Month: October 2023

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Welcome to “The Week Ahead” with your host Tony Nash. Key themes for this discussion are:

1. Supply Chain Risk: Middle East Conflict

Ross Kennedy leads this segment, diving into the critical issue of supply chain risk amid the current Middle East conflict. He explores the US’s supply chain capabilities in the face of geopolitical risks, including the historical context before WW2 and analyzes US political realities in Washington, D.C., and its intelligence gathering capability.

Ross also examines the US’s share of container shipping, the challenges of distance, and dependence on different shipping carriers and discusses the inhospitable nature of the Suez Canal and Eastern Mediterranean.

Further, Ross assesses the US’s reliance on European “commercial navies” and considers the potential impact on various commodities over the medium term due to ongoing political risks in the Middle East and beyond.

2. Geopolitical Dovishness

Albert Marko takes the lead in discussing geopolitical dovishness. He examine how dovish statements by Fed speakers have unfolded in response to recent geopolitical events, such as those in Israel. Albert also analyzes the elevated PPI and CPI reports and their impact on market dynamics, including fluctuating yields. He also gave insights into the future of the Federal Reserve and Treasury activities, and how we can discern the direction they’re taking.

3. Risk or Recession Back On?

Michael Belkin guides us through this segment and explores the dynamics of the tech trade and the recent resurgence of shares in companies like META. He takes into the intriguing analysis of a potential recession following a series of rate hikes and a 19-month lag.

Understand what he expects as the economy slows. What factors contribute to this scenario regarding the VIX (volatility index) and whether its movement is primarily influenced by recession expectations or other factors.

Transcript

Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Ross Kennedy, Michael Belkin, and Albert Marco. It’s quite a lot happened this week on the geopolitical side, so we’re going to start there and we’re going to move into markets. The key themes this week, first are supply chain risks, looking at Middle East conflict. We’re also looking at geopolitical or the possibility of that. And then we’re looking at risk or recession, which one is back on.

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Tony Nash

So, Ross, thanks for coming on again. It’s a great week to have you on. I know you’ve probably had a lot of discussion with your clients this week, given the current level of geopolitical risk. So, given that does the US have the supply chain capability to weather the storm of the current geopolitical environment or potentially even more intensive geopolitical environments?

Ross Kennedy

Short answer, yes and no.

Tony Nash

Good.

Ross Kennedy

And it’s really scenario-dependent. Like any good analyst, there’s a wide range of outcomes that you look at and you say, What’s my confidence that one scenario will emerge versus another? As things stand right now, we’re talking about a significant amount of naval traffic and activity happening on water, of course, primarily very close to the Suez Canal. There’s obviously already been a significant amount of disruption to particularly the grains and the energy supply chains coming out of the Black Sea region since the Ukraine-Russian conflict kicked off February last year. So in a sense, you do have a bit of a one-two punch. A lot of it comes down to what happens next. We saw these just really horrific videos and accounts emerge over the weekend seemingly out of nowhere. Depending on the story, Israel was either caught flat-footed in some way or there were some other factors potentially at play. But at the end of the day, the claim that the situation is contained now, this does follow patterns that we’ve seen in the past. Certainly to my criminal mind, if you will, you could easily be seeing a situation where you have a surprise attack.

Ross Kennedy

You suck, allied and other assets into the region with the intention of creating more significant widespread follow on destabilizationment. So in a scenario where Hezbollah begins emptying their pretty substantial arsenal of anti-ship missiles and making it rain in the Eastern Med, now we have a real startling situation. Egypt will do everything they can to avoid the closure of the Suez Canal. They’ve deployed or called up very significant portions of their military to ensure that that scenario doesn’t happen. But the Sinai has not exactly been the most stable either, going back 20 years. It doesn’t get a lot of press here in the US, but that’s certainly been a challenge, if you will. And then given the conflict between ISIS and the Sinai, Hamas, very much at war with one another two on the border region of Gaza and Egypt. It is a powder keg.

Tony Nash

Okay. If we assume that the situation stays as it is right now, Israel and Hamas, West Bank, that thing, and there isn’t a wider conflict. Are there issues with, say, ags and supply chains and other stuff? It stays local. Is that risk fairly contained? I know that’s a big assumption to make, but we see the terrible footage on the news, our heart breaks. But does that impact supply chains, agriculture, energy, that thing?

Ross Kennedy

Not to a great extent. Rude certainly won’t be, I guess in my view, that impacted. Certainly the disruption we’ve already seen to the net gas fields in the Eastern Med is a major challenge. That’s something that other players in the region, whether it’s Turkey, whether it’s Saudi Arabia, Israel, Egypt, all of them have some skin in the game, particularly on the NatGas issue. So we could see some potential disruption there, even if hostilities don’t escalate further. Infrastructure becomes obvious targets in the event of a larger theater-wide escalation. That’s really where we go from zero to 60 on the risk calculation. As it stands right now, not bad.

Tony Nash

Okay, so let’s go to that. We go out concentrically. Now, you don’t have to go too far to have major issues. First is you go north and let’s say, Hizbollah gets involved in the north. What are the issues?

Ross Kennedy

Well, you’re talking about certainly a significant disruption to commercial maritime traffic in the region. All risk and insurance on vessels and war clauses and things like that only go so far. So you’re certainly, I think, going to see a lot of commercial carriers elect away from obviously Port calls in Haifa, Alexandria, Piraeus in Greece. And that’s just as the situation stands now. If we’re talking about a really significant disruption to maritime traffic in the med, you don’t have to blockade the Suez Canal to begin to see a significant portion of freight that moves on water through that corridor, whether it’s grains going south, crude going north, certainly manufactured goods out of the Indian subcontinent, things coming out of Africa that tend to move north. That two-way traffic slows even if you don’t close the canal just by virtue of the risk inherent in the med. Really, the other shoe I’m almost waiting to drop on the premise that a lot of this is sponsored by and organized by Iran.

Tony Nash

Hold on, hold on, hold on. Let’s not go there yet. Let’s not go to Iran yet. Let’s just stay on the north. When you talk about if things escalate north of Israel, that can have significant impact on the med. We saw, for example, say, grains coming out of Ukraine, restricted because of issues with Russia, Ukraine. Turkey really tried to get that trade moving. How much of an impact could Turkey have if things go north and you start to see issues in the, say, the northeastern men?

Ross Kennedy

Turkey gets negatively impacted by the fact that most of their major commercial ports from where they export a significant amount of heavy equipment, minerals, manufactured goods for industrial uses. They do face a risk to their. Turkey benefits, though, opportunistically from the ability to pretty expediently open overland corridors to and from the Black Sea, being able to provide some level of guaranteed safe transport away from the risk of conflict in Lebanon and Syria, and being able to get things on water if they can obviously defend their own waters as it will and provide that safe passage north of Cyprus between Greece. On net, I say Turkey probably has the ability, if they play it smart to benefit more from this than less or be negatively impacted. We’ve seen they’ve been pretty savvy over the last 20-something months and how they’ve managed the Black Sea corridors by using the Montreux Convention.

Tony Nash

Absolutely. It’s really easy to forget the impact that trip can have if things go north, right? But they actually really do have a lot of impact. Now, let’s go southwest. Let’s say things boil over into the Suez nightmare scenario. What happens then?

Ross Kennedy

Well, at that point, you’re talking about anywhere from 10-12 % of everything manufactured in the world transits to Suez Canal. Every year you’re talking about 30-50 vessel passages a day going through there. There’s really two key domains that I’m looking at there from a negative impact standpoint, because oil and that gas have the optionality of pipelines at some level through Saudi Arabia, up in Egypt. TurkStream is always available as well. So from an energy standpoint, it’s probably not as crippling. However, Saudi Arabia does have a pretty significant amount of extraction and refining and transload capacity to bulk carriers on their Western shores, which is inside the Red Sea. At that point, those vessels get redirected, flows begin to redirect as well anything that’s moving north. There’s also the issue of food in Africa in particular. We saw that and have continued to see that be a pressing issue from a food aid standpoint because so much of that traffic moves to the Suez and terminates in the Horn or in the Red Sea. The third challenge is going to be to the Indian subcontinent. The Suez is the major corridor for trade between India and the Middle East, India and Europe, and India and the United States.

Ross Kennedy

We’re talking about Navasheva, one of the largest container ports. It’s right outside of Madras. In all of Southeast Asia or the Indian subcontinent is located there. 90 % of something that’s vessel traffic is going to go that way. It’s going to move northwest into the Suez. So India has some real skin in the game on this issue too, not only because of its connections commercially and from an energy standpoint to Iran and to Russia. Iran is more tenuous. They’re pretty tied at the hip to Russia in a lot of ways. So India’s calculus in this is that right now they lose the Imek for sure, the Indian Middle East economic corridor. That’s a dead letter at this point until things change. But for them, a significant amount of their export trade is with Europe and with the United States. They face a dramatically negative impact because the only alternative options are things like double-trans shipments of containers through Singapore, you go west, you’re talking a 60-day transit now versus about 35, or they have to go around the Cape. You’re talking adding 10-14 days to your vessels there too.

Tony Nash

This part is fascinating. So talk about Turkey’s impact if things go north, talk about India’s impact if things go down to the Suez. India has positive relationship with Iran. They have positive relationship with Israel. They have positive relationship with Russia. They can pull some strings. I think the US in particular needs to stay close to India on this issue, and Turkey, of course, so that all of this stuff can be positively impacted, right?

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Tony Nash

Sticking specifically with the med, can you talk to me a little bit about… I heard you make some comments about the US being dependent on European commercial navies for activities in the med. Can you talk a little bit about how the US doesn’t really have the capability there to move things if needed?

Ross Kennedy

Absolutely. At one time, particularly in the first 20-30 years of PAX Americana, we had the largest commercial fleet in the world. And we were a shipbuilding powerhouse. Liberty Ships taught us how to make vessels that can move fairly fast and carry cargo. Quantity has a quality all its own. We’ve really eroded that advantage with the advent of steamship lines. We begin to optimize more for outsourcing, and so our shipbuilding capacity, our maritime, sea lift capacity, so vehicles, manpower, all of that has eroded not just the commercial fleet, not just the tanker fleet, were a shadow of what we once were. And so the reference to commercial navies is really the big three ocean carriers in the world are MSC, domiciled in Geneva, but owned by an Italian family, the Apontes, and then Maersk, based in Denmark, and CMA CGM based in France. And given that in the case of MSC is really an independent player, but certainly Maersk and CMA are major participants in US maritime trade, significant parts along with Hapag-Lloyd out of Germany, the auxiliary, essentially our ability to call up US flagships with these carriers and press them into service. But to the extent that we have the ability to have the optionality to be able to put our own stuff on ships with our own sailors, we don’t really have that.

Ross Kennedy

Not at any scale that can defend the supply chains in the US from major disruption, particularly in the med.

Tony Nash

Before we get to Iran, because I know that’s a sweet, juicy thing that you and Albert are going to dig into. Hey, Michael, what are you seeing in terms of transport? Does it look like appealing to invest in European transport companies or is there too much risk there?

Michael Belkin

I’m agnostic. I’m not familiar with some of the names that he just mentioned, but in terms of global shipping, Maersk and Hapag-LLoyd are the two big ones listed in Europe. They’re shorts for me, but not very high confidence. But that’s something else. That’s not Middle East. That’s just global trade is not doing well and freight rates are falling and ships are not being booked as heavily. So agnostic, but slightly negative on the only ships I follow.

Tony Nash

Okay, perfect. That’s great to know. Thank you. Okay, so Ross and Albert, given that these aren’t major oil and gas producers, but we also have the US SPR at a very low level, and we have already crude exports that have been accelerating over the past couple of years. Aside from the $6 billion that was announced, I think, earlier today that the US is going to hold back with the Qatari government. Do you think there’s a possibility of seeing new sanctions on Iran? Is that a possibility? And what would have to happen for that to be a possibility?

Albert Marko

I do think new sanctions will most likely be enacted by the US on Iranian oil. Do I think it’s going to matter much? Probably not. They do ship-to-ship transfers all the time by turning off transponder. God knows how much oil they mix in Basrah with Iraqi crude. So sure, we can pay lip service to that, but I don’t think it’s going to make much of a difference.

Ross Kennedy

Yeah, I’d concur with as much as I love a good fight with Albert or anybody else, hey, I’d probably lose. But certainly on both the premise and I think just the factors that are in play here. Do I think sanctions are coming? Yeah, absolutely. It’s an absolute layup for an administration that’s been rightfully dragged through the mud over the fact that they released $6 billion in funds to buy seven Americans back. It’s the obvious go-to move. It’s the last option, not a very creative one, but it’s the last option. But Iran has already demonstrated like Russia, significant capacity to actually move sanctioned material. But more than that, it represents a significant buying opportunity, particularly for China, who does not give a crap about anything that the US State Department or Commerce Department does with regards to sanctions. I think it’s inevitable if we sanction them. All we do is we simply depreciate the price of Iran and crude and increase the amount that we will see moving between Iran and the Pacific Rim.

Tony Nash

I mean, crude is on sale for Asia, right? Most of Iran and crude goes to Asia anyway, right?

Ross Kennedy

Absolutely.

Tony Nash

India, China, other places.

Albert Marko

I’m actually more keen on finding out what Turkey is going to end up doing with Iraq since that oil pipeline has actually been blocked to the Mediterranean for many reasons. They say earthquake. The other ones say a lawsuit, but it’s many reasons. I think that that thing is going to probably be important in negotiations going forward, especially in terms of the crude oil market.

Tony Nash

Interesting. In Iraq, Turkey pipeline?

Albert Marko

Yeah. Well, they already have it, but they shut it down because of lawsuits.

Tony Nash

Okay.

Ross Kennedy

It’s interesting that, Albert, I’ll interject real quick. It’s not quite on script. But there is a real dark horse factor here with the broader Kurdish population that occupies that region. It’s the only population that is spread out at scale in Iran, Iraq, Turkey, and Syria. And yes, there are factions within it and all of that. And yes, to some extent, they’re insulated from the larger conflict to the extent they don’t get sideways with one of the main governments. But the ability of these very substantial Kurdish minorities in all of those countries definitely could impact anything from a logistics and supply chain standpoint. Certainly, that has to transit on rail or transit over land. They sit right in the middle of the new Silk Road corridor that China and others have been cooperating on to connect Chinese trade on land through the Eurasian continent. So that definitely bears watching because depending on how each of these parties responds, the calculus of the Kurdish populations in these countries changes too.

Tony Nash

Interesting.

Albert Marko

A lot of the oil is out of the Kurdish area right now because the pipelines are shut down, it’s trucked back and forth into Turkey and whatnot. But like you said, if the Kurds decide to act up, that’ll get shut down pretty quickly. Those are definitely something to… I wish you didn’t say anything about the curves. It’s a whole Pandora’s box.

Tony Nash

Yeah, we can do a special segment on that.

Albert Marko

I really just…

Ross Kennedy

That’s its own episode.

Albert Marko

I want to allow Michael Belkin to actually talk to me.

Tony Nash

Right, exactly. Guys, let’s get into… Albert, I’ve been wondering, given what we saw the Fed and Treasury say earlier this week within the context of these events, we saw Fed speakers out early making very doveish comments early in their week. But we also saw elevated PPI and CPI reports this week. Yields fell for most of the week, but then came back up later in the week. What’s ahead? Given the geopolitical backdrop and given what we’re seeing with CPI and PPI and other prints, and then we saw some consumption data out today where consumption is down, US consumers, what’s ahead for Fed and Treasury activity? And how do they balance this?

Albert Marko

How do they balance? They haven’t been able to do anything properly in the past, so I don’t know how they’re going to be able to balance this. I mean, the auctions have been absolutely atrocious. They obviously knew what CPI and PPI and the Michigan sentiment was going to be because they had every single person they could throw out into the media say, inflation is over, like Krugman and whatnot, or this is a success. They know what they’ve been doing. They know that they’ve been making mistakes. Yellen, I think two weeks ago, was at a staff meeting, screaming of why isn’t the bond market bondholders paying attention to problem? Why aren’t they listening to me? Well, you got a geopolitical event, and now they’re going to listen to you. The auctions aren’t good. The economy is certainly not good. Inflation is starting to kick back up no matter what they do.

Tony Nash

Sorry, let’s go back. You said the auctions aren’t good. Can you walk us through that?

Albert Marko

Well, there’s no bids in the bond market, especially the long bonds. Nobody wants them at the moment. There’s no bids. The only people that are bidding on it is the government itself.

Tony Nash

Why are there no bids?

Albert Marko

No confidence? No confidence of what’s going on specifically policy-wise in this country? Why would you bid on it?

Tony Nash

Okay.

Albert Marko

From there, it’s just like I don’t see how we get out of this situation without a recession and a pretty sizable recession. I know they talked about soft landing and whatnot, but they’re going to really need a recession and unemployment to tick up to even start denting inflation going forward.

Tony Nash

Okay. In the background, I’ve been seeing headlines of Company X lays off 1,500 people, Company Y lays off 5,000 people, other things. That seems to be happening pretty quietly so far. We’re not really seeing the recession. We’re too much out there. Given where consumption, those consumption numbers that came out today and given the need, I hate to say it, but the need for a recession, do you think that the news of layoffs will be more prominent in headlines so that we start to see the table set for some of these Fed and treasure actions to really be appropriate?

Albert Marko

I really think that a lot of the corporations are trying to slow out these layoffs because they don’t want to catch the IRA of the Biden administration calling them and arguing a wireline of people. But I just think that the margins because of wage inflation just getting out of control is going to take over to the point where companies are going to face either bankruptcy or lay enough workers. And neither one of them are actually neither one of them are a good thing to happen and going into an election year. I don’t know who wins, to be honest with you. Until I see earnings start dropping and unemployments going to go up, I don’t see how the economy is going to be able to get itself right.

Tony Nash

Okay, so if you could architect a recession, when would it happen to be the most politically ideal for a presidential year?

Albert Marko

Right now. Before Christmas.

Tony Nash

Right now.

Albert Marko

Yeah, right now. Going Q4 maybe into Q1 and get it over and done with and try to rally the markets and the economy going into the election. That’s what I would do. If I was an architect.

Tony Nash

Okay. So Q1 recession. Again, we’re not saying this is going to happen.

Albert Marko

No.

Tony Nash

In your ideal plan, Q1, Q2, new stimulus plan, Q3, it gets out there. It’s in everyone’s pockets. Then election, everyone’s happy, right? Yeah. That would be an ideal runway.

Albert Marko

That would be an outline that I would play.

Tony Nash

Okay. What do you think will actually happen?

Albert Marko

I think they’re just going to try to maintain the facade that the economy and the market is doing great and slow walking into a soft landing. I think at some point something’s going to break or it just gets out of control for them. Whether that’s in 2024, I don’t know. But certainly after the election, they’re going to have problems.

Tony Nash

Okay. Great.

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Tony Nash

Speaking of things breaking, Michael, let’s get into some data and whether we’re looking at risk on or recession on. You’ve told us for a while that the technology trade is pretty played out. We saw shares like Meta earlier this week just rise pretty dramatically. There were all-time highs, I think, on Wednesday and Thursday. Why the pop this week? What’s happening there?

Michael Belkin

Okay, good question. Let me just set the stage here. The consensus believes that inflation and higher interest rates are the biggest threat to the stock market. I think that’s over. The downward impact of monetary tightening on the economy is arriving with a 19-month lag. The US money supply, M1, is declining at a 10.5% annual rate. That’s the biggest ever on record and Federal Reserve data. Same thing in Europe. European M1 declining at a -10.4%. That was the chart. We’re probably going to show that.

Tony Nash

Yeah, no, charts up on the screen.

Michael Belkin

Okay. So these M1 money supply declines suggest central banks are driving economies into a depression, not a recession. This is 1930 stuff. And blowback is the unintended consequences of a policy mistake. The 9 % CPI inflation rate and 11 Fed rate hikes are blowback from unnecessary stimulus that they did in 2020, COVID stimulus, way over did it. The blowback we are about to experience is an economic slump caused by monetary and fiscal tightening that they impose to rectify their previous policy error. It’s a doom loop of overreacting to previous policy mistakes. The stock market investors are so far from realizing this, it isn’t funny. Wall Street, Robot, trading machines, and individual investors firmly believe central bank interest rates cuts are bullish for the stock market. Nothing could be further from the truth. In the last two major Federal Reserve rate cut campaigns that was starting in early 2000 after the TMT bubble and then 2007, the credit bubble, the S&P 500 fell by 50 %, more than 50 % from peak to trough while the Fed was cutting interest rates. Why? Because the economy and corporate earnings collapsed in recessions. Tell that to the algorithms, this is how I’m finally getting around to answering your question here, who dominate day to day stock market trading.

Michael Belkin

Those who programmed the Algoes seem to have skipped the stock market history class. The ingredients of a global risk off moving financial assets are falling into place. In the last few weeks, emerging market currencies, EM debt, EM equities, junk bonds, and cyclical stock market sectors have toppled. The Israel attack comes at a vulnerable time. This was already happening before that. Let me be a little more specific here. One of my clients is an Alpha-captured fund. I hate to boast, but it’s a reality check because we have a 100-70, 180 contributors on there. I was number one in last quarter of 19 % market neutral. I’m also number one right now to moving target, up 4%. And what I am is I am short crappy tech stocks. Not so much Meta, but the Shopify, these really overvalued software stocks, Carvana. That has heavy short interest, but the list goes on and on. We don’t have time for the whole list. I don’t want to disclose it. But we have 50 positions on there. And what it tells me… The reason I say that, again, not to boast because boasting comes before a fall. But I can tell what everybody else has on that my competitors in this Alpha Capture Fund, I watched my ranking go up and down according to the market.

Michael Belkin

So earlier this week I was down, I was number 10 or 20 or something and I saw these others. So what I know is it’s a feeling of consensus. Everybody’s still buying the same crappy stocks. The same stocks that blew up Tiger Global. Of course, they’re buying the Magnificent Seven and everything too, and those aren’t going down that much yet. So beneath the surface, these lousy tech stocks are going down and I think they’re shorts. So this is not a quick flip for me. I think I’ve been saying this for a while. These positions are on. I think you should be shorting on balances like we had earlier this week. Sell in short. Don’t get squeezed and say, Oh, God, it’s going up. It’s time to cover my shorts. I need to go long. That’s a trap. I think the market is going down big time. Just to final note on that. I was hired into Solomon Brothers. My background came out of UC Berkeley Business School, Staff Department. I developed… Everything I do is based on this quantitative model algorithm that I developed, which is a forecasting model based on time series analysis. I was hired into Solomon in 1986, right before the ’87 crash.

Michael Belkin

In ’87, what happened is the bonds sold off, Greenspan came in as the new Fed chairman, raised rates. The bond sold off about 24%. The stock market went up all summer, peaked in August, sold off, rallied back in September, and then crashed. We’re following… Nothing’s ever exactly like anything else. I hate overlaying one chart without another chart, expecting the same exact thing. Never works out exactly. But we have something history, rimes. So this year, the TLT, T-bond ETF is down 22 % since I think March. It looks like it may have bottomed last Friday. The thing that would make a crash happen is a major asset allocation shift out of stocks into bonds. When the consensus is super hyped up and bullish on stocks and overloaded, when they get squeezed and then all of a sudden they push the sell button and then bonds start to rally, you get this huge gyration where bonds go up and stocks go down just because of asset allocation flows. I think we have the potential for that. I’m not standing out here saying the market is going to crash. It could potentially happen.

Tony Nash

When could that potentially happen? Tomorrow or April?

Michael Belkin

Soon. So here we are in early Friday the 13th, right before solar eclipse on tomorrow. Not that it has anything to do anything, but I think it’s setting up for that. Basically, it has to do with sentiment. Another one of my clients is a big hedge fund. All they care about is sentiment. When people are too bullish or too bearish, and I just think I don’t get it. A little digression here. So the definition of psychosis is when you think you’re the only smart person and everybody else is crazy. I worry about that because that’s what I think. I think everybody else is out of their minds for after 19 months after the Fed has started tightening, the money supply is shrinking and people can’t get enough stocks to buy? Hello? Have you ever heard the Don’t fight the Fed. I don’t understand where this ebullient, excessive exuberance comes from. I just think it’s misplaced timing, misplaced from the what’s going on underneath the surface of the market. By the way, one other little point here. We went really… In the Alpha Capture Fund and also in the Belkin Report, I’m long defensive sectors, which nobody likes, which have been underperforming until this week.

Tony Nash

They liked them on Monday. They were up 10% on Monday. Are you talking about Fed stocks or defensive sector?

Michael Belkin

No, defensive. I’m talking about utilities. So things that nobody wants to touch with a 10-foot pole. Anybody that’s really bullish on the market, utilities, forget about it. They wouldn’t even think about it. So utilities, up 4% this week with the S&P up one. So 3% alpha. TLT, the T-bond ETF, up 3% this week. So it’s outperformed the index by S&P by 2%. Here’s another one for you, GDX, gold stocks, and gold. So gold is up 5% this week, GDX up 8% this week. That’s up 7% more than the S&P. We’re getting this risk-off move into defensive stuff, GDX, utilities, and bonds and then the VIX you probably want to… We’re going to talk about that in a minute.

Tony Nash

Let’s talk about the VIX. You are expecting a higher move in the VIX or a move higher in the VIX. Is it largely due to recession expectations or what are the factors you expect in that?

Michael Belkin

My model gives direction, position, intensity. It’s a 12-period forward forecast based on my studies of Fourier and Box-Jenkins in the UC Berkeley Statistics Department and the business school. Nobody else was looking at this stuff when I was doing it. I was not happy with what I learned in economic forecasting. It wasn’t very powerful. So I developed my own algorithm. So that says direction up, intensity strong, position just starting. And again, it’s another one of these things where the bubble people, as I call them, whoever they are, whoever they are, love to bomb the VIX. The market goes up, the VIX goes up, out of the woodwork comes huge selling and they knock the VIX down almost every time until that right tail kicks in. All of a sudden, the VIX is not… They can’t do it anymore. And then the VIX goes up in their face and the ball sellers get squeezed out of existence. So I think that’s the potential where the VIX could go up. So when it’s down, by the way, options are cheap. And this is very complicated and I don’t have all the answers. So now there’s these zero-day options, and the institutions are selling those things and retail investors are buying them.

Michael Belkin

So options selling tends to depress the VIX, and option buying tends to increase it. But options are still relatively cheap. I would say put options on the Nasdaq, which I think is like 20, 30 % too high just for starters. I like put options on QQQ, put options. I think they’re cheap. I think it’s a good entry point. I think the index goes down, so the value of the option goes up and the volatility goes up. You get a double kicker. Is it going to happen this afternoon or today, tomorrow or next week? I don’t know, but soon. I think it’s setting up for that in the model forecast.

Tony Nash

Fantastic. Albert?

Albert Marko

I like that. No, I like his idea. I hear people trying to short the two and 10-year, which I think is lame trade, to be honest with you. If you think that 10-year is going to end up going to five and a half to 6%, you might as well just shorten Nasdaq and some of the tech stocks. I mean, you get more juice doing that. Michael’s right. I don’t really see how this market can stay so elevated with so many just policy errors and bad sentiment out there. It’s just crazy to me.

Tony Nash

Given the policy errors, and I know we’ve talked about this a few times in the last couple of months, but it seems to me also that what both Michael, you and Albert are saying is that a lot of these companies, their margins are really compressing. Is that part of the reason you’re seeing this rotation into these other segments?

Albert Marko

Is that me, Tony? The only thing I have about margins and earnings is inflation does inflate earnings, at least with the headline numbers and temporarily. But I just don’t… Like I said before, margins are getting tight and wage inflation is getting out of control. It’s an inevitable thing. Historically, you’re going to see this market retract to something where it’s fair value, whether that’s 3,200 or 3,900, I don’t know. I can’t answer that. I’m out of my league.

Michael Belkin

Okay, so margins are one thing, but top line is another thing. In my scenario, so we’re moving into earnings reporting season and the banks were supposedly good today. But if the economy is going to do what I forecast it will do, then we’re going to see warnings. So basically in the rear view mirror, it shouldn’t be too bad. Q3, right? You can say, Okay, good. That’s okay. Worked out great blah blah. Going forward, I think it’s going to be bad. And the way this works is the companies say we’re downgrading our forward revenue. Our sales are going down. You can see it across the board in retailers, industrial companies, things like that already. It’s not so much tech stocks yet. But if they say, Well, all of a sudden at the end of Q3, beginning of Q4, our orders started to fall. Then you get these Wall Street analysts downgrading the stocks. And then you get this Pi Piper thing where all these long only managers that only listen to Wall Street analysts and consensus earnings forecast all of a sudden say, Oh, you mean Micron, semiconductor sales aren’t going to be that good. Maybe I should sell.

Michael Belkin

So you get this snowball effect, right?

Tony Nash

Sure.

Michael Belkin

The brokers announce the portfolio manager starts selling, and then it turns into the snowball thing. And one final point on that. So today somebody mentioned this in passing, EM consumer sentiment down from 67.3 to 63 in early October. So that’s anecdotal evidence of what’s happening. So when consumer sentiment falls, willingness to spend falls, and if you look at the rate on car loans and and stuff like that, forget about it. I’m also short on home builders. Home builders had enormous rally rolled over a month or two ago. They’re declining. Auto makers, they’re not the greatest short. They’re not up a lot. I would prefer to short something. But anyways, the point is the financing cost for a house and auto sales are off the map. It’s unaffordable for so many people now, particularly subprime lenders. So that feeds into the financials, the banks. So we heard, JP Morgan, the city bank, and Wells Fargo today were okay, earnings are supposedly good. Let’s wait until we hear what’s happening with the regional banks, which are short for me. I think that we’re in for another round where the regional bank start going down liquidation, they start warning of loan losses, deposit outflows, all the same stuff as last time.

Tony Nash

Okay. We have geopolitical risk, rising geopolitical risks. We have rising market sector risks. We have risk with a Fed mistake. Sounds like a lot going on out there. Michael, this has been really enriching, just hearing how to apply this broader stuff within specific market segments. So guys, I really appreciate this. You’ve really helped us sort through a lot of the noise and action this week. So thanks very much for all of this. Thanks, guys. Have a great weekend and have a great weekend. Thank you.

Ross Kennedy

Thank you.

Albert Marko

Thank you.

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.

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! In this episode, we engage in thought-provoking discussions on a range of critical topics:

1. Price Disinflation Recession: Our expert panel, featuring Seth Golden, challenges conventional wisdom by analyzing the rise in manufacturing volumes and its implications for the economy. Are we on the cusp of a period where valuation multiples could expand once again?

Also, discover differing perspectives on inflation and disinflation as our panelists share their views on the deceleration of inflation rates and concerns about wage inflation and political policies. Explore the impact of interest rates on the housing market and the potential for lower prices due to disinflation. We also shed light on the critical role of diesel prices in the economy.

2. Crude Tumbling: This discussion, led by Tracy Shuchart, dissects the secondary impacts of rising gas prices and the global dynamics affecting fuel prices. Stability in oil prices becomes a focal point as we examine the intricate interplay of factors like global demand and export policies. Comparisons are drawn between OPEC’s influence on energy markets and the Federal Reserve’s impact on equities.

3. DC Drama & Markets: Albert Marko led this discussion and he doesn’t shy away from discussing the lack of unity within political parties and the need for stable economic and fiscal policies. The panel raises concerns about wealth accumulation among politicians and calls for a reevaluation of the system.

The discussion also touches on the significance of the Speaker of the House in US politics and potential candidates for the role. Learn why an efficient speaker is vital for the productivity of the legislative body as we wrap up our discussions.

Transcript

Tony Nash

First is the Price Disinflation Recession, Crude Tumbling, which has… It dovetails with Price Disinflation, DC drama, and the relevance to markets. So… Hi, welcome, everybody. Welcome to the week ahead. I’m Tony Nash. This week, we are joined by Seth Golden, Tracy Shuchart, and Albert Marko. We’ve got some key themes this week. First is the Price Disinflation Recession, which is a really interesting concept that Seth’s been talking about. I just want to talk about crude tumbling, which dovetails with Price Disinflation. And then we’re going to talk with Albert about DC drama and the relevance to markets.

Tony Nash

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Tony Nash

Seth, thanks for coming on. First time, really appreciate it. It’s great to have you. I’ve been following you for a long time, and I love your Twitter presence. I saw your tweet about the NOPE index and rising PMIs. Your expectation is for a price disinflation recession, which is at odds with what Albert’s baseline hypothesis, I think, but not a volume-based recession, price deflation-based. Can you walk us through that? I’ve got that tweet up on the screen now. If you can walk us through your NOPE index tweet.

Seth Golden

Yeah. The NOPE index was actually developed by the Leuthold Groups, Jim Paulsen, who retired recently. But it essentially tries to strip out the sentiment factor within these soft data. The ISM is a survey-based report. And I think what becomes a greater magnitude in these survey data is what’s happening at the most basic level in price. So what the NOPE index does is it takes the new orders, that’s the NOV part, and then the price, which is the P part, and it basically takes the new orders and subtracts it from the price. Because when you look at the questions within the survey, the ISM, whether it’s the manufacturing survey or the services survey, there’s never any good price. There’s always this underlying bias within the ISM that is lower bound as opposed to above 50 or expansionary. Jim Paulsen created the NOPE index, which just says, hey, focus on this. It’s already soft data. But let’s see what’s really going on in the economy. So if you take the actual new orders and you subtract them from the price, whatever the reading is, if it’s above zero, you actually typically have a better manufacturing situation, then maybe the overall index is implying, the ISM manufacturing index is implying.

Seth Golden

The threshold or line of demarcation, if you will, in the NOPE index is zero. So a reading above zero is typically expansionary, and typically that is good for the S&P 500. The forward S&P 500 returns on an annualized basis when the NOPE index is above zero is about 13%, I believe. It’s a good gage, not only of what’s going on in the economy, but what could possibly foreshadow market performance going forward. I know that we’ve had this seemingly recession in the manufacturing sector, but there’s various data that says not even close. If we look at just the ISM, if we look at the S&P also, their measure of manufacturing, they’re both under 50, which technically is a recession in those particular industries within the economy. But the reality is if you look at, let’s say, the St. Louis Fed, the total manufacturing output in the United States has been booming. We’re out the from 2022 and through this calendar year. But we’re not getting the manufacturing inputs that we usually do get, which are driving this manufacturing expansion. Usually it’s the refining capacity, and usually there’s some various variables of goods production that is taking place, textiles or otherwise that are driving the ISM and S&P manufacturing data.

Seth Golden

But we have this dynamic since ’22 where it’s actually construction manufacturing, as well as electronics manufacturing that is driving this boom in the total manufacturing here stateside. So I’m not necessarily looking for a recession based on this NOPE index or what have you, I’m just trying to define what is actually going on through the NOPE index. Is it a real recession in manufacturing and or services, or is there underlying strength that just isn’t being realized by the ISM or the S&P manufacturing indices?

Tony Nash

Okay, so you’re saying that the manufacturing volumes are continuing to rise?

Seth Golden

Correct. That’s the most important thing about this. The NOPE index is that it strips out the price sentiment, basically. It gives you what’s actually taking place in new orders. Because if you subtract the price and you’re above zero in the NOPE index, you still have an expansion situation in manufacturing. You don’t really have a recession.

Tony Nash

Okay, so let’s take a look at that.

Seth Golden

Let’s take a look at the actual price that is influencing how respondents are actually answering the questions in the survey.

Tony Nash

Okay, so let’s look at this second chart you sent me, and I want to talk about that. I also want to put the price layer on that because I want to make sure that that’s not missed. You sent me this chart, recent rise in US manufacturing construction driven by computer, electronic, and electrical sector. Since these two acts were signed, the CHIPS Act and the IRA signed, we’ve had a spike in computer, electronic, and electrical manufacturing, right? That’s good, right? That’s good for US manufacturing.

Seth Golden

Right. Yeah, you’re getting a lot of transactional volume through that fiscal policy initiative, getting a lot and minimal. I mean, there is some price appreciation in there, but it’s nowhere on the scale of, let’s say, what we see in refining prices through that manufacturing capacity.

Tony Nash

Okay. Where do you pick up the construction or manufacturing?

Seth Golden

Yeah, you’re getting materials. That’s another way that you can validate that this is… Those aspects or industries where we are seeing electronics and computing and construction, we know construction materials and whatnot have actually been disinflating for more than a year now. Whether it’s lumber, sheetrock, concrete, all of those necessary construction inputs are actually disinflating for more than a year, but the transactional volume is basically superseding the price disinflation. Hence, you’re still getting this boom in manufacturing overall.

Tony Nash

Okay. Based on your thesis, so in ’22 and the first half of ’23, we saw manufacturers and services firms able to grow their margins because of the inflationary tailwinds. They could add margin, they had their top line growing, they had their bottom line growing. And they didn’t really care about the volume of transactions in many companies because they were still hitting top and bottom line numbers that were better year on year. Now you’re saying that because of disinflation, that margin is collapsing and those volume of transactions matter as much or more than the price itself.

Seth Golden

Right. Yeah, that’s a great way to summarize it because when you have this volume, you get this a reading in the total manufacturing layout. But it’s in sharp contrast to what we’ve seen in ISE because there’s no price situation that is ever really good for the respondents. Take, for example, we had an inflation boom. We got the ISM up to 60. It was there for what? One month before it collapsed? Because the respondents know this can’t last forever. I can’t push my cost onto the end producer and then the consumer. I’m going to start responding negatively because I know there’s an inevitability in this inflationary boom. Well, okay. Then the reading starts coming down. There wasn’t even in inflation times, that’s only going to live for so long. Then you get into disinflationary situation. Again, will prices keep coming down? Now, my profit margins, as you are alluding to, are also coming down. I’ve got to rely on volume, but how do I increase demand? The number one problem for a CEO, every single morning he’s always thinking about, I wake up every morning, I’ve got to figure out how to increase demand. So these ISM readings, they’re so sentimental and it’s always focused on price.

Seth Golden

One way or the other, price is bad always. So the note model does a great job of distinguishing the true strength and what the trend is in manufacturing, overall.

Tony Nash

Okay. Albert, I want to bring you in here in just a minute, but I have just a couple more things with Seth that I want to put on through. Okay, so we’ve gone from a very low interest rate to a significant interest rate rise over the past year. We’ve gone from very nice margins on marginally lower transaction volume to thinner margins on transaction volumes that may or may not be increasing. When we take those two worlds and we look at the valuations that companies have had, we had really nice valuations in a low interest rate environment with high margins. Now we’re in a higher interest in the environment, and I assume a higher for longer environment where we have lower margins and the transactions may or may not be increasing. What happens to valuations under your hypothesis, what happens to equity valuations in general? Without talking about specific sectors, but what happens in general?

Seth Golden

All right, yeah, if we just use the benchmark S&P 500, the consensus is that valuation should compress level. So far as the margins are concerned, there’s a bit more nuance there because while the actual margins per sale may indeed decline, the total profitability may not follow suit or the earnings per share may not follow suit because we have this dynamic of higher rates where part cash, be it households or corporations, is earning millions upon millions and billions every single month. So you have this free cash flow that also has to work itself way into the valuation model. Again, the consensus belief is that higher rates, higher for longer, should compress the earnings multiple. When in reality, that has been the exact opposite. If we go back to, let’s say, 1960s, 1970s, all the way up to the early 1990s, the S&P 500’s multiple was actually higher over a good 23-year span. I think it was 17.7 times from the late ’70s to the 1990s in that higher rate environment than even where we are today after the Federal Reserves program here. And now we’re at 17.4. But of course, we won’t know where we’ll be going forward.

Seth Golden

But there’s not hard and fast data suggesting that the multiple should compress because we’re not even where we were back in the ’70s or ’80s when it comes to the federal funds rate, let alone, let’s say, the benchmark 10-year Treasury yield. I don’t fall into the camp that aligns with a compressed multiple. If you look at the PE multiple, if you look at the CAPE ratio, they do nothing but expand over time. That’s the history of multiples. They expand over time, mostly because for every dollar that goes toward wages or whatnot, we get that much more productivity, so we have that much more cash flow. With that being said, the common pushback is no multiples don’t look at the peak. We still haven’t made it back to the peak of the dot com period. Okay, so fine, X dot com, that hyperbolic event or parabolic event, multiples indeed expand over time. So who’s to say that we are not in that new period, this post-pandemic period, where we once again jump the shark? Because there’s always this jump the shark moment when it comes to PE expansion. In real time, we shun it, we belittle it, we berate the multiple expansion.

Seth Golden

It’s only in hindsight that we realize, Oh, we just took a leap.

Seth Golden

That’s how I look at it secondarily, I say, if you look at the long term history of yields, they go lower over time. We might be in this vacuum moment where we’re becoming prisoners of the moment given the monetary policy initiatives. But in hindsight, again, we look back and we say, well, of course, the 10-year yield is lower over time. It’s just a matter of when it finds that new lower, low bound territory. So I’m comfortable with saying… And if, in fact, we finish at a 20-time multiple here this calendar year over the trailing five-year period, the S&P 500 forward PE multiple will have averaged 20 times for the first time in history, hence the jump the shark moment.

Tony Nash

Very interesting. All very sophisticated. Thank you so much for this. Albert, I know you are not well. I suspect you were not in line with the disinflationary underpinning of Seth’s hypothesis. Can you walk us through that?

Albert Marko

Yeah, Nope.

Seth Golden

I’ve been wrong twice before. No, I’m on you.

Albert Marko

I don’t even want to discuss this inflation until wage inflation is under control, and that is nowhere near getting control at the moment. On top of that, inflation in the last year and a half has only shown that companies can earn more. Put earnings through the roof. Until I see wage inflation actually coming down, I don’t want to talk about this inflation, to be honest with you. I can’t see it. Even the CPI prints have been completely nonsensical. Goods are just still 17%-20% higher than they were pre-COVID. Energy, as much as they want to push it down, energy is just bursting at the seams to go back to 100 on the Brent. I can’t see a pathway for disinflation. But of course, I’m only talking for the next 6-12 months after that. That’s just a different era, in my opinion.

AI

Heads up for a short break.

AI

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AI

Thank you and now back to the show.

Tony Nash

Seth, do you have a timeline on yours? Are you thinking ’24? What are your thoughts on the timeline?

Seth Golden

So far as getting to the Fed’s target?

Tony Nash

No, getting to this disinflationary environment that you’re talking about.

Seth Golden

Philosophically, obviously, Albert and I disagree. I understand where… He’s absolutely right. We have absolute inflation. That’s all we actually ever have. But in terms of what’s being measured by CPI, PCE and PPI, consumer price index and producer price index, they measure rate of change. So it’s the month of the month or year over year. So philosophically, I think we agree on the fact that there’s always inflation, but it’s a matter of what’s being measured is the rate of change of that inflation. So do I see that deceleration continuing? Yeah, I would suggest I see that disinflation or deceleration in the inflation rate continuing through the end of this year and at least for the better part of 2024. And so far as the wage inflation is concerned, we are starting to see an increase in the labor participation rate, which will facilitate some of that, at least to some degree, that deceleration in wages. This morning’s report may be a prime example, or the last two monthly reports, in fact, might be a prime example of an increase in the labor participation rate, working in favor of reducing that overall wage inflation.

Tony Nash

Right.

Albert Marko

Yeah, I just don’t take those numbers at face value. I’m just over the fact that CPI is at whatever, 3.3%. They’ve changed the weighting of it. They use the BLS deflators to manipulate the numbers on unemployment. The revisions come in every 3-6 months later that shows that it was actually worse than they were reporting. Like I said, until wage inflation, in my opinion, gets sorted out and they actually have political policies to address the oil and gas and energy markets, I don’t want to even discuss this inflation in my opinion.

Tony Nash

Interesting. Seth, I do think that your thoughts about the volume of manufacturing will be very interesting. I’m really intrigued by the disinflationary underpinning of it and how that could drive things. I think that’s very, very interesting. Definitely not a consensus view right now.

Albert Marko

If you get disinflation, like he’s saying, six months later, we’re just going to have another inflationary event because people are going to go out and buy everything. I mean, houses, goods.

Seth Golden

Yeah, I agree. One of the caveats or antithesis that I put into my models does center on the resilience of the consumer, the strengthening the labor market being what it is. And just the monthly, and I think it gets just way overlooked in terms of people that have been calling for a session since last year. The Fed is actually stimulating while it’s trying to ease the economic situation by tightening. We’re not as rate-sensitive as we used to be. Probably the least rate-sensitive economy as a whole, households and corporations in history. You have all these people that have fixed rate mortgages at three and four %, so the Fed raises to 550 basis points. What do they care? It’s not really affecting them to any monthly bill payment degree. Now they take that, their savings and they put it into a money market fund for 5 and 6% of monthly income coming. The Fed is tightening while these people are actually seeing the benefits of the tightening cycle. Unless you say, Well, the service industry, that’s where the real inflation is. I would totally agree. You go to any restaurant. You go to even some of the lesser Darden Restaurants like an olive garden, you can’t get a chicken parmigiana for less than $25.

Seth Golden

Your boy likes chicken parmigiana. I’m trying to feed a family of four out at the olive garden for dinner, and you get a bill for 150 bucks and you’re like, Whoa. I’m the consumer spending.

Tracy Shuchart

You also can’t forget what the government is doing, right? Fiscal policy is doing. I mean, the IRA act, which is very inflationary, for me. It’s butting heads. I just don’t see disinflation either at any point soon, except for maybe what the Fed is looking at in their core. But it’s hard for me to get on board with this disinflation theory.

Albert Marko

For me, it’s like a double-edged. Everything that Seth says is most likely correct. But the flip side is there’s double-edged swords everywhere. If you have disinflation, let’s say housing starts coming down or they have rate hikes coming down, mortgage is coming down.

Albert Marko

You have such low inventory of homes in certain states that they get snapped up like this because people are just cash rich at the moment. They sold whatever they did or their stock market. They’ve had calls on NVIDIA, made them 10 million bucks, and they come back and they start buying things cash. So you’re right. They don’t care about rates at all. They don’t care about it.

Tony Nash

I was talking to Morgan’s broker earlier this week, and I said, How is your business doing? Has it slowed down? And they said, Oh, yeah, a lot. It’s slowed down a lot. But they said, Most of the buyers that we’re seeing are cash buyers. So what you’re saying, Albert, is right, is people are not taking out a mortgage. They’re using their cash to buy a home. Has the volume declined? Yeah, it has. But I think that what the Fed has done with interest rates is working because you have these guys with two and three and four Airbnb’s who are not seeing the occupancy that they saw a year or two years ago. Because of the higher mortgage rates, those houses are eventually going to have to come on the market because it can’t service those mortgages. Those will come on at a lower rate. Will they get stopped up for cash? Maybe they will. Maybe they’ll stay on the market for a while longer. But I do think that the game that the Fed is playing is a medium term game, and it’s slow to get to where it’s going. So I don’t want Seth to feel like he’s being hanged up on it. I’m actually –

Seth Golden

Oh, no. No, no. I always do. I’m fine with the constraint.

Albert Marko

It’s good to test your theories on the other side. It’s not important to have that.

Tony Nash

I think one day in ’24, we could wake up, and the disinflationary part of our hypothesis could be very true. It could be or Feb, sorry, April, May, something like that. We got the the boob in this this disinflationary and people are just like, Wow, we’ve got high rates, but we’ve got my olive garden dinner is now 15 bucks instead of 25 bucks. Maybe that happens, right?

Albert Marko

I think that Seth is right. I just don’t know about the timing. I don’t buy it for the next six months for sure. On the next 12 months, 50-50. 18-24 months, absolutely. That’s-

Tony Nash

50-50, so that’s a win. Take the win.

Albert Marko

Because it’s an election year, right? It’s an election year, and political policies always want to be… They’re always inflationary. Food, corn, energy, all that stuff, and then mixing them up.

Seth Golden

No president has been reelected when there’s been a recession.

Tracy Shuchart

A recession, exactly.

Albert Marko

Yeah.

Tracy Shuchart

So they gonna do everything they can to halt that recession.

Tony Nash

Interesting. Tracy, I want to bring you on on this… While on some of this first topic. You had a great tweet about US manufacturing, rebound stretching diesel supplies and pushing up diesel prices. With Cess Hypothesis about the manufacturing volume coming back, which is great, how much of an impact do you think diesel prices will have on overall inflation readings? Is that a big driver of inflation in the US?

Tracy Shuchart

Well, I think that diesel runs the economy, period, end of story. It has everything to do with manufacturing, transportation, with agriculture. It is at the heart of what makes the economy go around, essentially. If you want to move anything anywhere, if you want to produce anything, you’re going to need diesel. Of course, that’s going to make a big impact on inflation. That said, that energy is not part of what the Fed looks at conveniently. That may not figure into their metric when they’re looking at for inflation, so to speak. But does that impact the consumer? Absolutely, that impacts the consumer because those costs are obviously passed on to the consumer.

Tony Nash

Yeah, there are secondary tertiary impacts, of course, that are passed on to consumers or that service industry people need higher wages, gas prices are higher and so on. Last night here in Houston, I noticed our gas prices were under $3 for the first time in a long time.

Seth Golden

Here in Florida, well, north where we are as of last week, $2.99, at one of the local stations.

Tony Nash

Yeah. If you’re on the Coast, I’m sorry, guys, but…

Tracy Shuchart

I’m like, Sir, our gas is not there yet, but it has come down, obviously. But we’re not really having a gasoline issue so much as a distillate issue, and people have to seem to separate those two because it’s it’s not doesn’t run the economy, Distillates.

Tony Nash

You’re right.

AI

Heads up for a short break.

AI

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AI

Thank you. And back to the show.

Tony Nash

Let’s look at those fuel stocks. You sent me a chart from Morgan Stanley and the EIA looking at fuel stocks in the US. They look to be at definitely lows within a a five-year range for ’23. That’s the dark blue line on the chart. Can you talk us through, since we do have low stocks, if we see this rise in the volume of manufacturing in the US, would it be almost this bullwhip-y rise in diesel prices because of that surge in demand?

Tracy Shuchart

Absolutely. Obviously, you’re going to see knock-on effects of that. Even though we’ve seen prices come come back, just had Russia this morning decide they’re going to allow diesel pipeline exports. That’s not all of their diesel prices. Remember, on the 21st, they said that we are stopping all gasoline and diesel exports, which really affects Europe more than anything. But they did come out this morning and say they are going to allow pipeline diesel exports, but still no gasoline gasoline That did alleviate some of the pressure across global markets. You saw some of those fuel prices come down, those diesel fuel prices come down globally. But that said, there’s still a global crunch. If we look at countries that are reporting, reporting, so OPEC countries, for example, because because they’re The US reporting is the best, but they’re next. If we’re looking at what they’re selling, their light sweet barrels will take Nigeria, for example. Their light sweet barrels are not really selling. There’s a lot of pressure on on light right now because all you can make from that is gasoline, essentially. But if you look at their heavier barrels right now in countries that produce crude oil that can be cracked into diesel fuel, those are selling for $8 or $9 above Brett prices right now.

Tony Nash

Russian are the selling you $9 above Brett.

Tracy Shuchart

No, not Russian. Other countries, because Russia obviously has a price cap, et cetera, but they are selling for it about $85 for their heavier crude distillates. But Russia is a totally different story because of the price caps and things of that nature, because they’ve had a very large discount to Brett. But I’m talking about other OPEC countries that are selling. In fact, we just had Saudi Arabia come out this week and they’re selling OSP, which is their official selling price is above above brand. Selling that across Europe and Asia and to the US.

Tony Nash

Yes. That is a perfect segue into our next subject, which is tumbling crude prices. As you were just talking about, as we’ve talked about for several weeks, our most visible discussion about this was crude not hitting $100. That was about a month ago. We’ve seen seen crude fall ten this week, I’ve got the light, sweet futures on the screen. In addition to what you were just saying, can you tell us what’s happening and how far do you expect it to go?

Tracy Shuchart

Well, I think it’s because we had such an initial… Every reaction creates an equal and opposite reaction. We had that that kick to almost $100 on Brent, $95 on WTI. That was just a major… That was a major chase push-up, CTA following people got on the trade, etc, etc, and then it’s a momentum. It’s a Mo-mo trade, right? When you have CTA traders, they tend to jump on any momentum no matter what product that is. That pushed prices to what levels that were where they really probably shouldn’t have have been? I mean, don’t need to be that high. High. That’s terrible. When we saw prices push up to $95, that is terrible for refiners. We saw margins collapse. You knew immediately these prices were too high and that we would have to see oil prices come down again because it was just awful for the industry in general. It’s horrible on emerging markets, especially with the dollar pushing up and you have dollar-denominated debt and then you have the pressure of oil prices being high. It’s a terrible scenario. It’s not surprising that we have seen a pullback. Has this pullback been more exaggerated than it likely should have been?

Tracy Shuchart

Probably. But I think what we really need is stability in oil prices because what happens is when you have this volatility in oil prices, this does not encourage producers to go out and spend money on new wells and new production, etc, where they’re all going to hold up. In the end, then this is going to hurt us in the long term because they’re going to be like, Oil prices are too volatile. We’re not going to invest. We’re not going to invest in new production right now. We just can’t. We don’t know what our oil prices will be tomorrow. In the long run, this adds to the theory that there’s higher oil prices for later because we’re going to see demand increase regardless if we see demand decrease in the we’re still seeing demand increasing in, in, again, emerging markets, Asia in particular. I think right right what we really need is some stability in oil prices. That encourages producers to at least start producing a little more to keep up with with so it’s not becomes crushing later on.

Tony Nash

Okay. How do we go and what is that stability oil price? Because I don’t think those two numbers are the same.

Tracy Shuchart

Well, I think $80, $90 range for right now is great. I think OPEC would be thrilled with that.

Seth Golden

That’s what I’ve been saying, OPEC, I think that’s-.

Tracy Shuchart

Would be thrilled with that. How low does it go right now? I don’t know how long. We’ve seen this drastic sell-off reside over the last couple of days. We’ve seen oil prices here stabilizing a bit today and yesterday, even though we had a little bit more of a a I don’t know. I think if you’re looking at $79, I would be a long-term buyer there for swing higher.

Tony Nash

Higher. I thought it was drilling.

Tracy Shuchart

I’m not saying that it can’t. Here is not a bad level either. I think the way… The oil markets are telling you that because the oil markets have stabilized again over the last couple of days. Yeah, we’re moving sideways over the last couple of days, but that drastic sell-off is over. I think people are done.

Tony Nash

So, OPEC’s happy where we we are mid 80’s. Low to mid 80’s. Dollar is happy where we are, 106. Is the world happy with where the dollar is? No.

Albert Marko

No.

Seth Golden

I mean

Tracy Shuchart

I’ll leave the dollar up to Albert.

Albert Marko

I would love to see oil go back down to 75-77.

Seth Golden

That’s my call. I think if I were a step aside long enough to get it down there.

Albert Marko

Yeah. I just don’t buy into these… I mean, last week we were talking to a couple of guys, and everyone last week was like, 120 coming, 150 coming. I don’t buy into these extreme moves, especially when you have OPEC and the Fed playing all these games. They’re not stupid. Saudis don’t want it over 100. The US doesn’t want it under 65. So you pick a range 75-90, 95. We’ve been talking about that for how long, Tracy? A month. A year almost. That’s such a nice sweet spot for everybody. They can do whatever they want with their CPI prints of crushing it down to 75. They’ll make the Saudis happy at 90, ping-pong back and forth. I just see sitting there for quite a long time, to be honest with you.

Tony Nash

That’s good. We need that. We need some stability, right? Some –

Tracy Shuchart

Absolutely.

Albert Marko

It’s crazy, though, because you look at these 6% drops the other day.

Tracy Shuchart

It’s ridiculous.

Albert Marko

What is that? Bitcoin? Is that what we are now? Oil is the Bitcoin market? Yeah, 6, 7% drop is insane.

Tracy Shuchart

You need stability in the oil market. I think think if you’re looking at oil equities in particular, if you’re trading those, that’s what you need to see. You don’t need to see this this volatility, does not help investors and it does not help producers.

Albert Marko

It doesn’t even help the shipping. By the time you ship something two months later, you can have a drastic swing of like $15. That’s way over my head, but I’ve heard complaints where traders had to hedge because they have ships out to sea.

Tracy Shuchart

Oh, absolutely.

Tony Nash

Yup.

Seth Golden

Think of OPEC just like the Fed. OPEC with these announcements that made more frequently this year than I can recall in the more recent past. It’s helped to create, I should say, volatility in the energy market in the same way that the Fed. With their ongoing, every day of every week post an FOMC meeting, we just get these wild swings in the equity markets. It’s realized volatility in the equity markets, not so much in the VIX, which is implied. But that’s how we’ve had these 6% positive swings include in in and then you get the adverse effect as well, mean reversion. But both of these entities with their press conferences and their press releases here and there and interviews with Saudi members and what have you, it’s helping to sustain the volatility that really does not need to be there and is not productive.

Tony Nash

And not helpful for for consumers, Right. People freak out about oil for a few few or gasoline prices, petrol prices for a few weeks, and then they’re relieved. And then they freak out and then they’re relieved. And it’s just uncertainty at the consumer level. Okay, so good. Thanks, guys. So let’s change the topic to a completely ridiculous one, which is a clown show that we call Washington, D. C. We’re going to talk about DC drama and markets. We’ve seen a lot of drama drama in this week. Us politics just doesn’t seem to make sense to foreigners, really. But Americans are in the middle of this. Government closures, House leadership contests, all this stuff. We care, but we don’t care. I could be wrong on on that, I think with every day, we’re just washed over with this news. I don’t know that it really makes that much emotional sense to us anymore. Can you tell us why the Speaker of the House is such an important role in Congress. Let’s dig into that a little bit. Also, where is the American mind on this? Because we have some people from overseas who watch watch and they’re hearing that this this the first speaker of the House that was let go outside of an election in 150 years or something.

Tony Nash

I don’t know. But I don’t know that most Americans really care all that much because of the drama that’s coming out of DC every day.

Albert Marko

Yeah. I mean, McCarthy was hated from both sides. It took him like two dozen votes to get elected to the speaker the first time around. It was a deal between seven or eight GOP members with McCarthy saying, do this, otherwise we’re going to vacate you. And McCarthy thought, and actually a lot of the congressional members that I talked to thought that he was going to be able to survive this. And last week, I’m a senator for shutdown because I didn’t think think would be that dumb to work with the Democrats and face vacation. And so all his famous tweet, bring it on, they brought it and he’s gone and not going to run again. And this is is worse than a shutdown, in my opinion, because now we have a contentious speakership of between three individuals, Scalise, which is basically McCarthy 2.0, Tom Emer, I’m not a big fan of him and his ridiculous Bitcoin antics. I don’t even know who else would be.

Seth Golden

Jordan.

Albert Marko

Jordan is not going to make it. He’s not going to make it. I would probably say Scalise or Emer are the top two guys.

Tony Nash

You know who is? I pay attention to this stuff.

Albert Marko

Yeah. I would say it’s problematic because the speaker is used as the mechanism to bring floor votes to whip up the majority, find the the and pass bills. We have eight appropriate… Well, seven Appropriations bills that need to get get passed. One has to be reworked all before 40 days comes up and a new shutdown deadline looms. The house is not even in session for another week. Take 10 days of that out of the way. You have 30 days to somehow get get bill that funds the government through. Like I said, this is so much worse than a shutdown at the moment. I would rather have a week’s shutdown and some compromise has been found and then get back to the the table get back to work, rather than now we have a speakership race between three monkeys that really shouldn’t even be there in the speakership saying ridiculous things and throwing out Trump’s name left and right. This is just an absurd clown show that we’re having at the moment.

Tony Nash

Is it feasible that Trump becomes a speaker? Yes or no?

Albert Marko

Absolutely not. I don’t want to even hear that stupid.

Tracy Shuchart

I wanted to add that, Tony.

Tony Nash

Tony. Sorry, sorry.

Seth Golden

I think you are potting, Albert,

Tracy Shuchart

The Twitter for the last two days have been like…

Albert Marko

You guys are just trying to give me a heart attack. That’s the color of that.

Tony Nash

I have a question about it.

Albert Marko

Trump has no chance to be a speaker nor should he even be a speaker. He doesn’t know anything about the mechanism about being a speaker. It would be nothing more than a campaign ad for the next seven months.

Albert Marko

This is a stupid idea put on by stupid griifters that we were trying to get into Trump’s favor for the 2024 election. That’s all it is.

Tony Nash

I was just talking about this yesterday with somebody in Asia. Americans see someone like Dianne Feinstein who made made salary for whatever, 35 years in the Senate, but passed away with $110 million estate. That is, I think, a perfect example of how Americans view people in Congress, House or Senate, and how they go to Congress as relatively normal people and then emerge these multi-multi-millionaires. So the frustration —

Seth Golden

It looks extortionist.

Tony Nash

Exactly.

Albert Marko

Don’t vote him in.

Seth Golden

They’re extortionists. Well, any time —.

Albert Marko

If you have a problem about your congressional member making $10 million every five years, don’t vote vote in. I don’t understand what the people are talking.

Tony Nash

My congressional member is Dan Crenshaw.

Seth Golden

What are we going to do about MTVs rock to vote then?

Tony Nash

Right. My congressional member —.

Albert Marko

Dan Crenshaw is a moron.

Tony Nash

I complain about that.

Albert Marko

Dan Crenshaw is nothing more than a corporate chill. He’s a corporate chill.

Tony Nash

That’s right. I can’t get used to it.

Albert Marko

Don’t vote him in.

Tracy Shuchart

But why do people keep voting these people in? This is what what it all mentions, Nancy.

Tony Nash

Because every election they vote.

Tony Nash

We were doing our civic duty.

Tony Nash

Every election that he says maybe —.

Seth Golden

Every time we get to the conversation of politics, I always go back to the same thing. When was the last two-party system that has succeeded in perpetuity for its population might drop? Because it should be be after that. We get to a certain tipping point, if you will, where the structure of the system just doesn’t work to the benefit of the average person. The other aspect of, and why, in my opinion, it’s become so contentious in the turn of the century is I think if you go back to the great financial financial crisis, were already in the deficit, but that compounded the deficit. And then you get the pandemic. And there’s no win here for politicians. When you have a deficit that is entrenched, what can you really do? You’re really just just a that guy who appeases that guy. It’s all a chain of appeasement at this point because we’re not paying our bills one way or the other at the end of the the day. Come out of this to what? $31, $32, $33 trillion. So it’s who can I appease best and can I amass a certain population of people where I can get elected?

Seth Golden

But then it’s just still about appeasement. And at some point, it just becomes unsatisfactory to the general population. And we’re at the point where there’s no such thing as as on a real continuum. It just doesn’t work.

Albert Marko

Bipartisanship is dead. It’s dead.

Tony Nash

Okay, Albert, given what Seth said, does whoever the speaker is even matter?

Albert Marko

Not really. Not in this day and age. It’s more about groups within each party that are controlling something. I mean, the democrats-

Seth Golden

It’s It’s too much within the parties.

Albert Marko

Yeah. I mean, the Democrats are more unified than the GOP at the moment because it’s the Trump GOP versus the rest of the GOP. They’re simply not unified, nor are they going to be unified.

Tony Nash

But I’ll argue you even have have I don’t believe we have a two-party system. I believe we have parties within parties. He’s going to be able have the party and all that stuff. You even have people like Marjorie Taylor Greene who are at odds with Matt Gaetz or at odds withand and these are all Trump people. So not necessarily two parties. There are are Bolsheviks Menshevik within each party. Sorry for that.

Seth Golden

You get stalemates. You get Mexican standoffs and and in perpetuity, year after year after year.

Albert Marko

I would gladly take stalemates with this clown Congress. Gladly. Because honestly, if you’re a corporation and you’re trying to do a five-year to 10-year outlook, I would rather have stable stalemates than extreme policies on the left and the right every time a new Congress gets elected in.

Seth Golden

You could just take line items out of the budget. You could just take line like they did with the Department of Weight and Measures. When was the last time you saw the Department of Weight and Measures in the congressional budget line items? It just hasn’t existed since 2014. Why hasn’t it existed since 2014? Because Amazon literally pays fines to equate to their entire budget. Just find other companies that will satisfy that as well.

Tony Nash

I had no idea about that, Seth. That’s amazing.

Tracy Shuchart

Me neither. That’s insane.

Tony Nash

Okay, so Albert, What happens? So is this intractable environment, one that actually creates some stability for, say, the private sector?

Albert Marko

No.

Tony Nash

No.

Albert Marko

No. Only because we don’t have normal, logical, economic, fiscal policies in act right now. We have insane things going on at the Fed and the Treasury and out of the White House. So we don’t have anything normal happening. So why would we… We have no chance to fix it. That’s the problem that I’m seeing going forward. We have dumb EPA rules, we have dumb immigration rules, we have dumb foreign policy, we have dumb economic policy. So until we actually have a decent congressional opposition to the White House, nothing’s going to get fixed, nothing’s going to get resolved.

Tony Nash

Does this change before, say, 2030? Is this a generational thing where we’re waiting for baby boomers to-

Seth Golden

I think we have to lower our expectations.

Albert Marko

No, baby boomers are checked out. They’re checked out. They’re cashing out of this market.

Seth Golden

We’re just still going to –

Tracy Shuchart

We need GenX to step up people.

Albert Marko

Boomers are using these market rallies. Boomers are using these market rallies for exit liquidity on the backs of millennials and Gen Z, where the GenX are going to have to step up and run the show for whatever’s left until the Marxist progressives are coming out of college and run things. That’s just the way it is. It’s a cyclical thing. I’m not even complaining about it. It’s It’s a thing. It happens in every society, every government. You have extreme right, extreme left, and then it falls back in the center a decade or two later.

Tony Nash

Okay, so there will be a speaker, right? It will not be done with someone, but we will have a a speaker.

Albert Marko

For sure. Sure. Two weeks.

Tony Nash

That will happen happen –

Albert Marko

Two weeks.

Tony Nash

-two or something, right?

Albert Marko

Yeah.

Tony Nash

Okay. Okay. And person is just really a tool to serve as a traffic light for things to work in the house. That’s all they do.

Albert Marko

That’s right.

Tony Nash

Okay. So once that is in, we have… I like a legislature that can’t do that much. Much. So does that mean when this person is in? Are they full scheme ahead, making legislation that we all can’t stand? Or is it a minimalist legislative body where there’s so much disagreement that very little gets through?

Albert Marko

It depends on who’s running the show. If it’s Jim Jordan, nothing’s going to happen at all whatsoever. If it’s Scalise, it’ll be status quo for what McCarthy was doing. Yeah, we’ll get some stuff done here and there. If it’s Tom Emer, yeah, I think it’s probably a little bit more efficient from the GOP side.

Tony Nash

Okay. Not who do you want to win, but who do you think would be the best to win for the functioning of that legislative body? Is it Tom Emer?

Albert Marko

No, I think it’d be Scalise. As much as I don’t like it, it’s Scalise.

Tony Nash

Okay.

Seth Golden

It’s status quo.

Tony Nash

It’s status quo. Okay.

Tracy Shuchart

Better the devil you know than the devil you don’t know.

Albert Marko

Well, the thing. That’s always the case. With Russia and Putin, the DOD guys say, Oh, we can get rid of him. Well, who’s coming next? You have no idea. I know what Scalise is going to do. I don’t know what Jim Jordan is going to do. God knows what he’s going to do. Do. So just the reality of it.

Tony Nash

Interesting. Such as American politics. Guys, thank you so much for this week. This is great. I appreciate your thoughts. Have a great weekend. Have a great weekend. Thanks, guys.

Albert Marko

Thanks, guys.

Seth Golden

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.