Month: September 2023

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Hosted by Tony Nash, this week’s panel of experts includes Dale Pinkert, Tony Greer, and Albert Marko. Together, they discussed critical topics that matter to you:

1. How low will TLT, SPX, and Gold go?

One of the burning questions today is the trajectory of TLT, SPX (S&P 500), and Gold. With the S&P 500 approaching the 4200 mark and bond yields on the rise, the panel discussed the numbers. TLT’s descent to levels not seen since 2006/2007 is interesting. Do these trends present unique opportunities or do lingering uncertainty clouds the horizon?

2. Identifying the Tradeable Bottom

Tony Greer explores the VIX and SPY, examining whether we’ve reached a point where markets are poised for a rebound. Gain insights into the indicators he watches closely to signal a potential tradeable bottom and what lies ahead for the S&P 500.

3. Government Shutdown Implications

With the specter of a government shutdown looming, Albert Marko takes the stage to analyze the potential consequences. Governments’ actions can have a profound impact on financial markets, and understanding these dynamics is crucial for investors. Discover what he foresees in the event of a government shutdown and how it could affect your investments.

Transcript

Tony Nash
Hi, everyone. Welcome to the week ahead on Tony Nash. Today, we’re joined by Dale Pinkert, Tony Greer, and Albert Marko. Guys, thanks for taking the time on this Friday. It really means a lot. Today, we have a number of key themes. We’re going to talk to Dale about TLT. We’re going to talk to Tony Greer about tradable bottoms, and we’re going to talk to Albert Marko about the government shutdown.

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Dale, really glad to have you here today.

Thank you so much for taking the time. It’s your first time, and we’re really glad that you’ve made the time for us.

Dale Pinkert
Great to be here, Tony.

Tony Nash

Thank you very much. We’ve seen the XPX approach 4,200 and bond yield spike and continue to rise, and TLT continues to fall, of course, as yield spike. We’re seeing TLT hit levels we haven’t seen since 2006, 2007. It seems to be one of those times where people are saying, We’re at levels we haven’t seen since X, in a lot of ways. How do you see this going? Is this an opportunity? Is there’s too much uncertainty? Where do you see that debt and equity environment?

Dale Pinkert

Well, on other broadcasts and people have been following me know that I’ve been looking for the October Low in TLT to be taken out. On the weekly chart, it was a confirmed low market to rarely bottom when momentum is confirming price. And all we did was move sideways. Took care of that low a few days ago. We’re not confirming this time. I won’t be pressing the short side of bonds anymore. I think that yields are in a peaking process, and it’s most likely to be a growth scare that generates lower yields, a lower again. And even though the path of living response would be to buy equities, I think equities are part of the weakness that would go along with that.

Tony Nash

So when you say growth scare, what do you mean by that?

Dale Pinkert

Just the employment report that we would have gotten next week, I was looking for that to cement it. As Albert said, the feds can be using different stats to judge it, and we won’t know that number. I expect this to last at least a couple of weeks into the eclipse. Don’t call me a kook, but I’ve seen a lot of astronomical things be turning points in the markets over the years. And eclipses are something that people that do planetary stuff, it can be a time of, like the ancients believed of famine, war, not good omens. And plus we had the—I’ll steal the deal—we had that comment with the Green Tail that hasn’t been around since 1623. I don’t know what we were trading in 1623, but that’s-

Tony Nash

Tulips?

Albert Marko

Tulips.

Dale Pinkert

Yeah. So there are a lot of things, messages in the heavens besides our charts. Price action is king, but I pay attention to things.

Tony Nash

Like that. Dale, I don’t think you’re a cook for mentioning astronomy because have you ever seen a technical trainer? I’m kidding, but so – I.

Tony Greer

Was going to say, Dale, you have an astronomy ticker on Bloomberg that I could start watching.

Tony Nash

Exactly. So, no, seriously –

Dale Pinkert

Hey, you could join me in my pyramid and put on a tinfoil hat anytime, Tony.

Tony Nash

No, look, I love it. People trade based on different things, right? And none of it’s crazy because we can infer causality or whatever from anything we want. So I want to go down that kook trail for a minute because I think that’s really interesting. From the astronomy perspective, tell us about the eclipse and what that means. I know this to people who are watching this may seem a little bit weird, but I’m actually really interested in this.

Dale Pinkert

Okay, well, this is the first time ever, which is a long time, that people are going to be able to see an annular eclipse with the Ring of fire. It’s going to be a long time before another one shows up. So yeah, there’s another sign. I learned about things like this from others. There’s nothing new under the sun. I have to give Chris Carolyn a tip of the hat for tuning me into lunar things and tides and eclipses. And I always had an interest in a vibe from them anyway, and I paid attention to them. I’ve seen a lot of turning points on eclipses. I’ve seen them in the dollar. I’ve seen them in metals. And I just think that the technical set-ups are being confirmed by what’s happening, the other signals that we’re getting that most people are oblivious to.

Tony Nash

Okay, that’s interesting. I have a lot of Indian friends for those of you who know me or people who watch my feed. My son is Indian. I spend a lot of time in Indian culture, that thing. I’ve had several Indian traders tell me that they look at Star Charts as a part of their trading strategies. Again, these things may sound kookie to people, but people look at this stuff. And so in terms of a change, like a turning-

Dale Pinkert

Art Crawford, he was another guy that I used to be interviewed with on CNBC and FNN before it became CNBC. He’s another planetary guy. I’m sorry I interrupted you.

Tony Nash

No, no, that’s great. What is the turning point that you expect? You’re expecting yields to fall a bit? What is that turning point you’re expecting?

Dale Pinkert

Yeah, I’m expecting everyone that was wrong-footed about six months ago looking for the pivot are on the other side of the fence now. I know we can’t show our charts now, but the tenure did what I call is a throw-over, where it trades above a return line and then re-entered it yesterday, and I think that yields are peaking because of market events, not because of the Fed, but because there’s going to be some fear. I know for a long time, the flight to quality trade hasn’t worked, so most people are discouraged from even attempting it. But I think that even if it doesn’t work, the bonds will not be as vulnerable as equities may be. We’re already seeing it in certain markets. Look at silver. From being up to 70 cents to being down 40, you know what that tells me? We have a problem with market structure and liquidity for silver to put in the day it put in today. Because I know Tony’s been trading a long time and Albert, and you, when’s the last time you saw a range like that in silver? Without any news.

Tony Nash

Tony Greer?

Tony Greer

There’s nothing you could tell me that happened in Silver that would shock me. You know what I mean? It is and has always been a rich man’s casino. People make big bets in Silver. They underestimate what one person’s liquidity does to the market, meaning when one participant decides that they’re getting in or getting out, that has a holacious effect on markets nowadays that are largely electronically driven and front-run and all that. So nothing would shock me in terms of what I would see in silver. I mean, that is an anomaly. It doesn’t happen very often, but yeah, silver is a beast of its own.

Tony Nash

So since we’re talking about silver, can you also talk to me about gold as well? Because a couple of months ago, everyone was on the gold bandwagon. Gold was resurgent. Everyone was moving toward gold. And now it’s just can’t get a bit. It’s way down. A lot of problems. Miners are seeing it, everything else. Can you, Tony, Dale, Albert, can you guys talk to us a little bit about what’s happening in gold?

Dale Pinkert

I’ve been looking for 1800 for months. Okay. And I’ve been bullish to dollar that’s been part of it. I think that around 1800 to 1780 and Silver 2040-ish is going to be a place where I’m going to be getting long. And you bring up the miners, Tony, that even gold bugs—and I’ve talked to Tony about this, we talked a week or so ago—that even the gold bugs that were trying to avoid losses and equities by going to the miners lost it in miners. And they’re so disgusted, people are so disgusted with the miners that they’re throwing up their hands and surrendering. I think that’s a multigenerational low coming in here, around ’24-ish in GDX. I’ve promised people I work with, I won’t talk about the short side of gold and silver once we get down there for a couple of years.

Tony Nash

Really? Okay. Albert, what are you thinking about gold?

Albert Marko

There’s not much more I can add to what Dale said. I agree with Dale. I think 1800, I could even see it going to 1700. The gold would be an excellent long position. For me, I was never a fan of the whole narrative of gold is going to replace the dollar and so on and so forth. I’ve always been apprehensive of even touching gold. But Dale is right. That 17, 1800 is probably a very good long position at that point.

Tony Nash

Yeah, we even saw Chinese gold sell off earlier this year.

Albert Marko

Well, everyone needs dollars, Tony, so they’re going to sell everything under the sun.

Tony Nash

Yeah, exactly. Tony Greer, what are you thinking about gold?

Tony Greer

Gold chart looks like crap. I’m out of reasons to be bullish. I mean, it just does. There’s a triple top. That is one of the scariest triple tops I’ve seen. And they say that there’s no such thing as a triple top. We’ll show them this gold chart right now with a triple top at 2100 and a pullback to 1850 right now. But I like Dale’s position where it looks like 1800 is in the cards here. It’s one of those things where people pile into a little bit heavier during inflationary scenarios. And once they’re in, you have the story, the narrative of the central bank buyer versus the producer seller. And what it looks like is maybe some of the central bank buyers got filled and the producers keep selling. And so it’s been a while where gold has been outperforming real rates tremendously, where gold could have pulled back a long time ago. So maybe this is just gold’s pull-back-into-line moment. Quite honestly, I thought that it was going to have a chance to break through that top or we failed again. And now I don’t even know what to say to be bullish.

Tony Nash

Okay. How much-. Go ahead, Dale.

Dale Pinkert

All right. Well, March was a very important time frame. We had a low in the S&Ps at 3,800. We had the gold low at 1,800. We had dollar peaks, which a dollar is now surpassing. I’m looking for a reset in all of these markets to revisit the March lows. I think the S&P will hold above it, around 3,900 after the market makes a stand at 4,200 but fails. I’m thinking that happens into the eclipse.

Tony Nash

Okay, great. Now you mentioned the dollar, and is this gold issue more a function of dollar strength? And where do you expect the dollar? Because it was almost two years ago in, I think, SEPA ’22, where gold was at what, $1,250 or something? No, sorry, the dollar, or DXY was at $1,150 or something like that.

Dale Pinkert

Okay.

Tony Nash

Do we see more dollar strength coming in the next month or so?

Dale Pinkert

It’s a little trickier now because we’re getting to FIBs. We’ve retraced that decline from 114 to 99 and a half. We’re almost at the 50 %. 61, eight is about 109 in the ballpark. And if you want to get real bullish, well, then you drink milk shakes, if you want to be real bullish. But 78, 6, about 111, I’m thinking around 109. And I think Tony could verify this. Gold can rally with the dollar going up, but it’s very difficult to find an example where silver thrived without a bear market and the dollar. So if I’m correct and this is a failing rally in the dollar up towards 109, then I think that’s going to be the sacrificial lamb to bring things back, is the dollar and letting the dollar go. And so that’ll bring back everything, even in nominal terms, will bring back the market.

Albert Marko

It’s fascinating, Tony, because I have almost the exact same levels and set up, as Dale mentioned, but for almost entirely different reasons. Because for me, I look at what the political atmosphere is doing, and then I make assessments talking to my individuals and saying, Okay, well, 109, 110, which I’ve been calling for for quite a long time, and the dollar was most likely our top, and 3,800 is probably where we’re going to have to go back to reset to get another rally into the market, but for entirely different reasons, which is quite fascinating.

Dale Pinkert

Well, I’m going to turn off that camera you have in my office, Albert. Anyway, you know what? That gives me more conviction about what I’m saying here. I really love confluence of… I interview a lot of people, and I get it’s almost like a confirmation. From people who someone may be an elitistician, Tony does pattern recognition, and when people from different disciplines are coming to the same conclusion, I think it’s a higher probability outcome.

Albert Marko

Yeah, and the dollar from my point of view, is like you start going into the 110, 115 area, things are going to break overseas-

Tony Nash

The instruction.

Albert Marko

-systemically destroyed. And the Fed and the Treasury know this, and they’re not stupid enough to keep it up at and have Europe meltdown or have all of Asia meltdown. They’re just not going to do something like that.

Tony Nash

Okay, so dollar 109, 110, right? Then it turns around. S&P at 3,200?

Albert Marko

No, I don’t think it’ll go that far.

Tony Nash

Did you say 3,800? Sorry.

Albert Marko

3,800, I think. 38, 39 is where they want to probably come back to and then reset and relaunch.

Tony Nash

Okay. Does that sound about right, Dale?

Dale Pinkert

I’m looking for to rally back to 4,250 or so because that’s a pivot. 4.2 is a big number, and I think there are tiers under 4.2. Also, when everyone looks for one number, I’ve noticed over the years—you can tell I’ve been trading for about a thousand years. It either never gets to the number, doesn’t achieve it, or the number doesn’t matter and it melts through it. Actually, I think this is going to be more prolonged, and my longer term target is 3k S&P. It’s taking out the October low by the first quarter of next year.

Tony Nash

3k. Okay, interesting. Tony Greer, what do you think about that?

Tony Greer

I have an opposite view. I don’t get too terminally bearish in the S&P. I think it’s going up. I understand that there’s been a real eight % pullback from the highs here that could very well get steeper. I’m not calling like a bottom. Don’t quote me on that at all.

Tony Nash

Right.

Tony Greer

It seems like sell-offs are going to be managed. The economy refuses to dump into a recession, which is why the stock market is going to be able to handle higher yields. Now, I do think that yields are going to work their way higher. I just don’t think that it’s going to necessarily break all of the bull markets that exist within the S&P. And I’m talking about the AI bull market within technology, the home construction market. And I understand that we got some weak housing data and there’s some struggles with mortgages and stuff like that. But people always adjust. And I just feel like I can’t just decide that rates are going higher and jump in and have a consensus view that the stock market is backing off. I just don’t see it that way. Like you said before, like we mentioned, I look to trade bottoms, and I think that we’re getting close to one here. Whether it’s another 200 points from here, I don’t know. It’s going to depend on behavior and whether or not we get a real capitulation, which we haven’t seen even close to, but I’m hoping for. If we get that, then I’ll be putting some chips on the table for a run substantially higher in the next six months back to the S&P highs.

Tony Greer

Then we’ll see from there.

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AI

Thank you and now back to the show.

Tony Nash

Hold on.

Tony Greer

Let’s stop.

Tony Nash

Before we get too far into that. Let’s give a perfect segue to our next topic of tradable bottoms. You and Tracy Shuchart, who’s a regular guest, of course, had a really interesting exchange about VIX and SPY saying we haven’t hit a tradable bottom yet. So can you talk us through what you look for in a tradable bottom?

Tony Greer

Yeah. I literally have an account in my trading account that sits in cash until the VIX trades 30, right? And that’s one of the basic ideas is just when there’s blood in the streets and total panic happening, that’s when you have to keep your head and be able to put money into the markets. And ideally, you get there on a slow burn up towards, say, call it 30 or 30 something, and then all of a sudden, you walk in on a Monday morning, there’s bad news out. The S&P is dangling at a new low. The VIX has bid a new high, and everybody’s like, Oh, my God, what is about to happen? That’s an in hell, stock in-hell, risk moment for me every time.

Dale Pinkert

Thirty-two is a March low too, Tony. I mean, the March high in VIX was 31, 32..

Tony Greer

Yeah, I knew you were talking about that. I think that that’s where you want to see some reach in volatility, which would coincide with a spill in stocks. Now that the S&P is back down here, the 200-day moving average, I get less and less bearish, and I called for a little bit of a move lower. This is something that’s totally manageable to me. But you need one more thing. You need to see the real panic in the VIX. You need to see huge tick index prints on the downside that show that everybody’s hitting bids, consecutive red days in a row. You want to see the fear and greed tip to extreme fear. That’s the stuff that gives you confidence to buy and very little else. That’s why I’m not sure that what we just saw over the last several days was a tradable bottom in the S&P. There was just no heave. That’s my point.

Tony Nash

Okay, so you’re looking to VIX at 30. So just for the people who don’t really understand the technical aspects of the VIX, the VIX is telling you the expectations for the S&P 500 over the next 30 days, the next option, right? And so what it’s telling you is there’s so much capitulation in the market over the next 30 days that it’s time to get in. The VIX doesn’t necessarily reflect the market today. It’s the expectations over the next option role, right? So –

Tony Greer

But the VIX expands when there’s buying in volatility, which is people trying to hedge the downside of their portfolio. Right. And once the last guy comes in to hedge the downside, that’s when the move lower is over.

Tony Nash

Right. And so that’s why some people think the VIX reflects the market right now, and it’s not that. And the reason it’s so important is because it looks over the next month. And so that next month is telling you how broad the capitulation is, right? And so a tradable bottom for you is VIX at 30ish.

Tony Greer

Yeah, you know –

Tony Nash

It’s very simplistic terms.

Tony Greer

It depends on the situation. But yeah, ideally something north of that where it’s gapping to that level and the S&P is gapping to to a new I’m a big fan of trading red to green days. When you see a potential reversal day, that’s always a potential trade for me, depending on the setup. When it’s a big picture S&P setup that includes a reach for volatility, all those negative days in the row, maybe the biggest negative day that gaps open lower, that’s going to be everybody out by the opening. A lot of times that’s when the last of the selling is done and the whole market can recover. I mean, we’ve seen that over and over.

Tony Nash

Okay, so Dale and Albert have made clear that they think S&P is headed to 38. You don’t necessarily think so right now. No. No. Okay. Do you expect that we’ll hit a tradable bottom? Do you have a general idea? Not that you’re saying, saying, it’s going to be November 32nd or whatever. You don’t have an expectation of the timeline. You just know what the signals are.

Tony Greer

Are. Yeah. I’m looking for one now. Now. And we close to putting one in on Wednesday when the S&P traded down below the 200-day moving average and came back and closed that the gun changed on the day, that was close. But would have been a lot better is if it opened below the 200-day moving average and then closed above the previous day’s high, up 3 or 4%. That’s a signal where it’s like, oh, okay, put my money on the table and my stop loss below the recent low and make them come and get me because that’s a high probability bounce of a situation.

Tony Nash

Okay. But just to be clear, you’re not looking for the S&P to go down to 3,800 before you’re looking for a tradable bottom?

Tony Greer

No, I don’t think it goes that. I do see see dipping. I don’t see it dipping that steeply. No, I’m a guy that I think it stays above 4K. Maybe it trades 4,200. Maybe it breaks that briefly. We are within, in my opinion, opinion, 100 or two points of a tradable bottom. I’m looking for that panic to come alongside it. I haven’t seen it yet. So we’ll see what happens.

Tony Nash

Okay, that’s very interesting. Dale, did you have-

Dale Pinkert

Could I ask Tony something? Absolutely, yes, please. All right, Tony, so you pay attention to the VIX. People have made a fortune being short volatility. Even during the bear market, people made more money selling Val than owning Val when we peaked at the end of ’21. Don’t you think that their day is coming from picking up quarters off the sidewalk, that they don’t see a a steam roller coming going to exacerbate the move and fix?

Tony Greer

No, because usually if there’s a real panic and a real, like lockdown type of sell-off, I’m not taking my eyes off the tape for when the Federal Reserve is going to come to the rescue like a white white.

Dale Pinkert

The Bazookas.

Tony Greer

Yeah, pick your choice of exactly what their their might be. Whether they flood the markets with liquidity, whether they start talking about dropping checks, helicopter money, whatever it is, the Fed is that’s where at some point the Fed put is real. So no, I don’t think really that selling volatility gets old. I think the market positioning gets way too lopsided at the wrong time and sometimes heavier than you think. And the reality is that there’s still so much cash on the sidelines. I mean, everybody that I talk to is in some way, shape or form involved in enjoying five % yield in the two year note. Whether they’re a fund manager, a family office, wealth managers, that’s what these guys are parking cash in right now. God forbid we get a steep enough dip, that money is going to come into the stock market at some point because it’s going to be a better option. That’s why I don’t get fatalistic about a curl-over-crash. I think the S&P is fairly well put together to withstand that. The system is put together to withstand that. I see a lot of reasons to be bullish.

Tony Nash

Great. Very interesting. Okay, speaking of helicopters and Bazookas let’s start talking about the government shutdown.

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AI

Thank you and now back to the show.

Tony Nash

Albert, give us the the story. We have had had media about government shutdown for the past two weeks. There’s talk of something happening over the weekend or whatever to rescue it. First of all, is it possible to avert a government shutdown?

Albert Marko

Unlikely. It’s almost a 100% bet that we’ll be shutting down over the weekend. The Senate has a continuing resolution going for funding, but I think it has 70 votes. But the House Republicans are simply not going to accept even looking at or even talking about it. There’s complexities within the the GOP of Gates wants to be leader versus McCarthy and so on and so forth. There’s a little bit of jostling of positions there, but we’re definitely going to be shutting down.

Tony Nash

Okay, so can can for people outside of the US who think that we have a failed government system who like to say things about government shutdown, we didn’t really have government shutdowns before about about 1994, 96 right?

Albert Marko

Yeah, that’s about right.

Tony Nash

And it became a feature of the US system. It’s almost a planned political activity really to polarize the electorate. Is that fair to say?

Albert Marko

Oh, absolutely. This is nothing more than weaponization of narratives for the opposition party versus the one that’s in charge. Simple as that.

Tony Nash

Right. This isn’t necessarily a failure in government. It’s just a victory of partisan politics. That’s all.

Albert Marko

It is. That’s exactly right. But the danger is here and why I think that we’re probably headed down down is because of the way that the Fed and Treasury and the Biden White House like to talk to one another, they’re going to pin the blame right on the Republicans for a shut down whether on the market dropping. They control the 10-year bonds all the way up, and they can sit there and manipulate the market to come down on a sell-off. Then once a funding solution comes in, they’ll relaunch this thing right back up to to 42, 43, 44, 4700 Who knows by the time the election comes around? This is nothing more for me than political optics of like, who is better for the the Is it us or is it them? And there’s only one party right now that has their foot on the gas and happens to be the Democrats in the Biden White House.

Tony Nash

Okay, so Monday comes around, anti-Janet comes out out and says sky is falling and the government is not open. What happens?

Albert Marko

I think there will be a lot of risk off just because of media narratives and algorithm is starting to trade, but nothing more. It’s not some critical everything shuts down and nothing in the government works anymore. People still go to work, the government still works, and they’ll just get their checks two, three weeks later, but they’ll still be working. Now the data, the Fed has this cute little commentary saying, Well, we’re not going to be able to get the normal data that we rely on to make policy decisions, so we’ll have to look at private data.

Tony Nash

From where?

Albert Marko

Larry Fink? What are you guys talking about here? That’s what’s interesting to me. I think a little bit of risk off and then a little bit of hand-wrangling and deals being cut and back to the bull market again.

Tony Nash

Yeah. Does the Fed even trust the preliminary prints of those data? I mean, nobody trusts that stuff, right? You look at it maybe directionally. But nobody cares.

Albert Marko

It’s perception. It’s perception as reality. Whatever the prints say is the reality for that moment. Nobody cares about the revisions, Tony. Those happened months later, and we can say, Aha, we were right but so what?

Tony Nash

Yeah, exactly. Exactly. Going to go to B of A, CPI or something like that, or they’re going to go to Larry Fink, something like that. Right, exactly. What does that mean, though?

Albert Marko

They’ll be able to control the narrative, whatever they say. If they say that the economy is great and the unemployment is great, inflation has been defeated, and that’s what those prints are going to show, and that’s simple as that.

Tony Nash

Okay. I guess, is this an opportunity for the Fed to say they’re relying on private sector data and the private sector data says that they’ve conquered conquered.

Albert Marko

Yeah, I would absolutely assume that that’s going to happen.

Tony Nash

Okay. And so then will they not produce the government data once the government is back from running they’ll just produce it late and nobody will care?

Albert Marko

Yeah, they’ll produce it late and then November, there won’t be a rate hike, and then all of a sudden, December, when inflation is still stuck around, another rate hike comes.

Tony Nash

Okay, so that’s what you think is going to happen with the Fed over the next couple of months. Months.

Dale Pinkert

I think they’re going to have a hard time convincing people that inflation has been beaten, either by the people who pay five bucks for a cup of coffee at Starbucks or anything else that they pay for, or someone who has to pay $1500 to rent a room in the house to keep a roof over their head.

Tony Nash

Right.

Albert Marko

Yeah, everyone knows this at the moment. Even now—I mean, eggs and food is still elevated. It’s still 20% more than what we were paying pre-COVID. It’s just this is nothing more than political optics in the media that’s being talked about inflation is dead. It’s back to 2% or 3%. It’s only slowed down. It hasn’t gone down at all in two years.

Tony Nash

Just to give you guys just a Texas view of inflation, rent a plot for a mobile home in rural Texas is $1500 a month.

Albert Marko

Oh, my God.

Tony Nash

I mean, this is a mobile home plot. This isn’t anything else. You supply the mobile home. It’s $1500 a month in rural Texas. It’s that expensive to find a place to plunk down your mobile mobile home, right? So everyone is feeling it. Albert, I think we talked a few weeks weeks and I asked you, do you think the Fed will really push toward outright deflation to normalize people’s price price Do you think that it’ll come to that?

Albert Marko

No.

Tony Nash

No. Okay.

Albert Marko

No, because it’s giving giving tail –

Tony Nash

So pricing level, it’s going to stay at that pricing level.

Albert Marko

Yeah, because it’s giving tailwinds to earnings for companies and boosting the market. Why would they get rid of it? It? You all they have.

Tony Nash

Okay.

Albert Marko

But I do think that the shutdown is probably somewhere close to a temporary bottom that Tony wants to trade. I think it absolutely is. Whether it’s 4,000, I don’t know. I’m thinking 3,800 because because of I don’t know. Don’t quote me on numbers, but I think…

Tony Nash

You just did.

Albert Marko

I just think these next 2-3 weeks is most likely going to be like some a bottom for a while.

Tony Nash

Okay. So the government shuts down, come back Monday, there’s no government. Half the country is celebrating that there’s no functional government. Half the country is upset about it. So how long does it last? Does everybody panic next week and they rush? And then, I don’t know, Matt Gaetz or somebody is portrayed as the bad guy.

Albert Marko

That’s always the case. I mean.

Tony Nash

Right.

Albert Marko

Always panic. Everyone panics in the beginning, but I think they panic and then settle down unless it goes two, three weeks, which I think it’ll go two weeks at least.

Tony Nash

You think it’ll go two weeks?

Albert Marko

Yeah, I think so.

Tony Nash

Okay. We’ll go until mid-October at least. What’s the downside? We start getting stories about how our military doesn’t function and how people can’t can’t get Social Security checks and all that that Within a week, we’re going to get that stuff.

Albert Marko

Of course.

Tony Nash

What’s the real impact on the government over two weeks? Is there any major impact?

Albert Marko

Not really. Not really. Like I said, they’ll come out with some weird headlines saying the sky is falling, but no real impact.

Dale Pinkert

The impact is for people who look at their draw downs on their IRAs and everything else. At 3,900, they’re going to be calling their conquer and say, Get this over with. You’re ruining my retirement.

Tony Nash

Okay. Does this also provide an opportunity for a dollar depreciation?

Albert Marko

Afterward, yeah, I would assume so.

Tony Nash

Okay. People have less confidence in the Fed through the US government. Dollar falls below a 100, DXY falls below 100, something like that.

Albert Marko

Oh, I don’t know about under 100.

Tony Nash

Okay. So tell me about that.

Albert Marko

I don’t know about 100. I think we definitely like go close to to like 101, but I don’t think we’re going to sub 100 of the rest of the world. This is even worse shape than we are.

Tony Nash

By end of October, we could have Dixie at just over 100.

Albert Marko

Yeah, I can easily say that.

Tony Nash

Tony Greer, what do you think about that?

Tony Greer

About what?

Tony Nash

Dollar. You think we’re near dollar highs? You think by the end of October, we have have a, Dixie that’s 101, 102, something like that?

Tony Greer

Man, it’s hard for me to prognosticate. I had been bearish. The dollar went literally neutral when it went into the moving averages and then then said looks like it can run. I have no idea how far, but we’re still in the middle of that run. And I really just use the dollar as a speedometer for the risk that I have on tone. It’s not like I’m going to place any bets on it. Right. So the way I see it is it still looks like there’s a need for dollars, and it still looks like if US rates are going to go higher, that money is going to flow this way. They just is a tailwind that I see continuing. I can’t really pick where the high is going to be. I’m not an expert.

Tony Nash

Okay. Right. Where else is it going to go?

Albert Marko

And Tony, remember, we’ve always said that… I’ve always said that the dollar is always range-bound here. It’s just stuck in 100-110 range, and it’s just it is what it is.

Tony Nash

Yup. Okay. Now, Albert, since we’re here, I do want to ask you a little bit about crude markets as well, because there’s been some noise over the past couple of days about the Saudi and other people putting more supply on the markets, that thing. How possible or likely is that? And how much of an impact would that have on, say, retail US gasoline prices, that thing?

Albert Marko

Well, retail gasoline prices need to come down. It’s a political problem at the moment. From what I hear from my people is the Saudi storage tanks are full. So yeah, they probably will be dumping oil into the markets relatively soon. And I don’t even know if the the really want want oil $100. It creates problems for them anyways.

Tony Nash

Great. What do you think about that? What do you see happening with crude prices and gasoline prices?

Dale Pinkert

Are you asking me, Tony?

Tony Nash

Yes, sir.

Dale Pinkert

I’m looking at potentially one more high. I have what’s called a three-drive formation. I just want to get back to the dollar for a second. For your viewers, take out your weekly chart of the dollar. They say FX is one of the best technical trending markets. For 12 weeks in a row, we’ve had green in the dollar. I challenge people to find 12 weeks in a row red or green anywhere else. So definition of a trend is what just happened in the dollar. Okay, as far as crude is concerned, find me a bear, I guess, Albert. There are no crude bears out there.

Albert Marko

No.

Dale Pinkert

I think it’s really crowded the long side of crude.

Albert Marko

I don’t like these extremes where people say, Oh, $200 $200 oil or oil, $60. I don’t like these extremes.

Dale Pinkert

People are talking talking super again.

Albert Marko

Yeah, of course. You know what happened last time they talked talked super spikes? Right down to 70,65 dollar from 130 I don’t like this. And I know for a fact that the Fed and even Tony Greer, we talked about this previously, I know that the Fed will act. I know that they use futures options to crush oil for political reasons, and rightly so for the US consumer. I don’t see a super spike happening, and I see probably us drifting back down to the high ’70s, which I would love to get along in the mid ’70s of oil. I’d love to.

Tony Nash

Okay, great. Great. So you think by the end of the the we could be in the mid ’70s?

Albert Marko

I don’t know. I don’t know about the end of the year, but possible. We shot up $20 in a month, so who knows?

Tony Nash

Yeah. Tony Greer?

Tony Greer

No chance. There’s no oil. There’s no oil. There’s been no investment in the sector. Saudi Arabia and Russia have taken a ton of oil off the markets. There’s now cushing is getting drained down to dangerously low levels. The SPR is not at a level where they can sell much more. That was the seller. Albert, I think you had your chance to buy it in the ’70s. I feel like that was it. We spent six months in that range while it was Joe Biden’s SPR versus OPEC saying they’re going to cut. And then we got the output cuts. We got them to say we’re going to cut whatever is necessary. There’s no Biden SPR for sale at all. And now there’s no oil and cushing. And I feel like that’s a really, really toxic cocktail for upside. I think we’re going to break above once we get above 93, then I think the range will be like 95, 105 for a little while. Also that everybody’s betting on a recession happening, and that is also in their mind necessarily, bearish crude oil. And I would would point to probably probably 80 of the last recessions that we lived through where gasoline demand is indented.

Tony Greer

So best where I see that we have a consistent politically structural energy inflation here in our country, and I think that prices are going to work their way way higher.

Tony Nash

Interesting. Okay, that’s great, Tony. Even with the whispers about Saudi putting more supply on the market, you still see things going higher?

Tony Greer

Yeah. I don’t think that they’re going to put enough on the market to tip this rally over. I mean, this is a beautiful technical rally that we’re in the middle of now. It could break down for all different kinds of reasons. Then I’m going to ask you where where are going to get the oil from. Who’s filling up Cushing? How is that going to happen? I need to know.

Tony Nash

Well, if you listen last week, it’s definitely not Venezuela.

Tony Greer

Right.

Tony Greer

Good Point. But But that’s what the bulls have to that’s what the bears have to answer to. We’ve got oil, gasoline and diesel all floating down to the bottom or below their five-year average inventory levels. So where it’s coming from? Unless there’s another lockdown, I have no idea.

Tony Nash

Right. That’s scary.

Albert Marko

Government shutdown lockdown like everybody everybody their homes.

Tony Greer

I’m in emergency lockdowns.

Tony Nash

Yeah, I hope not. Guys, thank you so much. This has been really amazing. We’ve gone everywhere from astronomy to crude markets, and it’s been fantastic. Fantastic. Dale, thanks for joining us. This is really fantastic. Tony, as always, we love it. And Albert, really appreciate appreciate you, as always. So, thanks very much. Have a great weekend and have a great weekend. Thank you.

Tony Greer

Dale, wake us up that there’s a big dipper pattern or something that we really need to know about, please.

Dale Pinkert

I’ll tweet it. I’ll tweet it.

Tony Greer

Thank you.

Dale Pinkert

And don’t be pulling any moons.

Tony Greer

Good point. All right. Take care, guys. Thanks very much, Tony.

Tony Nash

Thank you.

Albert Marko

All right, thanks. Bye.

Tony Greer

Bye.

AI

That’s it for this week’s episode of of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

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Welcome to the Week Ahead with Tony Nash. In this episode, we discussed three crucial topics:

1. Central Banks Unveiled: We’re joined by Arno Venter to unravel the mystery behind central banks’ actions and their impact on trading. Is the European Central Bank lagging in the fight against inflation, and what does it mean for the market?
2. Diesel and Refinery Challenges: Tracy Shuchart enlightens us on the increasing troubles faced by aging refineries in the U.S. With a 53% rise in unplanned mechanical issues, we explore how this contributes to rising gasoline prices. Plus, find out which markets are hit hardest by Russia’s ban on gasoline and diesel exports.
3. Venezuelan Migrants and U.S. Elections: Albert Marko discusses the Biden administration’s decision to extend protection to a significant number of Venezuelan migrants in the U.S. We dissect the motives behind this move, whether it’s election-year politics or a strategy to boost oil supply amid Saudi Arabian cuts.

Join us for a clear and concise analysis of these important topics in plain language you can understand. Stay informed for the week ahead! Don’t forget to like, subscribe, and share for more valuable insights.

Key themes:

1. Central banks breaking things
2. Diesel & refinery alerts
3. Venezuela migrants & crude supply?

Transcript

Tony Nash

Hi, everyone. Welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Arno Venter from South Africa, Tracy Shuchart and Albert Marko. We had a big Fed meeting. We’ve had some really interesting things happening with POJ this week. And so, of course, we’re going to talk about central banks breaking things today. Arno is going to talk us through that. Tracy is going to walk us through diesel and refineries. There is quite a lot happening there and some things we’ve talked about for a long time, but it’s a good reminder of what’s happening in those markets. And then we had a big announcement in the US about Venezuelan migrants. I want to dig into that a little bit and understand what is happening there. Before we get started, I want to let you know about a new free tier we have within CI Markets, our Global Market Forecasting Platform. We want to share the power of CI Markets with everyone. So we’ve made a few things free. First, economics. We share all of our global economics forecast for the top 50 economies. We also share our major currency forecasts, as well as Nikkei 100 stocks.

Tony Nash

So you can get a look at what do our stock forecast look like. There is no credit card required. You can just sign up on our website and get started right away. So check it out. CI Market’s Free. Look at the link below and get started ASAP. Thank you.

Tony Nash

Guys, thanks so much for taking time out of your week for this. Arno, it’s great to have you on. Thanks for coming. I’ve got a tweet on the screen. You pretty much called how the Fed would move this week and said the reaction would be a nightmare to trade. Can you talk us through that? Why is it a nightmare to trade?

Arno Venter

Well, to be honest, I wish I can take credit for calling the outcome, but the tricky outcome I was actually looking for was a Fed that decided to drop the 2023 dot to show no more hikes for this year and then ramp up the 2024 dots to above 5 %. So that was actually what I was going for. And my thinking with that was that if we got that, it would have been a nightmare for the markets to digest because you would have a doveish outcome on the 2023 dots, because no longer seeing scope for November, but then obviously ramping up to 2024. And I just thought that would be the worst case scenario for markets out there, because you would have so much to a volatility. But I mean, in the end, they actually delivered quite a hawkish message. I expected them to move up that 2024 one, but it was… I didn’t expect them to do 2025. I thought that was quite hawkish. That was quite a strong message from them saying that not only are we going to hike November, but we’re going to follow through with… We only see scope for 50.

Arno Venter

And if you think about it from a timing perspective, the fact that they had 100 priced in for June, that meant that cuts could have potentially happened somewhere, let’s say, quarter two as early as that. If you think of four hikes making room for that within their meetings, the fact that they went 50 probably pushes that all the way back to the second half of next year and then only the first half of 2025. So that was pretty hawkish stuff. Definitely not what I expected on that 2023 dot. For me, it’s like that last hike, does it really matter at this stage in the cycle? I think they could have let that one out and just still gave a signal that listen, hire for longer is here to stay. But that last hike, I just don’t know whether it’s worth it at this stage. We also had Powell kind of alluding to the same thing. They asked saying, Listen, why not just hike then now? Why do it a month later? It doesn’t really matter. He even said, Listen, maybe one more hike doesn’t matter. But anyway, yeah. I wish I could take credit.

Tony Nash

That’s interesting. Why do you think they’re waiting? Do you think they’re spooked? Do you think they’re looking at markets and they’re a little bit worried about things?

Arno Venter

I think what happened is I think they… Their communication, we know they don’t like to surprise when it comes to the rate decision itself. They would often surprise with the statement and the language and the tone, et cetera. What they don’t like to do is spook us on rates. And we had, what was it, four or five or six of the FMC members coming out, basically telling us they feel it’s better to pause in September. So I think the only reason why they pause this time round is because they told us they were going to do it and they don’t want to spook the markets. We went into blackout. They couldn’t really change that view. But I mean, it’s silly to this whole skip thing. If you’re going to hike anyway, just hike. Get it over with, get it up to that level. I know they would say that they don’t have a level in mind, but we know they have a level in mind. Just get to that level and then keep it there. But this flip flopping is just… But it is what it is. I mean, that’s central.

Tony Nash

Getting to six always seemed a little bit extreme, right?

Arno Venter

Yeah. I mean, look, inflation was very scary. I mean, it’s still scary looking at what’s happening now in commodity markets. I think they’re getting a little bit of a wake-up call. It was quite interesting to hear Pal talk about their forecasters saying that they’ve got the best in the business. I’m not sure about that. But anyway, 6% we’re so close to it that I think we were going to get close to six when they started. I didn’t think so. But inflation was just… It’s been on a rampage. So the level makes sense, but doing this whole skip thing for me is just a waste of time.

Tony Nash

Yeah, I used to work for two of the forecasters they rely on, and they’re really good talkers.

Albert Marko

Their problem is simply inflation. They’re trying to sit there and be cute about, Oh, data-driven, so on, so forth. But because of the political policies that are countering any Fed policy, they’re stuck between a rock and a hard place. I’ve always said that they’re going to get to six %. One way or another, they’re going to get there. That’s mainly due to inflation, and it’s not stopping. It’s reaccelerating. Oil has been on a rampage. They can sit there and put out whatever dot plots they want. But I don’t even take those seriously, to be honest with you. I think last year, their dot plot said they’d be down to 1%. I mean, that’s a joke.

Tony Nash

It’s good for sell-side research, right? I mean, it’s good fought for sell-side research.

Albert Marko

Yeah, that’s fine. You want to talk to fundamental guys and data-driven traders? Sure. You’re going to look at all that stuff because it moves the markets in the short term. But if you look over the long term, their political policies have gotten in the way and this is where we are.

Arno Venter

It was quite clear from what he has to say that they’re not really sure of anything right now. They gave us these dots and yes, it was much more hawkish than I thought it would be. But it doesn’t seem like they really know where it’s going. I think when he says we are taking this meeting by meeting, they really mean it this time because they have no clue. Listen, when we get to November, we’ll make a call and see whether that’s the right one type of thing.

Tony Nash

I think- Go ahead, Albert.

Albert Marko

Yeah, there’s no question. Arno is absolutely correct. They’re taking a meeting by meeting. They’re forced to take it meeting by meeting. They’re forced to take a meeting by meeting. Now there is no long-term strategy that the Fed has or policy or tools in the toolbox that they can use to bring inflation down to two % again. That is a pipe dream. It’s not going to happen. And more importantly, you’ve actually seen some Fed research come out recently talking about, Oh, well, maybe 4% should be the standard going forward. They’re already starting this narrative, Tony. They’re already starting it. Now, I don’t think that we’re going to say the Fed say 4% is the target, but don’t be surprised if 2.75 or 2.5 and then three comes along in a year or two and so on and so forth because there’s just no possible way we’re getting back to 2%.

Tony Nash

They’ll work on inflation bands like they work on rate hike bands within 50 basis points or something like that. They’ll be right technically, but will they really be right precisely? Maybe.

Albert Marko

Yeah, that’s right, Tony, because most of the markets… We had 9% inflation here in the United States last year. That means $100 item is 109. 3% this year or 4% this year doesn’t mean that you’re paying 104. It means you’re paying 113 for items. So you’re still 13, 14% up from pre-COVID.

Tony Nash

Do you think that they’re trying to get parts of the economy into a deflationary position, groceries, things like that?

Albert Marko

Yeah, of course. That’s whatever politically advantageous it is for the 2024, that’s what they’re going to target.

Tony Nash

They’re looking for deflation in certain aspects, in certain segments.

Albert Marko

Yeah. I just don’t know how they’re going to do it.

Tony Nash

Okay.

Tracy Shuchart

Have to bring up that I do think that they’re very unsure and don’t really know what’s going on right now. Because even during that presser, some reporter asked, Would you call a soft landing expectation plausible? The first thing out of Powell’s mouth was, no. Then he went off and he backtracked with some garbled words out.

Tony Nash

How to destroy a year and a half of narrative.

Tracy Shuchart

Right. Again, and I just felt the whole time, I had made notes that he was just very contradictory and came off very unsure.

Tony Nash

He did. I felt that same thing, that he was very hawkish, but he wasn’t confidently hawkish. And it tells me that they’re a little worried, I think. And I think the data that comes in in October, we really need to be looking at some things falling over. So here’s just an anecdote that I know about. I have a friend who runs a shop, and they had to hire people over the past year at a certain wage. They’re now offering new people a much lower wage than they paid last year. They’re looking at cycling out those higher wage people with lower wage workers. That is one way to get services wage deflation, I think.

Albert Marko

Yeah, but productivity goes down. There’s a double edged sword here.

Tony Nash

Maybe. It might. I don’t know. But I think the people on the front lines who are managing shops, who are managing landscaping firms, who are managing a lot of this stuff, they’re really looking at how do they bring down their hourly wage because their customers can’t take any more price hikes. And so for these services firms, they’re trying to figure out how to bring that down by 10 %, 20 %, something like that. That so that they don’t have to continue to pass price hikes onto their customer because their customers, they just can’t take it anymore. We’re at that point in the cycle, I believe, where the consumer is fatigued. Now, there are plenty of people on social media who would tell you the consumer isn’t fatigued, all this stuff, but the American consumer, I think, is very fatigued.

Albert Marko

We’re certainly getting there. Certainly getting there. You can even see it in the luxury items market where you go, Just go to a mall, walk into a Gucci store. A year ago, it was filled to the brim with everyone buying $800 juice. Today you go there and there’s maybe two people in it. You can see it on the ground. I don’t need data numbers to look at it.

Tony Nash

Right, exactly. Arno, look… Go ahead.

Tony Nash

No, go ahead to add to that.

Arno Venter

I think the other thing that is also a canary in the coal mine is all of the strikes happening. You don’t see that happen unless people are really getting squeezed. I think that is a very good barometer to show us that, listen, even though spending has held up okay, the consumer is getting squeezed right now, and they won’t be doing all of this strike action if it’s not hurting at this stage.

Tony Nash

That’s right. Exactly. We are at that weird point where there has to be a turn somewhere. I think we’re going to start seeing in the data and we may have a month in the next couple of months that really surprises to the downside conveniently, but it might be true too.

AI

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AI

Thank you and now back to the show.

Tony Nash

Let’s talk about other central banks, Arno. We’ve seen the ECB continue to go into rate hikes. They’re slightly behind the Fed, I think, in terms of hikes. Now, even though the ECB continues to hike, the euro continues to weaken against the dollar. We have a chart here that shows one year, USD against the euro. Is the ECB still… Do you believe the ECB is still behind the US in terms of inflation fighting?

Arno Venter

Absolutely. We’re almost 2% difference on the headline over a percentage difference on the core. The problem that we have in Europe right now in terms of inflation is that they, unlike the US, they don’t produce. So they are in a much tighter situation right now. You can obviously add in China into that mix as well. But sticking to inflation, they’re definitely behind the curve, definitely behind the Fed. But the big difference here is that they don’t have the economic data right now to back up more tightly. If you take a look at US data, even though there is definitely showing up, I mean, Atlanta Fed GDP, I looked at this earlier, we saw a full spot, nine %. I know that’s going to be revised lower, but growth is holding up much better. So growth is okay in the US. There’s been that whole US exceptionalism narrative running around. And I think that’s been the biggest negative driver for the euro right now. But in terms of the ECB, where they are right now is a much bigger rock and a hard place compared to the Fed, because they actually have the growth data that is so dismal.

Arno Venter

I mean, if you take a look at today’s French Flash PMI data that came out, it’s pretty dismal. The German data was better than expected, but we’re still below 40 on manufacturing. So it’s looking bleak. I just don’t think they know they’re behind. Everybody knows they’re behind. But the growth data doesn’t allow them right now to be as hawkish as they should have been. They should have gone much more aggressive earlier, but where they are now, they can’t anymore. They should have done it earlier, but now it’s like a rock and a hard place. And again, if you take a look at what commodities are doing right now, that whole reacceleration and inflation narrative, it’s something… I didn’t think they would even mention it, but I was quite surprised that all of these central bank meetings, all of them mentioned the recent moving commodity prices. You would think they would try and steer away from it, but they actually all said, Listen, this is something we’re watching. It’s a concern. But what can they do? If they continue hiking right now, if Germany is already in a recession, how much worse can it get for them?

Arno Venter

They’re in between a rock and a hard place right now.

Tony Nash

Given the economic data prints, do you think the ECB has overtightened given their performance?

Arno Venter

No, I don’t think so. I think the cycle just caught up to them a little bit earlier. I think the big difference between, I would say, Europe and the US in terms of the hiking cycle is a big component of their problem, I think, was China. Everybody was expecting China to do okay. And I mean, that narrative has just been completely smacked out of the park. So I think for them, the cycle caught up a lot faster because China, that massive exposure to China was a big influence for them. And obviously, they are more exposed right now to all of the other geopolitical concerns going on. In terms of whether they’ve overtightened, I think they could have done more. They should have done more a lot earlier. The one thing that I think is quite interesting, is that even though most of the data is probably made up that we get from China anyway, but if we get data in Q4 that looks slightly better than expected, at some stage you would expect things to start looking okay, even if it’s not real numbers. And I do think that the sentiment when it comes to the Euro or the Eurozone right now has been pretty pessimistic for good reason.

Arno Venter

But if China does start showing some signs of recovery, whether that’s real or not, that could feed into some sentiment for the Eurozone. And if the data starts looking slightly better, maybe there’s a scope for them to potentially hold rates higher for longer as they plan to. If that doesn’t happen in China tanks, we probably looking at the first central bank to cut rates in terms of the ECB. But I do think quarter four could be a little bit of a wild card looking at China right now.

Tony Nash

Okay, interesting. So you don’t think Europe is necessarily done. They’re just in a data-dependent hold pattern, it sounds like.

Arno Venter

I think if growth held up, they wouldn’t have called a pause last week, or at least signaled that they are done. I think if growth looked better, like the Fed, they would have rather opted for maybe one or two more hikes. But we know that from a political perspective, Germany, so Germany is so important for their decision making. When you look at German data, it’s like that’s the elephant in the room. Everybody is looking at Germany when you want to make a policy decision. I think that’s where the problem comes in is they have to talk more garbage for the sake of the growth story. If that wasn’t the case, I think they could have done one or two more. They should have. If you think of what they’re doing.

Tony Nash

I get the sense if we had a German ECB head, they would have hiked earlier and sharper. But because we have a French ECB head, it’s been slower and more moderate. I could be wrong, but that’s the way it seems to me. Can we talk about Japan for a little bit and BOJ and some of the dilemmas they’re facing? We have this BOJ chief who’s relatively new. He’s been in the seat for about six months. We’re standing pat on policy. We’re not necessarily taking action either way. Is that really a function of the Japanese economy? I mean, the PMIs came in pretty weak, even weaker than expected this week. Imports are way down, like double-digit down in the same way it was last quarter when they had that stellar GDP growth, but it was just stellar GDP because of the import adjustment. The BOJ is obviously very important in terms of obviously Asian trade and money markets. So what is the BOJ thinking right now? And do you think they’ll move soon or do you think they’ll just continue to play it safe and sit where they are?

Arno Venter

I think their biggest problem has been history. Time is not on their side. I think that whole deflation narrative that we’ve had in place for what’s a three decades, I just think that that whole thing, they’re not able to shake that off. There’s some positive signs in terms of wages. It does seem like they’re really trying their best, at least from a policy perspective, to try and boost wages and try and get inflation of that way. But I think one of the… Let’s just assume wages do go up decently. Will they be able to change the Japanese consumer’s mind, their whole mentality that’s around spending and not being as frugal? Unless you change that and unless you change the demographics, they’re always going to have this type of tail problem following them. So I don’t know. Everybody got excited a couple of months ago about them potentially moving. And look, inflation, I think they could have taken a shot at it. With inflation where it is, just try something different maybe for a change. You’ve tried this for three decades. It hasn’t worked. You haven’t stimulated the economy at all. So maybe try something else.

Arno Venter

But I think for them it’s really… I don’t think they’re going to move soon. They should have done it already. They had the chance, but I don’t know, this bank, I think, is just stuck in that mentality. It’s going to be difficult to, I think, persuade them otherwise.

Tony Nash

Because they’re so integrated with China, do you think they’re caught given China’s downturn? Do you think they’re caught between, say, the US running a little bit hot and China running pretty cold? Are they caught in the middle, you think?

Arno Venter

I don’t think it’s necessarily a caught in the middle scenario. A couple of months ago, they had a good chance to move away. The markets gave them that leeway as well. If everybody was prepped for them to start moving away, I think they should have taken that chance when they could. And you know what? A couple of quarters later, they could have maybe said, hey, we made a mistake because growth is slowing down. But I mean, growth has been anemic for three decades. They oscillate between no growth and very little growth. So it’s like maybe they should have moved ahead of… But at this time, I think regardless of China or the US, they need to make a decision to move away from this type of policy. And if they don’t take the shot now with inflation at the highest levels in four decades, I’m not sure what’s going to convince them. I mean, growth, I don’t think at this stage, growth should be their driver. I think at this stage, they should look at inflation as you know what, let’s just hike interest rates and see what happens. Obviously, there’s a lot of concerns with the amount of JJBs they’re holding.

Arno Venter

There’s a lot of losses in store for if they move yield. So maybe it’s more a case of the balance sheet. Maybe that’s the concern. Maybe they would… But how can you reverse that? After you’ve bought, I think they’re sitting on what, 51 or 52 % of all JJBs in circulation.

Tony Nash

And the to the apps, right?

Arno Venter

You have to either stop and then start getting rid of that, unless I don’t know. I don’t know what they can do. They’ve dug a big hole for themselves.

Tony Nash

Albert, what do you think about BOJ? Do you think they should move a little bit more hawkish?

Albert Marko

I think they should to head off inflation. I think they do have a wage inflation problem on coming. I think because of China’s slowdown and their manufacturing has been increasing slightly, I think that they are going to have a problem with inflation. I think they should move right now, but who knows what they’re thinking behind the scenes, and who knows what Yellen and the Treasury are asking them to do on the back end. I agree with Arno, they should move, but they’re probably not going to.

Tony Nash

Tracy, with Japan’s import data down so dramatically, are they importing less energy? Is that a part of a component of it?

Tracy Shuchart

They were at one time. They are the largest importer of natural gas in the world. They were just surpassed by China. We did see a little bit of slowdown, but we also have seen some projects with Russia that are new in the Arctic to secure supply. That dynamic’s changed a little bit, so they’re now a partial owner of that. But we are seeing what’s really interesting in the energy sector that we’re seeing in Japan is them reigniting their nuclear capacity and opening up and extending nuclear facilities. That’s been very good for the uranium market.

Tony Nash

Great. I noticed you said partnering with Russia. Let’s just hold that for a minute. Okay, Tracy, let’s move on to energy. You put out a brilliant tweet earlier this week about aging refineries in the US. We’ve talked about this many times before, so this should not be news to any regular week ahead watchers. You said unplanned mechanical issues are up 53% from last year. How much has this stuff contributed to higher gasoline prices in the US?

Tracy Shuchart

Well, certainly it does add a problem because when you have demand that is still high and increasing into the year, we have a demand for gas is 6.8% higher than it was this time last year. We have increasing demand and obviously we have a shrinking or stagnant refining capacity in that in itself is obviously going to be a problem. Now you add on more downtime for these refiners due to mechanical problems and that just exacerbates the situation.

Tony Nash

When you said 6.8%, is that the price or the volume? Sorry, I missed that.

Tracy Shuchart

6.8% demand, higher demand than we were at this time last year.

Tony Nash

Okay, great. Can you help me understand? You also posted about Russia’s ban on gasoline and diesel exports. What markets would that impact the most? Turkey or the EU or India? I’m not really sure.

Tracy Shuchart

It’s going to impact… Well, Turkey obviously is their largest buyer, and therefore the EU. The EU purchase a lot of diesel from Russia, even with the sanctions, because there’s loopholes, obviously, if it goes through Turkey, that’s fine, or if it’s by ship, that’s fine as well. That’s going to really impact the EU, and that’s why we saw… What day was that? That was just yesterday. Oh, my God. I’m losing track of-

Tony Nash

Long week.

Tracy Shuchart

But I know. Oh, my God. Anyway, yesterday, if you saw, what happened was we saw diesel refiners in the US spike. That was the only bright spot in oil and oil equities all day. But that’s because US refiners should likely benefit from the EU seeks alternatives. We still have a lot of refining capacity. They already do buy from us. We already do buy from them as well. I think it’ll be good for diesel refiner, certainly with all of that off the market. That’s just globally because they export a lot of diesel globally.

Tony Nash

Okay, But if we have refinery downtime and capacity impaired, how are we going to do… How is the US going to do that?

Tracy Shuchart

Well, but this is a global problem. We have Pyrenees and the Netherlands has gone down three times already this year. They have aging refining problems in the EU as well, and that’s the largest diesel refiner in all of Europe. We have a global refining capacity problem is really what it boils down to. Nobody wants to put money into refining capacity when you have governments telling you we want you disappeared by 2030.

Tony Nash

Right. We’re all going to be driving electric cars by.

Tracy Shuchart

2030, right? Right, exactly. This is really a global problem. It’s been a global problem, and it’s not going away anytime soon.

Tony Nash

Yeah. Okay, so you had some subtle points there, and I’m seeing a trend here. Japan is doing projects with Russia on the gas side. Europe is dependent on Russia for diesel still, as long as it goes through Turkey. Are these sanctions doing anything? It feels like this is just really a stupid fig leaf.

Tracy Shuchart

Well, if you look at it from the perspective of has Russia suffered from oil and gas sanctions as far as how much money they make? No, absolutely not. Price cap’s been exceeded? Yes. Has their economy been hurt in other ways? One could argue a little bit because if you look at all the stimulus measures they’ve put in place this year, which is very different for them, for their people to stimulate the economy as far as we’re going to give you money for kids, the more kids you have, we’re going to give you. There’s a lot of stimulus measures that did out there. But really, if we’re just looking at oil and gas sanctions and perspective of has it hurt them financially? No.

Tony Nash

Tracy, they don’t have McDonald’s anymore.

Tracy Shuchart

I know. Or Starbucks.

Tony Nash

Or Starbucks, right. They must be suffering. Okay. In terms of supply, I want to turn to Albert and talk about this Venezuela migrant issue and work that into potential supply angles. Albert, this week, the Biden administration extended protection for 472,000 Venezuelan migrants in the US. This is about the same size as the entire city of Raleigh, North Carolina, or Atlanta, Georgia. Imagine adding another one of those cities in one signature. It’s a significant number of people on the screen. I’ve got cities in the US that are about that size. 38th to 40th size of city is what the Biden administration just accepted into the US. I want to ask first on the political side. Why are they doing this? Is it election your politics? What is the American electorate feel about these types of immigration, illegal immigration issues?

Albert Marko

Well, obviously, immigration has become a hot topic ever since the sanctuary city issues in New York City is faced by, I think it’s only 100,000 migrants. Specifically with the Venezuelan move by the Biden administration, of course, is political. I think they’re miscalculating the political aspect of it because the Hispanic community in America is not unified. This is a fundamental flaw in their thinking for so long. You have Venezuelans, Puerto Ricans, Cubans, Mexicans, so on and so forth. They don’t like each other, first of all. For whatever reason they have against each other, they don’t even like each other. The Venezuelan move is, in my opinion, it was probably three-fold in their minds. One would be the political aspect of appeasing the Hispanic and immigration, the pro-immigration lobby. Two, Curry favor with the Venezuelans to probably get a little better deal on the Chevron or other waivers that they have for oil-producing contracts. The other issue is labor market. Accepting these amount of people probably helps the labor market fill in some of the gaps from the boomers leaving the market, from leaving the workforce. I think that’s what their calculations were. I don’t think any of them are going to work.

Albert Marko

I think it’s a complete miscalculation in that front.

Tony Nash

Let’s tackle the labor market first. What segment of the US population does that hit? Are those new workers going to take down the rate that white-collar consultants and finance people can charge? Of course. They’re largely going to hit lower wage, hourly workers who are already having trouble making ends meet, right?

Albert Marko

That’s correct.

Tony Nash

I don’t understand if that is the traditional Democrat voter, then how is this helping their base?

Albert Marko

In the blue-collar… Listen.

Albert Marko

The Democrats have a problem with blue-collar workers leaving the party. There’s no question about that. Ever since Trump came in, he’s siphoned off numerous votes from that party. They have a problem with that. They’re trying to offset it with the Latino votes in certain areas of the country, mainly urban areas like DC, Philadelphia, Houston, so on and so forth. Like I said, this is a miscalculation on their part. This is probably going to anger a lot more blue-collar families that are most likely going to lose jobs or at least get their wages cut down.

Albert Marko

Yeah. Of course. Right now, plumbers are making unbelievable amounts of money. But as these lower-wage workers enter the workforce, I’m not saying maybe in a year, but four or five years, entrepreneurial Venezuelans will start hitting those markets, hitting the plumbing, electricians, and so on and so forth, and it’s going to be a problem.

Tony Nash

Arno, from your side of the world, I don’t know how much US immigration hits the news there. I know you don’t speak on behalf of entire nation, but what does it look like from outside of the US when you hear about US immigration issues?

Arno Venter

Well, I think for me, the biggest… How can I put this? I think the funniest thing is where it comes from. I think the country that it has to deal with, I think often you don’t have to be in the US to know when it’s purely politically motivated. So when you have Venezuela and stuff like that, you immediately know it’s going to be all about oil. So I think what’s interesting is the motives around it. It seems like every single thing is, and of course it is, but it seems like everything is just it’s a means to an end. But it does seem like from the outside, it seems like very little people that you talk to is happy with these decisions. Even those from the Democratic Party, it seems like everybody you talk to is just not happy with the way that these things are going. So it seems like it feels like they are doing their best to anger everybody on either side of the aisle. But yeah, it just looks all motivated from this side.

Tony Nash

Okay, interesting. Okay, Tracey, so if this is energy related, how much capacity does… First of all, why Venezuela? The grade of oil works well in US refineries, right?

Tracy Shuchart

Well, yes. But the-

Tony Nash

Okay, then if the grade of oil works well in US refineries, then is their crude capacity to come to the US?

Tracy Shuchart

No, that’s therein lies the problem is this government seems to think or this administration has this idea in their head that they can… Venezuela has the largest oil reserves in the world. They used to produce 4.5 million barrels a day. They’re at 700,000 per day from 4.5 million, let’s just put it that way. What they’ve had is years and years of mismanagement and degradation of their facilities. If the US really wants oil from Venezuela, they need to pour billions and billions and billions into infrastructure because it’s just not possible to get blood from a turnip, so to speak.

Tony Nash

Okay.

Tracy Shuchart

Think they’re completely delusional if they think that they can get any real capacity from venezuela at this point.

Tony Nash

We do have Jennifer Granholm as our energy secretary. That probably.

Tony Nash

Is the reason for the flawed thinking.

Albert Marko

A lot of trust in that one. But the other thing that I’ve always found hypothetical about the United States’s stance with Venezuela and the oil industry is there’s such huge climate warriors here in the United States, but they completely ignore that Lake Maracaibo has more oil in it than they’re probably exporting. That goes to what Tracy was saying about the infrastructure being so dilapidated there that it needs to get addressed. This is ridiculous. To work with a country that has oil directly spilled into Lake Maracaibo is unbelievable. I’m not a climate war and I’m not some hardcore climate, so on and so forth. But there’s certain things that you can’t sit there and dictate to the world and then completely ignore when it suits your interests.

Tony Nash

But it’s not here.

Albert Marko

I understand that.

Tony Nash

Is it feasible, Albert and Tracy, that the US could end up spending billions and billions of dollars on Venezuelan upstream infrastructure in order to export more to US refineries as a counterweight to Saudi Arabia and OPEC?

Albert Marko

No, that would fall to… I’ll let Tracy go on more, but it’ll fall on Chevron and Exxon and others.

Tony Nash

Okay, so those guys would spend the money?

Albert Marko

Yeah, and what the United States backfills them later, who knows?

Tony Nash

But that’s going to take 10 years, right? It’s not.

Tony Nash

Something they can whip up.

Tracy Shuchart

Oh, no. Yeah, this is not going to come online at all. You need to completely rebuild these facilities. You need to rebuild their refines. You need to rebuild everything in that country. You’re not going to get away. The problem is it’s a black hole. You can pour all this money in this country and it’s all going to bribes and it’s all going to corruption and the government is still going to steal from the oil companies. It’s filling a black hole.

Albert Marko

What about the brain drain, Tracy? What about the brain drain of all the engineers that were qualified that most likely left to Iran or Iraq or something?

Tracy Shuchart

Oh, yeah, absolutely.

Tony Nash

Yeah. I was once working with a certain Asian government who was spending a trillion dollars on infrastructure. I was trying to encourage them to have transparent tendering. I asked them the question, How much are you willing to fall off the table to corruption? 10%, 20%, 30%, 40%. They wouldn’t answer the question. I don’t think particularly Americans understand how much socialist… I mean, of course, it happens in the West too, right? But how much money falls off the table to corruption in these centrally planned economies. If the US were to spend $50, $100 billion on the upstream in Venezuela, we could write 50% of that off, and it would not be focused on the upstream at all. It would be focused on going into different pockets. 30% is a small amount to siphon off to corruption.

Arno Venter

They should come and visit us here in South Africa to see what happens to all of those funds, all of these amazing projects.

Tony Nash

Tell us about it, Arno. Where does it go?

Arno Venter

Well, if you take a look at our biggest success story in terms of trying to sort out the electricity mess that we’re in, they are going on 10 years now, something that they should have spent, I think they should have spent two or three years on it. We’re going on 10 years now. It’s still broken. It’s still down. There’s still load shedding. Every single time that Western governments pour money into South Africa or economies like South Africa, it’s a fairy tale to think those things are going to go to those projects. Like you said, the correct wording is it’s a black hole. You are just going to keep on feeding money and it’s not going to give you the result you need.

Tony Nash

Okay, so we can conclude that a rational person may decide that the Venezuela move is not about upstream infrastructure, and it’s not about crude capacity coming to the US. It’s not about a counter to OPEC and Saudi Arabia, right? It has to be about labor cost, right?

Albert Marko

It has to be. There’s no other reasoning. I would say two-thirds labor cost, one-third appeasing the Hispanic vote. If I was supposed to give odds, that’s what I would say.

Tony Nash

Okay, interesting. It’s not just the Fed fighting inflation, it’s also the executive branch through immigration policy.

Albert Marko

Yeah, it’s coordinated. I mean, inflation has been a top issue for the past two years now. It’s not going away, it’s just getting worse. Of course, we’re going to have to try to address it one way or another.

Tony Nash

But it’s hurting the very lowest-end earners in the US economy. That’s the tragedy in this, is that, yes, it’s alleviating some stress, but it’s hurting the lowest-income earners in the US economy. Does that help services wages? Like in what time frame? Does it help in three months, six months, a year?

Albert Marko

Year.

Tony Nash

A year.

Albert Marko

Okay. Yeah, about a year.

Tony Nash

Okay. It’s going to take some time still.

Albert Marko

Especially in the hospitality sectors, I would definitely look at that come June, July, August of next year and could see it come down.

Tony Nash

Okay. All right. Well, we’ll wait a little bit right in the middle of election season. We’ll start just-

Albert Marko

Yeah, imagine that.

Tony Nash

What timing? -imagine that. Really interesting timing. Perfect. On that note, guys, thank you so much for your time. I really appreciate it. This has been really insightful. Thanks so much. Have a great weekend and have a great week ahead.

Albert Marko

Great day. Thank you.

Tracy Shuchart

Thank you.

Arno Venter

Thanks, guys.

AI

That’s it for this week’s episode of the Week Ahead.

AI

Please don’t forget to rate us and review on whatever platform you are watching or listening to this.

AI

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Register for a CI Markets account for FREE! No credit card required: https://completeintel.com/markets

Welcome to “The Week Ahead” with your host, Tony Nash https://twitter.com/tonynashnerd. In this episode, we’re joined by a panel of seasoned experts:

🔵 Markets & Mayhem – https://twitter.com/Mayhem4Markets
🔵 Tracy Shuchart – https://twitter.com/chigrl
🔵 Albert Marko – https://twitter.com/amlivemon

Join us as we dig deep into three important topics in markets:

1. Reacceleration of Inflation & Its Impacts: Mayhem takes the lead in discussing the resurgence of inflation, impacting sectors, and the broader economy. With retail sales surging and job openings dwindling, what lies ahead? Are we missing critical signals from the bond market?
2. Peak Oil by 2030? LOL 🤣: Tracy Shuchart tackles the eyebrow-raising prediction that fossil fuel demand will peak by 2030, as stated in the recent IEA report. Amidst rising crude consumption, OPEC’s response, and soaring energy prices, we scrutinize the report’s assumptions and the history of peak oil predictions.
3. Beneficiaries of US Election Year Largesse: Albert Marko explores the intriguing dynamics of election-year spending. From corn to other sectors, we discuss which industries may benefit from politicians’ efforts to woo voters with taxpayer dollars.

Join us for an engaging and insightful discussion that simplifies complex economic topics for everyone to understand.

Key themes:

1. Reacceleration of inflation & its impacts
2. Peak oil by 2030? LOL
3. Election year investments

Transcript

Tony Nash

Hi, everybody. Welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Markets & Mayhem, Tracy Shuchart, and Albert Marko, guys, thanks so much for joining us. We’ve got a lot to talk about today. The first is the reacceleration of inflation we saw at CPI, and we want to talk about that reacceleration and the impacts on markets and other things. We’ll talk about that with Mayhem. Next, we want to talk about peak oil. There’s a note out this week about peak oil by 2030. We want to talk with Tracy about that and how realistic that is. Then finally, we want to talk with about investments that you need to keep an eye on going into an election here. Albert’s obviously well-versed in both elections and in markets, and it’ll be important to have that discussion with him. So before we get started, I want to let you know about a new free tier we have within CI Markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things free. First, economics. We share all of our global economics forecasts for the top 50 economies.

Tony Nash

We also share our major currency forecasts as well as Nikkei 100 stocks. So you can get a look at what do our stock forecast look like. There is no credit card required. You can just sign up on our website and get started right away. Check it out. CI Market’s Free. Look at the link below and get started ASAP. Thank you.

Tony Nash

Guys, thanks everyone for joining us. Mayhem, I want to talk with you first. We’ve talked about the reacceleration of inflation in Q3 for a long time on this show, and we’ve started to see it again, most acutely with energy prices, of course. Retail sales came in stronger than expected. CPI came in line. At the same time, we’re seeing Jolt’s say down below nine million, which it’s still eight and a half something, still pretty good. We’re seeing pressure on things like residential real estate. We all know about the pain in commercial real estate. So a few questions for you. First, how do you expect the reacceleration of inflation to impact the sector rotation? You tweeted a chart out about this. So can you talk us through that?

Markets & Mayhem

Yeah, sure. I mean, we’re in the early stages of what might be a reacceleration of inflation. We’re seeing a little bit of that. Of course, commodity prices are leading the way, but the PPI print we got yesterday, the biggest contributor was energy, and the biggest contributor from energy was diesel fuel. Diesel is used to move everything everywhere, so it’s a pretty big deal. When that price starts to go up, it has secondary impacts that can boost prices elsewhere. I think that’s something to keep an eye on. We got import prices today. They came up 0.5% month over month, which was greater than the 0.3% expected and much higher than last month at a 10th of a %. You annualize that, that would be a 6% run rate, which would be unacceptable for import cost rising. This is all in the back of a rising dollar. It’d be interesting to see what that looks like if that wasn’t the case. Nevertheless, I think that in terms of the rotation that it could spark, I think that old economy companies come back into favor, particularly energy stocks. We’ve had a really robust run in crude.

Markets & Mayhem

I want to say it’s up above, it’s at 52 week highs or close to 52 week highs. It’s certainly at 2023 highs yesterday with the pricing that we saw. I think that we’re starting to see some areas where supply in elasticity is becoming a bigger problem because demand is starting to creep up. I think for energy stocks who had a pretty bad quarter two in terms of their earnings, we’re seeing the exact opposite backdrop this quarter, where prices of energy are rising. So margins for these companies should be rising and I think that presents an attractive opportunity for some of the better run companies, for investors to look at the ones that have better margins, clean balance sheets as an opportunity here moving forward.

Tony Nash

Great. It’s interesting. I think this is the third week in a row where people have talked about the rotation into energy. Of course, Tracy and Albert have been saying this for a long time that we’d see prices reaccelerating Q Three and that we’d see energy rise into the end of the year. This is really, it’s really consistent and it’s what we’re seeing out there. I want to understand your expectation of, say, a recession. Tracy put a tweet out about this earlier this week around bonds. Is a recession your baseline view? How would that impact some of the credit risks we see out there, meaning real estate and other things? Can we talk through this with respect to say, the 10-year and then around recession. Then what are your expectations around credit risks?

Markets & Mayhem

Sure. In terms of the 10-year, there’s a pretty decent positive correlation between the 10-year note yield and the price of oil. I think as long as the price of oil is moving higher and people are becoming more concerned about forward risks for inflation, there is some upward pressure on rates that can still exist and still push these rates higher from where they are right now. Now, if that view starts to shift to one where people are more concerned about a recession, about a looming economic slowdown, and they are about the rate of inflation, then we can start to see a bit of a different dynamic there. We also have some big unknowns. We have a huge basis trade with the largest amount of net short exposure to treasuries, which could add some fireworks into the mix. Now, granted, these folks are all long fixed income, but they have some positions that could work against them, that could add some volume, and the Fed and Treasury are looking at this with a little bit of concern. Now, moving into the idea of a recession, I think it’s something that becomes more likely. It’s like a it’s for stalled, but not canceled scenario.

Markets & Mayhem

I don’t believe that the soft landing is the most likely outcome for how this credit cycle resolves. I still think we’re still in that older credit cycle that the Fed and other central banks are doing what they can to end. I don’t think that we can get rid of the inflation bogeyman without some of that pain. I think central bankers are motivated. I don’t know that we’re going to see a hike next week, but I think November, December is likely. In terms of what that looks like, I’m going to have to look at really first quarter next year, where I think we start to see more evidence of that becoming a scenario that plays out. I think we’ll see some tell-tale signs in the fourth quarter leading into that. What that looks like to me is actually a slowdown in the economy that amplifies credit risks. I don’t think it’s going to be the other way around. I think it’s going to be that the economic slowing that we’re seeing is going to boost up delinquency and default rates across a variety of different instruments. That’s going to increase pressure, and that’s where you’re going to start to see some of those problems percolate.

Markets & Mayhem

If we look at, for example, the bank term funding program, we can see that it’s now surging again, that borrowing by banks is on the rise because longer duration has lost value. We’ve seen bond yields creep up to the highest levels this year, and in some cases, the highest level in decades. There’s a lot of pain on regional balance sheets, and they’re going to that window again, telling the Fed, Look, we need 100 cents on the dollar because we’re in a situation where we might have a bit of a liquidity crunch. But on the other side of it, the terms of borrowing from that window are actually somewhat favorable in an environment where they can lend out at 7 % mortgage or 10 % auto loan or credit cards or otherwise on even higher interest rates. So we do see bank lending actually coming back in an environment where the bottom 50 % of consumers don’t even have a thousand dollars or even 400 dollars in a rainy day fund. So if things slow down more, I think that’s where you start to see that domino effect that can hit credit markets. But I think it’s going to be more of the unemployment rate rising, the jobless claims rising, and the services industry breaking that really leads us down that path.

Markets & Mayhem

So my roadmap is I’m looking for jobless claims at 300K a week. I’m looking for unemployment to rise meaningfully above 4%, and I’m looking for the services industry to go into some multi-month contraction. We don’t have any of those things in play yet. That’s why I’m looking forward towards the first quarter of next year with some eye on whether this path has manifested or not to qualify the probabilities of that playing out. But if you look at the yield curve inversion, if you look at leading economic indicators and other things that have been pretty accurate in forecasting prior recessions, all of them still say game on.

Tony Nash

Right. Tracy, that was your tweet. Do you think about that in terms of Mayhem’s order of events?

Tracy Shuchart

As far as what? The yield curve inversion? I know that everybody’s looking at that. What I think that we should at least keep in mind here is that this time may be different because the last… I mean, it’s forecasted pretty much every recession to 2008, but the 2008, right after that is really when we put the pedal to the metal as far as quantitative easing and printing all of this money. We’ve never had a balance sheet this large and dealing with the yield curve inversion at the same time. This really is not my forte, to be honest with you, but I’m just thinking maybe that’s why it’s been prolonged for over 200 days or what it is the longest in history. Or perhaps maybe this time it is different and we do get a soft landing. We’ll have to see.

Albert Marko

Yeah, Tony, the one piece of data that I actually looked at today, this morning and just smirked was the import prices increasing. Because the entire argument for some people criticizing our re-inflation argument for months now has been, Oh, well, we’ll just import deflation. Well, that’s just certainly how not happening at the moment. Prices across the world are increasing. Price of oil across the globe is increasing, demand is increasing everywhere. The notion that we’re going to be able to import deflation for the next two years is absolutely ludicrous and completely wrong.

Tony Nash

Right. I think- Go ahead, Tracey. I also.

Tracy Shuchart

Think we need to pay close attention as far as the inflation scenario goes right now is this United Auto Workers strike, because really, depending on how long that lasts, that puts 24,000 cars at risk of production a day. We all know what happened in 2020 when we had the COVID shutdowns that led to automobile shortages, which led to run up in prices. I would just be keeping an eye on that to see how long this actually lasts. A week, fine, but if this goes into some prolonged strike, that also could be automobiles could be another inflation factor.

Albert Marko

That’s also assuming that they make cars that don’t get recalled every month.

Markets & Mayhem

But that’s a good point on cars too, because cars have become unaffordable for a lot of people where they are at current pricing because people don’t look at cars by price. They look at cars by monthly payment. Monthly payments have never been this high. So most people are already priced out of this market. You add in that scarcity that Tracy is talking about from a supply disruption, and that gets a lot worse and it definitely passes through to inflation as well.

Albert Marko

It’s interesting because I paid less for my G-Wagon than I know that some people pay for a Hyundai Sonata, which is absurd. Absolutely absurd.

Tony Nash

Yeah, if you’ve got a loan- You’ve got a great deal.

Albert Marko

-if you’ve got a loan within the last year, I think you’re paying closer or slightly above what I pay for my payments.

Tony Nash

Mayhem, you made an interesting comment about cars. You said people are priced out of the market. I’m hearing that more and more that people are priced out of the market. But then we see things like retail sales and consumption numbers that are higher. Are those numbers really just coming in based on nominal price increases? Or is it really a volume of transactions? Because at these levels, I really do get worried about a lot of people being priced out of markets.

Markets & Mayhem

Yeah, I think that’s a great question. I think we have a pretty staggering chasm between the bottom 50 % and the top 20 %. And I think that accounts for some of what we’re seeing. You’ve got some folks who have never been doing better and they have no constraints on their consumption. They’re the minority. But then you have the majority and they’re priced out of housing, and they’re priced out of automobiles, and they’re priced out of the lifestyle they used to enjoy. I think that that’s the dichotomy, the K-shaped, if you can even call it recovery, at least outcome, is playing a big role here. I think that’s something that we have to keep an eye on because that bottom half, that’s where the risk is and that’s where the risk continues to be amplified. You see it in auto dealers. They’re continuing to make concessions to sell cars. They continue to cut prices. They continue to do whatever they can. They’ll also buy your car at a higher price, just whatever they can do to massage the numbers to keep cash flow coming in. And the same thing is happening with home builders. They’re making massive concessions.

Tony Nash

So if you’re the Fed and you’re seeing that the bottom 50 % are being kept out of market, what can you do?

Markets & Mayhem

I mean, Powell has spoke to this repeatedly saying that the Fed’s price stability mandate compels them to keep rates high for a long period of time to try to ameliorate that pressure. I think that there is some truth to the fact that you’re not going to be able to quell inflation by just destroying demand, but you can temporarily subduit. So the Fed can sit there with the limited set of tools they have, and they can try to induce below trend economic growth, which is a polite way of we’re running a higher risk of a recession to try to get the monetary policy outcome that we want to happen. On the other side of that, though, longer term, they don’t have any tools to fix this. Once we get into inevitably a new credit cycle and structural inelasticity is still out there, as demand firms up, prices too will firm up and from probably a higher baseline. I think that that sets us up for a bit of a vicious cycle of the Fed having to come in earlier and tighter, but also not ease as much into the next credit cycle full well being aware of those dynamics, unless and until we have some, and good luck with this, but legislative and executive sanity on the matter of supply.

Tony Nash

I’m sorry to laugh.

Markets & Mayhem

About that. No, we have to laugh or we’re going to cry.

Tony Nash

Right, that’s true. Zerp is dead in our lifetimes.

Markets & Mayhem

I don’t know that it’s dead in our lifetimes, but I think it’s dead for the next five or ten years unless things go really abysmally wrong.

Tony Nash

Okay. Albert, do you think the Fed is out of tools?

Albert Marko

No. Do I think they’re out of tools? No. Are they running out of runway? Yeah, I do think they’re running out of runway.

Tony Nash

When you say running out of runway, what do you mean?

Albert Marko

Well, the tools that they can use are diminishing at the moment. For instance, oil, I know that they use futures options, SPR releases to manipulate the price of oil to bring down CPI numbers. Obviously, the SPR is being drained over and over again. They come up with a 2.9 million-barrel purchase, and then a week later, the Biden administration says, Oh, well, we might release some more SPR. They’re running out of runway at the moment. This is mainly because they’ve misjudged pretty much everything from day one. The accumulation of wealth, specifically from the boomers in terms of housing and whatnot, just runs ruin for all Fed policy. They can’t account for it.

Markets & Mayhem

That’s actually an interesting point, too, in terms of labor scarcity because the boomers have been the biggest component of the labor workforce. Just during COVID, they said, I’m not going to go to work anymore, and many never went back. The whole tightness in the labor supply, it’s not really that tight. If those folks came off the bench and really, sadly, there have to be some wealth destruction to encourage them to do that, the labor force scarcity issue would be largely ameliorated for at least three to five years.

Tony Nash

Okay, interesting. Albert, are you also looking for a session that’s going to come? Are you also looking at, say, Q1 of ’24?

Albert Marko

I would say the latest of Q1 of ’24, and It don’t think it’s… I do actually think it’s going to be a soft landing in terms of just the data alone. I don’t know about the reality of the situation, but in terms of data, I think it’ll be a soft landing and pretty brief going into an election year.

AI

Heads up for a short break.

AI

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AI

Thank you and now back to the show.

Tony Nash

Interesting. Okay, great. Let’s move on to crude markets. Tracy, you put a tweet out about peak oil or peak fossil fuel demand by 2030. We had an IA report recently saying that the world would hit peak fossil fuel demand by 2030. It’s hard, given the demand that we’re seeing, it’s hard to say that with a straight face, but they actually published it. We’ve got crude growth consumption, we’ve got OPEC supply cuts, we’ve got high crude and petrol prices. OPEC responded this week. It wasn’t pretty. It included words like, quote, such narratives only set the global energy system up to fail spectacularly, which is, as you say, shots fired. Can you walk us through this? Are there realistic assumptions underlying the IA assertion that fossil fuels will peak by 2030?

Tracy Shuchart

No, absolutely not. They’ve been wildly wrong for the last 10 years.

Tony Nash

What assumptions are they using? Let’s figure.

Tracy Shuchart

That out. They’ve been wildly wrong about demand numbers for literally the last 10 years and supply numbers for even longer than that. They’ve always had supply way higher than it’s ever been, and they’ve always misjudged demand numbers. Now, this really came into play during the Paris Accords when the IEA decoupled itself from being an independent actual energy agency and latched itself onto the bureaucrats that run Europe and the United States essentially. That was at the Paris Accords. Then became an affiliate or allied with the WEF in 2016. Since then, obviously, their demeanor has been towards Green Energy Clush. A lot of their reports of, I think they said EVs would be 50% of global consumption by now, back in 2016.

Tony Nash

By now?

Tracy Shuchart

Yeah, which was wildly often. They go back and they make revisions, but you never hear about the revisions because they quietly make their revisions. Right now, I think they’re not credible right now. I think they have an agenda and they’re pushing that agenda. I think, unfortunately, even OPEC last year basically kicked them out of being a secondary source of information, demand information in their monthly reports and said, You’re just not a credible agency anymore. We can’t have you as a secondary source.

Tony Nash

OPEC doesn’t trust the IAEA anymore.

Tracy Shuchart

Correct. 100%.

Tracy Shuchart

If you look at this last report where they said, We’re going to hit peak demand, basically their assumption was global oil demand is only going to grow by three million barrels per day out to, I think it was 2028 or 2030 is when they said that we were going to hit the peak demand. However, if you look at the historical norms, oil demand has been growing at over 6 million barrels a day. To suggest that from here on out, we’re going to be at half of that in global growth is a little bit unbelievable. Because you’re just cutting oil demand in half for no real reason, especially when we look at emerging markets and where we’re still seeing demand growing. In fact, as a whole, if we look at emerging markets, it’s starting to surpass developing nations.

Tony Nash

If 2030 really was peak oil, what would we be seeing by now?

Tracy Shuchart

Well, you would have to see not a breakdown in green energy technology that we’re having right now. You just had a bunch of wind companies say, This is not feasible, economically feasible for us to do, or said in the United States to big wind farms. They said, We can’t do this unless we raise our prices by 63%, which obviously goes to the consumer. They also said they’re willing to walk away from that project. No problem. It can’t be some solution. That solution, i. E, would be a bunch of government subsidies, i. E, your tax dollars. You have that. Then you just have Germany come out and say that over 15% of their solar panels are in severe degradation. That’s quicker than they initially thought it was going to be. We’re seeing these problems, and this is what I’ve been talking about this whole time. You can’t frog leap technology. You can’t just make a leap to technology that’s just not there yet. We’re finding out now that this technology is more expensive than we thought, and it’s in degradation a lot sooner than we thought. We’re going to have to need to see a huge technology shift or fusion to come into light, really to be able to change this narrative at this point.

Tracy Shuchart

Because it’s just we’re not there yet. They’re trying to push something and it’s just not there yet.

Tony Nash

We talked last week about NatGas in Asia and how that’s becoming a preferred feedstock in Asia. We saw this week about how in Niger, the government there is changing the basis price of selling uranium to France. It’s going to be up, I don’t know, 300 times or something because France was getting just a heck of a deal. Some of these things, the demand is increasing rapidly, say, for NatGas, and the basis price for some of the nuclear because of this Niger development could be changing for some of these countries. Does that help us get beyond peak oil or does that prolong it because we already have the installed base for peak oil.

Tracy Shuchart

Yeah, I know. I think in peak oil, they include NatGas in that. They include NatGas in that. They take fossil fuels as a whole. So yeah, nuclear would be fantastic. We are seeing more nuclear projects come online. We’re seeing a lot of muffled, particularly in Japan, a lot of muffled facilities come back online. That’s great news. Except for if you’re talking about new projects, you’re talking about giga projects, major nuclear projects, those take years. You’re not really going to see those in the West where you already have projects that started years ago coming into use case within over this next decade, particularly in Asia, there’s a lot of buzz about the new SMRs. That technology is great. They’re faster to build. That’s excellent. It’s really-

Tony Nash

Sorry, what’s an SMR?

Tracy Shuchart

The small nuclear reactors. Okay. A small modular reactor.

Tony Nash

Okay.

Tracy Shuchart

Actually the acronym. That’s great, but still those projects still take time to come online. You’re still not getting away from fossil fuels, particularly as you’re trying to win a lot of these emerging markets off a pole. You’re going to go to NatGas, you’re going to go to… Because again, you can’t leapfrog to technology. Yeah, they want to build wind and solar, but they’re going to run into the same problems that the west is coming and so on.

Tony Nash

Can’t subsidize as much. What does that mean for markets? We’ve talked for a long time about how there’s under-investment in the upstream. We really haven’t had upstream investment since what, 2014 or something? I can’t remember the year that you’ve told us. Do predictions like this just serve as justification for upstream companies to delay investment in the upstream?

Tracy Shuchart

I don’t think that it serves as an incentive to delay. But again, you’re facing these problems that you’re having governments tell them, We don’t want you to be around in five years. Why are you going to invest all of this capital in something that the government keeps telling you we want to get rid of? There’s a ton of obstacles that the Biden administration and the EU Commission has set on fossil fuels in Europe and in the US. It’s just becoming more and more difficult. These companies want to keep investors. How do you keep investors? Dividends, stock buybacks. And things of that nature. They want to keep investors around. There’s just not a lot of incentive right now to vote for CaPEx.

Tony Nash

Okay. Short term impact or shorter term impact. Short to medium term impact on, say, energy companies or energy prices. Do you think this IAA prediction has any impact in, say, the short to medium term, meaning one month to, say, three years. Will this have any impact over the next one month to three years on crude prices, net gas prices, the value of XLE or something like that?

Tracy Shuchart

No, absolutely not.

Tony Nash

Okay. Albert, what do you think?

Albert Marko

I don’t really have much more to add, so Tracy pretty much nailed that one. For me, it’s just like the notion that we’re going to be in some peak oil demand is just silly. I don’t think it’s.

Tony Nash

Yeah, we have to talk about these things, though, right? Because this is what’s out there in markets and we have to… Is this real or is this. Just a desirable-

Albert Marko

But, I mean, like Tracy says, a lot of it’s political nonsense that they just spit out there because they have a narrative to tell. But saying that peak oil is going to be 2030 is just… I mean, that’s years and years away. We don’t know what’s going to happen after the US election. A lot of it has to deal with how policy gets implemented from here on out. If we have a conservative government in the United States, things change drastically. At that point.

Tony Nash

Having been in forecasting businesses for almost 30 years, if you’re going to make a forecast or prediction that’s that far off of reality, you typically want to make it 15-20 years out so nobody remembers it when it happens. They’re saying 2030, which everyone’s going to remember, and in 2030, they’re going to point back and go, Oh, those guys were crazy.

Albert Marko

It’s silly. We have no idea who’s going to won the US elections. The policy can change on a dime.

Tony Nash

Right, Mayhem. What do you think about this? Kind of these long or well, not even longer term, peak oil by 2030. Are you seeing any reflection of this in markets?

Markets & Mayhem

I think it’s a fantasy. I think the peak oil we have to be concerned about is supply, not demand. I think that the biggest problem that we’re confronting here is that policymakers are leading with fantasy and not reality. We want a green revolution. That’s great. Let’s see how we can make that happen without enough oil. Every single part of everything they’re talking about involves using hydrocarbons. I mean, even solar panels, they need quartz mined out of the earth. They need coal mined out of the earth. You’ve got to combine these in really hot furnaces just to make that silicon surface. Everything. I mean, the components of the wind turbines, the magnets, the metals, the sheer magnitude of this stuff. There’s so much hydrocarbons involved with building any of this so-called bridge to a renewable future that it’s pure fantasy to say that we’re going to be seeing peak oil within the next decade or two, in my opinion.

Tony Nash

Okay, so I’ve had this belief for a while, but I want you guys to tell me if I’m wrong. Seems to me that a lot of these fantasy visions of the green future are largely driven by zero interest rate policy and negative interest rate policy. When there’s no cost of money, we have subsidies and we have investments going into things that don’t have a near-term payout. If we continue to have an interest rate environment like we have now, do you think that these green energy plans will continue? Or is my thesis completely wrong?

Tracy Shuchart

No.

Albert Marko

No, It’s not wrong. They pile up debt for research, development and implementation. Anything from wind to solar to name your green technology is just laden with debt, and they can’t take that on if we have interest rates this high.

Markets & Mayhem

I think it’s an interesting burden when we’re looking at solar technology that takes less than a quarter of the photonic energy that is exposed to and converts it into electricity. That right there is a huge problem that we’re not more efficient because we can’t hope to power anything from solar, given how intermittent it is, how far the storage technology has to go, and how we’d have to build really a modular grid. You can’t really have centralized solar power at any conceivable scale that you’re not going to start dealing with impedance issues for the amount that… Because then you start saying, Okay, we’re getting less than 25 %. Well, by the time you get to the end user, maybe you’re getting 12 % of that photonic energy into electricity.

Tracy Shuchart

Maybe.

Albert Marko

That’s exactly- I used to run a solar cell research firm out of the Republic of Georgia years and years ago, and opened my eyes to a lot of the nonsense that comes out there. We have not made any headway and solar technology. We still use silicon cells, which are 22% theoretical max. Once you put on the filters and all the degradation, you’re at anywhere between 10 and 15% at max when it comes to commercialized products. The stuff that you see that come out and say, Oh, well, we got 44% in the lab. Yeah, that’s for two milliseconds under 300 suns before the thing gets blown up. You know what I mean? It’s just complete nonsense. If we really want to get into the whole solar thing, we really need to put in a lot of money and a lot of subsidies, which I don’t think is feasible at the moment.

Tony Nash

It’s just not affordable anymore, right? No. It’s real money. Money costs money now. Money used to not cost money, and now money costs money. Okay, great. Thanks, guys. Let’s move on to the beneficiaries of election year, Larges. Albert, you are the man to talk to you about this.

Albert Marko

My favorite topic, Tony.

Tony Nash

That’s right. Of course, we’ve got election coming up here in the US. I’ve been told that maybe, just maybe some US politicians like to use legislation to give money to key voting blocks, allegedly.

Tony Nash

As we head into an election year, what sectors can we expect to benefit from legislators spending the American taxpayers money to get re-elected?

Albert Marko

Well, this is interesting because it only happens really in the set circumstances when there is a majority of senators in a certain area being up for re-election like we have in 2024, like we had in 2020 at the same time, actually, we had sorry, 2018 in the midterms. But in the Rust Belt, pretty much actually all the way from Montana to Pennsylvania, up north, there’s a lot of senators that are up for re-election. And in those areas, if you want to win a Senate seat, you have to address the rural vote. To address the rural vote, you need votes from the oil sector, and you need votes from the agricultural sector. And Corn, I’ve been on here before, and I’ve mentioned, Corn is one of my favorite plays, is if you want to get the rural vote, you better make sure that those corn fields are profitable at the moment. They’ve done a good job of suppressing corn, but going into 2024, you’ll start seeing a lot of legislation with a lot of subsidies, perhaps ethanol waivers, which is one of the favorite, which boosts up corn prices. That’ll get done probably in March, April, May of next year.

Albert Marko

At least they’ll start talking about it. That’s one of my favorite trades in an election years. Wait till corn gets absolutely crushed in early February, March of 2024, and put a play on a position for a long position going into September, October, November.

Tony Nash

Interesting. Okay, so Corn is number one. What else are you looking at?

Albert Marko

Honestly, probably the auto industry at the moment because it’s such a big headline and there’s a lot of demographic voters in those areas. I think that they’ll get some subsidies going forward into next year. I don’t like playing the actual manufacturers. What I do like to play is the logistics. As long as the parts have to get delivered to get the cars made, I think ParkOhio is one of my favorite little companies that does that. I think that’s where I would position myself in.

Tony Nash

Great. Okay. We’ll revisit this from time to time. Mayhem, do you have any thoughts on favorite investments or favorite sectors that politicians are going to goose going into the election?

Markets & Mayhem

I don’t. I haven’t spent a lot of time thinking about this, but if I had one area that I think may be a potential beneficiary, it might be digital advertisers that will see a surge in demand during that period of time.

Tony Nash

Okay, that’s really interesting. Okay. And, Tracy, I would assume, I could be wrong, that there’s going to be a lot of political pressure to reduce energy prices, especially gasoline prices here in the US before the election. First of all, is my assumption true? And second of all, could that harm some of these refiners?

Tracy Shuchart

Obviously, they’re going to try. Now, the thing is that the Republicans have no incentive to really help them in that situation. They love to see high gas prices going into an election, so they obviously can say. I think it’s going to be really difficult. Again, what Albert was talking about is they’re running out of runway. There’s really not a lot that they can do right now. You’re really going to have to suppress oil prices, which actually is better for refiners. That’s actually better. They are able to… Because if you reduce oil prices, that’s less that they have to pay, and then they’ll charge you more. I just think it’s nice and all for Biden to come out last night and say, I will reduce gasoline prices. Okay, well, give me a solid plan for that, because there’s just not a lot of options out there. I think going through this election, I think oil companies are still going to remain… I think oil companies are going to remain strong because, again, like I said, there’s just no incentive from the opposite, from the other side of the aisle to really help on that.

Albert Marko

Yeah, I think their best chance for getting oil prices down back into the mid-70s is for recession fares to start popping up, and that’s not until Q1 really.

Tracy Shuchart

And that doesn’t help them either, right?

Markets & Mayhem

And it’s funny too, because with all this draining of the SPR to levels we haven’t seen since 1985, the price of gasoline for the average American consumer is up over a buck and a half during the Biden presidency, from just about two bucks to over 350.

Albert Marko

This is mainly due to policy problems. They sit there and cut off pipelines. They agitate domestic production. They push and they scream and yell narratives against the oil industry. I don’t know what they expected.

Markets & Mayhem

They tell the oil industry, We don’t want you anymore, but we need your fuel.

Tracy Shuchart

I know, right? Yeah.

Tony Nash

Well, so the one thing we can guarantee is that politicians will spend the American people’s money to get reelected.

Markets & Mayhem

Absolutely, yes. 100%.

Albert Marko

I guess they will.

Markets & Mayhem

If there is a way to bet on that, we’d all be millionaires for sure. Right?

Tracy Shuchart

I don’t know. Maybe predicted, I’ll have it.

Albert Marko

Yeah, corn. Corn. You want to do it? Play corn.

Tony Nash

Perfect, guys. Thank you so much for this. This has been an excellent show. Thank you so much. Thanks for your time. And guys, have a great weekend and have a great week ahead. Thank you. Thanks, guys. Thank you.

Markets & Mayhem

Thanks, everyone. Take care.

AI

That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

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This Week Ahead discusses three key topics: Inflation & Growth, Jobs, and Housing with Adem Tumerkan, Albert Marko, and Leo Nelissen.

First, we explore Inflation & Growth, where Albert shares his thoughts on rising inflation and what it means for the economy. Adem also addresses concerns about GDP and GDI.

Next, Leo takes us through the Jobs market, touching on Challenger job cuts and the US JOLTS data, and what it implies for the Fed’s plans.

Finally, Adem talks about Housing, highlighting the ups and downs in the US housing market and the role of the Fed in these changes.

Key themes:

1. Inflation & Growth
2. Jobs
3. Housing

This is the 78th 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
Leo: https://twitter.com/growth_value_
Adem: https://twitter.com/RadicalAdem

Transcript

Tony Nash

Hi everyone. Welcome to the week ahead. My name is Tony Nash. Today, we’re joined by Adam Tumerkan. We’re joined by Leo Nelson and Albert Marko. Guys, thanks so much for joining us. We’ve got some key themes we’re going into. They’re broad and simple, but I will go to a lot of depth on them. The first is inflation and growth. The second is jobs. And finally, we’ll dive into housing. I know we could talk for probably three hours on these issues, but we’re going to try to collapse it into probably 45 minutes.

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Tony Nash

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Tony Nash

Guys, before we get started, just over the last few weeks, honestly, I’ve grown really, really weary of the hot takes of the Fed’s going to kill everybody and markets are going to die, or we’re in a new bull market and you have to jump on. I mean, life doesn’t work that way, typically. The whole point of a soft landing is to make markets a little bit boring. Am I off here? What are you guys are seeing differently there?

Albert Marko

No, I think that’s right. I mean, the Federal Reserve, with all the rhetoric that’s come out has talked about a soft landing and no recession and so on and so forth. I know that people don’t buy it, but look what they’ve done with oil and the market overall. They’ve kept us in this range where they tempt you with an ultimate crash and then they tempt you with market blow-off-top with all these newsletter guys selling whatever they want to sell. But their intention is to destroy excess money and they’re doing a damn good job of that.

Tony Nash

Yeah, that’s a good point. I mean, extremes are really good for selling newsletters, right? But what the Fed is trying to achieve is the slow suffocation of excess risk capital. That’s really what they’re trying to achieve so that we don’t have either of these extremes. Leo, what do you see on that?

Leo Nelissen

I agree with Albert. It’s basically, I mean, oil, equity markets are basically range-bound. Last year I said, I’m not really a trader, I mainly invest on the long term. But I said I think we’re basically in a range between the mid-3,000 points and mid-4,000 points where we are now at the upper bounds of that range. I think risk reward is getting a little bad at these levels, especially if you look at inflation, heating up again. But I think in general, I post some bearish charts, some bullish, but if you post bearish charts, most people think you are very bearish. It’s always, as you just said, there are always extremes. I think most people when they trade, they always think in these extremes. Either we are going up 10% or down 10%. I think that’s very tricky. But as Albert said, it’s a great way to reduce excess cash in the market and liquidity. But I think we could go down 10% again. But I don’t have any trades on that. I’m just basically waiting because it’s just up to inflation and we really need new signals from the feds. Everything else is just noise.

Tony Nash

Yeah. Adam, what do you think on that?

Adem Tumerkan

Yeah, I agree. I run into that quite a bit on Twitter and stuff. I get people… You post some data, whether it’s good or bad, and then half the crowd jumps on you and then the other half of the crowd just cheers it. It’s weird. I always try to tell people like, Nobody knows. Nobody knows what will happen. We’re just all bumbling around trying to make our best guess with the data available in a very complex world. I think it’s important you need to stay fluid and adapt to the markets and not take it personally. I remember I learned a long time ago that don’t confuse a profit and a loss with right or wrong because rarely do those two actually align together. One is your opinion and then one is an actual outcome. That’s something and I always try to tell people on those. But I agree. I think the market extremes right now are pretty steep. We saw it last year, everybody was expecting a hard landing. It missed. Now everyone’s expecting a soft landing and they think it’s fine. That’s what has me more worried now, is that everyone thinks it’s a soft landing?

Albert Marko

Yeah. It’s a consensus that whenever the consensus starts pushing out whatever narrative they want to, then usually it’s wrong. The recession calls for Q3 and Q4 for the past year, look at recession, recession, recession. Yet here we are with no… I mean, it’s debatable whether it’s a real recession or not, but on paper, it’s not. That’s where we’re at here.

Tony Nash

Good. So let’s dig into that a little bit. Let’s first talk about inflation and growth. You tweeted this statement from Nick Timareos from the Wall Street Journal about PCE inflation. We saw both headline and core PCE rise in July. You’ve been talking about a resurgence of inflation in H2 for six months or something, I think. Let’s talk about this data a little bit and tell us what happens from here. Does this get steeper? Does this taper off? What do you think happens here?

Albert Marko

Well, it’s a double-edged sword. We’ve talked about this a few times where inflation right now has given tailwinds to corporate earnings, which has driven the market up, which is exactly what Yellen and all her other cohorts want to see because the market is the economy, as they keep saying nowadays.

Albert Marko

But. That has after effects, second and third tier effects of commodities rising, cost of goods rising, wage inflates and rising, which in turn spurs CPI inflation. And the Fed’s done a… Well, the Fed and Treasury has done a magical job of concocting whatever data they want to give some headline number. We’re in the threes again, and we all need to be back down to two, but Supercore and Core keeps rising. It’s not going anywhere but up from here on in.

Albert Marko

Honestly, it’s been summer. Europe has been completely on vacation and in a zombie state for six months to a year now, the US is getting back to work. The holiday seasons are coming. Demand’s going to start stepping up. I saw Keith McCullough had a chart out showing that luxury good spending was down. Of course. But that coincides with people on vacation not doing much, the service industry, it was just still strong, but the consumers were still out there spending, but not as much as they were. But now here we come into the fall, the second half of the year, and into the first half of next year, and I expect demand to go right back up to where it was eight, nine months ago.

Tony Nash

Well, budgets are tightening. It’s hard to argue with the fact that budgets are tightening generally, but that doesn’t necessarily mean that the economy takes a nosedive, right?

Albert Marko

Yeah, of course. Budgets are tightening for what? 60, 70 % of America. But realistically, the top five % of the ones that are actually spending absurd amounts of money on luxury items, and they still will. When you go to a Gucci store or a Chanel store, you have lines out the door of people that probably shouldn’t be buying that stuff.

Tony Nash

Yeah, Leo, do you want to chime in?

Leo Nelissen

Yeah, I think that’s a great point. There’s this debate, is the consumer strong or is the consumer weak? That’s been going on for over a year now. I’ve always been on the site of we have a weak consumer, but I think it’s really what Albert says. On one hand, we have the more wealthier people, people who pretend to be wealthy, who are still spending and they keep not… I think Ferrari also had new all-time high earnings and a great outlook in all these companies.

Leo Nelissen

On the other hand, the Maas are actually in a very poor state. Yesterday I tweeted to the chat of one of my investments, Norfolk Southern, which is one of the biggest intermodal railroads. It’s just a mess right now. Demand for intermodal and all these things. And the dollar general is seeing massive demand issues and shrink, people stealing stuff.

Leo Nelissen

I think in general, the consumer is in a very weak state. But as Albert already said, the upper 10%, 20%, maybe 40% is keeping the economy alive. But I think we could get to a point where we are seeing more weakness, especially with inflation improving or increasing again. If the Fed needs to keep rates elevated, that’s going to really take a toll, especially with housing weakening and all these issues. I’m not bullish on the consumer for the next few months.

Albert Marko

Yeah, it’s another devil-headed sword here because it’s like double a sword because the consumers are spending, but not in as much demand as they were maybe a couple of years ago. But companies are getting away with inflated prices because they know they can at the moment and still can. But at some point…

Leo Nelissen

But it’s weakening, Albert. If you look at PepsiCo and its competition, even Wall Street they said we don’t care for these companies that use only pricing to boost revenue. They really want companies that are somehow able to boost volumes. And it’s actually happening a lot. General Mills and all these companies are struggling now big time. I think for 2020 they were so able to boost volumes a little bit, but now that’s completely gone.

Albert Marko

I agree for the general and the fundamental aspect of it, I totally agree. But when you have inflationary numbers pushing prices of services from the tech industry, which really is what the market is basing on, it gives you a skewed view of everything. Everyone thinks that earnings are great because NVIDIA posts some horse shit number out there that they can’t even justify. Then the market rally is 70, 80 points, and everyone’s, Oh, the market’s great, the economy is great, so on and so forth. 80% of the US consumers can’t buy bread. They have to choose between meals.

Tony Nash

Albert, when you say inflation is persistent, you’re talking about services inflation. You’re not necessarily talking about goods inflation.

Albert Marko

Is that right? I think goods inflation is starting to taper off as supply chains have become better. No question about that. But services has just gone through the roof and housing has gone through the roof. It’s a shelter, which is a 30% component of CPI, is just still sky high. Right now.

Tony Nash

Yeah, we’ll talk about that in the last segment. It’s really interesting to look at housing prices. I can’t wait to talk through that.

Tony Nash

Let’s move over to growth. Adam, I’m really concerned about your… You tweeted a GDI versus GDP chart this week. We’re told that the Atlanta Fed GDP now is close to 6%. I never believe the Atlanta Fed. When people tweet the Atlanta Fed, it just erodes their credibility to me. But we’re seeing GDI at negative 5%. What’s happening here and how could the acceleration of inflation, particularly services inflation, impact GDP and GDI?

Adem Tumerkan

Yeah. GDP, GDI is just in theory, they should equal the same thing. For anyone who doesn’t know, GDP is gross domestic product. It’s what the economy produces essentially, the output. GDI is gross domestic income, the take in money from what was produced. In theory, one-to-one, they should still be equal. But there are times in history where you see them start diverging and we haven’t really seen…

Adem Tumerkan

There’s a lot of empirical evidence. Some St. Louis Fed individuals came out and they said actually, GDI may be a better indicator than GDP because historically, GDP revisions drop down to match if GDI is below. The GDI predicted 2008, three quarters before GDP did. There’s a lot of good evidence for why it’s good or worthwhile to use. Right now, the US real GDI, gross domestic income has been negative the last three quarters straight. By those standards, technically, we should be in a recession.

Adem Tumerkan

Obviously, there’s an accounting difference between the two, but still. Lacey Hunt does a good job. He posts, If you average the two out, real GDP and real GDI. It’s basically showing that the US is growing at like 0.5 for the last two questions. It’s basically been flat if you average out the two.

Tony Nash

That honestly sounds about right.

Adem Tumerkan

Yeah.

Tony Nash

On a real or nominal basis?

Adem Tumerkan

On real.

Tony Nash

Okay. Honestly, that’s about right. Half of the growth is…

Adem Tumerkan

I mean- The nominal gap…

Tony Nash

Between the two. I look around, that’s what it seems like. When I look around in my daily life, that’s what it seems like.

Adem Tumerkan

Yeah, I know. It’s interesting because we’re seeing it fade. Granted it was 0.5 and Q2 negative 0.5, and it was down over a percentage, the last two, so it’s down a little. But we also saw GDP recently. Q2 got revised down from it was about 2.4 to now 2.1. That narrows the gap between the two. But still, yeah, even if you average them out, it’s 0.5. I just don’t see how the Atlanta Fed is 6%. I don’t know if you saw yesterday’s data also, the personal income and spending. Personal income came in very weak. It’s been fading all year. It’s now just 0.2 month over month for households. But then personal spending was at 0.8.

Adem Tumerkan

Clearly, you have to use debt to subsidize that gap or excess savings. Well, the St. Louis feds posted a bunch of research. J. P. Morgan recently, the… You’re saying that the excess savings is sub 500 billion at this point from June. J. B. Morgan actually thinks that’s already exhausted for most Americans. I don’t see what the continued boom will be. Consumer credit change, if you look at the year-over-year of credit change in the US, it’s been declining the last seven months pretty sharply.

Adem Tumerkan

If your real wages can’t justify your spending, and it can’t, like a big ticket item like a home, they’re trading at a record high. The median home price right now is like 7.75 to household income. That means it would essentially take you eight years of pre-tax household, that’s two or more people, all money just to buy a house. Cars, I think it’s about 45 weeks right now, average household income. If you just use all your money from 45 weeks on a two-person household.

Adem Tumerkan

Clearly, these items, you need credit to subsidize the difference. It puts the producers, like Leo was saying with Pepsi earlier, he brings up a good point, and we’re seeing it in China too. You get to a point where if the consumer is not borrowing as much because they don’t want to either they’re getting more nervous or they’re just feeling tapped out, whatever the reason is. If they’re not going to be taking on credit to buy these big ticket items, the producers have two things. They either have to let prices collapse or sink to invite more demand, but they usually don’t want to do that, obviously, because it’ll crush their margins.

Adem Tumerkan

Then you have the other option is that they will extend credit at favorable terms. We’ve seen this in the housing market. New home builders, mortgage buy-downs because you have to choose one or the other. You have to extend the game, keep the credit game going at a lower rate to move your inventory, or you have to let prices sink enough to move the inventory organically. No one wants to do that option.

Adem Tumerkan

China is dealing with that right now actually. Now America is doing this and we’re seeing Ford, all these companies trying to push credit to move their own inventory. I guess we’ll see if the consumer really wants to go on to it. I mean, it’s better than what they can get at a bank right now.

Tony Nash

For a couple of comments. First, I think you said the average car would be 10 months of household income, right? Something like that?

Adem Tumerkan

Yeah.

Tony Nash

The average car that Albert buys would probably be about five years of average household income, I think.

Albert Marko

That’s about right, yeah.

Tony Nash

That’s my first comment. Second comment, since we’re talking macro data, I’m thinking about a clothing line like truckers, hats, and T-shirts that say always wait for the revision. I know I’d have five customers, but when I see these GDP numbers, especially on this chart that you put up with the wide yawning gap between GDP and GDI, I mean, that’s not real. There’s no way GDP is a real number, and there’s no way that that can’t be revised way down in the coming quarters.

Tony Nash

I mean, this is just not real data. I’ve said several times on this, employment data, wage data, retail price data is not right in any country. I’ve done detailed studies of that year over year. Everyone complains about China data. It’s not just China. It’s Sweden. It’s the US. It’s Germany. It’s Japan. It’s Australia. It’s everywhere. Wages, retail sales, and so on. These are terrible data points. They’re not right and they’re not settled until probably three years after. Check the third revision on these things. In many cases, these will change by more than 50%. Okay, more than 50%. We cannot trust these data. It’s not just wait for the first revision, wait for the third revision for OECD countries.

Tony Nash

Terrible. Terrible, terrible data. Is it possible that we have an environment where we have services inflation and goods price deflation?

Albert Marko

Yeah, I think that can absolutely happen. I don’t know. It depends on what rates are going down and what rates are going up. But Itry to fully expect that to happen actually probably into the early next year.

Tony Nash

Yeah, Q4, Q1. So services going up, services prices going up, goods prices not just disinflating, but actually deflating.

Albert Marko

Yeah, because they have a lot of inventory to get rid of. The holiday seasons are coming up. That stuff’s got to get moved. They have other stuff coming in spring and the summer. It’s got to get pushed around. One of the other things is that, Adam, I don’t know if you talked about, but as wage inflation. That’s certainly problematic for a lot of corporations right now. They’re getting pressure to increase people’s wages. A lot of it’s from the Biden administration and the Labor Secretary, but the fact is they can’t keep up those margins. So something’s got to give. Either growth and margins are going to go down or unemployment is going to have to tick up. But we see that. We see unemployment ticking up, especially with the revisions.

Tony Nash

That’s a perfect segue, Albert.

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Tony Nash

Let’s talk about jobs now. Leo, speaking of somethings got to give, you’ve been looking at the US jobs market and you tweeted about the challenge your job cuts as well as the US jobs data. As you look at this, what is this telling you? Are we closer to what the Fed may be looking for in terms of slowing down persistently hot jobs markets or do we have a long way to go?

Leo Nelissen

If you look at jobs data only, I think you can make the case that we are getting a soft learning, right? That’s jobs only. Jobs actually showed, I think it was the steepest decline in job openings, which isn’t very bullish. But overall there’s still 1.5 open jobs for every unemployed person. Even though temporary work is also rolling over, which is actually very a concessionary cycle, but you see that a lot of companies actually turn temporary workers into full-time employees because it’s so expensive to get new employees in certain areas. Then obviously, NFP numbers today you got somewhat slowing wage growth. Even though you got a pretty steep revision, you just talked about revisions of the past two months, which is quite interesting. I mean, household service showed I think, 12,000, 220,000 new jobs. I mean, it’s the softest layer planning, right? I mean, the Fed is seeing this wage growth is moderating, but still no very bearish data.

Leo Nelissen

I think we need to look beyond employment data. I think the bigger trend is bearish. If you look at temporary work is cooling off very quickly. I mean, historically speaking, I think in 100% of the cases where this happened, we were entering a recession after two or three quarters.

Leo Nelissen

I think this actually aligns with the gross domestic income we just talked about. I think, Eddie mentioned that gross domestic income had been negative for three quarters, which is nine months, if my mouth is correct. The ISM index, ISM manufacturing index has been negative since today for ten months. So it all lines up. Temporary work is slowing down. But I think just NFP numbers, I usually ignore them because it doesn’t mean so much. There’s so much data out there. Outrageous wages actually down a little bit. But if you look at the length of Fed data for job switching data and all these hourly wages, they’re actually up again. I think people who switch jobs get an earning spruce of 6.4%, which is up from 6%. That’s not what the Fed wants to see. If I were very bearish, I could make a very bearish case using this data. If I were really bullish, I could make a case. I think in general, it’s not a pretty picture. It could slow down really quickly if you see cracks in housing.

Tony Nash

A few weeks ago we saw the Michigan consumer sentiment survey, which I don’t really put a lot of stock in, but evidently the Fed looks at that and things are starting to turn sour there as well.

Leo Nelissen

Yeah, I think Michigan is interesting. I think last month it went down again. In a month prior to that event, it had a really steep increase. If you break it down into the bottom half and the top half, I don’t know exactly what they use, but only the higher income earners actually push it up. It’s actually what we talked about. The lower spending class is still in trouble and it’s not even worse because the entire index went down again. I think it’s with the bigger picture.

Adem Tumerkan

It had its biggest drop in two years. It’s the largest month over month drop. And you bring up a good point to what you and Al were talking about earlier with the wealth inequality in the country in America, the whatever, upper, middle, bottom poverty level. Mariner Eccles, who was FDR’s former Fed chairman—and I know this might sound obtuse on this, but in his memoirs, when he was reading back on how they handled the Great Depression, there’s a really good chapter in his book where he has a great quote. He says, Mass production requires mass consumption.

Adem Tumerkan

He said, And when you have the wealthy, the money flowing to the few, the hands, it acts like a huge suction pump because it’s taking buying power from the mass consumer. He’s like, The top 10% are net savers, not net consumers, hence why they’re rich. They essentially, the bottom 90% has to borrow credit to keep their spending going because their real wage is can’t justify it. Then very directly at the very end, and as soon as the credit stops, the game ends. I think it’s really important for today too because we have wealth inequality is pretty bad. It’s the upper middle class income right now that’s acting like a suction pump. You see the people post data points, they’re like, Oh, the Fed is paying so much interest on bonds. It’s going as a net asset into the economy. It’s like, Yeah, but who’s getting that money? The bottom 90% are net debtors. They have more debt than assets. But usually mortgages, student loans, all these things. So it doesn’t help them. They’re not net savers.

Adem Tumerkan

Any money they have left over that’s disposable, they can’t save relative to parking and debt. If the rates go up higher that it’s paying off on bonds to the rich, that means consequently, credit card rates have gone up, auto loan rates have gone up. The net debtors are actually feeling that it’s offsetting it. I think it’s important actually going forward, seeing how the dynamics are between the income groups. We’ve seen the bottom 75% pretty much get squeezed out over the last 20 years. It’s dropped pretty bad. I do think this is going to play a role in demand later. And I think that’s why we’re going to see continued pressure from the administrations to boost wages and keep doing things like buy now, pay later. You know what I mean? Just roll over the student loan pauses and deferments, all these things. They’re going to just have you to keep rolling the credit game over to keep that consumption going because otherwise they can’t get it.

Albert Marko

Yeah, we’re seeing that now, Adem. Literally you’re seeing that right now and it’s probably the second or third ending of what’s been going on. They’re just trying to keep this train, this locomotive going while the top 10% of earners are just holding back at the moment.

Leo Nelissen

Would you agree? When you look at construction spending, the Inflation Reduction Act, I think that’s one way to actually boost the income of lower wage earners. I think construction spending and manufacturing alone is like 200 billion on a seasonal annual basis. I think that’s one of the reasons. Obviously, onshoring technology is important, but I think… I think that’s one major driver of income in the lower income levels. I wonder what happens if these construction projects are finished. I mean, 200 billion on annual basis, that’s massive. I think if these run out and they don’t have new spending, I mean, these factories don’t need to rebuild every year. I think that could be an issue at some point. Am I just obstating this?

Albert Marko

No, I think you need to divide it in two separate parts. One is industrial scale construction, where government contracts last 10, 15 years, so on and so forth versus the smaller scale construction of homes, remodeling, plumbers, electricians, so on and so forth. The problem is as those prices go, as those wages have gone astronomical high, that hits the consumers. It costs almost double to redo a kitchen nowadays than it did five years ago. All those expenses have to be calculated in and what the consumers can do going forward.

Tony Nash

I got to tell you, I have watched more YouTube videos on how to do things around my house and with my air conditioner and with my sprinkler system and all that stuff because these guys, you’re going to spend at least 600 bucks for somebody to come out and fix something.

Albert Marko

Yeah. If you’re handy now, it goes a long way.

Tony Nash

That’s doubled over the last couple of years. The other part of this is, even at restaurants, I have some friends who have franchises, and it’s really hard to keep staff. When they come, the wages have not gone down at all. I’m in Texas, I’m not on the coasts, but those hourly wages generally are doing very well. Leo, this challenger data and the employment data you’re seeing, is this mostly impacting, say, small and mid-size, say, non-services, non-let’s say restaurant jobs, tourism jobs, that thing? Where are the layoffs hitting?

Leo Nelissen

Actually, if you look at jobs, it’s a company who cut vacancies. It’s mainly in services, I think professional services were mentioned. I think that makes sense because with rate inflation, a lot of these white-collar jobs will actually see… We are still far from automatisation and AI adoption. That’s still a long way, but we are starting to see the beginning of this. I think if inflation remains high enough on a long-term basis, you’re going to see more losses in these white-collar jobs than the blue-collar jobs. I think that’s one of my thesis, especially if economic growth returns in the future, you will see a lot of demand for the jobs you just mentioned. I think that’s the main takeaway.

Tony Nash

We see things grinding ahead with these lower-level jobs, but we see weakness in the mid, high, and higher-level jobs. Is that fair? Is that what you’re seeing?

Leo Nelissen

Yeah, exactly. Also what you just said in Germany, it’s quite interesting. Germany is now actually starting to see an increase in unemployment because of the weak manufacturing sector. But still it has a lot of structural labor shortages. We didn’t have that in the great financial crisis and in the other recessions. But now the government also plays a major role in these issues. I think they just boosted unemployment income for the unemployment by 14% in Germany. You just basically paid to stay at home. It was bad during the pandemic, but it’s still very bad, especially in Germany.

Leo Nelissen

I think the average family, if you have two or three kids and both parents are unemployed, I think you have €35,000 per year that’s after tax. The government pays for your heating, electricity, rent, everything. I think to solve these social issues, we really need to fix these things, but that’s probably not going to happen anytime soon. But it’s just what we’re seeing now, this mix between pressure on employment and structural labor demands.

Tony Nash

We started the show talking about how these extreme views, either extreme positive or extreme negative. What I’m hearing from you on labor, to be honest, it doesn’t really sound that good. Is the labor picture worse in Europe than it is in the US?

Leo Nelissen

I would say so, yes, because I think the most important labor are the ones that are most value in Germany, for example, which is the industrial heart of Europe. It’s just the entire automotive supply chain. These people, they’ve made good money for decades. They got special bonuses. They made really good money. And that’s ending now. There’s not really an incentive for companies like Mercedes or BMW to invest in Germany anymore or in Europe in general because they always used to invest in Germany because there were a large markets for automotive demand, but they stopped caring about it. I think all German automotive companies, except for Volkswagen, are now saying we’re going to drop cheaper models. We’re going to focus on margins and sell in China and the US. I talk to someone who is now building homes in South Carolina to lease them to BMW executives and that’s happening over everywhere. They’re just moving out. And if these jobs start to fail in Europe, that’s going to hurt. And we’re already seeing this now. The chemical industry is another one. I mean, people in the chemical industry, Germany is a country with relatively low wages on the receiving end.

Leo Nelissen

I mean, employees pay a lot in Texas, but the chemical industry has always been like an industry with very high wages, and that’s going to end soon. I’m not saying it’s going to end for everyone, but growth is gone, definitely. People are divesting. So for the next few years, we’re going to see some significant changes in European employment. The US is in a much better position. It’s not even close to my opinion.

Tony Nash

Interesting.

Adem Tumerkan

Okay. Just to add on that real quick. Leo, don’t you see that as a problem? Because I agree. I mean, the problem with China, Germany, Japan or the Eurozone, essentially three of the four largest economies in the world, they have no demand. They have no internal demand. They’ve all depended on exports for the last 30 years. They all run these chronic surpluses. That’s the problem. I was debating about this a year ago with a gentleman in the Twitter space because I was saying, I was like, Look, China cannot consume what they make. Germany can’t either. They don’t have the demand in that economy. So you have to depend on exports to get that growth. That’s where it’s going to come from then, because if you can’t consume it at home, you export it abroad. But once the exports start declining and US real imports of services and goods is actually negative year over year now. It’s like negative 5%. I just want to put it on the record, it’s only ever really drops negative when there’s a recession. That’s another signal for America. But we’re seeing that in the reflection of data with China. China’s exports are down double digits.

Adem Tumerkan

The only reason they run a surplus is because their imports are down even lower or further. But with these other economies not able to consume what they make and they’re trying to offload it, they’re stuck with either deflation and rising unemployment. We’re seeing that in China, youth unemployment. They’re not even posting the data anymore because it’s gotten so bad. I think Germany is probably going to be right behind them. Japan’s recent GDP was pretty big. But one thing to note, it wasn’t from their domestic economy. Their household share, yeah, it was literally external demand. Their internal demand actually declined quarter-over-quarter. I do think it’s an issue because it’s usually the US and the UK are the big two deficit-running countries in the world. If they start slowing, which we are seeing now, everyone’s like, Oh, the US trade depth’s it narrowed. But to me, that just says like, okay, that means the US is obviously pulling back on goods. Like Albert was saying, we’re moving more towards services. But that’s going to affect these economies far more because basically we have no outlet for those things.

Albert Marko

Yeah, right, Adam, that’s correct, and it’s compounded by the fact that the European, specifically Germany, has just made error after error on social and economic policies.

Albert Marko

For the past two, three decades. When Merkle was in power, she just gave away all of Germany to the Chinese with no foresight to see that they’re copying their stuff and cutting into their exports. Now the European Union, which they should have done, and I think we talked about this two years ago, Tony, they should have pivoted towards Latin America and Africa using their old school networks and rebuilding those supply chains for their products to sell out. But instead they did. They just got lazy. They got used to free money, and then here we are.

Leo Nelissen

They make it even worse always. I know that in the EU they’re basically saying we’re not going to buy soy and corn from Brazil if they cannot prove that it wasn’t part of deforestation. I mean, nobody can prove that. They’re basically saying then we won’t buy much need agriculture products from South Africa.

Tony Nash

We hear principal European statements all the time, right?

Leo Nelissen

Yeah.

Tony Nash

Exactly. I’m sorry to be I might be.

Leo Nelissen

Skeptical there. Yeah, but it’s true. But you know what Albert said? I think this week the IAA, the biggest automotive show in Europe is starting. I think it’s in Munich this time. 60% of car companies are actually foreign, with most of them being Asian, and they’re exporting so many cars to Europe right now. I think China is exporting more cars than Japan, and the quality of these EVs is actually quite good. That’s another issue. Not only is Europe losing exports, but actually there’s more consumption of Asian cars right now, and the production is in Asia. That’s just total worst-case.

Tony Nash

What you guys are telling me, what it sounds to me is we’re going to have Europe and Asia continue to export deflation. Going back to our earlier discussion, that will put serious deflationary pressure on goods. I would think in a quarter, two quarters, we really start to see some of these goods in Western markets, especially in the US, specifically goods prices go down dramatically. That’s what it says to me. I could be wrong here, but I think this working thesis has some legs to it. While in the US we see persistent wage levels. I don’t know. I could be wrong, but I don’t know that we’re going to see wages dive like we’ve seen in some previous.

Albert Marko

No. We’re not going to see wages dive. This is a political game that they want. They want wages up. Listen, it’s been 40-some years since the US worker has had a wage increase in reality, and they’re getting it now, but it’s coming at a cost.

Tony Nash

Okay. We have deflation in goods. So a lot of these companies, as you were saying, Albert, earlier, these companies that have goosed their stock prices based on margin jumps, they’re going to see some pain, right?

Albert Marko

Oh, yeah. Oh, without question.

Tony Nash

And so for consumers, if we’re seeing goods deflation, we may actually have to see. And I’m not really in the feds going to ease camp, but we may actually have to see that the Fed maybe slow down QT or something to make things easier on consumers.

Albert Marko

Oh, yeah. It’s an election year. I think it’s in election year, of course we’re going to see that. They’re going to spend. They talk about cutting spending and whatnot, they’re not doing that in an election year. They’re going to cut QT, they’re going to boost the markets, boost inflation because they know it gives tailwinds to earnings and make everything look all hunky-dory for the 2024 election.

Tony Nash

Okay, so here’s the biggest concern that I have, and this is the segue to our final segment on housing. The most significant wealth effects for Americans are felt with the value of their house.

Albert Marko

For boomers.

Tony Nash

Yes, for boomers. For boomers and ex-res, I believe. Millennials don’t own houses. I’m kidding. But housing is the biggest wealth effect, right? Now that crypto is dead, it’s housing really, even for millennials, I think. Now, we’ve seen… We have this chart on the K. Schiller home price data where we show from peak to trough, houses in San Francisco are down 17%. In Seattle, they’re down close to that almost 17%. But many of these home prices are up 40%, 50% from March of 2020.

Tony Nash

Adem, you were talking about US housing markets earlier this week, and they seem to be breaking their off some amazing highs. If you look at this, US housing is still up 43% on average from 2020. That’s insane. But it’s good because it’s helping people to stand. You posted this other tweet about how the Fed has broken the market based on their MBS purchases, both on the supply and demand side. Is how is the Fed’s destruction of those markets likely to be resolved? Is there a possibility that we can have a soft landing in housing? I mean, especially going into an election year, those are serious issues for voters.

Tony Nash

What do you think happens here?

Adem Tumerkan

Two things on it, and I agree. I think the housing market has been completely screwed by, to put it nicely, between the Fed and the government. After ’08, essentially the government, we all know they went out and they were like single-family zones, HOAs, greater bureaucracy, effectively restricted supply of home construction. Right there, you take away the supply, you already put a floor under the price. Then you have the Fed, which in my opinion, financial historians are going to be scratching their head looking back at the COVID era about the mortgage-backed security buying, the two-plus trillion they bought. I think they’re literally going to look at it and be like, What the hell were they thinking? Because when the yields were so low, how would those mortgage-backed securities work? They’re buying them. When yields drop, you can refinance and you can down pay it faster. But they bought at record-low yields. Now our yields are going up and they’re not repaying them. They can’t refinance them to roll the mortgage back, secure those older. They’re stuck holding them longer. As we saw with SVB, they’re pretty illiquid, a lot of them, unless you plan to hold them until maturity.

Adem Tumerkan

I really think that you’re seeing it on both sides. The government needs to get out, allow more construction out of the way. There’s actually a good report that came out by Brookings Institute I found fascinating a year ago. The cities with the strictest building loss have the highest home prices like Portland, San Francisco, et cetera. It creates a dual incentive. They want to build properties. Like you were just saying it’s a politically sensitive topic. But if you’re a homeowner, the last thing you want is more supply because it weighs down your home price. If you just took out a $500,000 mortgage and then the government’s like, Hey, we’re going to build more supply in the area that could weigh down your home value relative to your debt, you’re not going to vote for that. You create these perverse incentives against each other like, Hey, we’re trying to do some more housing to get more individuals in. Oh, but the people who are voting don’t want that because then it’ll weigh down their home prices. It’s created this really toxic combination that there’s really no easy way out of. I think that the Fed… I really don’t understand the post-COVID thing again.

Adem Tumerkan

If anyone has better insight, I get it. People aren’t paying it, people are panning, but the government already paused mortgage deferments and essentially paused mortgage payments to give out stimulus. I didn’t see why the Fed had to come out and say, Hey, let’s just buy 2.4 trillion in bonds, mortgage bonds to pour gas on the fire. As a wealth effect, it’s created definitely like you said, it’s in theory, yes, rising asset prices is meant to stimulate more consumption. But there’s a catch to it because you can only spend more, is if you borrow against your house or if you sell your house. But the problem is if you sell your house, there’s no net difference because if you sell your house, you’re probably going to have to buy another house and the prices are up everywhere. That money just shuffles from one hand to another. It doesn’t really leave you with a massive amount of purchasing power. The idea is that, hey, you can borrow against your home because the asset price went up so high. That creates new deposits, which is inflationary because if you hold the asset and you’re borrowing against it, you’re creating more demand while holding on to what you already have.

Adem Tumerkan

I don’t know if households want to do that. There is a huge amount of home equity that could be borrowed against. But I still think individuals remember post-2008, and they’re cautious about doing that.

Tony Nash

No, I don’t. I don’t think they remember. I don’t think they care. I think we’re going to see deregulation of bond and stuff like that.

Adem Tumerkan

Yeah, that’s true.

Adem Tumerkan

We could see that. You’re right. That’s my big thing because I think the consumer right now, consumer credit change, like I was saying earlier, it’s been fading for seven months. It’s just been sinking bank loans. Your auto loans are negative. It’s the first time it’s actually been negative since they started counting the data year over year. Loans and leases are down half. It’s already below pre-pandemic levels. Bank credit is negative. It’s only been negative since 2008. Mainly it’s from securities, obviously their bond holdings, but also 75% of that bank credit rating is their loan book. Banks are tightening lending. I don’t know if individuals want to borrow at such high rates against their home when the whole market, there’s essentially an liquidity pocket. You have people who don’t want to sell because they’re locked in at a sub 3%, and you have individuals who are wary about buying because of the high prices. So something has to give one or the other, otherwise we’re just going to sit in this illiquidity pocket. I think that’s something that the government broke in the housing system. For sure.

Albert Marko

You know what I would say, Adam, and what bigger minds than me, perhaps yourself and those data is I would look at the actions of, who is it? Blackrock that bought up so many homes and have them into some portfolio. For what reason and what returns are they? What are they doing with these things? And a lot of them are not even for rent, they’re not for sale. So what are they doing with these things? Are they acting on behalf of the Fed or the Treasury or whoever to help assist on those mortgage-backed security purposes? I don’t know. That’s something that I would be really keen on hearing who’s got some perspective on that.

Adem Tumerkan

It’s interesting you bring that up because them helping the Fed, that could be a good angle actually. I’m going to look into that. But I did read a good paper from the Chicago Booth economic review and they were essentially showing that there’s a massive savings in the US post 1980s. There’s just been the top 1%, the corporations, the current account, surplus economies, they have so much savings that when it floods into the banks, it’s crushed return on investment just because you’re obviously more supply than demand.

Adem Tumerkan

The banks, they obviously more savings, they owe interest on it. That’s always compound. It’s like you always have to pay more and it keeps getting rolled over. They had to be more creative with buying the outlets for this money for some return to pay these liabilities. They said housing became attractive after 2015. It started becoming more attractive. They said big institutional money that were just drowning, trillions of dollars like black or our controls, Banker, they have literally trillions of savings that they owe. They had to find places to put it. They were looking at housing for a way to have any appreciation, but also to rent.

Adem Tumerkan

But you’re right, I haven’t really seen them renting it out.

Tony Nash

Do you think there’s any serious option if you use housing other than kicking things down the road a few years? Are we really going to see mortgage rates continue to rise? Because if consumers are as crushed as they are right now in terms of their liquidity. They’re going to have to refi, and they’re going to have to refly, and they’re going to have to refly at higher rates. We hear all these great stories about people at 3% 30-year mortgage rates, but consumers, according to the data, seem like they’re running out of money, so they’re going to have to refi. To me, it tells me that there’s going to have to be some deregulation around home equity lines of credit. People can keep their 3% loan, but they can get incremental loans at this higher rate or something like that. Does that seem plausible?

Adem Tumerkan

Yeah, definitely. I do think it’s plausible. I mean, because something has to give you. You either have to have lower prices or more supply. But like we were saying earlier, that’s going to be a bitter pill to stomach for anyone who owns property, who bought property. We’re seeing the auto market already. Negative equity is already soaring for anyone who bought it. If you do refinance, which is another problem at a higher rate, it’s very deflationary long term because you can only do two things with your money: spend or save or deliver or pay down debt. The higher your interest rate, that’s less money or less disposable income for you to spend.

Adem Tumerkan

Which will trickle into other sectors. I think that’s the big problem right now is that there’s a lot of debt, there’s a lot of higher interest rate debt revolving credit outstanding is pretty high. I don’t know if you saw recent data from the Fed… I’m sorry, the conference board. The delinquency rates on revolving credit auto loans. They’re already way past pre-pandemic. They’re the highest they’ve been actually since a decade ago. You’re having more defaults. I don’t know how much more individuals can handle it because you’re getting squeezed on mortgage.

Adem Tumerkan

Assuming you’re locked in, but now you have student debt, then you have your credit card debt, personal loans, et cetera. I don’t see how they can really get out of it easily. I think whichever one they try to choose, it’ll be politically unpalatable. I’m assuming they’ll just try to kick the can down the road or like you said, there’s going to be some deregulation, some reimbursement, some… The government is going to figure out something that they’re going to just say like, Hey, we’ll put on the taxpayer and just to keep the game going.

Tony Nash

Yeah. Very good. That doesn’t sound very… It doesn’t sound like we’re ending on a good note, but I think we’re ending on a realistic note. Housing prices are very high and they’re way above where they were a few years ago. With interest rates rising, this rarely ends well. But I think we’re going to see the feds try to extend this as long as they can and they’ll come up with really interesting ways to do it.

Leo Nelissen

I actually heard that bigger buyers and institutions, I know about BlackRock, but they’re actually building a war chest because they expect a situation where somewhere down the road, the Fed is forced to cut rates more rapidly than expected with elevated unemployment. Because at that point you can borrow really cheaply from bigger projects and you don’t have competition from people who are unemployed. I think you will see massive institutional buying if that scenario were to occur. That’s actually why I’m looking to buy in a home builder stocks. But I think that that’s the next ball case for these industries. But I agree with everything else.

Tony Nash

Yeah, Leo, I think you’re probably onto something. I think that would be very difficult to allow in an election year because America-

Leo Nelissen

I think after next year, but yeah. As Albert already said, they probably have already planned out how next year is going to go. But after that, who knows?

Tony Nash

At the end of the day, BlackRock will win. We all know that, right? But maybe not. Maybe I’ll be a little patient in ’24.

Albert Marko

Sure.

Tony Nash

All right, guys. Hey, thank you very much. Thanks for all these great insights. I really appreciate your time. This is incredibly valuable. So have a great weekend. Have a great week ahead. Thank you, guys. Thank you.

Leo Nelissen

Thanks for having me.

AI

That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.