 

This is interesting. So you mentioned the liquidity sponge, and you also talked earlier about howthe TGA activity was kind of offsetting the QT activity that the Fed was doing, right? 

Mayhem 

Yeah. 

Tony 

So if this debt issuance is acting as a liquidity sponge, it’s almost an acceleration of tighteningbecause you don’t have the TGA necessarily offsetting QT anymore. Right. You’ve got thisliquidity sponge that’s taking dollars out of the market unless the US government can acceleratetheir spending. Is that fair to say? 

Mayhem 

I would say that even if they do accelerate, the net impact is likely to offset. And I don’t thinkthat the way things are lined up now, that we’re not going to see too much acceleration. But Icould of course, be very wrong about that. But the main takeaway here that I have is like yousaid, really from October of last year until present we’ve had a lot of flows from TGA, PBOCand BOJ. Now the BOJ and PBOC are probably going to continue being aggregate adders ofliquidity. They have to, yeah, I think so. And they’re trying to kind of decouple their credit cyclethe best they can from credit cycles that in the west are being ended intentionally by centralbanks to try to offset this inflation wave that we’re experiencing which is now concentrated morein services. I think that that vacation is kind of coming to an end and what we’re seeing now isthe inverse that not only is the TGA not going to be spending as much in all likelihood, but alsothat that issuance combined with QT by the ECB, by the Fed and to some extent by the bank ofEngland. 

Mayhem 

That is more of getting back to what monetary policy had intended for, which is to tightenfinancial conditions. And then the other additive to that is also that credit conditions aretightening. Right. Banks are lending less and to whom they’re lending, they’re lending at higherinterest rates. And so there’s aggregate impacts, there are cumulative impacts to what’s happeningwith rates rising as much as they have because more and more people have debt that they have torefinance. There’s also small mid sized businesses and a fair amount of consumer debt that arerevolvers that as rates rise, the compounding effects of those higher rates are starting to reallyhurt. So I think that when you put that all together, it does suggest that there is some potentialfattening of the left tail going into the back half of this year in terms of how risk assets and ratesmight behave in an environment where liquidity goes from being rather abundant to rather scarceduring a time where seasonality has a similar effect. 

Tony 

Right. So in terms of the impact of say, the credit crunch that’s coming, whatever normal is, arewe returning to kind of a normal balance or is it extraordinarily tight? Do you think things willget extraordinarily tight? I know that no matter what happens it will feel extraordinarily tightcompared to where we’ve been for the last few years. But are we returning to a normal or will itbe tighter than normal? 

Mayhem 

That’s a really good question and I’m going to imagine that it will gradually become tighter thanwhat we’re used to. But what we’re used to was also a rather unprecedented time. It was severaldecades of disinflation of a really overall pretty strong economy, lower and lower interest ratesalong the way, very abundant liquidity and credit ever increasing over really the better part of thelast 14 years to unprecedented levels. So in comparison to what most people are used to, I wouldsay yeah, it’s likely to be tighter. The question is for how long? And the question is what otherunintended consequences will happen along the way. I think one of the most interestingdiscussions on the other side of this is that as rates go higher and stay higher for longer, it notonly helps to subdue demand, but it actually also starts to constrain supply. Because if you’re theCEO of an energy company or a metals company or an agricultural company and you’re hearing,okay, wages are going up and they’re high already, costs of capital are high and availability ofcapital is dwindling and business conditions aren’t so robust moving forward, am I going toexpand supply into that environment? 

Mayhem 

So then what do things look like as we approach and get into the next credit cycle when we startfrom a place of higher prices but less availability of supply, when demand comes back andthere’s not supply able to absorb that and credit still, it’ll loosen, but it’ll likely be tighter thanwhat we’re used to. It seems like there’s not the capability to address that in a timely manner, thatinflation has become a little bit more structural. And some of the irony of that is part of that’sdriven by the Fed’s policy. Now, to their credit, they can’t do much to offset the fact that thegovernment, not only at the federal level, but various state governments and other countriesgovernments are sort of providing this inflation relief right, checks to people to offset the impactof inflation. But that just in aggregate adds money to the system. 

Tony 

That’s like your 02:00 P.m. Sugar high, right? Like it just gets you through dinner. It doesn’treally keep you going. Right? I mean, that can’t be permanent. 

Mayhem 

No. And it’s just kind of extending some of the issues and making them a little more structural innature, I feel like. So for the first time since the 1930s, we’ve seen M two money supply fall yearover year. But then if we look at it just as a number rather than a year over year trend, we can seethat it’s just really reverting back to the trend that it’s had that money supply growth wasextraordinarily high. During COVID that they really flooded the system with money, helicoptermoney, liquidity for the financial system while simultaneously shutting everything down andthen kind of scratched their heads when prices of everything went up, when there wasn’t enoughsupply. But some of the supply constraints that we’re dealing with, and Tracy could speak to thismuch more than me, is a lack of investment. We haven’t been investing in so many of theseresources for such a long time. And that’s also created some structural potential for inflation tomove higher. And as we get into another credit cycle, I think we’ve probably seen the worst ofgoods inflation. This credit cycle barring any kind of meaningful disruption in supply. 

Mayhem 

But then services inflation is also quite sticky. And one of the recurring themes we see in ismdata and employment data is the services industry is very strong. Wages continue to rise there,and those wages are being passed on to consumers in the form of rising prices. 

Tony 

Yes, Albert’s talked a lot about the structural nature of inflation and expects it to rear its headagain. But what’s interesting, from what I’m hearing from both you and Tracy is tightness. Tracyis talking about tightness in crude. You’re talking about tightness in credit. And it just feels likewe’re on the precipice of this snap change where we’re transitioning from this world ofabundance for the last few years, setting aside the supply chain aspects of things world of kind ofrelative abundance into a world of scarcity. And that’s what happens when interest rates rise,right? That’s what happens when credit markets tighten, is you have scarcity, then you have realbidding for the price of things. Right. So that’s really interesting. So, Ma’am, let’s move on to realestate. You posted a really interesting chart about investor purchases of real estate. So you saynew home purchases by investors have fallen by the most ever. Is it BlackRock kind ofphenomenon where they stop buying homes, or is that real people stopping to buy investmenthomes as well? 

Mayhem 

It’s both. And I mean, it’s driven by some of the same factors that we’ve talked about becausehome prices are stubbornly high. There is a lack of supply from existing homes because whowants to move when mortgage rates have more than doubled from where they may have financedtheir mortgage at? So there’s a lack of supply there. Homebuilders are trying to keep up with thenew orders, but they’re struggling because they’re facing rising wages, rising capital costs, lessavailability of capital, lower in aggregate new homes pricing. So their orders have gone down,their backlogs have gone down. We’re starting to see that in some of the homes data, but I thinkthat it’s both sides of the coin because if you’re an individual home flipper or someone whoaspires to be a landlord or whatever else, banks are going to be more skeptical lending to thosesecond and third mortgages, right? Your initial mortgage, they’re still churning those out, butthey’re much tighter with their credit. But for the folks that are hopeful investors, most banks arenot willing to do that for a rate that is favorable. So you look at the disparity between rent andhome ownership in a lot of areas. 

Mayhem 

It’s hard for a new landlord to get in because with the mortgage cost and insurance, propertytaxes are all going to pay. They’re not going to be able to compete with some of the otherlandlords unless they’re in a really hot up and coming area. Like, you might be able to do it inNew York, you might be able to do it in Miami, you probably won’t be able to do it in a lot of theUS. But in terms of what’s going on in real estate, it’s an interesting dichotomy because then onthe other side, we’re seeing prolific weakness in office buildings. Right. There’s the lowestamount of utilization we’ve ever seen. So there’s at least one place in the market where there isn’tscarcity. 

Tony 

Yeah, I think a couple of things. I think Meta just announced that they want their staff back threedays a week or something soon, which it’s going to be really interesting to see how that playsout. But also in terms of people moving gosh, I was just in Austin last weekend, and I thinkprobably six to 8% of all the license plates I saw were California plates. So there are a lot ofpeople who are selling their places in California and moving to Austin. I don’t see that as muchwhere I live, but that seems to be one of those markets that seems to be defined gravity, which isjust crazy to see that as the rest of the US. Seems to be at least holding or maybe selling off.Okay, that’s great. Ma’am, thank you so much for that. Your stuff is great. I really appreciate yourfeed and all the stuff you always put out. It’s really balanced and really smart. So thank you forthat. Albert let’s move on to some geopolitical stuff. And there was an announcement this weekabout the UAE that you tweeted about where UAE is pulling out of a maritime coalition that theUS set up for security and Gulf waters. 

Tony 

And I know that the US and UAE have been partners in security for the region, very closepartners for a couple of decades, and it seems like that may be breaking up. But we’ve talkedabout this several times before. Like, the State Department in the US. Is very ineffectual. It’sactually DoD that conducts the more important diplomacy on behalf of the US. So when we seethese defense things break up, it’s significant. So can you help us understand that a bit more? 

Albert 

There’s two reasons for this. One is the Biden’s administration of continuing Obama’s theories oflead from behind in the Middle East, which is absolutely nonsensical. It just doesn’t work.Vacuums get filled. Turkey had to stabilize the region by looking towards other nations like theUAE, qatar and Oman and Saudi Arabia. And this is just a natural progression of the US.Stepping back. If you ask the Biden administration, they continue to say that they’re engaged, buttheir level of engagement and the way they go about it is questionable at best with the Saudis justwith lack of respect towards Biden and Blinken. This is nothing of a surprise to me. In fact, Iforesee Turkey being a much more regional player in the coming decade than the US will be. 

Tony 

It’s really interesting. About 20 years ago, a book came out called The Next Hundred Years, andGeorge Friedman wrote about how Turkey was going to be a regional power again. And at thetime, it. Seemed not intuitive. And I know Friedman has a lot of things that haven’t necessarilystuck, but to see Turkey reemerge as a regional power is very interesting for me. And to seeErdogan reelected, I don’t think it’s a complete surprise, but it’s interesting to see the leadershipthey’ve taken. So can you give a couple of examples of how Turkey is taking leadership in thatregion? 

Albert 

Well, they’ve been setting up military bases, I believe, in Qatar and the UAE. They’ve beenworking hand in hand with the Iranians, believe it or not, in Africa. And the Russians, they’vebeen pushing out their drones to pretty much anyone that was willing to buy them. 

Tony 

Including Ukraine. Right? 

Albert 

Of course, the Ukraine, everybody, they push it out to anybody they can buy. And they use thatas leverage for trade deals. And right now, a lot of Russian money goes through Turkey. Andthey don’t really care what the United States has to say because the United States still and theworld has to deal with Turkey as a geostrategic place in the world. Look at Map, for God’s sakes.They have the Prosphous, the Black Sea. They touch Europe, they touch the Middle East.They’re active in Africa. They’re everywhere. 

Tony 

And they have relationships with China, too, that are positive. Right? 

Albert 

Yeah. Well, of course, the Chinese need to push their materials through Turkey, the bots forstraits, and through train rail. And they’re a force that you just can’t get around, literally. Now,they do have big economic problems, and I have disagreements with them concerning the USdollar, but once that reality bites them, they turn back and actually build some reserves. Theireconomy should be fine and get away from this hyperinflation threat that they’re facing. 

Tony 

I see countries like Turkey, India, Indonesia that are pretty independent, diplomatically. Theyhave a foot in the US sphere. They have a foot in the Chinese sphere. Some of them, like India,turkey especially, have a foot in the Russian sphere. What does that mean? Can the US. Kind ofmend fences and build relationships with those guys? Because there are three very importantcountries. You don’t hear about Indonesia a lot in the US. But it’s one of the largest countries inthe world. Turkey is strategically placed, and India is the largest country in the world. So howcan the US. Build those relationships without having kind of a binary, say, bilateral partnershipwith them? Meaning it’s the US. And no China, no Russia? What’s the best approach for them? 

Albert 

Well, I think, first of all, we need to get an entire new administration, starting with the StateDepartment and the DoD. Without that changing. Nothing’s going to change. First Obama, andnow you have the Biden administration continues to push on the Indians and given themultimatums on dealing with Russia and whatnot. India is a billion people. They have their ownconcerns, economic concerns. They need that cheap oil, and they. 

Tony 

Have a long history with Russia, too. 

Albert 

And they use Russia as a counterbalance with the Chinese. Now Indonesia has the same oppositeeffect. I mean, Indonesia is food security. They have their own food security, so they don’t reallyneed that. They have a bustling manufacturing center just gaining more steam, and they interactwith the Chinese because they have to. That’s the regional power. So you can’t really expect Idon’t understand why people expect pick them or us. It’s never like that in the world. It justdoesn’t work like that. Like I said, things will change when we have a new administration, andit’s probably going to take a couple of decades to rebuild those relationships, but. 

Tony 

Couple of decades, you think, well, you can’t just. 

Albert 

Turn something around in one administration. Let’s just say, theoretically, DeSantis wins andcleans house, and it takes two years to be able to shift things around properly and see somethingstarting to materialize. And that’s not enough. Then you’re up for reelection after four. If he winsagain, you have eight. Maybe at the end of his second term, you have some kind of fruits thatwill be blossoming between those relations. But until then, this is just not good news. 

Tony 

And they’re just looking out for their own self interest, right? I mean, it’s not every nation does. 

Albert 

It’s national self interest. I made this argument about the EU for so many years. Everyone keptsaying, oh, the EU is unified and we’re this and we’re that. Well, when you add a little stress tothe situation, the rift between Berlin and Paris starts to show its ugly head and the NorthernEurope versus Southern Europe, and everybody’s in for themselves. It’s just the reality. 

Tony 

Go ahead, Mayhem. 

Mayhem 

I would just say that the issue that Albert mentioned about countries, governments, that you guyswere talking about them having their own self interest, always in mind, that’s also an issue withpoliticians individually, and that’s a huge problem as well. 

Tony 

Yes. Are you talking about America? Are you talking about everywhere? 

Mayhem 

I can only speak to America, but I’m going to say it’s likely everywhere. And one of the problemsthat we do face in America that’s a big challenge is that money has the rights of free speech, thatcorporations are treated as people, and unfortunately, that doesn’t necessarily bode well for theinterests of the citizenry being represented by the political elite. 

Tony 

Absolutely. I agree with you. And we could have a very long conversation on the voices that getheard in, say, the State Department, and the voices that get heard in DoD and the voices that getheard in these different departments. It’s, I believe, fully money backed 100%. 

Albert 

Just look at the Fed and the Treasury. Where do those guys go to work after they’re done withtheir wall? 

Mayhem 

Exactly. 

Albert 

You’re telling me that Yellen and Powell don’t take calls from market makers and brokerages onthe side? I mean, that’s just a joke. It’s literally a joke, right? 

Tony 

Let me just get back to Geopolitics for a minute in the Middle East. So the US relationship withSaudi Arabia has really started to change a bit over the past couple of years, and I think it reallystarted changing during the Khashoggi stuff and it’s kind of deteriorated since then. So Tracy,what are you seeing with in energy markets? I know this nuclear thing was just announced withSaudi, but with regard to energy, we’ve seen Biden go to Saudi and ask him to release more oilwhile restricting oil here. 

Tracy 

As far as energy is concerned, the US. Doesn’t have any pull there anymore. And again, that’sbecause shale is no longer a threat to them because it’s not growing for a lot of reasons, right?You have heroin acreage gone. You have no capex for the last seven years. You have oilcompanies beholden to shareholders at this point, buybacks dividends, capital, discipline, payingdown debt, et cetera. And so really, you’re not going to see shale go crazy anymore. So it’s not asbig of a threat as it once was. And so that factors in as well. And the current administration iscertainly not helping by any stretch of the imagination as far as trying to get these companies togrow whatsoever. He wants to shut it all down tomorrow. So I think that’s really this nuclearthing that came up, what they’re calling kind of the nuclear Aramco, I think that’s very interestingbecause it does point that I think Saudi relations with this particular administration are at the lowlevel, but they know that this current administration is not going to be here forever. We still needthose ties, and we’ve had tumultuous times with Saudi Arabia since we really started having thatalliance in the 1930s. 

Tracy 

But we’ve been longtime partners and have gone through bumps in the road. So I don’t think thatrelationship is I wouldn’t count on that being gone whatsoever. It’s just right now, this particularadministration particularly does not have any pull. 

Tony 

Albert, what are your thoughts on that? I do kind of actually worry about the US relationshipwith Saudi Arabia. Is that something where you think the Saudis are just kind of biting time untilthe administration? 

Albert 

Yeah, they’re buying time. They still listen. They still know that the US dollar is a reservecurrency and not changing in anybody’s lifetime. They know that they have to rely on the UnitedStates as a defense partner. They have these realities that they go through. Obviously, they haveissues with the current administration. There’s no question about that. They don’t like howrelations have been handled in public. So inevitably, the Saudis were going to push back a littlebit and at least give a little bit of tension towards DC to push back and say, hey, we’re not justpushovers. You just can’t use us as a punching bag for whatever political situation you have backhome. It doesn’t work like that. But until I don’t think anything really dramatic is going tohappen. Like, they’re just going to say the hell of the United States, we’re going to China, oranything like that. There’s too many other realities that play here. 

Tony 

Okay, guys, let’s wrap it up just really quick. The week ahead, we’ve got the Fed meeting comingup. We’ve got OPEC meeting on Sunday, this sort of thing. Tracy, let’s start with you. What doyou expect for the week ahead? Do you see strength continuing to come back to crude anddissolates, or what do you see happening? 

Tracy 

I think the OPEC meeting kind of set the tone for the week, right? If they do nothing, we may seea little bit of a pullback in oil. But again, this market is heading for tightness, and that’s just afact. So really my weekend is spent on OPEC, and that’s really what I am looking forward to,obviously, their macro events. 

Tony 

Albert, what do you see for the week ahead as we tee up for. 

Albert 

The Fed, definitely starting with OPEC, I want to see what they do. I actually think that they’regoing to probably announce some surprise cuts. I think markets run up based on that. I thinkthey’re trying to create a buffer because tension because of OPEC oil probably rising andprobably the Fed coming in there. And Jerome snap slapping 25 basis points on us again. I thinkthis might be the last one, but I’m not sure until the fall. 

Tony 

Okay. And Mayhem, you can come in here too. I think the 25 seems all but guaranteed, but whatdo you expect the tone will be? Do you think it will be a relatively hawkish tone given the jobsnumbers, or do you think it will be a relatively kind of dovish hike? 

Mayhem 

I’m going to be, I guess, a bit divergent versus what’s been expressed so far. I don’t think the Fedhikes in June. I don’t think they hike in June. I think that they’re going to go into more of a hikeskip, hike, skip pattern. If there are to be more hikes, I think the next hike is likely to come inJuly, and I think that they’re going to leave the door open to additional hikes, and they’re going tosay they’re continuing to monitor data. But one thing Powell specifically mentioned watching isjolts. And with the data that we’ve gotten recently, we can see that we still have something like1.71.8 jobs available for every person seeking work, and that’s a metric that displeases this Fed.So at the very least, whenever they are done hiking and it’s sooner than later, maybe they haveone, two, maybe three. I kind of doubt it, but I’m leaning pretty heavy on at least one hikes left intheir plan. But the bigger and I think more important question and this is something that Powellhas even expressed to the press, is that the bigger question is how long do they leave rates high? 

Mayhem 

How long do they run down their balance sheet? And I think that is a really important questionthat the market continues to misprice the answer to. The answer is generally thought of, oh,they’re going to start cutting as soon as September or November of this year and we’re going tojust automatically go back into a complete easing cycle when inflation has become much stickierthan I think anyone wanted to see. My thought is that and I saw Albert laugh, and I agree. Imean, it is laughable, but my thought is that it’s much more likely next year and probably in thesecond half of next year that the Fed considers really easing. And the caveat there is if they breaksomething big enough, because that’s been the classic Fed turnabout, their real dual mandate, Ilike to say, is creating and destroying bubbles. They haven’t yet destroyed this bubble and thelagged impacts of monetary policy. That hiking cycle having really just started early last year,they’re only starting to hit. The first hike was in March. The first bout of Junior QT was in Juneand then it went up to full throttle in September. 

Mayhem 

We haven’t yet felt the entire tightening, nor have we felt the tightening of credit conditions frombanks. So I still think there’s more to kind of go through and I think the Fed is going to strike ahawkish but balanced tone and say that don’t misinterpret this skip for an actual pause, a hawkishpause. 

Tony 

I like that. It’s not consensus and that’s why I like it. Very good. So we have a little bit of adifference here, so let’s see what happens. So, guys, thank you so much for your time. I reallyappreciate it, all your insight. Have a great weekend and have a great week ahead. Thank youvery much. 

Mayhem 

Thanks for having me.