Month: November 2023

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Welcome to “The Week Ahead” with your host Tony Nash.

1. The Upcoming USD Squeeze. Michael Ncoletos discusses the potential impact of a US dollar squeeze on the global economy, focusing on the factors contributing to the potential strengthening of the US dollar and its implications on emerging markets, particularly about their dollar-denominated debt. He also highlights the significance of interest rates and the cost of money in determining investment decisions.

2. Year-end market check. Bob Iaccino discusses the current state of the markets, emphasizing the impact of higher interest rates on the tech sector and the significance of the energy market in relation to inflation. He also mentions the potential impact of technology stocks on the economy and expresses concerns about the future performance of tech stocks in 2024, particularly in the second half of the year. Additionally, he discusses the potential for Argentina to dollarize its economy and the challenges and potential for success of a conservative government in Argentina, drawing parallels with other countries and global political trends.

3. China, US & geopolitics. Albert Marko discusses the recent election in Argentina and expresses skepticism about the potential for significant change under the newly elected leader, Milei. He mentions that Argentina is burdened with a significant amount of debt and that it would be challenging for Milei to make substantial changes without a strong support structure or clear policy direction. Marko also raises concerns about the influence of leftist forces in Latin America and suggests that Argentina may be set up to fail. He expresses doubts about the feasibility of Milei’s plan to dollarize Argentina given the country’s debt and limited dollar reserves. Overall, he indicates a reserved judgment on Milei’s potential impact and suggests that the composition of Milei’s cabinet would be crucial in determining the direction of Argentina’s policies in the next 12 months.

Transcript

Tony Nash

Hi everyone, and welcome to the Week Ahead. I’m Tony Nash. Today, we’re joined by Michael Ncoletos, Bob Iaccino, and Albert Marko. We’re going to talk through the upcoming US dollar squeeze, which Michael has just published a stellar piece on this. We’re going to talk with Bob about year-end markets and see what we’re heading into. Then we’re going to talk to Albert about some geopolitics, specifically about Argentina, but how does that apply more broadly? Looking forward to the discussion. Guys, thanks so much for joining us.

Tony Nash

Hi, everyone. We started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeantel.com/BlackFriday and subscribe to CI Markets for $99. Thank you.

Tony Nash

Michael, actually, you and I met a few years ago when I was giving a presentation on China, and I used one of your charts on the weakening advocacy of Chinese debt issuance. It was so great that you were there. I didn’t know you were in the room, and the humility you had around that was just astounding.

Tony Nash

I follow you really closely. And we’ve been talking about the dollar for a long time. Albert talks about the dollar a lot, and you published a paper a couple of weeks ago about the coming US dollar squeeze. This is really, and pardon me for oversimplifying it, but it’s really a story of interest rates and viable alternatives to the dollar. Obviously, there’s a lot more to it. You outlined a seven-step process. Would you mind walking us through that? I’ve put up a chart on the Fed funds rate to get us started. Would you mind walking us through each of those steps as an overview?

Michael Ncoletos

First of all, it’s great to be here. I also enjoy your work, so I share your thoughts about your work, and thank you for sharing with everyone and love the discussions we’re having. But sometimes you bump into someone by luck. I think we bump into each other by luck. That’s right. I think it was in the came of Ireland, right?

Tony Nash

That’s right. That’s right.

Michael Ncoletos

I’m Greek and you’re from Texas, right?

Tony Nash

Yes, that’s right. Worlds of way.

Michael Ncoletos

We met in the came of… That’s-

Tony Nash

Not a bad place to me.

Michael Ncoletos

How small the world is. A few weeks ago, I was thinking about the dollar, which I’m one of these people who think that the dollar is unlikely to weaken unless the US government or the US Fed decide to do so. And the thinking is we’ve been reading a lot about the US deficits, about the situation in the US and fiscal responsibility. And we’ve seen a lot of people talking about the new currency, the BRX currency that could replace the US dollar as the global reserve currency. So I try to lay out why I think the dollar is not going to go lower. And by lower, I mean it’s going to squeeze higher for a few reasons. After a 13-year expansion of the US balance sheet, which I think the balance sheet reached around $9 trillion, if I’m not mistaken, the Fed decided to stop that and to start raising rates and then to start QT. So in the first phase, the Fed just started raising rates. And by that when you raise interest rates, you effectively drain liquidity from the world in the US dollars because a lot of dollars, as simplified as that can be, are going to go to the currency which has the higher interest rate, assuming that there are no capital controls or nothing else.

Michael Ncoletos

So that was the first step. The second step was that the Fed stopped QE. And by stopping QE, stopped reinvesting the treasures that you had bought and the mortgage-backed securities, which again by stopping reinvesting means that these new issuance need to be bought by the market. So when the market needs to buy them and it’s not the US government, more dollars are used for that. You need dollars from the market which would be used for something else to buy these treasures and these mortgage-backed securities. Then the Fed moved a step further and started QT, which means it started reducing its balance sheet. But when you reduce the balance sheet again, which means you need more money from the market to start buying these treasures, more liquidity started to drain. Now to put all this together in an economy that is going through, let’s say, a Cold War, you want to put it this way with China, in a world where there is reshoring and in a world where there are a few wars going around. So there is a supply issue in terms of how inflation is created. You have less oils and oil prices go up.

Michael Ncoletos

You’ve had an inflation scare across global which has translated to real inflation. Now, in normal conditions, when you have a supply-driven inflation, the remedy is not to raise interest rates because monetary policy is effective when inflation comes from the demand side, not when it comes from the supplies. The Fed of San Francisco published a research paper a year ago, I think, showing that two-thirds of the inflation in the US was coming for supply reasons. So the question I ask myself is if what I’m saying is correct, and I’m pretty sure the people of the Federal Reserve are pretty aware of it, why are they raising rates and increasing the deficits when this is clearly not going to do much on the inflation side. Okay, we’ve had the pause, we’ve had an inflation coming down, but we need to see where it’s going to stabilize. So the question is, when you have fiscal deficits and fiscal deficits are around seven and eight % of GDP and you don’t have the central bank buying treasuries to fund that deficit, it means that these bonds, which according to a report I read, I think next year it’s eight trillion, eight trillion need to be financed from the US government.

Michael Ncoletos

So eight trillion dollars need to be found from the global market to fund that deficit. Now, most people are aware of the dollar and how it works, but most people are not aware of the Euro dollar market. You’ve raised it a few times, but most people don’t understand. The Euro dollar market are effectively all the dollars that are not included in the US M2. We can go into specifics what’s included and what’s not. It’s very technical, but I don’t think it doesn’t make sense to do this discussion on. So all the dollars that are not included in M2 are the euro dollars, which are outside the US, which it’s equivalent in size of the US dollar mark. So M2 is around 20 trillion. Imagine that there’s another 20 trillion or maybe more outside of dollars. So what’s the problem with that? When the dollar goes up, you effectively create an issue, especially on emerging markets. Why do you create a problem in this emerging market? Emerging markets because they do not have hard currencies, tend to issue debt in dollars. They tend to issue debt in dollars, the interest rates go up, their bonds go lower, so they have a funding need.

Michael Ncoletos

They either need to put dollars in to bridge the gap or they need to start selling bonds. It’s not as easy as one would think.

Tony Nash

Michael, let me… Let me just pause there and ask you a couple of questions. You said the US needs to raise $8 trillion in debt next year. Is it possible to have a failed auction?

Michael Ncoletos

I guess it could be, but why would there be a failed auction? The rate, the interest rate will go high.

Tony Nash

Right, that’s the answer. I hear a bunch of the dollar naysayers go, Well, the US is trying to put so much debt out there, they’re just going to have a failed U. S. Treasury auction. But what you’re saying is, no, they’ll just… The U. S. Will just offer a higher interest rate on that in order to sell that. Is that right?

Michael Ncoletos

Yeah. Let me put it this way. There is this chart floating around, especially on Twitter about the liquidity of the U. S. Treasury market. This is ridiculous, and I’m saying it’s ridiculous because the U. S. Treasury market has an average trading volume of like 15 trillion a month. The next one, the next one is the eurozone with six trillion, and then it’s Japan with three and China with two trillion per month. So if US dollar bond liquidity is going down, imagine what’s happening on the other markets. We’ve seen the Japanese bond market are not trading for a day. We’ve seen no… When we talk about liquidity, and I’m not saying that liquidity is going up, I’m saying it’s going down, but it’s a relative discussion. It’s not an absolute discussion.

Tony Nash

That’s key. And everyone understands.

Michael Ncoletos

What does that mean? You’re going to buy what? Japanese bonds.

Tony Nash

Currencies are relative. It’s all relative. And I think that’s something.

Michael Ncoletos

That currency are relative. And what’s more important, people need to understand that the dollar disposition is a derivative of the US capital market system. The US capital market system is so efficient, at least in terms of anything else that we see right now in the world. So when a government, whatever government buys trades in US dollars and accumulates US dollar FX reserves, they can buy at the split of a second US treasuries, and they can sell at the split of a second US treasure. There’s no such issue. Now imagine doing the same, accumulating one, for example, or rubles and FX reserves, and then one day needing to sell them, A, there’s no liquidity. B, if you manage to sell them, there are capital controls. You need to take them back. How will you take them back when there’s capital control? So the most… The next most efficient is the Eurozone. And the Eurozone is not one market, it’s Germany, France, Italy. So when we talk about the Eurozone, we’re not talking about the 20 countries. We’re talking about three or four countries within the 20 countries. So again, when we talk about the US dollar, it’s a relative discussion, but it’s also a relative discussion of the capital markets they are representing.

Tony Nash

Right. Okay, good. I just wanted to get that out of the way..

Tony Nash

The other point I wanted to raise was you said emerging markets need to raise their debt in US dollars. I don’t think that’s really well understood by a lot of people. So if you’re in like an Indonesia or Sri Lanka or whatever, if you need to sell debt to international investors because you’re not really going to raise that in domestic markets, are people overseas going to take the currency risk along with the sovereign risk?

Michael Ncoletos

Well, let’s put this. Turkey has interest rates at 30%. They should debt at 30% or are they going to issue debt in dollars, which would be at like 6, 7%, whatever the number is right now. They’re going to try that and they’re going to hope that the economy recovers. And as the economy recovers, their currency is going to become stronger. So the debt repayment is going to be cheaper. In theory, all very nice. But when the dollar goes up, it creates a squeeze on the world, on the growth, on the collateral, on everything, which makes things much worse for all these countries. Unless they have current account surpluses, which once they have, they can sustain that period for a longer term than the others. But again, they’re going to get squeezed as well. There is no hope. So all these countries that raise debt, dollar debt or foreign-denominated debt in the last 10 years because rates were at zero, now are facing issues because what we’ve seen the discussion that happens right now in US banks about the collateral that banks have and that the treasures that they hold have a mark to market loss, as we’ve seen, which effectively that doesn’t…

Michael Ncoletos

It’s not the case because the Fed made a…

Tony Nash

BTFP.

Tony Nash

BTFP, which they accept at face value the bonds. Now imagine what the US banks are facing, countries facing it without the BTFP to protect them at face value and with them needing to refinance that debt at the worst possible time. So if you’re asking me, the squeeze will not go in the liquidity of the US Treasury Bank. The problem would be in Turkey, China, Russia, Indonesia, Egypt, these countries and all the others are going to face Argentina. They’re going to face issues when raising debt because their capital market is not deep. When you buy these bonds, you marry them. If you don’t marry them, you’re going to be selling at a deep discount the day you decide to sell them. Okay, and you have more issues. So we tend to talk about the US. And I want to make a point. The US financial situation is not good. Definitely, and I’m not saying it’s good, but I’m saying the way the world is structured and the US being the global reserve currency, it’s less bad than whatever everyone else is facing.

Tony Nash

Yeah. I hadn’t thought about the sovereign debt issues before today, but now that you mentioned that, that’s Silicon Valley Bank all over the world at a central bank level, right? At a finance ministry level.

Michael Ncoletos

Let me put it simple. I’ll put it as simple as possible. When you can buy US treasury two year treasure, 4.9 %, 4.92 %. So five %, let’s say five %. You buy 5%, you buy US treasures, the safest asset in the world. You gain 5% a year and you sleep like a baby. So when you invest, you need to think, is there something that’s going to give me a higher return and it will be relative to me sleeping like a baby and gaining 5%? This is as simple as that. Because if I’m gaining 7% and I’m not sleeping at night, it’s not worth it. I need a higher return, and this higher return goes with the countries that are hard to find the finance.

Tony Nash

That’s right. Bob, what do you think about this?

Bob Iaccino

Well, I think the perfect end to that extremely impressive summary of what’s going on in the global markets is the sleep at night part that a lot of investors seem to ignore when we’ve gone through, let’s just call it multi-years bull markets and equity assets. Because they tend to… Investors tend to forget, and I’m speaking a little bit more to retail because I believe institutional investors know it, but sometimes they don’t. Let’s take the example of the hedge fund, for example. Hedge funds are supposed to perform when equities are performing, and they’re supposed to outperform when equities are collapsing. One of the things I like about this format versus the traditional financial media that unfortunately I’ve been a part of in theory since 1999 is that they tend to have this view that positive performance is the only performance that matters, and outperformance, they’ll put somebody on TV and they said, You’ve outperformed the S&P this past year. The S&P is up 12%, you’re up 15%. But when the S&P is down 24 %, and that particular person is down 18%, they’ll come on and say, Well, you’re down 18% this year. Well, you’re still outperforming to the opposite side.

Bob Iaccino

It’s one of the things I talk about a lot, and I’m digressing a little bit, but outperformance to the downside to me is much more important than outperformance to the upside. To Michael’s point, if you can make 5% and sleep at night, that to me is worth an extra 5%. That’s just the way that my internal math works. It’s not some technical formula that I can explain. You need to double my return to take away my sleep at this point in my career is basically what I’m saying.

Tony Nash

Yeah. Our traditional investors, are they looking for 30% returns a year? They’re not necessarily looking for 30% returns a year. That’s crypto level, right?

Bob Iaccino

When I was part of the investment committee of the fund to funds that I was a principal at, we went into these big investors. I’m not going to mention the fund because it’s dissolved at this point. But we had 10 years of returns where our worst year was down 46 basis points. Our best year was up 8%. That was what the fund was designed to do. But when we went into large, large allocators, they would say, God, I just love your returns, but you represent nothing but risk for me. Why? Well, because you don’t have a lot of money under management at this point, and we worry that allocating to you would affect your performance, which it would have, but whatever, didn’t happen. That stuck with me for a very long time where these large institutional asset allocators are very worried about sleeping at night because their management fee matters more so than beating their last year’s performance by a % or two. That’s something a lot of investors don’t understand. Again, I’m digressing a little bit, but it goes to the point of how much it matters that the safest asset in the world is between four and a half and 5% depending on what duration you put on it.

Bob Iaccino

That matters a lot, and that will continue to draw very large capital for a long period of time. That capital won’t necessarily leave those assets for a 25 basis points here or there or 50 basis points here or there.

Tony Nash

Interesting part-.

Michael Ncoletos

Can I add something, Tony?

Tony Nash

Absolutely.

Michael Ncoletos

I think we’re 100 % involved. You’re being paid to wait for the first time in your life after 20 years. You’re being paid to wait.

Bob Iaccino

That’s a great. Way to put it. That’s a great way to put it.

Michael Ncoletos

You’re being paid to wait. For the last 20 years, this hasn’t happened. So you’re being paid to wait. And when there is a correction, if there’s a correction or if there’s a recession, or there’s a depression or whatever, I won’t go into what could happen, you will have money on the side, being paid and being able to deploy it as you wish, having the most liquid asset in the world, which at that point would probably rally, which you’ll be making a couple of gains as well. And you’ll be doing the best thing you can do.

Bob Iaccino

If I can add to that, Tony, we have five trading days left in the month of November. Really four. Friday is a lost day, so to speak. We have four or five trading days left in the month. Let’s call it four and a half in the equity markets. You’re about to post your greatest November percentage-wise on record to the upside for equities. The volume is barely half of what it was in October. Now, it’s not going to make up the rest in four trading days. I guess it theoretically could, but it’s not. What does that tell you about the overall stance of the institutional investors? Honestly, in huge dollar amounts, they have not been involved. Because what Michael said, they’re being paid to wait. If you look at the overall makeup of this particular earning season that we’re basically finished with, it’s been good. But we have the weakest buyback numbers announced since 2016. We have the largest negative reaction on individual stocks that have missed earnings expectations since 2011, largest drop on misses. We have the largest cut to estimate since the second quarter of 2020. What does that tell you that these analysts and these investor relations parts of these large companies are thinking?

Bob Iaccino

They’re worried. They’re not mentioning recession as much. As a matter of fact, the lowest mention of the word recession, I believe since 2022, but they’re not positive overall, even though there’s beats on the outright figures.

Tony Nash

Because the risk appetite is mitigated by what Michael is talking about.

Bob Iaccino

By what Michael is talking about, exactly.

Tony Nash

It’s great. Let’s get back to this USD thing for a few more minutes, and then let’s move on to markets and talk real deep with Bob. Michael, you have chart showing the foreign exchange turnover by currency. Of course, it’s overwhelmingly USD. Of course, we’ve had some growth in CNY since, say, 2010. But on a relative basis, where is that CNY taking market share from? Is it taking from British pound or where is it taking that market share from? Is it from the dollar?

Michael Ncoletos

I think I say mostly from the euro.

Tony Nash

From the euro? Okay.

Michael Ncoletos

Yes. But again, China has done like 40 swap deals since 2016. They’ve been trying to make their currency more usable, let’s say, as simple as that. But again, everyone who trades in China and Yuan, they will do it at the equivalent of a Barker size trade. They will not do the extra mile to accumulate the FX to zero. So if I’m buying 10, selling 10, I’ll use that 10 to do it in one. But if I’m doing 30 and 40, but the 10 is only the bilateral trade going both ways, I don’t want to accumulate the Chinese.

Tony Nash

Right. Here’s one of the key things there that I don’t think a lot of people, a lot of these CNY cheerleaders understand is if people accumulate CNY, they’re trusting the People’s Bank of China, right?

Michael Ncoletos

A, and they trust them. They’re going to get their money back when they want it.

Tony Nash

Right. But when we look at the currencies on this chart, it’s the Fed, it’s the ECB, it’s the BOE, and the BOJ. Very highly covered, and I wouldn’t say transparent, but relatively revealing on some of the decisions they’re making. I don’t remember the last time I saw a PBOC press conference open where people could ask questions, real questions. Until we can have that level of questioning of a central banker, it’s really hard for a country or a company to accumulate that currency because they have no idea what the policy of that central bank is going to be. Is that fair?

Michael Ncoletos

Tony, before you get your… You have to take off the capital controls.

Tony Nash

Yup.

Michael Ncoletos

The right mind when I accumulate the currency which has capital control. We’re talking about the Bricks currency, okay? There’s a discussion. Two out of five countries have capital controls. Two out of the five have capital controls, and half of them don’t trust the other half within the Bricks. We’re talking that this is going to be the alternative to the US dollar? Okay.

Tony Nash

It’s great. Put them in the ring together.

Michael Ncoletos

Okay. If you want to believe in Santa Claus, you can believe in Santa. But as things stand now, this is no option. Sorry.

Bob Iaccino

Santa Claus, is that real?

Michael Ncoletos

Sorry.

Tony Nash

Yeah. We’re not going to reveal that on this show in case there’s kids watching. Let’s take this full circle to… I know there’s great chart on risk premium from EMs to the US, and I know we covered this a little bit, but seeing that risk premium really disappear, what is that? Effectively, that sucks all the money back to the US. Like you said earlier, what’s the point in investing in emerging markets if you have a guaranteed return, a US dollar denominated guaranteed return?

Michael Ncoletos

It comes back to what we talked about earlier. Again, I agree with you 100 %. If you’re getting 5 % for the safest asset, you need to at least get the double in order to get the risk. Okay, obviously it depends on the risk anyone can take. But let me put it this way. When you take risk, you need your upside to downside risk to be skewed on the upside. So if I’m willing to make 5 % to lose 5 %, there’s no point of having the discussion. If I’m losing to make 10 % to lose five %, that’s a two to one or a three to one, then it makes sense for me to make the investment. So a 10 % return is something I’m starting to consider in order for me not to put it at the five % and sleep at night. So to quantify what Bob said easier, I’m thinking in terms of how much you’re going to make in terms of what you can lose. So two to one, three to one, whatever that is. But it should be something bigger. So if it’s one to one, why bother get something riskier with the same return when I can buy something which there’s no risk or at least there’s never no risk, but there’s very small risk.

Tony Nash

Right. And the other thing that I try to reinforce with people that is so basic that some people look at me and think I’m stupid by saying this, but interest rates are the cost of money. And if money costs five % in the US, money should cost a lot more in riskier markets, right? That sounds really stupid, but that’s just the basics of it. So –

Michael Ncoletos

No, it’s simple. It’s very simple. Unless you’re safer than the US, which safer doesn’t mean only a fiscal situation, which is better. It means you have rule of law, you have an open capital markets, you have a democracy. There are a few things when you say safer. It’s not just numbers. So if you have an overall safer economy, then you should justify a better interest than the US. If you’re not safer than the US, then you need to justify a higher cost of money. As you said.

Tony Nash

Okay. Hi everyone. We’ve started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeintel.com/BlackFriday and subscribe to CI markets for $99. Thank you. We always hear about China being in the ascendant. Albert, as we saw that Chinese vessel with smoke coming off of it yesterday, is China a real competitor right now if they don’t have a Navy to enforce their policy?

Albert Marko

Nope. Simple question is absolutely not. They don’t have any maritime, naval force to enforce any of their trade activities globally. Everyone points out. I think I’ve seen some charts out there of, Oh, look how many ports that the Chinese own. Yeah, but those host nations can evict the Chinese at any point in time with absolutely no repercussions. So it’s like-

Tony Nash

So does DP World out of the UAE, and do they command a world trade? They don’t. They run them out.

Albert Marko

They don’t. Yeah, it’s exactly right. These comments of China being a competitor to the dollar or the US in the near term is just a lame argument. It’s silly. I don’t take any of it seriously.

Tony Nash

Great. Michael, do you have any view on the timing of this squeeze? Are we in the middle of it now? Is this something that’s coming in a few months? When do you expect the intensity of it to really hit?

Michael Ncoletos

Well, the Fed doesn’t need, first of all, to raise rates anymore. You can stay here and the problem will continue. As the deficits grow, more dollars are needed from the market. I guess next year is going to be a bit tricky, unless, of course, because, and I mentioned this in the paper, because we have US elections and because of US elections, you never know what the government will do. Maybe they do another QE. Or if it’s not a QE, it’s something with another name, not to call it QE, and they throw liquidity into the system, this thing might pose. But I think positioning in the dollar in the next couple of years, you’re going to see the dollar much higher.

Albert Marko

I agree with that. That falls right into my political outlook, where in order to combat inflation, they’re going to have to keep the dollar high. That’s just either raise rates or keep the dollar up to a level where it just suppresses inflation over the long run. That’s same view as me.

Tony Nash

Interesting. That’s great, guys. Okay, so let’s move on to the next topic on year-end markets. Bob, you already mentioned there’s only a few trading days left in November, and I know you cover a lot of markets every day. I’d really like to get a sense check on where we’re going into the end of the year. We have higher interest rates globally, like we just talked about. Inflation seems to be abating, at least for now, and we can debate the magnitude of that. We have some geopolitical factors, but they seem to be easing, especially US, China, these sorts of things, seem to be easing up a little bit. Of course, there’s the Iran, Hamas thing, but that’s relatively local. Spending seems to be slowing. Us retail sales and all this stuff are down. We’ve had some dire retail outlooks for the holiday period. At the same time, corporate profits peaked in Q3 2022. You mentioned earning surprises and stuff earlier, but they’re slowing. I’ve got a chart up showing corporate profits, and they’re down fairly at a significant level since 2022. What are you looking at as we go into the last month of the year?

Bob Iaccino

One of the things I’m looking at from an equity market perspective is what’s going to break first. The reason I say what’s going to break is because I think it is a matter of what and not if. I think the soft landing scenario, you would have to believe that the Fed was possible of creating a soft landing. They were capable of it, which I don’t in order to. You would have to allow the Fed a victory lap regardless of… I mean, I agree with what Michael said when you have supply-side-driven inflation, the Fed doesn’t really have a lot to do with it. But they have been successful when you look at the data in slowing the housing market, and that’s about it. You need to see others slowing in order to believe that inflation is actually going to get to their 2% target, or they need to accept something higher than the 2% target. Now, whether they know it or not, they left the door open for that a couple of years ago. When Jerome Powell said, Because we’ve been below 2%, I’m paraphrasing, of course, he said, When we’ve been below 2% for long, we may need a little bit of time above 2% in order to reach an adjusted average of 2% inflation.

Bob Iaccino

I still don’t know what an adjusted average is. We didn’t learn that in statistics class. We just learned average. He could actually, at some point down the road, say, You know what? We’re between 2.8 and 3.1% is okay for now, which to the point of the elections next year that Albert brought up, and I think that could be one of the things they say going into the elections. They could actually put pressure on the Fed to say, Well, we’re allowing it here for a little while, and we’ll reassess in 2025 to see if we need to do anything more. Also, wages are growing at a rate. When you look at the three-month average of real wages, you’re seeing a level that isn’t consistent with 2% inflation. It’s much more consistent with about 3.2 to 3.8, 3.2 on the core, and you’re pointing it on the headline. So the driving factor for me going into next year really is energy. I’m a little biased because crude oil is the thing I trade the most. But as you mentioned, I look at 29 markets every single day, and when those are boring, I go to individual equities.

Bob Iaccino

But energy markets to me are the number one thing because despite crude oil and crude oil is trading at about $74 on NIMEX right now, 78 on Brent, that’s still high historically. We actually talked to Tracy Shuchart, chigirl about that on a recording that will release this coming Wednesday. I’m sorry, this coming Wednesday, but she’s the one who brought it up and it struck me because we tend to think as $70 oil as being, Well, that’s okay, we’re back down below $3 a gallon. But that is still a relatively high price historically. Put that up against the higher interest rates. I got in trouble for on a Bloomberg TV interview about a year or so ago where I mentioned that there were somewhere in the range of 37-40% of C-suite people in the S&P 500. But the last time we had rates this high, they were in high school. Some of them weren’t born. The journalist that was interviewing me at the time got offended because she was in high school the last time rates were at this level.

Tony Nash

You could be bragging, right?

Bob Iaccino

I know. She should have been like, That’s me. That’s me. And she said to me, Well, they could read, Bob. And I could tell she got offended by that. And I said, I didn’t say that they couldn’t read. What I said was, and I’ll go to the old Mike Tyson quote that I bring up a lot, Everyone has a plan until they get punched in the face. And these people are about to get punched in the face with rates they’ve never had to deal with. You take Silicon Valley Bank as an example. They’re out there having DIE parties, and I’m not judging that, rather than hedging their to maturity interest rate risk, right?

Tony Nash

Right.

Bob Iaccino

Because they never had to do it before.

Tony Nash

Yeah, there was at zero interest rates, there’s really no… You have the nominal, say, punishment for risk, but nothing beyond that. Now, your punishment for risk is multiplied over the nominal cost.

Bob Iaccino

You brought up the cost of money, which is a very real thing for consumers as well as investors. We’re going to go into… The holiday season is a big deal to me, and energy prices are a big deal to me. How much more do consumers themselves even at their higher wages? Because while we’re looking at potentially 2.8 to 3.2% inflation next year, that’s on top of the inflation that we’ve already had. The news media tends to do consumers a disservice by saying inflation is falling. That does not mean prices are falling, and the three of you know this. That does not mean prices are going down. That means the $30,000 car that became a $38,000 car is now a $40,000 car. The increase is not as much, but prices are still increasing. You pile on higher energy prices, which is not a guarantee, it’s not a given. I think there’s a lot of trouble going into maybe Q2, Q3 of the markets next year.

Tony Nash

Yeah, I’m with you all. I feel like the consumer is really stressed, but I hear this stuff every day with people telling me the consumer isn’t stressed. But I see it in front of my face every day when I go out into –

Bob Iaccino

They say they’re stressed. Paul Krugman and put it… I work a lot about it. It was about a month ago, and I just recently found it and retweeted it because of the just complete ridiculousness of his stance, saying that consumers are complaining about their financial position, but it’s not as bad as they think. I’m like, What the hell are you talking about? Somebody says they can’t pay their bills, and Paul Krugman is out there saying, Yes, you can.

Tony Nash

Right.

Bob Iaccino

Are they talking about?

Tony Nash

He pay my bills if he wanted.

Albert Marko

Paul Krugman is nothing more more than democratic mouthpiece at this point. He doesn’t say anything relevant to anything economic at this point in time, in my opinion. Every time he speaks, he just says something more ludicrous that is just absolutely out of bounds.

Bob Iaccino

I can agree more, and I don’t care that he’s a democratic mouthpiece. Just say you are. Don’t throw yourself in the Nobel Prize-winged economist anymore, even though that’s technically a fact.

Tony Nash

I’ll say this in Krugman defense. I had his international finance textbook grad school, and he writes an amazing textbook. We’ve got to give them.

Albert Marko

That’s the problem is because the guy knows he’s a smart guy. There’s no question that a smart economist, financial guy. But for him saying these ridiculous things that, Yeah, you can pay your bills, even though everything’s 30% more than it was three years ago, is insane.

Tony Nash

Right, and cards are loaded up and all that stuff. I want to ask you about tech. We have a massive concentration of equity risk in tech right now. I’ve got a chart up on the screen showing the relative concentration in tech compared to other sectors. It’s interesting, you mentioned energy, and if anything, people are less concentrated in energy than they were a year ago. Tracy Shuchart actually posted this earlier this week. What are your thoughts on tech? We just saw this OpenAI nest over the last week. OpenAI is the peak of tech right now. The governance in OpenAI is terrifying. We all saw it play out and live. I would submit that the governance in OpenAI is more representative representative the governance in tech than not. We have this concentration of investment in tech, which is risky anyway. Then we have governance issues playing out, and people want to act like that’s not relatively normal in tech. Can you talk to us about your views on tech and what you see? Is OpenAI, do you you reflective of governance in other tech areas?

Bob Iaccino

Well, I have no insight in a company like OpenAI, but what I do like to look at is an equity sector backtest and describe what the four sections of equity market performance look like to me. One of them is recovery, which is faster growth, slower inflation. Another one is deflation, which is slower inflation, slower growth. Then you got reflation, which we went through a bunch of years of with faster growth, faster inflation. Then you have stagflation, which we all know what that is. It’s faster inflation, slower growth. In three of those scenarios, scenarios, is in the top five in terms of their historical returns. Worst-case scenario, they’re in fifth place if you have slower inflation and faster growth. But I think we have a better chance of stagflation or deflation over the medium medium term and performs poorly in deflation, but doesn’t actually perform that badly in periods of stagflation. Now, granted, we haven’t had that many. But the number one one performer faster growth, faster inflation, and faster growth, I’m sorry, faster inflation, slower growth is energy. That’s why, again, I look toward energy because in third place in both of those backtests is technology.

Bob Iaccino

If energy is rising and it’s having an effect on inflation to where we have inflation not quitting, I want to be in tech, even though that might point to higher yields. But when you look at a yield equity backtest, the only time when tech suffers is when the yields further out are struggling, specifically the 10-year yield. If the 10-year yield is rising, tech tends to underperform. If the short-term yields are rising, let’s say that the Fed is hiking and the market thinks that it’s going to work, tech outperforms again. It’s difficult for me to see stocks going up without seeing tech going up. But my base case is actually the stocks don’t perform that well in 2024, specifically in the second half of 2024, which would mean stock tech would lead to the downside. Does that make sense?

Tony Nash

That makes total sense. Do you think-

Michael Ncoletos

Can I add something to that?

Tony Nash

Yes, please.

Michael Ncoletos

Well, I agree agree 100 with both. Technology mostly the ones that do not have a bottom line are a duration asset. When the duration gets hit, they get hit as well. It’s as simple as that. When they have a a bottom then it’s a DCF, and depending on your discount cash flow or whatever, net present value or whatever you’re doing, then you can assess a value which may be doing better or do well. But again, I think you hit it right on the nail on the head. I view it the same way. I just wanted to add that.

Tony Nash

Albert, what are your views on tech?

Albert Marko

As long as the higher interest rates are remaining, I don’t know what tech is going to be how they’re going to be able to perform going into 2024. Obviously, the Fed likes to use the Mag Seven stocks to pump markets, but long term, they’re so riddled with debt and they’re holding it and their interest rates are just higher for longer. As long as the market is offside again on this pivot or rate cuts, I don’t see what tech is going to be able to do in 2024. We’re already at stratosphere levels on tech. I think think we have 35 times earnings or something like that. It’s absurd. I agree with Bob. I don’t see much of what tech could possibly do. Would I not want to… I mean, I’d sure as hell want to hold it if the market shifts, knowing full well what the Fed can do. But for me, I don’t see much play here going up.

Tony Nash

Sorry, NVIDIA is 116 times earnings. Right now.

Albert Marko

Oh, sorry, I was probably referencing 2021 levels.

Tony Nash

Just to break that down, as the market is saying that it will take 116 years of earnings to properly value the equity price price That’s what the market is saying right right now, I mean, you guys trade more than I do, so I just want to make sure I have that right.

Bob Iaccino

That was the very first definition that was given to me as well. Yeah, the very first one one I’ve ever I’ve always held that in the back of my head because even if you’re looking at 35 EPS during times of bull markets, the things that people are buying are between 28 and 40, and then they get as high as 116, obviously. But to what Albert said and to what Michael reiterated in the simplest of terms, again, thank you for that. When these companies raise money, they like to go to the public markets. And if the public markets aren’t doing well, they are not going to to like the yields do because the vast majority of them are not that cash positive. We’re not talking about the big seven here. We’re talking about the vast majority of the tech sector. Now, how much has to happen for the tech sector to drag the big seven down? Well, I think that’s more a matter of taking profits than anything. One of the biggest moves lower we see in these high flying names, and I’ll throw Apple in there, even though Apple is probably more of a value stock than a growth stock that it used to be, they will sell those because they don’t want to lose on the other positions.

Bob Iaccino

They’ll sell them to cover options positions for margin calls, things like that. That’s when those start to get hit. There was the big news story about Michael Burry of the big short short betting against the SOX, the Semiconductor Index. They talked about how he took $47.6 million position. We took it an option, so it’s not $47.6 million. Again, the legacy media doing a terrible job at everything. And by the way, sidebar, legacy media would want us to argue about this stuff rather than agree and have a consensus as to what things are looking like. That’s why I like these formats so much more, because if we do agree, we should be allowed to agree. And it’s part of the reason I got kicked off CNBC for having that fight. But anyway, when you’re talking about moving forward, what can happen to the tech sector, we all acknowledge and understand that tech is going to lead the future of all nations. Nations. So you’re buying a currency, the first definition I learned of buying a currency is you’re buying a share of stock in that country’s economy. Economy. So you’re advanced in tech, the currency tends to benefit from that, hence the US dollar remaining strong for a long, long time, among all the other things Michael mentioned.

Bob Iaccino

But when you’re looking at tech falling, tech will be the first thing that people buy dips of. It will also be the first thing that they cover when those buying of dips don’t don’t if yields are higher for longer because these companies will need to manage a lot of their cash flow based on higher yields they have not had to do for two decades. I think that backs up both what Albert and Michael are saying in terms of why yields actually matter. They don’t matter for inflation today. They matter for the condition of the economy 18 months from now, two years from now, and how we adjust to these inflations. Because, again, I don’t even know how many of us on this stream are old enough to remember those rates. I remember my dad dancing because he got 6% on a house. He was thrilled because his first house was at 14% or 12%. This is a very new phenomenon, even rates where they are now. I wonder if the Fed will blink. I don’t know if they will or not. I’m curious about it.

Tony Nash

I remember my parents with a double mortgage in the early 1980s. Yeah. We have a lot of treasury people and a lot of CFOs who I don’t think… I don’t know if they’re ready for the… Yes, they can read, but I don’t know if they’re ready for the lessons that they’re…

Bob Iaccino

My father literally danced. He had a friend who had an accordion and knew how to play it. He danced the Tarantella for about 15 minutes because he got 6%. I’m sorry, I’m a child of immigrants, and that’s what we live with.

Tony Nash

Fantastic. Okay, great. Thank you for that, guys. Guys. Hey, talk about Argentina for a little bit, but because, of course, we had that big election in Argentina, and we saw a radical radical and according to Bloomberg, a madman, Milei, elected in Argentina. He’s got great hair, of course. This Bloomberg snip that I’m showing on screen right now, evidently, Bloomberg believes he’ll only help rich people and that only rich people want Argentina to end their economic slump. Bob, you’ve made some comments about media, and this is the stuff that we see there.

Bob Iaccino

Turning off Bloomberg as you speak.

Tony Nash

Yeah. With the Milei win, of course, the MSCI Argentina Argentina rally up 22% since October 31st, which is great. Great. Albert, what can Milei actually change? If you were in charge of Argentina, well, first of all, what could he change? Then if you were there, what would you change?

Albert Marko

I don’t know what he can change, to be honest with you. Argentina is riddled in debt. I have a suspicion that a lot of the debt is not reported in some special vehicles vehicles whatnot, and they’ll probably find out when they unload that just as as the interest-

Tony Nash

Yeah.

Albert Marko

-in office. Office. He doesn’t really have… Listen, I like him. He’s quite a character. He says some crazy stuff, some stuff that makes a lot of-

Tony Nash

I can see you liking that.

Albert Marko

Yeah, and I do. And I like the guy personally. But he doesn’t have a support structure. I don’t know who is going to be in his cabinet at the moment. His rhetoric for elections is far different than actual policy when you’re in charge of things. I don’t know-

Tony Nash

I’ve heard it’s hard.

Albert Marko

It is hard. And I don’t know what he can actually do. And I’m afraid that if he starts just firing people left and right and all these different institutions, that has to be all rolled up into something else. I mean, you just can’t just eliminate an entire ministry of so and so without some repercussions. I don’t know what he can actually do. I don’t really have a positive outlook for Argentina, regardless of him or anybody anybody else. In charge for the next 12 months. But like I said on Twitter, I like to reserve judgment until I see who his cabinet positions are. Until you see that, it’s really hard to make an assessment on the guy and what he’s going to be able to do for Argentina. He’s talked about dollarizing Argentina. Which in principle I agree with. It would absolutely stop hyperinflation in Argentina. But the reality is with what dollars is he going to do this with? Their debt is enormous and they don’t even have enough dollars to dollarize. It may be a five-year plan, perhaps, but but it’s not going to happen. I’m sure Michael can sit there and tell you more about the dollar and how they could possibly dollarize, dollarize, I don’t see a viable way that his election rhetoric can match up with policies going forward in the next 12 months.

Tony Nash

Bringing up Michael is a good point. Michael, you live in Greece?

Michael Ncoletos

Sorry, did I understand? In order for Argentina to dollarize, it will need another, like braided Balls type of trick. The US government has to be on board and they need to fund the Argentinean economy and make quite a few deals on this, make a few agreements, which I think is not that unlikely given that we’re also going into a geopolitical conflict, if you want to put it this way. So if you look at the Cold War between US and Russia, you had spheres of influence. I guess we’re going to go through that again. And it feels to me that Argentina is closer to home in terms of the US. The US will want to bring Argentina into their sphere of influence and help the new government in that sense. That’s my feeling. But this has nothing to do with economics, has to do more with a geostrategic view.

Tony Nash

Okay.

Albert Marko

Yeah, the problem-

Michael Ncoletos

I know with other things.

Albert Marko

Yeah, the problem with that is is has been notorious of installing leftists throughout Latin America. Look what happened with Brazil and then Colombia. Also. I have a suspicion that Argentina is set up to fail. They don’t want a conservative in there to actually succeed in economic policies.

Tony Nash

Can we just ask… Michael, you live in Greece a decade ago or so. They were facing very difficult economic times. When you look at Milei, just your top-level assessment, do you think he can be successful?

Michael Ncoletos

Well, Greece had a blessing and a curse. The blessing and the curse was the the in the sense that because we had a hard currency, things did not collapse. That was the blessing. The curse is that because we had a hard currency, it took us 10 years to adjust. So it depends how you want to see it and depends how, as Albert says, what the cabinet will be and what the policies will be. It comes down to pure policies and economics economics how they’re going to deal with this. If they want to be serious, they’re going to get the heat for 24 months and then they’ll be okay. If they don’t want to be serious, this can last for another 20 years and we can be having this discussion every five years.

Albert Marko

I’m going to have to agree with option B on that one. I just think that it’s going to take a long time for Argentina to pull out of this. Even with the policies, if he enacts some policies that are good, that’ll probably be credited towards the next leader of Argentina and not the not Milei.

Tony Nash

Let me just wrap this up. I know Bob needs to go, and I know we need to give our viewers a little bit of time to digest this stuff. Whenever there’s a win like this, and I’ve heard this in the the over the past couple of of days. Person on the right wants to believe that it’s a signifier of a bigger movement. Like, Milei’s win means that geopolitics is moving to the right, all this other stuff. Do you think think real or do you think it’s just a one-off?

Albert Marko

I think that there’s certainly a building momentum for conservative governments out there. But the fact of the matter is a lot of the leftist players control the markets and the media, and it’s hard to actually displace that in the near term. I think it’s going to be at least another… It’s either going to be another decade before conservative government stay gold or they’re going to need some some black swan or economic economic to the point where people are just fed up and don’t want to hear it anymore.

Tony Nash

Which is what happened in Argentina, but the question is-

Albert Marko

Yeah, we’re talking about a global thing. Yeah, that’s exactly right. We need a global thing. I think a good indicator would be what happens in in Holland. The next election coming up right now.

Tony Nash

Okay, just real quickly tell us what’s happening there.

Albert Marko

Well, the leftist government has absolutely butchered the economy there, and I think the people are pretty much fed up. But the problem problem is if the Conservatives get in there, do they have enough to actually have a majority in Parliament to lead lead coalition? I don’t even think that’s possible over there at the moment.

Tony Nash

Okay.

Albert Marko

We’ll see.

Tony Nash

Interesting. I think there’s a lot to come come Argentina, as you say. If he doesn’t have the people around him who can help him lead, it’s going to be extremely difficult for him to have much of an impact. I am so grateful for your time and your thoughts. I really appreciate this. Thanks. Have a great holiday weekend and have a great week ahead. 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.

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Welcome to “The Week Ahead” with your host Tony Nash.

1. The Stock Market – Gone. Tony Greer provides insights into the current state of the stock market and where it might go before year-end. He also explores the relative levels of the SPX and the VIX, and shares valuable perspectives on where equity markets might head.

2. Record Oil Demand & Growing Gas Supply. Tracy Shuchart discusses the dichotomy of global oil demand reaching record highs while crude oil prices continue to fall. She discusses the implications of Saudi Arabia’s commitment to supply cuts and the EIA’s projections on LNG export capacity. Why are LNG export facilities concentrated on the Gulf, and what does it mean for global markets?

3. China, US & Geopolitics. Albert Marko reflects on recent diplomatic victories between the US and China, particularly the reassurance from China regarding Taiwan. He shares the dynamics of US-China relations, the risks involved, and China’s change in diplomatic tone. Whare are the potential geopolitical risks on the horizon and the internal and external challenges facing China?

Transcript

Tony Nash

Hi, everyone. We’ve started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeantel.com/blackfriday and subscribe to CI Markets for $99. Thank you.

Tony Nash

Hi, everyone welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Tony Greer, Tracy Shuchart, and Albert Marko. This week, a lot of interesting statements. When I contacted Tony Greer about the show, I said, What do you want to talk about? He said, Four words. He said, The stock market gone. That’s what we’re going to talk about today, the stock market gone. We’re also going to talk about record oil demand. We’re talking about growing gas supply. We’re finally going to end with Albert talking about China, the US, and geopolitics coming out of that meeting in San Francisco. Guys, thank you very much for joining us on this Friday. Tony, like I said at the top, when I contacted you, you said the stock market gone. I really want to understand what that means. That was very concise. Can you walk us into what does that mean? What should we be watching right now? Why are you saying that? I’ve got on the screen just a snapshot of the VIX and SPX just so that we can understand what’s going on in those markets as well.

Tony Greer

I think this week, Ton was… Sorry, I just have an alarm going off for no reason. This week was watershed week for me for observing the stock market. I feel like we have a date that will live in infamy on Tuesday, November 14th. We got CPI data. It was benign. The data wasn’t off by much, but the market clearly, by virtue of its response, responded that inflation is no longer going to be an issue. Right? Bonds rally, stocks rally, both are dramatically oversold. Both have huge, usually negative sentiment. And so they up and take off, right? So what I feel is that the stock market has just gone uncaged because that move broke it out above all major moving averages that day in a major magnitude S&P rally. We had a major magnitude bond rally, huge magnitude bond rallies that day across the curve. New lows in rates. New low closes in rates today. So all of that follow through to me means that the high in Fed funds is in. It means that we are now going to be in a very tight range of Fed funds. And I feel like the market just weathered a very terrible storm.

Tony Greer

And so now the risk has changed where the risk to the stock market was the bond market. If we had hairy inflation data, the bond market was going to collapse and scare the crap out of the stock market, stocks were going to go with it. Now that has all been removed. All been removed, all been removed. Then crude oil went down $15 and further removed the idea that there’s going to be any brand of inflation scare coming across the airwaves. With that all said, technically the breakout is intact. I don’t want to take on too long. Go ahead, Ton.

Tony Nash

No, that’s great. What people have been saying for the past year or so is higher for longer. The er part of higher is you’re saying is gone. It’s going to remain high for a long period of time, but it’s probably not going to go higher. Is that fair?

Tony Greer

Are you talking rates or inflation?

Tony Nash

Rates and inflation.

Tony Greer

Yeah, similarly. Similarly, headline inflation is gone. It’s not going to be back. We’re not going to see any pops in CPI that’s going to scare the market anymore.

Tony Nash

Over ever or, I mean, not ever, but like over the next two years?

Tony Greer

Yeah. Well, give it six months to a year, right? Oil price has been buried, gasoline prices are getting buried. The gas price is going to go down in election year come hell or high water. I just think that that removes an unbelievably huge risk that the stock market was pricing in, right? It priced it in right into the Treasury refunding. It priced it in right into the Middle Eastern conflict. We came out of that. And so with.

Tony Nash

All of that- That all sounds good to me. That all sounds really good to me. Tracy, you know the rules here. Jump in. Don’t raise your hand.

Tracy Shuchart

I’m trying to.

Tony Greer

Sorry, Tracy. Sorry I keep cutting you off. I know.

Tracy Shuchart

What I wanted to ask is, what do you make of that health insurance print? It was negative 34 % and CPI. I mean, we know they changed the metric, but that’s really what brought down the CPI, right? Because it’s actually included in core.

Tony Greer

Absolutely.

Tracy Shuchart

What happens if we have a revision or is the market going to care and the market’s not going to care? It’s already-.

Tony Greer

I was going to say, Trace, I’ve matured in my thinking to the belief that the market trades off the data that it’s given and takes it totally on its face. Nobody’s reading into… Yeah, the health insurance was something that the micromanagers of the market follow. The rest of the world, CPI point one, doesn’t care, stocks, bonds, gone. That was the statement. That’s what they said. That’s what I’m going with.

Tony Nash

Can I comment on that, Tracy? Sorry, go ahead, Albert.

Albert Marko

No, it’s right. It’s perception is reality in this market. They don’t care about revisions. They can go back six months from now and say, Oh, yeah, inflation was actually 5%. Nobody’s going to care at that point. It’s done. It’s over and done. These algorithms and trades, they run on the same day. I mean, if you see some decent number, that’s it. It’s gone for the next five business days. It’s just what it is at the moment.

Tony Nash

I’ve actually trademarked to wait for the revision if you guys haven’t paid attention on Twitter. I do pay attention to revisions, but I think I’m the only one. It’s obvious that Tony doesn’t care. But what it also tells me with that healthcare change, Tracy, is that the guys who publish the economic data want those numbers to come down and they will change whatever mechanics they need to make them hit the zone that they want so that guys who just look at the top number, they see what they want to see. That’s part of the statistics game, I think. I think, Tony is right. Take it for what the top-level print is. Digging down is awesome for nerds, but it takes too long for traders. Is that right, Tony?

Tony Greer

A little bit like that, right? It’s like if we’re not going to trade off of the data that comes out officially, then what are we going to trade off of? I feel like the market already done and dusted, decided that a long time ago.

Albert Marko

The only problem I see is whenever they make these ridiculous changes to weighing inflation or employment or whatever data point you want to talk about, just for me, it compounds the looming problem that’s coming with this market. Because they can have clear sailing as long as the geopolitical issues are in check, as long as the data that they can manipulate is in a certain range and so on and so forth. But if something goes wrong and it gets out of their control, that’s when we’re going to have a problem. Do I see that in the next six months? Probably not. I would have to say trade on the data. What else are you going to do?

Tony Nash

Yeah, my health insurance didn’t go down 37%.

Albert Marko

That was a criminal change. They’re using corporate profits as a metric of CPI. It’s just insane for me. But whatever, we can go on that for hours. But it is what it is.

Tony Nash

So slowing inflation is a good thing, but we saw there’s this little company called Walmart. And on their earnings call, their CEO said, We could be facing deflation in a few months. And we also had another CEO come out in their last earnings call saying that we’ve already seen deflation. I’m starting to get the sense that deflation is going to be one of those terms that we’re going to hear a lot in earnings calls for the rest of this quarter and probably next quarter as a justification for shrinking profitability. What do you see with that, Tony? Are you expecting not just inflation to stop or trail off? Are you outright deflation? If that happens, how does that impact markets?

Tony Greer

I try to stay away from economic predictions because I’m not a biologist. But if I had to trade off of what I feel like the bond curve and the yields market are telling us, I feel like the curve had a very violent double bottom down at -100, and everybody was convinced the recession was coming. Then the curve went and rifle all the way back almost to zero, two cents. Now we’re somewhere in the middle at -40 basis points, which means that we’re still going to be navigating some waterfalls in the stock market. They’re just going to be a lot more shallow than anybody can imagine. That’s great. Yeah. And just related back to the inflation deflation thing, I would imagine that the narrative becomes a little bit deflationary, which I think is just going to be more fuel for the bond market to get off the lows and get rates back even another 25 basis points lower. I think that’s going to be even better for Mag 7 and any lowering rates in the end of the curve. I mean, it’s going to be good for home builders. It’s going to be home construction is going to rally.

Tony Greer

Semiconductors are going to rally. Like all of this stuff is just going to start going. Breakouts are really tradable right now and they’re going to continue.

Tony Nash

Interesting. Albert, what do you see?

Albert Marko

What are we at? 4,500, 4,500 and change, whatever it is today?

Tony Greer

Yeah, 4,500 a quarter.

Albert Marko

Where do we go from here? I mean, what are we talking about? 4,800, 5,000 on the S&P? I could see that at the end of the year towards the election. I for sure can see that. But for the next three months, we go to what? 4,500, 4,600? 4,800? Then what? We’re at all time highs for everything across the board at that point.

Tony Greer

Breakout City.

Tony Nash

Yeah.

Tony Greer

Performance chasing, career risk, things. Like that.

Albert Marko

Yeah, listen, I don’t discount it. It makes me vomit inside a little bit, but I don’t discount it.

Tony Greer

Play the game, man.

Tracy Shuchart

You have to think is all these CTA chasers, their model’s just flipped. They’re going long because their models flipped, and they don’t really care what’s happening in the underlying market.

Albert Marko

Yeah. For me, it’s like I look at this in a political script way, and if they want to get the market booming by the election time, I think they’re going to have to fake a crisis in February, whether it be banking or something, just to be able to relaunch it back up again. I just don’t think that they can stay in this 4,6, 4,7 area, 4,600, 4,700 area, and keep it there for nine months.

Tony Nash

But a couple of months ago, we were talking about S&P at 3,600 or something like that. And obviously, we’re not there, right?

Albert Marko

No. They got to lose control first. And they’re in no way of losing control of anything. There’s no China, there’s no Europe. So what’s going to happen?

Tony Nash

We went through the regional banking crisis. We went through inflation. We’ve gone through housing, worries about housing. And now everybody says 60 % of people in their homes or whatever, and it’s not a big deal. And we’ve gone through a lot of these concerns. And Powell, I think, is looking pretty smart right now. I mean, everybody wants to snipe at the guy, but he’s actually looking pretty smart right now in terms of managing things and managing the markets pretty deathly. Am I wrong on that?

Tony Greer

Trying to close the fucking door.

Tony Nash

Right, exactly.

Tony Greer

That was the best line. I’m sorry. That was the best line ever.

Tony Nash

Oh, yeah, exactly. He showed us he’s a real human being. Which is great.

Tony Greer

Yeah. I mean, it was cool as a cucumber for a change. A leader was like, You’re kidding me? Close the fucking door, man.

Tony Nash

Right. As a trainer, Tony, when you see the way Powell has acted and continues to act, is he providing a consistent, confident approach that you’re looking for as you look at markets?

Tony Greer

I feel like he’s a little bit volatile. I feel like sometimes he exudes pretty good confidence and I can listen to him. Other times I’m like, I feel like this guy is a deer in the headlights and has no idea what to say. He gives me mixed feelings.

Tony Nash

Okay. Do you think we’ll look back on him and go, Wow, he was handled things as well as Greenspan, although he didn’t do it as smoothly as Greenspan did, but he handled some tough things and got things back on track.

Tony Greer

I was going to say it would be hard to say that Powell made too many enemies during his tenure. He’s trying to help. He’s helped us out of the SVBI. He stewarded that fairly well, I thought, and doing a way better job containing inflation than I ever would have thought possible. But it’s just further proof that if you control the money supply and the narrative, you really control everything.

Albert Marko

That’s right.

Tony Nash

And puking fiscal doesn’t hurt either. Right. Having a DC that wants to spend a ton of money doesn’t really hurt.

Tony Greer

100%. That’s going to be part of the reason why the stock market is going to go up and keep going.

Tony Nash

Yeah.

Tony Greer

In my opinion. You know what I mean? God forbid the economy gets back on its feet and they still don’t have an inflation impulse to battle. That’s a really bullish cocktail for stocks.

Albert Marko

It’s tough because they still have wage inflation hitting corporations at the moment and they’re starting to leak out jobs here and there. So I don’t know. Man, it’s just hard for me to swallow that this economy is going to get back on track when inflation is still 20% above 2019 levels, and jobs are starting to leak away from the publics. Man, it’s just so hard for me to swallow, Tony. It’s hard.

Tony Greer

No, I hear you. Jobs going down is part of the volatility. We get a weak economic data, we get a weak print and bonds go off on another leg higher. To me, that could be totally part of the trade.

Tony Nash

Yeah, but here’s what I’ve seen. In the recession in ’91, which nobody talks about it anymore, we had huge job cuts. Boom. Everyone fell off in about a month. In 2000, same thing in tech and finance, boom, everything cut off. 2008, across the economy, everything cut off within two, three months. Here we saw Meta, Amazon, Microsoft lay a bunch of people off a year ago. Then over the past couple of months, we’ve seen banks lay a bunch of people off, especially in their mortgage units and their lending units, that thing. What I’m starting to see is clusters of layoffs, not one single economy-wide action. I’m not saying this time is different, but I’m saying a few different things happen by sector over an extended period of time. We could still have that event where a bunch of jobs disappear within a month. But we are seeing big clumps of jobs. We saw this a year ago in tech with a bunch of jobs just disappearing over a week or two.

Tracy Shuchart

The only thing that I’m concerned about is that we raised rates so quickly, like faster than almost any time in history. I feel like maybe markets haven’t completely digested this yet. That’s the still what if question in mind.

Tony Nash

What does that look like? Markets digesting it. What does that look like to you?

Tracy Shuchart

That means that I don’t think it’s really hit the economy yet. We haven’t really seen labor come off. We haven’t… We haven’t really seen those effects, except for maybe, I guess you could call the commercial real estate market, but one could argue that that was already in trouble from COVID and that was just a carry-over and just got worse with rate increases. I just think that I’m just still a little apprehensive or a little skeptical that maybe markets haven’t completely digested this rate increase and that we could be blindsided, well, quote-unquote, blindsided in some respect if things really start to fall apart. I’m just saying it’s just in the back of my mind. I’m not saying it would happen.

Albert Marko

The market keeps chasing this Fed pivot and Fed cuts. Now they’re pricing cuts in May, I think that’s what they’re looking at right now, four cuts for all of 2024. That’s not happening if super core inflation doesn’t trend down. That’s simply not happening. I don’t think the market thinks that’s going to… For sure, the market is not looking at that. They’re not contemplating any more rate hikes. I still think we’re going to get one or two in 2024.

Tony Nash

Q1.

Albert Marko

What’s that? Yeah, I think Q1, Q2, we’re going to get a rate hike, one or two of them.

Tony Nash

I just want to tell you, from my college football perspective, since we’re right in the middle of the season, Tony Greer is our quarterback who just snaps back and forgets the last play, just keeps on plugging. Tracy is our offensive coordinator who has a little wider view, a little bit afraid of the defense coming after. Albert’s the GM who’s just taking everything into view and looking for the long term. It’s great.

Albert Marko

Yeah, well, quarterbacks wins championships.

Tony Nash

That’s right. Yeah, they do.

Tony Greer

I just want to play the game right and make sure that I’m on board if there is a seasonality-driven rally that to me seems like set up a picture perfect scenario for that to take place and in magnitudes that people are not going to want to believe and it’s going to be all that much harder to jump in and get position for. And that’s why I think it’s a lasting thing.

Tony Nash

Hey, Tony, just for reference, when you look at a position, how long do you usually take a position for? Is it a day or a month or weeks?

Tony Greer

I start off with a two day to two week time frame, almost with pretty much everything, Tony. That’s how I address it. And if I live through a two week time frame, then I’m usually just go on cruise control, which is putting in a trailing stop scenario and then let the market take me out. And in those conditions, I’ve been in position for like two years. You just have the trailing stop right up behind you if you get it really right. Okay, great. It doesn’t happen a lot, but it happens sometimes.

Tony Nash

Fantastic. That’s really good context to understand because you’re looking at things right now for a relatively near-term trade turnaround, right? I think Albert’s looking at things longer-term, thinking elections and politics and that thing. That’s really interesting. Not that Albert doesn’t go in and out in a day at times, but I think that’s really interesting.

Albert Marko

Multiple times in the day.

Tony Nash

Exactly.

Tony Greer

Speaking of the election, who knows? But Trump was good for the market, right? And if the market starts pricing him in, that’s a bullish scenario that I didn’t even calculate what that will do to the markets because I don’t know if that’s going to be the case, so I don’t think about it yet. But man, I think that would be a bullish scenario. The guy was good for the economy, good for the stock market, right?

Albert Marko

Well, you would have a double positive. You’d have the Dems trying to push up the market because they want to look good for the election. And then you’d have some people in the market pricing in Trump because they think he’s going to be good for the election.

Tony Greer

I wouldn’t be short stocks if Donald Trump got elected President.

Albert Marko

Oh, God, no. Hell, no.

Tony Nash

Interesting.

Tony Greer

Like, period. Not for a day.

Tracy Shuchart

It would be like all in everything.

Tony Greer

Yeah, right? I’m saying that day that I was talking. About-

Tracy Shuchart

I would triple my energy positions. Right away.

Tony Greer

Yeah. Oh, yeah, forget it. Yeah, totally. But on that day, the reason that day was so insane to me is because there were 17 sectors that I follow that had a two-sigma or more, most of them breaking out through moving average resistance. On any given day like today, there’s one stock with a two-sigma move on the board today. On any given day there’s probably an average of 2.3 two-sigma move, stock movers. That day, 17 sectors all rallied in two-sigma fashion. That is the everything rally. That is like if you’re short, you’re dead.

Tony Nash

Yep. Wow. Interesting. Let’s definitely keep an eye on that as things move. I’m not sure, Albert, it’s too early to take polls at face value, right?

Albert Marko

No, I mean, it’s way too early, and you have all sorts of variables like Democratic and Republican operatives trying to show some narrative in the way they ask questions in the polls, and then you have just voters flat out lying. You have people that are pro-Biden that they want to see Trump get in, so they give Trump extra votes in the polls and vice versa. It’s a mess. Polling is a mess right now.

Tony Nash

Right.

Tracy Shuchart

Well, it’s not. They used to call you on the phone, or they call people on the phone. I mean, who has a phone anymore? Boomers? I mean, like a landline, right?

Albert Marko

Yeah.

Tony Greer

Seriously.

Tony Nash

And cable. Who has a phone and cable?

Tony Nash

Okay, guys. Let’s move on to energy, Tracy. This week you tweeted about global oil demand at season record highs. Since we have crude prices falling, I want to understand what that’s about. We also have Saudi Arabia saying they will continue supply cuts. Why is that? Why is crude falling when we have record demand?

Tracy Shuchart

Well, I think first that data was JODI data, so it lagged too much. That was September data, just to make it clear. But really, if you look at the OPEC monthly report, which just came out last week, they’re still showing demand, very supportive, and that’s only, say, a month lag. But really what we have seen is a lot of length come out of this contract since October to the latest COT report. We’ve seen about 40% of the length come out of that contract. Obviously, it’s going to be more after this week, but we haven’t really seen short positions initiated. For whatever reason, people are jumping out of this contract. Now, my hair, brain theory is that we saw this come out as soon as markets started to rally and we saw the great jump pile in into tech again. That only exacerbated after we had that CPI print. Then after the CPI print, we saw oil go down even more. We saw everybody jumping into that tech trait. I think that’s partially the reason, that narrative where you’re changing from the value to growth scenario. Does that make sense? Because growth stocks, as soon as you hear the Fed wants to pause, that pause narrative that we started hearing right before the last meeting at the very beginning of November, we started hearing a lot of this pause from all of the Fed heads, right?

Tracy Shuchart

That’s when we really saw a jump into growth again because that’s what those markets like to hear, because you don’t want higher interest rates and file into growth. In my opinion, that was part of the… That is part of the exodus and the liquidation and crude stocks. But really, it’s not that anybody’s getting short. It’s not that the fundamentals of this market has changed. The market still remains very tight. In fact, our US distill stocks, which are like diesel, heating oil, jet fuel, et cetera, are ending the fall season at their lowest seasonal level since 1982, and we haven’t hit winter yet. We definitely have a problem with the shortage in diesel, and it’s not just in the US. We’re seeing this in Germany as well, which is unbelievable considering their manufacturing has taken a complete dive. Manufacturing definitely takes more distillate. We’re seeing this distillate problem. I think that’s only going to grow as we hit into the winter seasons. Again, what I’m saying is the market is fundamentally still tight. I know that was a lot.

Tony Nash

It’s still tight, but prices are down because investors have rotated out of energy into tech. Is that, if I understood what you’re saying.

Tracy Shuchart

I believe is slow. I believe so. I think it’s because everybody loves to jump on that growth narrative, the Mag 7. It’s a huge pylon. I’ve been posted a chart on Twitter this week. Basically, 99% of hedge funds are invested after 12% at the beginning of this year. Since then, that rotation into growth pulls a lot out of value stocks. Nobody’s value investing, and it’s not just the energy. We can look at this across all the value sectors.

Tony Nash

I mean, a rug pole in tech would really kill a lot of people, right?

Tracy Shuchart

Yes.

Tony Nash

What’s that?

Albert Marko

And then some.

Tony Nash

Yeah. I’m shocked to see that number of hedge funds that highly invested in tech right now. But I guess it makes sense. If you’re talking about the rotation. We had another guest on about a month or so ago talking about the rotation out of tech, and we started to see a rotation out of tech, but it almost sounds like those guys have gone back in.

Tracy Shuchart

Everybody’s piled in, especially after that CPI print. I mean, it’s a rocket ship.

Tony Nash

Yeah.

Tony Greer

I’m calling something else that you have to consider in crude oil is Cushing inventories just saw a couple of pretty big builds and put them back into the range they were in over the summer rather than right off of their lows.

Tracy Shuchart

Still at historical lows, though.

Tony Greer

Yeah. No, I know, Tracy. I’m just trying to circle the fact that WTI this week was the source of the weakness, right? Wti is a five % gas is off one or two, and I think diesel is almost unchanged. I’m saying it was like a purely WTI slide. It was a pure supply-side issue. I mean, front month spread went from 25 cents back to 25 cents contango, and the front price front month dropped $15. That was the whole thing right there, if you ask me.

Albert Marko

Yeah, this ridiculous drop in this price. I mean, this is like Bitcoin’s time moves from the oil market. It’s just super suspicious, especially with an OPEC meeting coming up where I think they’re probably going to announce deeper and longer cuts.

Tracy Shuchart

For sure.

Albert Marko

Yeah. We’ll see what happens. I’m a long oiler. Right now, I’m a long oiler.

Tony Nash

You’re long. Okay. Interesting. Okay, guys. Then, Tracy, let’s talk about gas for a minute. We saw this street from EIA talking about LNG export activity from North America. Is this a realistic projection? That’s the first question, but also why are all of the US LNG facilities on the Gulf, which I would assume means they’re serving Europe. Why don’t we have any LNG Asia-facing? Because it looks like Canada is the only one that’s really serving Asia.

Tracy Shuchart

Well, because California. They are trying to phase out oil and gas, and so they don’t want any more pipelines. They don’t want any more. They want nothing to do with it. Same goes all down the Westcoast, right? If you’re talking water.

Tony Nash

Okay, so we’re not servicing three and a half billion people in LNG.

Tracy Shuchart

Right. Because of-

Tony Nash

We have the second most abundant LNG in the world or something? Or gas, sorry, in the world. We’re not serving three and a half billion people in Asia because-.

Tracy Shuchart

California doesn’t want oil pipelines and they want no oil and gas. Yes, correct. Basically, that is it. They’re trying to phase it out. There’s nothing you can do about it. Environmental groups. There’s too many problems trying to get more capacity through California. It’s just not going to happen. End of story, unfortunately. We do have LNG going to Europe. We do. But right now, the other problem for that is the Panama Canal.

Tony Nash

Tell us about that. What’s the Panama Canal problem?

Tracy Shuchart

Right now, there’s drought, and what they’re doing is there’s not as many ships can go through and not as many heavy ships can go through, so you have to split things. We saw the same thing in Germany last summer with the Ryan River. We’re seeing in the Panama Canal right now, people are paying on… I think the last figure was somebody paid $4.5 million just to jump the line to get their cars to go through.

Tony Nash

Wow.

Tracy Shuchart

In the Panama Canal right now. What that is doing is it’s causing prompt Asia prices to rise over European prices right now. That’s out into summer of 2024.

Tony Nash

Okay, wow. When I look at this map, the rest of the export facilities, there look to be two on the East Coast. Everything else is in the Gulf. Then we have two from Canada. It looks like there’s one from… No, there’s not one in Mexico. Well, there are a couple in Mexico, it looks like.

Tracy Shuchart

Yeah, but they’re not.

Tony Nash

Is there a lot of LNG export from Canada to Asia?

Tracy Shuchart

No, not yet.

Tony Nash

It’s mostly Qatar type of trade.

Tracy Shuchart

Yes. They’re building out their export, but it’s a case with Canada that’s a little bit too little too late because the liberal party or the party in charge there was like, We want nothing to do. We don’t see a base case for LNG until US exports started to-

Tony Nash

Who would want cheap energy? I mean, it’s terrible.

Albert Marko

That’s absurd.

Tony Nash

That’s absurd.

Tracy Shuchart

They do have capacity, and it’s good for them that they’re building out and they have more capacity coming online, so they don’t have to be as dependent on the US, and that’s for oil as well as gas. But ultimately, everything is focused and everything’s been focused really on the Gulf because we can still get it to Asia and we can get it to Europe from there. All the big companies, LNG, CHK, Oxy, they’re all building out big facilities. In fact, by 2022, we became the largest LNG export facility, and we still have a little bit more in the Gulf. We have the largest LNG export capacity in the world right now. We still have a couple more projects coming online out to 2027. The bulk is majorly done with, but it’s a huge area right now.

Tony Nash

Texas is the energy capital of the world and becoming the tech capital of the world. You guys can keep finance on the East Coast, but we’ll take energy and tech.

Albert Marko

Maybe if the Canadians priced things in hockey sticks and maple syrup, they’d see the light, but apparently, they don’t understand that whatever.

Tony Nash

Okay, great. Hey, let’s move on to this big China meeting that we had in San Francisco this week where US and China met, Biden and Xi Jinping met. It was a… Well…

Tracy Shuchart

Brain wreck?

Tony Nash

Sorry.

Tracy Shuchart

Brain wreck.

Tony Nash

It was a train wreck, but I think it’s been portrayed as this amazing shaking of hands and meeting of minds and all this other stuff. But I’m not sure anything material was really decided there. But one thing that was at least lightly committed, and this is where Albert takes his victory lap, is that China has no plans to invade Taiwan. Let’s dig into that first. Albert, on the screen, I have an interview we did with you on February eighth of 2021, where you said, Not going to happen. Taiwan invasion, not going to happen. It’s not going to happen. Since then, you’ve been saying it’s not going to happen. There are all these fear mongers out there, so many of them saying, Oh, China is going to invade Taiwan. It’s that season. It’s October, it’s April. The straits calm, they’re going to invade Taiwan. Now all these boats are lining up. But it hasn’t happened. I just wish that the Taiwan fear mongers would shut up for a little while and realize the dynamics of the China-Taiwan relationship and the US-Taiwan relationship, and I wish they’d listened to you. Take your victory lap, go.

Albert Marko

Well, first of all, you had it right with their forging slip, but they don’t have planes. They don’t have planes or plans to attack Taiwan anytime in their future. They don’t have the military to be able to… They can bomb the hell out of Taiwan if they wanted to, but they have financial repercussions, both by closing ports down. They also have investments in Taiwan and the semiconductor industry. The CCP elite, they have shadow money in those factories over there. So to make this assumption that China is going to just scroll in there and just burn everything down and take it over and install a new government and so on and so forth. It’s a tired argument, really. I’ve been going at this for, I don’t know, I think it’s like 2013. I love my NATSEC guys. The Pentagon guys are great and all, but they do have to justify budgets and their existence. But until there’s some shift in that area where the Chinese are extremely confident that they can win quickly in Taiwan, I don’t see any plausible way that it materializes. And even Xi comes over here now for this meeting. And initially it started off as him coming here as throwing an olive branch to let’s work together economically and so on and so forth.

Albert Marko

But then Biden says ridiculous things. The meeting was rushed and I don’t think really had some real agenda besides just shaking hands and taking pictures and pushing them out to the US and global media. Other than that, I don’t want to see what the purpose is of this meeting at all.

Tony Nash

California will have a glass of wine.

Albert Marko

It was like… Well, Yeah. Okay, well, sure.

Tony Nash

I’ve done work for and with the Taiwan government and the Chinese government. When you talk to people in Taiwan, there really is not a worry about China invading. I know that sounds anti everything you hear in America, panic social media, but the Taiwanese are not sitting on the edge of their seat waiting for the Chinese to invade because they have dealt with it for so long, and the chronic, continual, fear mongering out of certain voices in the US is just tiresome.

Albert Marko

Yeah, it is what it is. I mean, you have these World War III type guys coming out there. Even Friedmann at one point said the US is going to attack North Korea in two weeks. Things don’t materialize this quickly. I mean, for China to have serious intentions of invading Taiwan, there needs to be a lot of prerequisites in place economically, politically, militarily that just don’t exist right now. They just don’t.

Tony Nash

Right. If they materialize that quickly, if they do materialize that quickly, it’s usually a mistake. Somebody’s made a mistake somewhere and something’s happened.

Albert Marko

Oh, absolutely. Something’s happened or it’s either desperation or a mistake’s been made.

Tony Nash

Yeah. China does not want a war with the US. Regardless of the rhetoric that mid-level people say, China is not one war with the US. The US does not want a war with China. Regardless of what people say, the US does not want a war with China. And the leadership on both sides knows that.

Albert Marko

Yeah, of course not. We’re in this weird symbiotic relationship. China does their thing and they’re the world. The United States does everything else everywhere else in the world at the moment. There’s no reason to change that status quo. Simply there isn’t any.

Tony Nash

Okay, let’s talk a little more broadly about the US-China relationship. What do you see as the key risks? And, Tracy, Tony, jump in here too. What do you guys see as the key risks between the US and China right now?

Albert Marko

Oh, man. That’s tough. Besides the whole espionage and corporate espionage and that thing, I don’t really see too much risk out there because I don’t really think that China can do anything that would upset the status quo of the relationship at the moment.

Tony Nash

Okay, let me throw something out. What about supply chains out of China? China was very inept in handling supply chains through COVID. I get it, global emergency, all that stuff. But the ineptness out of China was shocking. When we had 6, 9, 12-month backlogs for things, this was just shocking. Do you think supply chains out of China are still a risk?

Albert Marko

Not really. I don’t think so. I think they’ve learned their lesson and they’re going to learn even more important lesson where Europe is no real economy at the moment. And the emerging markets where they can dump their cheap Chinese stuff is drying up. The only place they’re going to have to look to is the United States and the Middle East. Those are the only two areas.

Tony Nash

Okay. So supply chain is off the table as a risk right now from China.

Tony Greer

In hindsight, I feel like that was madly, madly hyped up in order to blame inflation on it and to pair that up to be able to say, Oh, look at the supply chain issue. Well, that’s why prices are higher. Don’t say anything about doubling the Fed balance sheet or anything like that or spiking money supply. I mean, look at this. The biggest canal over here is jammed up, and that’s why prices are through the roof on everything. In hindsight, it seems like that was really, really part of the deal.

Tony Nash

Okay.

Tracy Shuchart

And realistically speaking, I’m just going to say if we’re looking at, say, these transition metals, battery metals, China still has not only are they the largest producer of a lot of these, but they’re the largest processor of a lot of these. They mine this stuff in Africa, they process it in China, then they send it out. Right now, we’re two decades behind. We’re talking about wanting to bring mining to Europe and to the US, but our permitting process is 10 years. Europe’s not that far behind. We’re really 10, 20 years behind China at this point. We’re going to have to realistically rely on them because we just can’t bring the supply online domestically, either in Europe or in the United States to be able to-

Albert Marko

No, we have EPA and environmental restrictions that prevent us even making basic things like active pharmaceutical ingredients. It’s a dirty business. That’s why the Indians and the Chinese do it. That’s why we outsource it over there. That’s not going to change.

Tony Nash

Yeah, that’s the APIs are… I think APIs are a huge risk for pharma and for the American health care system. That is a massive risk that people talk about it every so often, but then we forget. I think API is a massive risk for us. What about real estate in China and the real estate markets? Could that impact the global economy or do you think that’s pretty isolated in China?

Albert Marko

I think it’s isolated and it’s priced in at this point. I mean, we’ve already had Evergrande and other companies go belly up, essentially. What’s it done? It hasn’t really done anything at the moment.

Tony Nash

Okay. Then what do you think about China’s relationships in Southeast Asia? For example, the US and Indonesia just came to an agreement this past week about trading nickel and some metals. The US and Vietnam came to a very tight security agreement last month. Do you think the US getting more directly involved in some of, say, the Southeast Asian countries is troublesome and worrying for China and could be destabilizing for the status quo?

Albert Marko

Not really. I view China’s actions twofold in the Indian Ocean, and South China sees one is security, obviously, but other one is illegal fishing. They love their illegal fish. They have to. They have to pump out all that fish and feed their population grow. That’s a necessity.

Tony Nash

Right. Okay. Although I don’t think a whole lot necessarily happens substantially in the event itself. But I think what it’s allowed people to do is take a deep breath and just go, Okay, let’s just carry on here and try to figure out how we can have a normal relationship. If nothing else was achieved, do you think that was achieved and people will look at China a little less hyperventatively or whatever or like a little less-

Albert Marko

Oh, yeah. There’s no question that the US and both Beijing and Washington need some economic partnership or trade deal or something in the next 12-24 months. There’s no question about that. And that’s what I think they’re probably leading up to.

Tony Nash

Okay. Do you think that that could be part of the reason markets have calmed a little bit this week as well? Meaning, hey, this China thing is going to be okay. There’s not going to be a war. We take a little inhale, exhale. Do you think market that could add to a little bit of… Well, take a little bit of risk away from market activity?

Albert Marko

I don’t think so. I don’t think that’s really… I don’t think you can correlate to at the moment only because a lot of… If China starts rallying that actually takes money out of the US and goes into Asia. I don’t really think that’s much. I don’t think it’s a factor, to be honest with you. I think everything is the US market rallying is what Tony was talking about earlier.

Tony Nash

Yeah. That’s part of my question, is the rally partly because the risks and fear of China is off the table at the moment?

Albert Marko

I don’t think anybody was seriously considering China war as a risk for the markets, especially the –

Tony Greer

The gold market and the treasury market would definitely not pricing in imminent conflict with China. I think that’s fair to say.

Tony Nash

Then on the energy side, Tracy, China pretty stalked up with energy. It’s not like there’s no war over energy or worry about energy or anything with China.

Tracy Shuchart

No, they’re demand is still high. We even saw their teapot refineries just asked for extra export quotas for the end of the year. They’re doing well. Their demand, despite the property implosion, which leads me to believe it’s a controlled demolition, but that’s a whole other tongue.

Tony Nash

Of course, it is.

Tracy Shuchart

A whole other story. But we’re still seeing demand very high from them. Again, we have the teapots to ask for additional quotas. They’re using it, they’re selling it. Obviously, we have a diesel problem. That’s one of the reasons why they ask for export quotas because they can’t… The demand was higher than what they could export.

Tony Nash

Great. Very good, guys. That’s great. It’s the end of a great week. I think things have ended really well. Tony, I’m really glad to hear your optimism. I think that offsets a little bit of Albert’s wariness from time to time, so it’s great to have you on.

Albert Marko

It’s one of those things where I can be wary and we could dip a little bit, and then Tony’s thesis comes into play, and you absolutely have to jump on it. My my negative sentiment is something of an opportunity for Tony’s-

Tony Nash

Oh, yeah. This is why we all love markets, Albert. It’s a battle of ideas. It’s a battle of data. I’m not saying you guys are necessarily polar opposites all the time. I just think one day Tony wins, another day you win, another day Tracy wins. I think that’s great, right? Because it’s that battle of ideas.

Tracy Shuchart

Yeah. Well, that’s why we have a discussion, right?

Tony Nash

That’s right.

Tracy Shuchart

There’s a lot of… And so, yeah, you can pick each other’s brains.

Tony Nash

So guys, thank you so much.

Tony Nash

Thank you. Have a great weekend. Have a great week ahead. Thank you.

Tony Greer

Thanks, Ton.

Albert Marko

Thanks.

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.

Get 40% OFF your CI Markets subscription: https://completeintel.com/save200/.

Welcome to “The Week Ahead” with your host Tony Nash. In this episode, we discussed three crucial topics:

1. Rates, market pricing & earnings quality: Bob Elliott discussed various topics including the Federal Reserve’s approach to controlling inflation, the impact of interest rates on the housing market, the challenges of small modular reactor (SMR) projects in the nuclear energy sector, and the outlook for crude oil prices.

He highlighted the potential for a soft landing in the economy going into an election year, the complexities of the housing market, the difficulties faced by SMR projects, and the favorable risk-return profile for investing in oil.

2. Dollar, commodities and elections: Albert Marko discussed various economic and financial topics, including the potential impact of fiscal and monetary policies, interest rates, inflation, and the outlook for the dollar and commodities. He also touched on the challenges and prospects of small modular reactors in the energy sector, as well as the implications of energy prices, particularly in relation to crude oil. Additionally, he shared insights on the housing market and the potential impact of political dynamics on the economy.

3. SMR: Death of nuclear power?: Albert and Bob discussed the potential death of new nuclear power in the US, citing increased costs and R&D as contributing factors. They also mentioned the challenges related to transporting small modular reactors and the regulatory restrictions associated with them. Additionally, they highlighted the difficulties in developing new green energy technologies and emphasized the need for incremental progress and realistic expectations.

Finally, the conversation shifted to the outlook for crude prices, with Bob Elliott and Albert Marko expressing a favorable view of oil as a growth asset, considering its current pricing and potential for a diversifying bet against economic weakness.

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.

Transcript

Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash and today we’re joined by Bob Elliott, Tracy Shuchart and Albert Marco. We’ve got a few key things to cover today. First is rates, market pricing and earnings quality. We’ll go in deep with Bob on that. We’ll talk about small nuclear reactors with Tracy and the potentially death of new nuclear power in the US. And then with Albert, we’ll get into elections a bit and dollar and commodities prices through the election cycle.

AI

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Tony Nash

So, Bob, thanks again. Really appreciate you joining us again. It’s always really educational. You’re one of my favorite Twitter followers, or Twitter follower.

Bob Elliott

Thank you. I appreciate.

Tony Nash

Always, always super detailed. I always learn something. So yesterday, Thursday, just poor Powell dropped a bunch of F bombs and killed the melt up. You put out a great tweet about two year rates. Two year is just up a bit, over 5% I believe, right now. And you tweeted this. So it’s come up a little bit. The yields come up a little bit. So can you walk us through the trajectories? Kind of, why are rates here? Where do you expect rates to go and what impact does that have on markets overall?

Bob Elliott

Well, I think the basic question that was actually at the center of Powell’s contentful commentary yesterday, rather than foul mouthed rants, was around the fact that inflation is still not durably at the Fed’s target. And it’s not just that it’s not there, it’s that the Fed, at least right now, doesn’t see a clear and convincing path to it, so they can start to ease off the tight monetary policy that they have in place. And so I think one of the things, what we’ve seen obviously, over the course of the last six months is a recognition that we’re going to need higher rates first in order to slow the economy, in order to kick off that moderating cycle, to slow wage growth, which should eventually slow nominal spending and then slow inflation. But that rise in interest rates essentially hasn’t been yet enough to get there in a convincing manner. And I think one of the issues was that the Fed basically said, as of a couple of meetings ago, they were really pointing to the fact that the short rate, or recognizing the short rate really wasn’t the thing that was going to get the job done.

Bob Elliott

They really needed that long end to move up. And they got some of that. Until, of course, Janet Yellen wrestled away the tightening that they needed through the shift in the QRA composition, bringing bond yields down.

Tony Nash

Yeah, we don’t have a team, right? I mean, they wrestle each other all the time.

Bob Elliott

Of course, what I would emphasize is, from a roles perspective, if you actually go back and read about fiscal monetary policy in the. This is not unusual, I would say, particularly in heightened inflationary environments, or in environments where there’s a desire to engage in fiscal expansion and populism, as well as global conflict, to fund global conflict. And so it’s not like this is a shocking move on the Treasury’s part. But I do think it’s an important move because the treasury has been a technocratic institution basically for the last 30 years, and now what we’re seeing is indications that it’s going to be a policy making institution rather than a technocratic implementation institution. That’s a big shift, and you’d be surprised at how much flexibility Janet Yellen has actually to shift the composition of duration before running into any meaningful sort of outliers in terms of the overall debt composition in the US.

Tony Nash

Right. And I think we’re all old enough to remember when Janet Yellen was the Fed chair and she was banging on the table saying, hey, we’ve done all this monetary policy stuff, but there’s no fiscal right. So now that she’s know, leading the treasury, she’s doing all this fiscal, but it’s offsetting the monetary policy stuff. So they’re just not on the same page at all.

Bob Elliott

Absolutely. I think one of the things that was super interesting about the market action coming out of QRA was that there’s basically a bid on all bonds, right? But what that ended up doing is it created a bid on twos and tens, and that didn’t make any sense, because if these two levers are going to work in opposition to each other, which I think I’d say probably over the next year, we’re going to see opposition between them. What that should indicate is that the Fed needs to be tighter than expected before the QRA, and given that the treasury is going to be essentially easier than expected before the QRA, but instead, the exact opposite happened in the market action, which was Powell got priced in to ease more in 24 as a function of the QRA. And that’s the thing that I think makes no sense, to be honest with you. If we’re in this new world, Powell is going to have to do more in response to the easier long end policy. And so those 75 to 100 basis point cuts that are priced into 24 certainly look vulnerable in that context.

Albert Marko

Yes.

Tony Nash

Albert, come on in on that.

Albert Marko

All right. No, I agree with Bob. We’re certainly in uncharted territory right now. Late 60s style maneuvers by the Fed and the Treasury. There’s no question about that. I think the bigger debate in the near term, six months, really, is whether a soft landing is possible or not. Now, I know Bob’s going to be on the opposite end of me on this one, I get it. But all fundamental guys are. Bob’s a top notch guy and fundamentals and whatnot. But for me, going into an election year and knowing how much power the Fed and the treasury have of working the long bonds and everything, I do think that they’re going to get a soft landing just for this election cycle, after the election tans off at that point. But I think that’s where I really want to discuss is soft landing versus hard landing, if it’s possible in 2024.

Tony Nash

What does that look like to you, Albert? A soft landing. Can you paint that picture for us a little bit?

Albert Marko

Fake breakdown, the 3800, 3900, and then rally for the election? That would be my soft landing. I mean, obviously, inflation is a persistent problem, and this is a manifestation of the treasury and the Fed with conflicting policies that I just don’t see alleviating. So that’s a wild card in there.

Tony Nash

Okay, Bob, what do you think on that?

Bob Elliott

I think it’s one of those things where, let’s say from a longer term perspective, I think the core question about sort of soft landing and the durability of a soft landing is, can the Fed bring inflation to its mandate without a meaningful weakening of economic activity? And I think there’s pretty compelling evidence over history that the answer to that is no. The way we will get inflation back to that target is through a meaningful rise in the unemployment rate. So there will be a landing, and it will be hard because that’s what’s necessary to achieve the Fed’s goals. Now, let me pause on that point and say, but that doesn’t mean tomorrow there’s going to be a soft landing. And if anything, tomorrow there’s going to be a hard landing. Like a year ago I felt like a man in the wilderness saying that we weren’t going to have an immediate recession. Right. And the reason why that is, is two, I think, important points. One, macroeconomic cycles, if left to their own devices, not in a crisis mode, but in left to their own devices, frankly, are like slow moving. It’s like molasses, like go back to the 60s cycles go back to the late 80, 90 cycle.

Bob Elliott

Even the 2000 cycle took three years to play out. Three or four years to play out. So I think we have a very slow moving economic environment. And you see that, like with payrolls, which are slowing at the pace of molasses. Right. Nothing too exciting. And the issue is that the ability that particularly the treasury has, but also the Fed, has to run inappropriately easy. Monetary policy is absolutely there. They absolutely have the capacity to be able to do that. Right. Even if Janet Yellen actually reduced the amount of coupon issuance over the course of the next year, reduced, we would still only see a bill share in terms of the total treasury debt stock that’s still under 30%. So that’s okay. That’s not prudent. It’s not a good idea. It’s not good to keep stoking these inflationary pressures, but it’s certainly possible, particularly if they’re politically motivated. And so when I’m looking at this overall picture, what I’m saying is I’d rather not bet necessarily so directly on hard landing versus soft landing. I’d much rather bet on where are there opportunities in the market that are underpriced in that context. Right. So for instance, assets like gold and oil don’t look to be particularly priced, that we’re going to have continued inflationary pressures or continued if I’m going to buy a growth asset.

Bob Elliott

Oil is the cheap December 24 oil is like the cheapest growth asset that’s out there in the world today. And similarly, if we’re going to have this stimulation, these policymakers extending this cycle, then those December 24 sofers, they’re looking like those rates are probably going to have to rise relative to what’s priced in.

Albert Marko

Yeah, I certainly agree on the rates rising. I think that Powell will probably have another two or three hikes going into 2024. In my opinion, the only issue, two or three. Yeah. If they can’t get inflation down going into an election cycle, what are they going to mean? What are they possibly going to know? The issue I have is that both Powell and Yellen has White House and the Senate on their side going in for fiscal stimulus, farm bill that’s going to be coming up, God knows what other juicy little stimulus projects that they’re going to pump in into 2024 and just artificially keep the markets up. For me, knowing how DC works intimately, I can certainly see them keeping this pig up at least through the election cycle.

Bob Elliott

And I think that’s one of the questions. In that context, where’s the best way to express that view if you think that that’s, or essentially, where is that possibility underpriced? And that’s where I think it’s a bit underpriced. I mean, I think it’s definitely underpriced in the short rate market. I think it’s moderately underpriced in the long rate market, though, Janet Yellen will probably be responsive if rates were to rise 50 basis points again, she’ll just be a little like even easier in the next announcement. It’s underpriced in commodities, I think. And then if you go over and look at stocks, that’s the place where it looks a little overpriced, where we have earnings growth expectations from analysts bottom up to be almost 12% next year. That’s not like a great, that’s going to be tough even if things work out perfectly. Right.

Tony Nash

Let’s get into that in just a minute. The earnings stuff.

AI

Heads up for a short break.

Tony Nash

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AI

Thank you. And now back to the show.

Tony Nash

I want to ask you about some of your earnings tweets. But before we get into that, we had a viewer question, Bob, and they said, what importance should investors place on long term bond auctions? Can an auction actually fail? As in having a bid to call ratio of less than one.

Bob Elliott

Auctions? The US treasury market is like the deepest, most liquid market in the world. And so can auctions fail? I mean, maybe technically the auctions could fail. I don’t think. That’s not really the big deal thing. I think when you scan across, this is the challenge in the bond market, particularly the US government bond market, which is, will someone buy the bonds? Yes, someone will buy the bonds. That’s going to happen. The question is, at what price will they buy the bonds, and what are the elasticities of all the different players in the market? Now, I went out when bond yields were moving swiftly to five. I was looking at the composition of the bond buyers and I said, look, actually, we’re seeing a lot of yield sensitive buyers coming in and starting to man.

Bob Elliott

I mean, there’s a reason why it’s kind of like peaked literally at five, right? It almost looked like there were a bunch of orders in place at five at a 5% yield. They’re just like, buy, buy at 5% yield. Now, look, maybe it has to go higher than that in order to clear all the duration supply. Or maybe Janet Yellen is going to just increase the bill issuance until we get a turn in economic activity, until there’s enough supply demand for duration, because the economy is deteriorating in order to fill the duration supply gap. And so I think a lot of folks are looking at the bond market like when it was at 2% and not thinking about it at 5%. The bond market at 5% is totally different than the bond market at 2%. Totally different supply demand composition, and particularly a reactive treasury. What would I say? Anyone who’s drawing a line to yields to 13, which, to be clear, I was asked, like, a serious person on CNBC asked me whether bond yields are going to go to 13, and I was like, no, that’s not going to happen. You got to be kidding me.

Bob Elliott

I almost laughed about it. That claim, are we in the ballpark of what’s going to clear the market at these levels, this amount of duration, supply. Look, we’re in the ballpark. Maybe it’s got to go up 30 basis points or 50 basis points, but it’s not 500 basis points.

Tony Nash

Right. And Bob, that’s a good call, not laughing at the CNBC people before, because I’ve done that and they don’t ask me on anymore, so good.

Albert Marko

I personally have PTSD dealing with the bond market. The long bond market for me is just like, it’s the size of Apple’s market share, the 10, 20, 30, and tips all combined. So I have a suspicious feeling whenever the market’s about to break down that bonds pump two points and all of a sudden we’re back on the rally terms again. So I personally don’t like to play the long bond.

Bob Elliott

I think most of the easy money has just been made in the long bond.

Albert Marko

Yeah.

Bob Elliott

When yields were in the mid three s and the economy is growing at six to 8%, you looked at it and said it doesn’t make any sense. Right. Okay, so now we’re in the ballpark of five. Like, should it be five and a quarter? Should it be 475? It’s not the business I’m in in terms. There’s a lot more interesting opportunities that are out there. And remember, as a trader, you don’t have to trade every market, right. You don’t have to even have a view in any market. You just say long end bonds like in the ballpark and move on.

Albert Marko

Yes, exactly.

Tony Nash

Yap, Bob, you had started getting a little bit into earnings, and earlier this week you wrote a tweet about Q three earnings within the context of 8% nominal GDP. So kind of dumb question. You talked about 6% earnings growth within the context of 8% nominal GDP. Can you help us understand why that matters?

Bob Elliott

Well, I think the basic question for the equity market is thinking about what’s priced in. And I know at some point sometimes I start talking about what’s priced in and people are like, that’s so boring. Why are we talking about what’s priced in? But when you’re trading the market, you got to trade it against what’s priced in. That’s all there is to it. Analysts are expecting twelve. We’ve had pretty mediocre earnings growth, like at the S&P 500 level. Quarterly earnings has been from a macro guys perspective. You look at the numbers, it’s kind of been flat for two years, basically, right. It means up a little bit this quarter. It kind of wiggled up and down, but basically flat. I’m sitting there thinking, well, my God, GDP growth, nominal GDP growth has been about as good as it will ever be in the rest of our lifetimes in the United States. And earnings are totally flat. And it’s like, okay, well, what happens when things get worse? How are they going to meet that earnings growth expectation that sits in the market in the event that even in the good times, these companies are struggling to generate this type of nominal earnings that would get aligned with the types of expectations that are priced into the market?

Bob Elliott

So that’s the gap. That’s the gap that I see. And also, to be clear, from that time we’ve had interest rates rise a few hundred basis points. We’ve had on the short end, on the long end, we’ve had the global economy, Europe and the UK slowing down. It’s not like there’s a boom out there. And the impact on US companies is likely ahead rather than behind related to those issues as well.

Tony Nash

Right. So we’ve talked about this before about the margin expansion that companies had over the last two years. That opportunity, that window is closing. It just seems to me that there are a lot of headwinds in terms of earnings growth going forward. Is that kind of what you’re seeing? This nominal GDP you say is as good as it’s going to get? Does it just seem like that window is closing for those companies and we’re in for some difficult quarters ahead?

Bob Elliott

Again, from a macro perspective, when you look at it, how do companies make money? Either the top line sales have to grow really well or they have to have margin expansion. And the way that you have margin expansion typically is through borrowing, household in particular, borrowing and spending. Or really what’s happening is their incomes aren’t keeping up with the top line sales growth. And when you look at that picture today on a forward looking basis, it certainly looks like you’ve got a circumstance where nominal GDP growth will be lower in the future than it has been over the last two years because we’ve tightened, because global economy is slowing, et cetera. And then you look at the margin picture and it’s like, well, I mean, the labor markets are pretty tight, wage growth is a lagging indicator. The big reason why those companies were able to get such good margin improvement during essentially like coming right out of the COVID crisis is because it just takes a while to negotiate the wages up. But now we’re in a circumstance where some people say, well, real wage growth is a good thing and I think it’s a good thing for the individual spender, but it’s actually a terrible thing for a company like companies don’t want real wage growth.

Bob Elliott

Companies want negative real wage growth. They want their prices of their goods to rise a lot faster than what they’re paying their workers because that’s when their margins expand. So real wage growth from a company perspective, which is driven by the tight labor markets and the flow through of the previous inflation to wages eventually coming through, that’s a bad outlook. So I don’t know. From a macro perspective, it’s not looking good.

Tony Nash

Yes.

Albert Marko

No, certainly not. Without question that inflation has masked a few of the earnings and boosted quite a few companies earnings as the relative volume has gone down. But it’s going to come back to bite them in the ass sooner or later.

Tony Nash

Yep, probably sooner. Okay. Hey, Albert, let’s jump to a little bit of discussion about the dollar, commodities and elections. So there were some elections in the US this week and a Republican presidential debate, which really nobody seemed to care about. Then Joe Manchin out of West Virginia announced that he won’t run for re-election for the Senate in 2024. And you tweeted about this on Thursday. So why is that important? And what could that mean for things like congressional support for, say, Ukraine, for fiscal, for appointments in the next administration, that sort of thing?

Albert Marko

Well, assuming that Biden still wins in 2024 and Manchin because he’s not going to run. Jim Justice, a lot of question is going to win that seat for the Republicans and the Senate majority is so thin at the moment that this could pretty much spell that the GOP takes over the majority in both the House and the Senate with a possible Biden second term. It’s not going to be good for any kind of fiscal spending. It’s not going to be good for very many bills out there because there’ll just be roadblocks left and right all over the place. Even today, the margin for the majority is so slim that they have problems passing things that are normally easy to pass, like the farm bill. That’s a bipartisan thing that usually every five years gets rubber stamped and shipped off. But even that is looking months down the road before that happens, which going back to commodities is great if you want to buy corn early 2024 because I love corn going into Senate races and presidential elections.

AI

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Tony Nash

Right. Okay. So with Republicans in charge, it’s unlikely that we’d see like an inflation Reduction act part two or something like that, which could help. Sorry, go ahead.

Albert Marko

No, you’re right. We’re not going to see that unless we have some sort of market or economic breakdown where the GOP is getting scapegoated daily in the media, where they’re going to be forced to pass something into an election year.

Tony Nash

Right. So that could, I would think, conceptually help to avoid kind of a re, or re-reacceleration of inflation in 2025 maybe. Right. I mean, I don’t necessarily believe the fairy tale that Republicans are fiscally responsible, but I think it would potentially help to avoid kind of a secondary or tertiary kind of reignition of know. And Powell has said that he wants to focus on controlling inflation. So can you help us really think through what that means in terms of obviously the fiscal environment but also the dollar?

Albert Marko

Well, I think that the dollar is one of the key tools they’re using right now versus inflation. I do see it going up in 2024. I mean, there’s weaknesses just all over the world. Bob mentioned slow down in Asia, slow down in Europe. The problem is that the dollar.

Tony Nash

Japan can’t get itself –

Albert Marko

Japan, yeah, Korea, you name it. But the problem I see with the dollar surging over 110, 113, 115 is you start breaking things globally to the point where it transcends back to the United States market. And I don’t think they want to see that. I think it was at 115 like a year ago, and Europe almost broke Europe down below parity. So it’s certainly a problem for the dollar being up that high with the Republicans being roadblocks or in a majority. Everyone wants to say that they’re conservative, fiscal conscious people, but realistically, they have jobs, they have to be reelected and their constituents want to get paid. So I expect more stimulus packages going into the next two years.

Tony Nash

Okay. And we’ve got the dollar today. We’ve got the dollar at about 106, up from earlier in the week, last couple of weeks. So it does seem like they are setting some expectations for a stronger dollar already based on.

Albert Marko

I mean, it’s crazy.

Albert Marko

We’re at 106, 107, 104, 105 for extended period of time, and it’s done anything to our economy. It’s actually quite interesting to see, like Bob was saying 1960, 819, 69. We’re sitting here with all sorts of problems globally and the dollar is strong as ever.

Tony Nash

Right. So what would you expect? I mean, we’ve got oil that’s pretty weak. We’ve got commodities that are pretty weak. What other impacts would you expect it to have?

Albert Marko

Oh, man. Housing. Housing would be a big issue going into 2024. I mean, the White House and a lot of Democrats want to see housing come down and make it more affordable. I don’t see how you do that. DC wants it, but boomers and other investors certainly don’t want to see that break. So I don’t know how that’s going to pan out. I’m actually quite perplexed about the housing market.

Tony Nash

Yeah, it’s pretty sticky. Right. Bob, what are you seeing in housing?

Bob Elliott

I think the most important thing on housing to recognize is that the composition of the housing market at a peak or a boom is just like totally different than a freeze. And we’re at a freeze and we’re at like a traditional standoff. Both sides are staring at each other, that being the buyers who want lower prices and the sellers who don’t want to sell. And they’re just kind of staring at each other. And usually what you need in order, you usually need a catalyst in the housing market to start to create that price change. And in 607 we had a catalyst which was, there were a lot of floaters and iOs that basically reset and totally hammered people. Right. And so that was the catalyst back then in this case. And if you go back in previous cycles before that, the catalyst is unemployment. And so the basic question is like, what’s the catalyst today? Well, as long as incomes are okay and unemployment isn’t deteriorating, we can just stand and look at each other and basically have no transactions and have elevated levels of prices until you get to the point where in particular I think, employment starts to deteriorate.

Bob Elliott

And then what we’re going to see is it’s going to be a bloodbath, a fast moving bloodbath where the folks who are trying to dump their house onto the market are going to have absolutely no luck. So if you have a house to sell, today’s the day to do it, because tomorrow may be a lot more challenging.

Tony Nash

Yeah. And I hear people say it’s kind of Airbnb is going to people selling Airbnb residences, all this sort of stuff that may or may not happen. I think what you’re saying is, well, maybe not what you’re saying, but one way of interpreting that is if we start to see mass layoffs and people have to sell their houses to get cash, then we could really see prices drop pretty quickly.

Bob Elliott

Right. And the Airbnb thing, there are a million Airbnb listings in the US. And like. Okay, so what are you talking. Know, most of the people who list their house on Airbnb live in their house or it’s their vacation house or whatever. The number of people who are buying like twelve apartments in Miami on South beach in order to lay it out for an Airbnb is pretty tiny in the scope of 100 million units that are out there in the market. Airbnb will not be the catalyst. Unemployment, that could be a catalyst.

Tony Nash

Right. Yeah.

Albert Marko

And you don’t even see slowdown in hiring and construction, which would tell you that maybe the housing market is getting soft. I mean, there’s no layoffs in the construction sector.

Bob Elliott

Yeah, that’s right. Part of that is the multifamily. There’s also these secular dynamics, which is basically the household formation has been considerably elevated, making us millions of units short relative to household formation over the course of the last 15 years coming out of the financial crisis. And so in some ways, a few Airbnb owners puking out their Airbnbs would actually be good because there’s some young couples who would love to live in those apartments at a slightly lower price than they can right now.

Albert Marko

Yeah, well, there might be a microcasm that’s actually watched because New York just banned Airbnb. So I’d like to see what the rental market does there in the next six months, see if there’s some kind of lowering of it.

Tony Nash

That’s great. So Albert’s already said that he likes corn going into an election era. We’ve already talked a little bit about energy prices. Bob, you’ve already said commodities are probably a little bit undervalued right now. So let’s talk a little bit about energy. Tracy talked earlier this week. Tracy, one of our guests talked a little bit earlier this week about nuclear power. And last week we talked about wind and solar power projects being pulled because of higher interest rates and higher costs. So we had what’s called an SMR project pulled and I had to look that up. It’s a small modular reactor. These are small nuclear reactors that are apparently much easier to deploy and maintain and this sort of stuff. So I’m not an expert here, but Albert really knows this stuff. And so there’s a company called New Scale that shut down the first SMR project in the US because of costs I think the cost rose something like 50, 60%. And again, this sounds similar to the wind story and the solar story that we talked about last week. So, Albert, why are we seeing these costs elevated in nuclear? And also, is the option to pull these?

Tony Nash

Is it partly because of interest rates, but partly because we’re seeing other energy prices, like crude and Nat gas, continue to drift lower?

Albert Marko

Well, I’m sure it’s a combination of it. I mean, I’ve known about these SMRs for like 20 years. These aren’t new, by the way. Mitsubishi had prototypes out there years and years ago. The problem that they have is R and D, debt, cost, interest rates, wage inflation. Even being able to hire qualified people to put these projects into motion is very difficult. I mean, the biggest problem with those SMRs is like, okay, you build them, but how do you transport them? I mean, transporting a small nuclear device is not like putting in the back of a semi and hauling it across to Abilene, Texas. It doesn’t work like that. There’s big problems and there’s actual federal restrictions on with the EPA and whatnot. How do you put that thing 100ft down and how do you regulate it? And who’s going to come out and monitor? There’s so many headwinds for SMRs that I don’t think that’s even a consideration for the next 50 years, in my opinion.

Tony Nash

Okay. You can’t just put it in the back of a cyber truck and get the kind of green revolution perfection.

Albert Marko

Please don’t give Elon any more fuel to go on Twitter and do any more tweets about cyber trucks being nuclear powered. Definitely don’t.

Tony Nash

Okay. Last week we talked about wind and solar. This week we talked about nuclear. It almost feels like with the rise of interest rates, we’re going to have to kind of double down on these old hydrocarbon generation feedstocks. Is that where we are? Is that the end game? We’ve seen all this to green over the last 15 years. And is all that just resulting us going back to coal and oil and nat gas?

Albert Marko

Well, of course, they’re the most cost efficient and most stable power supply that we have, aside from nuclear. I mean, nuclear is on a different level. But look at Europe. Europe’s an perfect example. They’ve tried wind, solar and whatnot. Germany’s industrial sector was decimated for a few years because the wind and solar was giving fluctuations in the energy grid and destroying equipment. So, I mean, these little calculations are not really thought of whenever people start spinning this stuff up. But it’s not as easy as turning on a switch as saying, oh look, wind and power is on, it’s carbon neutral or whatever catchphrase you want to put out there.

Tony Nash

Yeah, I don’t want people to think we’re anti green. I mean, we’ve talked.

Albert Marko

No, I’m not.

Tony Nash

It sounds almost like we’re antagonistic to green. That’s not the case at all. We’re just taking a very realistic view on, okay, this requires capital investment at the start, right? And without the subsidies, without low interest rates, without other things, we get situations like I think just today or yesterday it was announced that the German government has to bail out Siemens with their wind business. So there’s another green energy company that’s being bailed out by a government. And between the subsidies in China and the subsidies in Europe, and obviously with the IRA, the subsidies here in the US, it’s really hard for those businesses to get moving.

Albert Marko

You know, listen, I’m not anti green or anti environment by any stretch of the imagination, but people have to understand that things happen in increments. They don’t just leap forward into some brand new technology or brand new computing thing or whatever technology you want to throw out there. It doesn’t work like that. It takes R&D, it takes time, it takes money, it takes testing and so on and so forth. It’s a progression. And that’s what we should look for instead of jackpots.

Tony Nash

Okay, let’s move this back into, say, crude prices. We’ve seen crude prices fall pretty dramatically over the past few months. What’s the outlook through the winter? Do we expect crude to stay pretty weak during the winter? And gas, are we going to see a winter like we saw in Europe last year where things spike? I mean, we’re already in November and things already spiked by last November. But are we going to see that stuff rally back through the winter? Or do you think we’re kind of where we will be through the winter?

Bob Elliott

I think probably. If you think just generally what growth assets are priced cheaply versus more expensively, I think it’s pretty clear that oil is priced cheaply in the scheme of things. Is it possible that we could have weaker growth ahead? It’s certainly possible. Weaker global growth, but oil is basically pricing in a pretty bad outcome. And I think, of course, one of the things to recognize is that there is a price sensitive seller in this market who will just start withdrawing supply if we get anywhere close to, frankly much more than a drawdown that we’re seeing in the December 24 Brent Curve. It’s not going to take a ton more before the Middle Eastern folks are going to start bringing oil off the market in order to support prices. And so I think in that risk return profile standpoint.

Bob Elliott

Right.

Bob Elliott

You’ve got a pretty good profile. If I had to hold a growth asset over the course of the next six months, oil looks like a better growth asset given the range of plausible outcomes than does holding something like stocks.

Albert Marko

Yeah. From what I was told is $69 is problematic for US production. So that’s somewhere where I would probably go all in on at the moment. I’m long oil as it is at the moment anyways, but that’s what I’ve heard is 69,

Tony Nash

73 today. So like Bob said, there’s not a lot of downside.

Bob Elliott

Yeah. And look, it’s a classic example of a macro trade where, look, you trade these things down because there’s certainty that’s going to go one direction or the other.

Bob Elliott

Right.

Bob Elliott

You’re looking for skewed outcomes. You’re looking for good risk return profiles. You’re looking for a good range, particularly if you think, let’s say you’re a little more concerned about the economy.

Bob Elliott

Right.

Bob Elliott

You want a diversifying bet against economic weakness. That’s what you’re trying to do. Right. And I think the long oil trade right now, I’m particularly struck below in the something like that out in December 24 looks compelling to me.

Tony Nash

Interesting. Very good. So that’s good. Let’s keep it low while we can. Right, guys? Good. I really appreciate this. We’ve covered a lot of ground. Thank you very much for your time. Thanks for your thoughts and have a great weekend and a great week ahead. Thanks, guys.

Bob Elliott

Awesome. Thanks.

Albert Marko

Thanks.

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.

Get $200 OFF your CI Markets subscription: https://completeintel.com/save200/.

Welcome to “The Week Ahead” with your host Tony Nash. In this episode, we discussed three crucial topics:

1. Deposit flight, banking and deflation: Hugh Hendry discusses several topics in the episode. He talks about his willingness to buy during a significant market correction and expresses his belief in a potential credit event.

He also discusses the impact of higher interest rates on government policies, the devaluation of the Chinese yuan, and the relationship between the Federal Reserve and regional banks.

Hendry mentions the challenges faced by China due to its real estate market and the potential consequences of collapsing property prices. He highlights the fragility of the euro dollar system and predicts the end of the bond bull market.

Hendry also discusses the impact of green technologies on China’s power generation sector and expresses skepticism about their viability.

Overall, he shares his perspective on current market conditions and his strategies for investing, acknowledging the uncertainty and potential for significant changes in various factors.

2. How broken are wind and solar?: Tracy Shuchart highlights how higher interest rates are discouraging people from participating in green initiatives, despite governments wanting to promote them.

Tracy also mentions the potential for further consolidation in the banking industry, particularly among smaller banks, due to unrealized losses. She predicts that bailouts for more banks may be necessary and expresses concerns about banks not taking on sufficient risk.

Additionally, Tracy discusses the recent write-downs in the wind and solar industry, attributing them to rising interest rates. She suggests that higher rates undermine investments in the Green New Deal and the Green transition. Tracy also talks about the challenges in the US solar industry, the impact of tariffs or import bans from Asia, and China’s advantage in terms of resources and supply chain.

Lastly, she mentions her investment strategy in hard assets due to her belief in upcoming problems and emphasizes the importance of old and hard assets in her trading strategy.

3. The “melt up”: Albert Marko discusses the challenges faced by younger generations in affording homes due to artificially high real estate prices in the US, caused by cash buyers and low mortgage rates.

He also discusses the uncertainty surrounding the actions of the Chinese government regarding real estate valuations and the potential impact on their credit rating.

Furthermore, Marko highlights concerns about the banking industry, including the potential for consolidation and the risks faced by smaller banks.

He expresses skepticism about a potential “melt up” in stock prices and emphasizes the need for caution in the current market situation. Overall, he stresses the importance of monitoring economic factors and preparing for potential market disruptions.

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.

Transcript

Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Hugh Hendry, Tracy Shuchart, and Albert Marko. We’ve had a big week with the Fed meeting and the press conference. We’ve had some results come in. We have some relief in markets the back half of the week. But there’s some pretty critical things we want to talk about. The first thing I want to talk about with Hugh is banking. He’s talked for the last year about deposit flight and banking and potential for deflation in ’24, so I want to talk through that. Tracy has talked quite a lot this week about the wind and solar models being broken. We’re going to talk a little bit through that. Then we’re going to talk about the meltup in equities with Albert. That’s a little bit sarcastic. Let’s get there.

Tony Nash

We’re having a quick promotion for our CI Markets platform. This is our platform that forecasts currencies, commodities, equity indices, individual stocks, and global economics. Right now, you can get 40% off of prepaid annual subscription. It’s a limited time deal. That brings the price down from our normal $500 a year to $300 a year. Visit completeintel.com/save200. Use the promo code SAVE200 at checkout.

Tony Nash

At the start. Hugh, thanks for taking the time. I really appreciate this. You’re in a beautiful location, and we’re all jealous. You’ve been talking about deposit flight since Q2 from US banks. Of course, this happened because of the duration risk at commercial banks when depositors moved money to money market funds and treasuries. We’re still seeing deposit flight. According to Fed data, this is on a year-on-year basis through I think last week. The gap appears to be narrowing a bit, but how stable is the US banking system given this deposit flight? Can you talk us through a little bit of that?

Hugh Hendry

Well, it’s a global issue, and it really relates, again, back to there are two agents within the economy which have been caught out, if you will, with the feds very aggressive hiking cycle for the last two years, one being the Treasury. I think the legendary Stan has been out for the last 10 days or so, lamenting on the Treasury’s decision not to extend majorities. And of course, the other was the banking sector or the wider financial sector, because there was something extraordinary in that period, late 2020 and all of ’21 when the majority of the private sector refinanced their rates. And of course, that made the Fed’s rate hiking somewhat impotent, or it certainly took a lot of time. And we’re still digesting the 4.9 % annualized growth. It took a lot of the potency of historic rate hikes out of the thing. But there was a transfer of interest rate risk within the community. So the household sector and corporates have been spared. And of course, that was then put on the balance sheets of insurance companies and those buying treasury bonds. The long dated, the US Treasury has been trading as low as 50 cents on the dollar.

Hugh Hendry

So the capital flight was twofold. Mostly, it is the income arbitrage. Why? I said, there’s still trillions of dollars on site accounts earning basis points. And slowly but surely, people need the money, and they either go to their internet account or they do something about it and they transfer, that’s flight. And then the other issue is the impairment. A bank essentially is a hedge fund that either owns treasury bonds or these index-linked securities called loans to the private sector. And we’ve seen a big impairment on the government bond holding. We know officially that’s half a trillion dollars, more than half a trillion dollars. And so that could be motivate a credit flight. That’s been very, very modest. That was only there in March of this year. But of course, here we are. And a lot of smart folk are getting really concerned about a slowdown in Q4, Q1 of next year. And we’ve yet to really see cyclical credit charges rise within the banking sector. So it’s an influx. The regional banks are trading at 40, 50 % discounts to NAB, which is a reflection of that uncertainty. And the only thing is perhaps that uncertainty is going to become less as we roll into the months and quarters ahead.

Hugh Hendry

But you’d imagine that the story is going to be adverse.

Tony Nash

Sure. We’ve heard people talk about credit events and these sorts of things. You say the uncertainty will become less. Do you think there’s a possibility of a credit event in the near term? Or do you think we’re largely past that?

Hugh Hendry

I do. The big thing in my world is Stan Druckenmiller. Stan is a god. I feel very uncomfortable because I differ from Stan in that I still believe in the prevailing cyclical behavior of our economy and the major participant being the Fed, which is to say that this leveraged economy, which needs more and more debt, really, as the dynamic for incremental GDP growth, By repricing the debt dramatically higher, I’ve been of the view that there would be a systemic economy-wide credit event. I still hope to this that over the next 12 months, you will see the Federal Reserve cut rates very, very rapidly and head back to zero. Then in that 12 to 24-month period, we might be talking about the Federal Reserves, but balance sheet again moving to $15 or $20 trillion. I still think there’s one last cycle of that nature stands like, No, no, they can’t do that anymore. Again, but that requires, your central question in the thrust world is the credit event. I’m assuming a credit event. Then lastly, I’m assuming a global credit event because, again, the private US sector largely vaccinated itself against the Fed, but overseas agents and primarily the Chinese government and the Chinese serial fakesh GDP thing, if it worked, the transmission was zero Fed rates, and it clearly doesn’t work.

Hugh Hendry

And so the fear that I have more widely and the need for the Federal Reserve to come back down to the SERC region would be a further profound movement, especially in the cross currency, you’re seeing it with the Yen and then the Chinese, the Juan, really seeing the anchor around the 7:30 and heading closer to 8, if not in the direction of 9, I think that would precipitate enormous need for the Federal Reserve to change tack dramatically and aggressively.

Tony Nash

Let’s talk about China for a minute, because Albert said, I don’t know, six or nine months ago that if the Fed heads to six, China is going to be in a lot of trouble. We’re at 5.5 right now. From your perspective, why does that cause problems for China? I know we have this big real estate issue in China. We also have commercial real estate issues here in the US. Why is Fed policy such a big problem for China right now?

Hugh Hendry

Well, it’s the global over valuation of everything. For a property, we could just as well discuss the private equity industry and these are trillions of dollars large. The last 15 years, Professor Michael Pettis out of Peking University calls it the Bezos. Sometimes fraudulently, but in 90 % of the cases, we just mistakenly over-egged just how rich we were and how good the prospects were. And so assets, typically at the economic level, match the liabilities. So asset values are inflated, which allows a huge amount of debt to GDP. So it’s a collateral. And we start to see collateral in.

Tony Nash

Sorry, just a second. You’re-

Hugh Hendry

Then you have to, again, my. Oh, heavens, you lost me a bit.

Albert Marko

That’s all right. We got you back.

Tony Nash

We got you back. Yeah, we got you back. We got you back now.

Hugh Hendry

Okay, forgive me.

Hugh Hendry

Let me check if it jumps to my Wi-Fi. It should be working. Anyway, the impairment of assets and the need to distribute wealth from the Chinese have pursued that years and they’ve robbed the wealth of the consumer. And now the question of just how much more they can rob the consumer of their wealth because you’re seeing it in severely low sales figures like private consumption. So the consumption to GDP excluding the government sector is astonishingly low. The ability to bring.

Tony Nash

You talk about assets being valued very high. We have that in the US with the real estate prices right now. We have that in China with real estate prices, even though things have come off a little bit, I think the hope with rising interest rates was that some of those real estate prices would come down both here and in China. We haven’t really seen it that much. Albert, what do you think? What’s the problem? Why are the prices so sticky right now?

Albert Marko

Well, I mean, first of all, you have cash buyers selling from up north and buying the south. And on top of that, you have people with two and three % rates that simply don’t want to or can’t move to any other homes at the moment. There’s no inventory and it’s keeping the prices artificially high. It’s a political problem both ways because the boomers have a lot of cash in the real estate market, which they don’t want to give up. But then you have the youth vote where there are crying that they can’t afford a home and they’re still living with their parents. It’s a problem both ways. I don’t really see how it gets resolved, to be honest with you. As long as you have those cash buyers willing to step in on any type of dip in the rates, I don’t see housing in the United States really crashing per se.

Tony Nash

Okay. Do you guys see the Chinese government allowing the valuation of real estate to fall dramatically? Because that effectively takes the savings that Chinese consumers had. And if they collapse real estate prices, then a lot of that savings that the Chinese had really gets disappeared overnight, right?

Albert Marko

To be honest with you, it’s over my pay grade because to try to figure out what the Chinese want internally and how it affects their credit rating and their leveraged loans and politically, it’s too hard for me to even think about it.

Tony Nash

Hugh, what do you see there?

Hugh Hendry

Well, on both fronts. With regard to the US, I would say, I think it’s pretty obvious what happens. If rates stay at this level or higher, property prices and other risk asset prices, I think, could fall 40%, especially in the property. Or rates, they collapse very rapidly and therefore you don’t have that 40% reduction.

Tony Nash

Okay, so you’re expecting rates to fall pretty dramatically in ’24. Is it like this? We’ve got a huge demographic of people who are, say, baby boomers and they’re voting and they don’t want their wealth to disappear. We’ve got all of these commercial real estate loans that are being marked down pretty dramatically. The Fed will have to reduce rates so that that big voting block of boomers doesn’t lose wealth and so that commercial real estate valuations don’t fall dramatically. That saves the banking system. Is that where you’re going?

Hugh Hendry

I guess where I’m going, we’ve got all of those zombie real estate loans. We’ve got all of those bank holdings of treasury bonds. It’s trading an enormous haircut. We have presently the cyclical credit cost in the bank PNL was really, really low. And then finally we have the diversification model blowing up. Everything correlated. The 60-40 equity bonds thing, everything is correlated. And my guess, again, is if we just stay at this level, it’s going to… There’s going to be a big reveal. There’s going to be more of the March episode where we’re going to see we’re going to see corpses. And I think we’re going to see the economy just sees. And the seizure comes rapidly, bankruptcy and hemmingway. On the China front, regardless of the painting the tape, if you will, by the authorities, Chinese properties, we’ve determined the Chinese Communist Party, we’ve determined that prices haven’t fallen. Their problem is the people have marked it. They’re like, Oh, O’Meard is way below, and it’s not producing anything. And it had the luster because in people’s heads, mentally, they had it. They were factoring in, I don’t know, seven to 12 to 15 % annual price appreciation.

Hugh Hendry

And now they’re like, it’s zero, and it’s probably negative if that’s huge. The only, not the only power, but a very powerful force available to the Chinese administration is to revalue the property in dollar terms. Yeah, that’s a very effective way. And you could say, Oh, the domestic population don’t see it. They only see it in renminbi. And that’s the scenario that takes you to a nine-.

Tony Nash

A nine to the dollar? Yeah.

Hugh Hendry

A nine to the dollar. And that’s profoundly deflationary. Again, that will take you into the zero interest rate. And I just think I’ve been talking about this for two years. I’m running out of rope for that talk. This is a first quarter, first four months of ’24. We got to see it. Then that’s my expectation.

Tony Nash

You expect notable deval of CNY in the first quarter of ’24?

Hugh Hendry

Yeah.

Tony Nash

Okay.

Hugh Hendry

That’s very tied to where we are just now, and it’s all coming out of Tokyo and that hitting the 150, the dollar Yen. And in heaven’s do not… I was at the laundry in Gustav here. I was having my chocolate croisson. I was like, there was news out overnight. The Japanese government like, Oh, we got it. Our poles are down. The good folk are taking in the ass with price inflation because the Yen has been very weak. They’re like, Hey, we had this great idea. We’re going to have a supplementary stimulus package. We’re going to spend $200 billion or whatever. And I thought, What is? So my life is I ask myself questions why is sky blue? What is the primary surplus deficit in Japan? I should know, but I was like, you got to revisit that. And really, really, really far. It’s huge the deficit, enormous, and they keep adding to it. And you remember, the Japanese 10-year is 91 basis points, roughly. We hit 500 basis points in the US. Five hundred basis points, if you put… And with short rates in the US being five and a half, being minus 20 basis points in Japan, Japan’s interest servicing in terms of its lean on the budget, 7.7 %.

Hugh Hendry

And the US is at 4.4. I mean, imagine if Japan really. The world is a perilous place. But for all the peril, for the good for watching this, you just got to say, the S&P is a remarkably robust institution. It may be reliant on those seven stocks, but it’s also reliant on that flow that comes in all the time.

Hugh Hendry

So. When I say I’m looking for a credit event, unfortunately, we live in an over leveraged environment where that’s possible and it’s happening more frequency than 100 years of data would suggest. And that again, speaks to just the quantum of debt that’s outstanding. But it has to be now. It has to be here we are in November, and I’m talking about… I’m still talking about this in April. Closer to me down.

Tony Nash

Yeah. You always take a very different perspective on things. What else are you thinking about right now as you look at markets? What are the big pain points that you’re seeing right now?

Hugh Hendry

I mean, for all that I’ve said about the rates coming down, the major drama of today is that the what I call the crazy faction, the the Peter shifts of this world. The whole dollar being dethroned. I was lamenting there on the perilous nature of the Japanese fiscal balance sheet. And of course, Druckenmillers and everyone else will tell you that the problems of the thing just stopping, the entitlement, the inflation, which was a 2035, 2040 thing is like, come on, we’ve got to start answering it now because it’s getting closer. But with the rate rise, we’re talking about it being 2025 to 2027. That’s an environment where that would be a hundred years since the denouement of the previous global currency regime, the gold regime, which eventually became gold was replaced by dollar treasury bills. And again, we’re coming back to this notion of impairment in the reserve currency asset and what happens. And so I’m doing a lot of thought about if the whole thing breaks down, what do you want? A lot of people previously have said, Well, you would own the likes of Apple. But actually, Apple doesn’t work because Apple just sells iPhones and services, and it gets dollars, but we could be at a point where who wants dollars?

Hugh Hendry

You’ve been an arbitrage. Well, maybe Bill Gates seems to be buying all that agricultural land. Actually, if I’ve got steaks, if I’ve got cattle, that’s not cash, but that’s something you actually need for life. I’m trying to think, what do you own if you get profound impairment in the reserve currency asset is something that’s occupying me?

Hugh Hendry

I think that’s the real question, right? Is what is it? If it’s not dollars, what? We’ve been talking about that here on the show for over a year.

Albert Marko

Bullets.

Albert Marko

You own bullets.

Tony Nash

Yeah, exactly.

Tracy Shuchart

You know I’m all about hard assets.

Tony Nash

Right, you are.

AI

Heads up for a short break.

AI

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AI

Thank you.

AI

Now back to the show.

Tony Nash

Tracy, you put out a tweet earlier about… Because he was talking a little bit about an event and some difficult things and difficult trade-offs. During the Fed meeting, you tweeted out where Powell had said, The Fed has been working a lot with financial institutions to make sure they have a plan for how to deal with unrealized losses. If we’re seeing this credit event, you tweeted this out saying, read, taxpayers prepare for bailouts. What do you think about the magnitude of that? Do you really think this is coming? Do you really think bailouts for more banks is coming?

Tracy Shuchart

Absolutely. I think we’re still set to see a lot more consolidation in the industry. We have still a lot of small banks in the US, like 4,500 small banks. We are seeing more and more consolidation. I think that is set to continue. I don’t think anything… I don’t think what we saw earlier this year with SPV and that mini banking crisis is set to end. I think that we’re still going to see problems within some of these smaller banks, especially with what they are exposed to. Moody’s even came out and said that some of the smaller banks are sitting on 650 billion dollars worth of unrealized losses right now. I think that is going to be a problem for smaller banks, and I don’t think we’ll see further consolidation. This is nothing new. This started in the banking crisis of 2007, ’08 with the fall of Lehman Brothers. We saw a huge consolidation with the larger banks. I think now it’s going to be bigger banks swallowing smaller banks.

Tony Nash

More of that. Albert’s told us before that the Fed hates regional banks and they hate smaller banks. Why is that, Albert?

Albert Marko

Because it counteracts any type of tightening policy that they’re implementing. The regional banks will do what they’re going to do because they’re at the forefront of mid-sized companies. I’m not issuing loans out. I know they don’t like them. I think what Tracy was saying about bank consolidation is probably right. I think what he was saying about the credit issues is right because, from what I’ve heard, Bank of America is insolvent. That’s a looming problem that I don’t think anybody’s really talked about or addressed. You want to talk about a Lehman moment? Imagine if BSA crashed. They would have a problem there. That’s something I’d want to certainly keep my eye on in the next 6-12 months.

Tony Nash

Yeah, but okay, let’s say that’s true, and I’m assuming it is. Does it surprise anybody that a systemically important bank is insolvent? I mean, they’re backed up by the US government. Do they really have any worries?

Hugh Hendry

Well, the worry is the what do we call a disintermediation? It’s the banks sponsor and spread economic vitality via the credit transmission. The impairment and them not feeling good about their world means that they are not risk-seekers. Banks get such a… It’s hard being a bank. Everyone hates you when you’re a bank. They hate you because you take too much risk or you take too little risk. You can’t really win. But we’re in an environment where they’re not volunteering to take risk. That just tends to mean that at the margin, the economy will suffer. That’s not a good thing.

Tony Nash

Small companies suffer or mid-sized companies suffer because they can’t borrow, right?

Hugh Hendry

Indeed. But it’s more than that because we can go, again, esoterically into this matrix like world of the euro dollar system. And Jeff Snyder, who just the locus of all knowledge about the euro dollars and the euro dollar system, he thinks it’s broken. I don’t think it’s broken. I think it’s just that system, which creates unregulated lending. And with infinite leverage is not showing up. That it’s not excited either by the remuneration or by the risk reward payoff from extending new credit. And so, again, we’re at an environment where it feels very fragile, it can break. And we’ve just gone through the most preposterous attempt to restart the credit mechanism via the IPO window. And you look at that and it’s like the scoring being carried across the river by the frog halfway over and the scoring kills the frog. He’s like, What are you dying, croaking words? Why did you do that? Because that’s who I am. It’s like, Why? That’s really the best companies. Birkenstock, Arm, which is just a huge plaster on SoftBank. I think SoftBank is a zero company in my world, and that was a desperate attempt to stave off bankruptcy and the market’s all through.

Hugh Hendry

I see credit just being pulled and yanked away everywhere. But then, so how my mind works is I work with irony and paradox. The world’s greatest investor, Stan, and the world’s second greatest investor, someone like Jeff Gundlach, they’ve worked around. Within three to five years, the US Treasury System model doesn’t work. It stops. It stops because of where rates are, it stops because you’ve got a debt multiple. The debt is a multiple of GDP that you’re running deficit. You’re having to borrow more and more every year. It becomes like this S curve. They’ve said, This thing breaks. The dollar breaks within five years. Okay? Stan is like, Yeah, I’ve really bought a lot of two year, but I can’t see how the long end of the market comes down. My mind is a mess, but I work with drama. I think everyone takes their intellectual leadership. Everyone is very fearful. We’ve seen the bonds trade there. They’re getting a rally to four and a half. But I… We’ll see. I just think that the bond bull market that began 40 years ago in 1982 will end in that spectrum that style and emerges with the Treasury.

Hugh Hendry

But the people who are either shorting or saying, I won’t own bonds will be the ones who own it when we get that credit event. So my idea is if you look at TLT, it fell from 180 to 80 decline. I think it can go back to 140 to 160. And in that environment, I want to be shorted. Markets are likely to give you drama and irony. When we started the bull market, we were in a profound recession with the Fed hiking rates. And from early 1981 to the summer of ’82, if there was anything going on in your mind, you had to clearly see the visible trace of inflation declining. Michael Steinhardt bought bonds. He bought treasuries, and he was sued by his clients. That’s the crazy stuff. So I’m expecting a crazy, very sharp halt in the economic progress of the US and where it becomes less of an outlaw and it joins Europe and China with their travails, the Fed does something very, very dramatic. And then fast forward two years and we’re talking about, hey, listen, the Fed’s got a $20 trillion balance sheet and the treasury model doesn’t work. It’s the end of the dollar system.

Albert Marko

Oh, thank God.

Hugh Hendry

We can’t.

Tony Nash

Honestly, that’s the most plausible scenario I’ve heard about the end of the dollar system, Hugh. I mean –

Albert Marko

Yeah, I would agree.

Tony Nash

-cny and other currencies and commodity-based currencies and all this other nonsense. But the Fed doing itself in is the most plausible scenario I’ve heard. Albert?

Albert Marko

Yeah, of course, that is. I mean, the issue I have with this is this is a Yellen versus Powell conflicting policies that’s ongoing that’s causing a bigger problem. I think Yellen’s actions certainly would shorten the lifespan of the dollar without question, and you can see that. But Powell was pretty clear that if long rates were to suddenly fall because of Yellen, he’d have to step on the gas and tightening again. That’s the only thing I’ve heard about that during the Fed minutes. Maybe Yellen can get us to 4.7, but that’s going to be hard beyond that. It’s just not going to be enough this late in the cycle to get the equities where she wants them for political optics, in my opinion. They’re definitely going to have to use the dollar, take it down to 100 to rally a market. But that’s just my opinion.

Tony Nash

What do I know? They’ve got some good progress over the past 24 hours, right?

Albert Marko

Yeah. Oh, God, yes, they did. We were at 4,400 October 18th, 19th, whatever it was.

Albert Marko

It was a.

Albert Marko

Couple of weeks ago. It’s unbelievable what they’ve done.

Tony Nash

That’s right.

Hugh Hendry

Okay. I think you give them too much credit. I think these things just pop up. But on that the dollar and all this nonsense that it’s going to be other countries that take it down, the dollar system ends when it’s rejected domestically by the US. When the US says, This is not working for us. That’s how it ends. I think that becomes closer. You’ve already seen a dramatic devaluation by the Japanese. And if that leads into the one, then the will be so great that it’s actually the US that comes and brings global leaders together and says, We got to think of a new way of doing this.

Tony Nash

Yep. I think as you talk about Japan and China, I think the best proxy for what’s actually happening in China in my book is Korea. We have to watch the Korean won. We have to watch Korean economy to really understand what’s happening inside of China. It’s a microcosm, very small microcosm, I believe, and I’ve watched it for years of what’s actually happening in China. It’ll be interesting to watch that play out.

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Thank you and now back to the show.

Tony Nash

Okay, so as we watched the wind blow through Hugh’s hair and we all wish we were in Saint Barth’s, Tracy, let’s talk about wind and solar for a minute.

Tracy Shuchart

Nice segue.

Tony Nash

You like that? We saw some serious write-downs of wind and solar this week. First on Wednesday, we saw Orsted abandon two US offshore wind projects. The estimated write-down was about five and a half billion US dollars. Orsted is the largest offshore wind developer in the world, and they had already received about a billion dollars of subsidies from the New Jersey government. If Orsted can’t make offshore wind work, who can? We also saw Equinor write down $840 million for Offshore New York. Both of those guys are blaming government delays and red tape. But I think it’s a little bit weird that those companies that have benefited so much from government subsidies and regulation are now blaming governments for their losses. I guess the real question is why is this happening now? Probably cost of money, but that’s one of the questions I want to go into. But the irony, if we look at wind, is these next tweets that you put out where one talks about Sunrun taking a $1.2 billion charge, which Sunrun is the largest solar installer in the US. Then in the very next or the previous tweet, you talked about how coal hits a record in India with 16.1% growth in September.

Tony Nash

What’s happening? We’re supposed to be in this green new period. I know that you and Albert and I have a bias against the viability of these business models, but I think we need to try to figure out what’s really happening here and why are these guys doing these huge write offs?

Tracy Shuchart

Well, I think at this point you have to understand that first you have supply chain issues and all the things that existed before. Obviously, there’s still inflation. But the core of this is rising rates. Because all of these projects take a lot of money and a lot of borrowing to make them come to fruition. With rising rates, these projects become unviable, economically speaking. With inflation rates and such as… Let’s step back a few months when we go Orsted, for example.

Tracy Shuchart

A few months earlier, asked, or I think it was mid-October, sorry, they basically said to New York, if you want us to make this project viable, we’re going to have to charge you 55% more per kilowatt, meaning we’re going to have… You’re going to have to pass this on to your consumer, obviously. What are you going to do as a utility company? The utility company just said this is breathtaking enormous. We didn’t expect this whatsoever. And so they denied the request. And that’s really what brought on them bearing down the write down and said, okay, well, then we can’t do this project. We’re going to walk away from this. And so I think that you’re going to find that happening more and more as these projects balloon in price, even with government subsidies, they’re ballooning in price and they’re just not affordable without charging the consumer more and without charging the utility companies more. Nobody want… Even New York, which is about as liberal as you’re going to get, said, No, this is a red line on this project. It’s going to cost too much money. It’s going to cost us too much money. It’s going to cost our consumers too much money.

Tony Nash

Okay. Is the Green New Deal and the Green transition, all that stuff really something that only works in a NERP and ZERP environment? Is this a canary in the coal mine of different types of investments in industries that we’ve seen?

Tracy Shuchart

Absolutely, I think it is. They’ve only thrived in that environment. As soon as we see rates rise and these projects balloon in price, they become more and more economically unfeasible.

Tony Nash

Okay. Because the opposite factor of your coal tweet and your solar tweet was so interesting to me because you just have to wonder, as interest are the cost of money. As money costs more, we can’t spend on these things like wind farms and solar and all this other stuff because the installation cost is so high. Are the running costs high? Maybe, maybe not. I think there’s different data saying different things. But the really cheap cost of coal when money is expensive is really to me on a volume basis.

Tracy Shuchart

Absolutely, it is. If we take, for example, what just happened this week is that we had the German economic minister basically was approached by one of their nuclear facilities that said, We can bring this back online. We can do this cheaply. They said no, and opted for more coal because that was even cheaper than bringing that project back online. We’re seeing… Higher interest rates are literally doing the opposite of these government’s brand new jobs.

Tony Nash

You guys, correct me if I’m wrong, but if I recall correctly, it was 2008 and ’09 after the financial crisis that Spain and Germany spent huge amounts of money subsidizing solar. That really led to China developing a lot of their solar industry. Is that right?

Tracy Shuchart

Yes, absolutely. You said you guys, I didn’t know who you wanted to answer. All three of you. Yes, absolutely. Here’s the problem is we’ve seen what’s happening right now is I put out a tweet about what’s happening in the US solar industry, and I got a lot of responses that said, Well, just place tariffs on China, which we have, or ban imports altogether from Asia. Now that’s easier said than done because if we did that, first of all, we’re not that far down the supply chain enough, or we’re not built out enough in the US to cover those needs yet. Manufacturing wise, we don’t produce enough to cover our own needs at this point. Then we also have a problem is that if you cut these people off, you ban this, then you balloon solar project budgets by 10 billion footlong. You’re pricing everybody out of the market. We’re not talking about solar panels for your roof. We’re talking about big commercial projects that are fed into utility grids.

Tony Nash

Right. Okay. What does that do for… China makes more solar than anybody. They’re the green leader. They’re doing EV cars than anybody. As money costs more, how does that impact the ability of China to grow their green power generation sector?

Tracy Shuchart

Well, I think that… I mean, China is going to grow the green power sector, but you have to realize this is coming off of a very, very, very low base. Everybody’s just looking at, Oh, my God, they’ve done X amount, which is really just the rate of change, but it’s not really the biggest part of their entire energy makeup. If we look at what they’re doing, coal is still a majority of their power. They can take the rest of that. The thing with China is that not only do they have the minerals, but it’s easy to produce there. Their permitting process is totally different. They also process these minerals. Because it’s not just sticking them out of the ground, you need to process them. They’ve got the whole supply chain already there, and they’re 20 years ahead of us.

Tony Nash

Right. Just for reference, and tell me if I’m wrong here, but I believe coal is still something like 74% of power generation in China. Is that right?

Tracy Shuchart

Yeah, correct.

Tony Nash

All these green products are being produced by coal?

Tracy Shuchart

Correct.

Tony Nash

Okay. Go ahead.

Tracy Shuchart

Essentially, yes.

Tony Nash

Okay. Hugh, what’s your view on this? As green technologies become more expensive to build, those factories become more expensive to build, that thing, what’s the impact on a place like China? Because we just talked about Chinese currency having a deval, all this other stuff. Do you think there’s a major impact on China and their position as the ability to produce green technologies?

Hugh Hendry

Well, I thought you were on a pretty sound footing with the cost of money and the engagement with the green technology. Whilst, of course, indigenous or domestic sources of energy are very much from coal in China, at the margin in terms of globally, China dominates solar panels. The Europeans had a goal, but we have a goal. Our economic models require investment on the basis of a return on investment. The Chinese have a different system, again, which is predicated on the Fed being at zero. The Chinese system creates GDP growth, not wealth, because it doesn’t require the reciprocal of a return. But the big issue that we had with the Huawei or no way, the cell station software companies like Ericsson and Nokia, those stocks have disappeared. They’re still quoted, but they’ve fallen 90 odd % in the last 15 years because there’s just no economic vitality, no return, no profit return. Whereas the Chinese dominated because they’re like, We strategically want to own these areas. And so they will own those areas at the expense of a return. And that has serious repercussions for the rest of the world. But for sure, the great capital cost of implementing these huge green schemes into electrical grids in the West, they do not work with the present price of money.

Hugh Hendry

And then I have to confess, I’ve been so grotesquely wrong on the uranium sector. And when I say I’ve wanted to participate, I’ve participated in uranium bull markets. And again, I’m suffering from too much drama. People get it. Chemical, I think, was it this week or a week ago? They had results. Stock was zooming, zooming, zooming. People talk about the Magic Seven and the S&P. I mean, look at those uranium stocks. Incredible, right? But I was going to push it back to Tracy or Albert. The capital cost of a new nuclear scheme keeps going up, and at the present, interest rates is really, really hard, and it requires an increasing tariff subsidy from the government, which is unwilling to give it for solar and wind. Is it more willing to give it for nuclear? I’m not so sure. What’s keeping it going? Question.

Albert Marko

I don’t know. From personal experience, that was not nuclear, but for oil terminals, I had a colleague of mine looking for financing to build out a terminal for major oil companies, and this financing was minimum 12%. That’s just not doable. That ruins the economics of anything you want to do, whether it be fossil fuels or nuclear or whatnot. It’s just not conceivable, in my opinion.

Tony Nash

Minimum 12% for an oil terminal. Imagine what a small company loans are. That’s crazy. Tracy, I want to come back to you on this. We saw wage growth is slowing in the US. Consumers are starting to be fatigued. We’re starting to see companies not able to push margin and price like they have been. Do you believe that US consumers are willing if, say, these green technologies are more expensive and say, the production costs are more expensive for electricity, are there consumers in the US willing to spend more to know that their power is generated by solar or wind or something else like that?

Tracy Shuchart

Absolutely not. There’s already been a million studies on this. If you’re seeing utility companies balk at these prices, trust me, the US consumer has already said, We love to be green, but if it’s going to cost me an extra $1,200 a year, thanks, but no thanks.

Tony Nash

It’s a nice to have.

Tracy Shuchart

Especially, as long as their power is on and they have heat and they have air conditioning.

Tony Nash

Right.

Tracy Shuchart

Let’s be honest, the American consumer cares in theory, but doesn’t care when it comes to their pocketbook. It doesn’t care when it comes to their budget. Especially when you have inflation ripping. We could talk, food prices are still high, gas prices are still high, utility. Still inflation is hurting the consumer. Obviously, they’re not going to… It sounds nice and all, but when it comes down to it, and again, there have been a lot of polls and studies on this that the American consumers just not. You are feeding my kid lunch.

Tony Nash

Even the Germans are opting for coal.

Tracy Shuchart

Even the Germans are opting for coal, which is completely crazy to me. But that’s a whole other story, and we’ve talked about that often.

Tony Nash

Many times. Okay, great. Thanks for that. Albert, let’s talk about the melt up. We’ve seen it over the past couple of days in markets. They obviously turned since the Fed meeting. Albert reported fairly well on Thursday. We had 78% of companies beat on earnings this quarter. Yet, and it’s hard to imagine, you put out a sarcastic tweet about a melt up saying this was all rigged to crush shorts and squeeze back to 4400. Good luck to Longs thinking the melt up is coming. Why are you killing the melt up vibe?

Albert Marko

For me, the Fed and Treasury, they love long rates up here, higher for longer because it’s doing the dirty work for them, so they don’t have to take the political blowback of the markets crashing down or whatever problems that arise from it. Right now I’m glad that I’m a thousand miles away from you because you might punch me at the moment. But I think in 2024, I think they rally long rates hard again. I think equities certainly aren’t pricing in five and a quarter on the 10-year as anything other than a passing phase. With rates rallying again, they bring down the equity back into a range of 4,150 to 4,500, which they seem to love to keep us in this range to crush longs at the high and crush shorts at the-

Tony Nash

You’re at the precipice of doom and hope, right?

Albert Marko

They’ve been doing this back and forth.

Albert Marko

It’s silly. They’ve been doing this back and forth, and it’s killing money. Left and right portfolios are getting absolutely crushed. I’ve run through the numbers. The net buying required for them to move the long end is like the market cap of Apple. It’s not really that big a deal for them to move it back and forth. That includes the 10, 20, and 30 years. My bond take isn’t really bullish equities, simply because I think what they’re using the long rate for the duration of 2024 to keep the market in check. I think after the election, I don’t know what happens after that because they don’t really have the political restrictions involved.

Tony Nash

Let’s talk about the Magnificent Seven for a minute. Everyone’s favorite, Jim Cramer, came out and praised the Magnificent Seven. You talk about, if we strip those out, the S&P is in negative territory. Can you tell us about those stocks and how they’re used to goose markets?

Albert Marko

Well, I mean, there’s no… I mean, I’ve said this for how many years? Three years? Two or three. That they used about a dozen stocks, a dozen tech stocks to rally the market whenever they felt like it. I just think this mag of seven stocks just going into the atmosphere whenever the markets seem to want to break down into the 3,900s or 3,800s, it’s a bit silly. How can you really look at this market with seven stocks holding the whole thing up and saying that it’s a healthy market? For me, I can’t do it. I just can’t do it. I need to see something or a credit event like Hugh talks about or some bank breakdown or something happens where this corrects this market into normal territory. I just don’t like it, to be honest with you.

Tony Nash

Okay, so what’s normal territory? Sorry, go ahead, Tracy.

Tracy Shuchart

I call this tech trade, this Magseven or Feng or whatever you… Whatever the hot ones are today, the Pav loves dog trade. It’s the tech. It’s that everybody wants to be in the tech sector since 2009. That’s all they can do. You know what I’m saying? They’re just conditioned. Every dip gets bought, not realizing that we’re in a completely different environment than we have been for the.

Albert Marko

Last time. I don’t think that rate hikes are to be done with. I think that inflation comes back a little bit over in Q1, Q2, and I think they have to hike again. Could you imagine Powell hiking in 2024? What a disaster that would be.

Tony Nash

I think you want to see it, though.

Albert Marko

I do want to see it. I like chaos. I might as well see it. It gives you some opportunity, buy or sell, whatever.

Tony Nash

Okay. When you say take markets down to normal levels, what does that mean to you?

Albert Marko

I think fair value is 3,800 in my opinion.

Tony Nash

Okay.

Albert Marko

That’s a 3,600. That’s just my opinion. Who knows?

Tony Nash

Okay. We could potentially see that in Q1?

Albert Marko

I think so. I would love to see that in the end of Q1. I would absolutely love to buy that going into an election.

Tony Nash

Great. Okay.

Albert Marko

I see Hugh over there pacing already.

Tony Nash

Yeah, Hugh and you are on opposite ends of the spectrum.

Tracy Shuchart

Oh, yeah.

Albert Marko

I’m Waiting for the onslaught.

Tony Nash

Right. Come on in, Hugh.

Hugh Hendry

I’m the heavens. I was just looking at the so far interest rate expectations curve. And since, was it last Thursday when we had the 4.9 annualized GDP, the markets have now pretty much priced a quarter basis point cut from June of next year at the margin. And you get it in the commentary of the Bill Gross, Ackman, Gundlach, Stan. Everyone’s back channel. Something is just giving and breaking. I’m in the market where I want to buy things. I always give people my confession. I get a bit of a aromatized because I made 50 % in the month of October 2008, made 32 that founding year. But my huge regret is what happened five months later. Because five months later, at the end of March 2009, the S&P had fallen 60 %. I was on a train in China, a slow train. I wasn’t buying that damn S&P. I said to myself, The next time we get a 3, 4 standard deviation type correction in a principal macro asset class, I’m buying it. I’m damn buying it. I’ve been doing that via limited cost call options on the TLT, the ultra-long. The last two months have been, I’ve just stopped using Twitter, to be honest. I’m just-.

Albert Marko

Oh, yeah.

Hugh Hendry

But if you look at the charts and the bottom where we’re etching into that TLT market, the next step is I want to physically… I want to start buying more and more of it. But to move, I still maintain that for it to move, it moves and it moves rapidly under duress that something breaks in it. That’s just my gut. That’s how I’ve set the world works. But just to clarify, I want to buy things, but in a world where everything is overvalued, I have to buy this grotesque pig-like entity of the US out for long treasury. My expectation is that it probably moves on the basis of some pretty ugly economic events taking place in the next six months.

Tony Nash

I think we’re all fairly uncertain, right? Are we all in that place where… I know, Albert, you and Hugh are on opposites, but I think I get to read that we’re all a little bit uncertain.

Albert Marko

Well, we are, we’re not. I do think that this market has come down, and I think Hugh does also in some manner, fashion, or whatever triggers it. I think we’re pretty much on par there. We’re just so overvalued. How does it break? What breaks? And does the Fed step in and make this soft landing that they’ve created the narrative of for the past two years now? I don’t know. I don’t know. I don’t know what breaks.

Tony Nash

Go ahead, Tracy.

Tracy Shuchart

This is why this is one of my myriad of bases for old and hard assets right now. Just going to throw that out there now because I’m the only one that I know that I can trade trade every year.

Tony Nash

You can find that back in six months.

Albert Marko

For me, it’s just like they haven’t fixed inflation. And if they haven’t fixed inflation, especially with Europe and Asia completely in a zombie status at the moment, I think there’s going to be problems in the next 6-12 months. That’s the basis of where I’m getting at.

Tony Nash

Yeah, I suspect, and we’ll close on this. I suspect that we already know what’s going to break, but we just don’t want to let it break yet. That’s my suspicion. I don’t think it’s a big mystery what’s going to break, but we all know what’s going to break. It’s just we haven’t let it break yet. When that happens, then all the things that you guys talk about is going to happen. Does that make sense?

Albert Marko

Fair enough.

Hugh Hendry

It’s hideous. What’s the thing that’s going to break?

Tony Nash

Well, what have we talked about? We’ve talked about banks, we’ve talked about real estate. We’ve talked about Japan, we’ve talked about China. There’s enough out there that we’ve talked about that can break, that can bring about some dramatic change. I don’t know that there’s going to be some mysterious thing that’s going to come to the front of where, Oh, we never thought about that. I suspect we already know what it is. It’s just a matter of us allowing it to break and the timing of it.

Hugh Hendry

Yeah, okay.

Tony Nash

You don’t accept that?

Hugh Hendry

No, I think what Powell said, again, if we just take when the wheel stops, where does it stop? Let’s say it stops on dollar Yen. You’ve gone from something traded 100, 110, now trades 150.

Tony Nash

Oh, gosh. It traded ’76 in 2012. I mean, the magnitude of the range of that is huge, right?

Hugh Hendry

But the ’76 was when you had the systemic, the tsunami, the nuclear thing of that nature. Without that, and it was a very short, compressed moment. It was 110 for 15 years. It’s now 150. They’re walking back the yield curve control, the movement in the 10 year again. These are standard deviation. These are irregular movements. And your 90 basis points, and like I said, interest and you’ve got the overnight rates are still negative 20. And yet, the Japanese government’s interest expense on that is almost eight % of GDP. We’re saying the US is within five years of breaking. I mean, where’s Japan? And again, what I love about Japan, because my thing is irony, it’s paradox. So Japan was the instigator of quantitative easing. They’re this great bogeyman of the of the consensus, the printing of money, which is really the printing of the capacity to print money. Japan had to do it 27 different ways and still doesn’t seem to print money. What if actually the Japanese quantitative easing, they actually found the resolve to print money, that they actually used all of those JJB bank reserves as collateral to borrow dollars and then to take term and credit risk into China.

Hugh Hendry

I’m talking about over the… They did it silently in an invisible manner via the Euro dollar system over the last 15 years and probably powered and contributed to that S curve in Chinese property. And then when the Evergrande thing went over, surprise, surprise, but that’s when the Dollar, Yen, if you will, the Yen strength peaked. And it’s been downhill ever since. Now we’re 150. And I feel like the famous words of Bruce Kovner, when it was at 300 is like, Call me crazy. But market’s whispering in my year 100. It was 100. It’s now 150. Call me crazy. Market’s whispering 300. It’s all there. It’s in front of us. It’s right there. Right there.

Tony Nash

Yeah. I really do think it was well laid out. I think we know one of the things that’s going to break and it’s going to happen and it’s not a mystery. It’s just the magnitude and when and it’ll happen. It’ll happen. It’ll happen in the next three months, six months, whatever, but it’ll happen.

Hugh Hendry

I think what we’re saying is we can see a profound disturbance in the force.

Albert Marko

There’s a better way –

Hugh Hendry

Profound disturbance there. But what we don’t know is the knock, how it reverberates, but it’s going to knock something. My estimation will see it knock into the Chinese Remembers rate. And I think that’s perhaps the most systemically important price level just now that the world is confronted with.

Tony Nash

I think you’re right. Guys, this has been amazing. Thank you so much for your time. Really appreciate the thought always that you guys put into this. So thank you so much. Have a great weekend. Have a great week ahead. Thank you.

Albert Marko

Thanks, guys. Thanks, Tony.

Tracy Shuchart

Thank you.

AI

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

AI

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