Year-End Sale is here! Get 80% off CI Markets subscription at $99 per year. Promo ends Dec. 31st.
This 2023 year-end special of The Week Ahead has a lineup of great guests, discussing topics to prepare you for the upcoming 2024.
1. Brent Johnson on 2024 Growth, Disinflation, Central Banks, and the Dollar:
We tackle the Fed’s stance; frankly, it’s a bit perplexing. With various opinions floating around, from 275bp cuts to just 2, the big question is, why the urgency if everything seems fine? Brent helps us get clarity on that.
We’re hovering around 5.5%, and markets are soaring, but what’s the rush? Brent sheds light on why 2024 might be “priced for perfection” and explores potential downside risks, from Fed miscalculations to unexpected Dollar strength.
2. Tracy Shuchart on Crude Quality:
Turning our attention to shale, Tracy dismisses the Texas export buzz but gets into a more interesting topic – crude quality. Tracy and Ralph discuss on Twitter the nuances of shale and the importance of understanding crude quality, especially with recent stories about Texas exports for tax reasons. What are the secrets of gassy wells and their impact on the market?
3. Albert Marko on Yemen-Red Sea Shipping Risks:
With rockets fired by Houthis, a coalition is formed to protect vessels, leading some shipping companies to bypass the Red Sea and opt for the longer route around Africa. Albert gives us the lowdown on how long this situation might persist, its reasons, and the potential impacts on shipping.
Join us for these insightful discussions and gain a clearer perspective on the year ahead.
Transcript
Tony Nash
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Tony Nash
Hi, everyone, welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Brent Johnson, Tracy Shuchart, and Albert Marko. As we head into the end of the year, we’ve got a few things we’re going to talk about today. In 2024, obviously, we’re looking at growth, disinflation, central banks, dollar. We’ll talk with Brent about that. With Tracy, we want to talk a little bit about fracking and crude quality and the surge of exports we’ve had out of the US and Texas lately. Then with Albert, we’ll talk to you politics, and we’re looking at the Yemen, Red Sea shipping risk and what’s really happening there and how long it will last. Guys, thank you very much. I know we’re headed into a holiday weekend, so I appreciate you taking the time.
Tony Nash
Brent, and again, thanks for joining us again. I want to start with the Fed because we had this meeting last week where everything’s doveish now. I honestly don’t know what to think about the Fed. Are we higher for longer or not? I saw one bank, it’s a European bank, so that helps you to understand, but saying that we’ll have 275 basis points of cuts in the first half of the year. It seems ridiculous, but I think nobody really knows if we’re going to have five cuts in ’24 or two cuts or no cuts or whatever. Bostec was out earlier this week saying that we’ll have two cuts, but we have other Fed presidents saying other things. I think we’re in this mode where I don’t even think the Fed guys are aligned on what they do. I guess what I’m confused by is why is there so much hope for cuts when we’re told that growth is fine? We’re told that inflation is fine. We’re told that retail sales are fine. PCE in Q3 was just adjusted to 2%, so PCE is fine. We’re at a 5.5% Fed rate and markets are flying. Why the urgency now?
Tony Nash
I put this tweet up on the screen. Some of the deep sale capital, I don’t know who that is, but they basically boiled this question down and I wanted to prep you for this. So why the urgency now, Brent?
Brent Johnson
Well, it’s a very good question, and to be honest, I’m really not sure myself. It was a very fast change of tone from Powell. On late November, early December, he was hired for longer and two weeks later, he says we’re considering cutting rates, basically, and didn’t push back when people challenged him on it. There’s clearly something going on. I’m not quite sure what it is. I have a couple of theories. I think the most prominent theory right now is that it’s political, right? They don’t want to have a recession going into a presidential election. And if we had a big recession right in front of it, that could be bad for Biden, and that could be as a political move or vice versa. There’s other people on the other side are saying if he goosees the economy going into the election, that’s political, too. But I think that could be part of it. I think the other part of it is that potentially they have access to information or they see some things coming that the rest of the market doesn’t. And if they are going to be cutting after so recently saying that’s hire for longer, they must see some bad things on the horizon that nobody else sees or the rest of us don’t see.
Brent Johnson
And one thing I would say is I think the market has reacted correctly directionally to the news, but I think the magnitude of the moves have gotten way ahead of themselves. So equities rallying on a doveish pivot from the Fed makes total sense. And this goes all the way back to the previous Fed meeting because they were somewhat dove-ish in that meeting as well. And markets have gone straight up for six weeks. Yesterday was the first significant down day in a really long time. And so to me, everything is priced to perfection right now, and we just live in a very imperfect world. So I agree with the direction. I disagree with the magnitude. And for me, it’s easy to decide what to do right now, and that’s to do nothing and to, if anything, hedge the downside. Because to me, everything’s priced in to the upside already. The other thing I would say is that some of the criticism of the Fed is warranted, but some of it is not. And the thing is, regardless of what the Fed does, they’re going to get criticized. There’s a whole industry that has been created and designed to criticize the Fed regardless of what they say.
Brent Johnson
Let’s say they do see some slowdown in the economy coming. At the end of the day, the Fed wants to slow the economy. That was the whole point of the rate hikes to begin with. That is the way they thought that they could tame inflation. But while they want to slow the economy, they don’t want to crash the economy. They don’t want to have a global financial crisis that they cannot control. And so if you take that into effect and you consider how far they went in such a short period of time from 0-5.5 %, and now let’s say that they see some success, they think the economy is going to start to slow, but they don’t want to crash the economy, then it does actually make sense to start before you get to the 2%. He even said that in his press conference, If we don’t start cutting before we get to 2%, then we risk going past 2% and getting into severe deflation, which they don’t want severe deflation. If you think about it like landing a plane, you don’t want to land the plane going full speed. You do want to come in on a smooth path.
Brent Johnson
And so maybe there’s some of that going on as well. And the final thing I’d say just on this is that the people at the Fed are not stupid. Now, they may be misguided, they may be out of touch, they may be arrogant, but they’re not stupid people. And so if they are now signaling that no more hikes and probably cuts, there’s probably a reason for that. And I think people should take that into account when they’re buying the all time highs and all these assets. Oh, yeah.
Tony Nash
Go ahead, Tracy.
Tracy Shuchart
I have a question, Brent. Do you see a scenario which we’re going into an election year? Obviously, there’s a lot of political things going on. Nobody wants the recession heading into this next election. But do you see a scenario in which we have Fed cutting, you have Yellen still issuing bonds, and obviously fiscal spending is not going to stop. So do you see a situation where this could reignite inflation?
Brent Johnson
Yeah, potentially. It all depends on why they are now moving to cuts, right? If they are moving to cuts because they are trying to combat this deflation that they see on the horizon, then it just depends. If the deflationary forces outweigh the cuts that they’re doing, then you could still get deflation. But if those deflationary forces don’t show up and they start easing again, it definitely risks the possibility of a further acceleration of inflation. I think that’s the last thing that Powell wants, which is why I feel like there must be some reason that he’s risking inflation reaccelerating. I wish I knew what it was. I don’t. But it’s a very good question. And that’s what’s got me thinking the most is because nobody thought he would go to five and a half % in 12 months, but he did it. And nobody thought that he could do it without crashing the markets, but he did it. I think the reason that he did that is he didn’t want to be another Arthur Burns. I think his legacy is extremely important. He’s already got all the money in the world. He doesn’t need any more money.
Brent Johnson
The only thing he has to protect at this point is his reputation. I think that’s a big thing for him. For him to risk inflation reaccelerating, I think he must see something that perhaps the rest of the market doesn’t see.
Tony Nash
Yeah. Before Albert jumps in here, I want to say a couple of things. First, I agree with you that although I mock the Fed on occasion, I actually think they’ve done a really good job of getting us into this zone of acceptability. It’s taken longer than a lot of people wanted to, but the magnitude of their actions was actually really fast. I think they could have hugely miscalculated, and I actually don’t think they did terribly. Because these are broad policy decisions they’re making. You don’t really know where it’s going to hit. They actually, I think, did a really good job, despite a lot of their personal defects or whatever. Like you said, they are smart, and they did a pretty good job of landing us where we are. I do think, though, I hear you say the election year, but it is pretty normal to hike in an election year. If we look historically, it’s not a completely abnormal thing. Of course, we didn’t see that in 2020 because we had COVID, right? But it’s not abnormal to hike or for the Fed to adjust monetary policy in an election year. Is that right?
Brent Johnson
I don’t think it’s abnormal. I don’t think… No, I think you’re correct. I don’t think it’s abnormal. I just think we live in abnormal times where everything is managed now. From the last, let’s just call it 1980 to 2020, we lived in a world that was globalizing and getting closer and working closer together. For the last four years, we’re now in a world that is fracturing and supply chains are not getting more efficient, they’re becoming less efficient. And we’ve got geopolitical issues that we didn’t have the whole time back then. I just feel like… And as a result and the fact that the debts have gotten so big everywhere. And this is what I don’t think a lot of people realize. There’s a lot of people out there who think that inflation is here to stay and 2020 was a game changer and the government’s response ensures that we’re always going to have inflation. Listen, I can’t say that that’s not true. Maybe we will have inflation going forward. But with the type of system that we have in a debt-based monetary system, you always risk deflationary shocks. Because if the economy is not moving and money is not circulating, you will get defaults.
Brent Johnson
And when defaults happen, there’s always the risk that it becomes contagious and it jumps from one place to the other.
Tony Nash
Yeah.
Tony Nash
I want to talk about deflationary shock in a second. Albert, what have you got?
Albert Marko
I mean, I agree with Brent. 80, 90% of what he says is pretty much correct, but going… I’m one of those guys that I like to look at who’s in charge and what have they done in the past. For me, Yellen has been doing the exact same playbook as she did in 2017, where she took the VIX to 9.7%. She had 12 weeks. I looked at the chart, there was 12 weeks of up markets at that time. It was crazy.
Albert Marko
Trump at that point with Minuchin, ousted her. They just got rid of her. They didn’t reappoint her for the position, so she was done at that point. But the biggest thing that we should learn this year is the Fed wants inflation. The reserve currency guys don’t do debt jubilee, so they’re using inflation to do whatever soft landing plans that they have in the mix to cut corners off your currency. They had multiple chances to cut inflation all of last year, in which they’ve emphatically passed each time. Now we can debate whether it’s economic problems on the horizon or political strategy by certain members of the Fed and the treasury, that’s something else. But for me, US stocks love 1% GDP growth, which by definition means 65% of the rest of America is already in a recession. I mean, nobody wants to discuss those things. But going into an election year, we’re definitely going to hear more about it. I just don’t see inflation easing up. I’ve talked to quite a few people that are connected up into the Fed, and they’re looking at inflation and starting to worry once again. Cutting rates is a very dangerous game with inflation still problem, in my opinion.
Tony Nash
Okay.
Brent Johnson
Can I just follow up really quickly? The other thing, again, I think the markets have reacted correctly directionally, but just the magnitude is way too big because you got to remember these dot plans. It’s just what each person thinks at that time. They can change their mind. It’s not a unanimous thing. They don’t all agree on the dots. Again, it is true that if you don’t want to crash into 2% and you want to glide into 2%, then you probably want to start cutting as you get closer to it. But if we don’t see continued movement towards 2% inflation, we’re not going to get all these cuts. In other words, all these cuts are not guaranteed. That’s where I think the market has just gotten way ahead of themselves. I think that while they haven’t necessarily misinterpreted the Fed, I think they have misinterpreted the Fed’s intention to not let inflation just totally run away again. Now, again, it doesn’t mean that that won’t happen. It doesn’t mean it won’t get away from them. But I don’t think that they have just all just pivoted and said, We’re cutting rates no matter what, inflation be damned and we’ll just deal with the consequences later.
Brent Johnson
I think they’re trying to get this off landing is what they’re trying to do.
Albert Marko
Without question, they’ve said that over and over and over again for two years. There’s no question they’re trying to do that. I think the magnitude of this mood, this is a question for you, Brent, is that you think a lot of it is to do with just the liquidity of the market in this time. Right now is the holidays, nobody’s really there, things can move quickly.
Brent Johnson
I think it’s that, but it’s also, again, directionally, I think it makes sense, but the dollar has sold off a lot. And as the dollar sells off, that provides liquidity to the whole world. And that’s why you’ve seen financial conditions ease so much. And part of it is also that everybody’s just front running the Fed. They’re not front running the ECP. They’re not front running the other central banks. And the idea that the Europe, which is already basically in a recession, is going to outhawk the Fed over the next year to me just doesn’t make a lot of sense. And so if we get a bunch of cuts, then what the dollar has done and what the equities has done makes sense. But again, these are all priced in, but they’re not guaranteed. And we could very well be in a situation where Europe is cutting aggressively in order to fight their recession, in which case the dollar probably rises versus the euro. Again, I think 2024 is going to be much more challenging than 2023. And in fact, I think could look a lot like 2022. I think we could have a lot of volatility in the first half of the year.
Brent Johnson
And then as we go in towards the second half of the year and the election, things perhaps calm down a little bit. But I think the first six months are going to be very volatile.
Tony Nash
Yeah. One of the things that whenever we talk about the Fed and what the rate intentions are is Powell and the Fed have said they want to normalize rates. We had ZERP and NERP and all this other stuff. Five and a half %, to be honest, historically, is not a high rate. If we’re normalizing rates, if we see cuts coming, what is that normal rate? Is it two and a half? We don’t really know the answer to this, but we don’t have, let’s say, the demographic issues that Japan has where they have to have NERC to make up for productivity. We don’t have the demographic issues that Europe has where they have to have low interest rates to make up for a lack of productivity. Similar argument could be said for Korea, China, at least in the next year or so. Five and a half %. I hear people act like these interest rates are extremely high, but really from a historical perspective, are they?
Brent Johnson
They’re not high from a historical perspective, but what’s different from previous times in history, where they were at this level, is the level of debt and the level of debt that was taken on at very low rates. What I mean by that is there’s a lot of debt that let’s just say, that was issued sometime in the last 10 years, 5-10 years. It was issued when rates were zero to one and a half %. Now that they’re getting reset with interest rates at five and a half %, perhaps their car payment is going, I’m just making something up. Or their mortgage goes up from a $500 payment to an $1,800 payment or whatever it is. The speed with which rates went up and the speed and the magnitude of the difference of where the debt was initially taken on and where it’s being rolled, I think, is much different than in previous points in history where interest rates are at these same levels.
Tony Nash
Right. Okay, that’s fair. Before we get. Into the next-
Brent Johnson
I’m going to jump up and turn these shades down because the sun is still coming right in my eyes.
Tony Nash
Okay.
Albert Marko
That’s something that I don’t see in Nebraska very often.
Tony Nash
That’s right.
Brent Johnson
That’s right.
Tony Nash
Brent, while you’re doing that, I want to ask a question about Japan. Okay. We’ve had all sorts of discussion about the Bank of Japan and them potentially tightening, taking on different tightening activities. But why would the BOJ tighten if we have a Fed that’s loosening? Because that effectively makes them uncompetitive in terms of exports. We’d see the Yen jump dramatically in value. From an export perspective, their competitors are Taiwan, Korea, and China. Those guys are not putting on tighter. They’re not tightening at all. So it doesn’t make sense to me that Japan would start tightening right now. Does that make sense to you? I hear the chatter every day, but I can’t quite put it together why they would start doing that.
Brent Johnson
Well, I think part of the reason that they were doing it was the currency fell 30 % in two years, which that’s an absolutely enormous move for a major currency. It’s not totally unheard of for an emerging market currency, but for the let’s call it the second or third biggest currency in the world, that’s a massive move. And then for the first time in literally decades, they were starting to get inflationary pressures in Japan. And so I think there was some pressure. The currency just kept falling, starting to get inflationary pressures. I think there was some political pressure internally to get off of zero and get somewhat… I mean, again, if you even go to half a %, that’s nowhere near normalization, but that’s a big move for Japan. I think that is part of it. But I agree with you, Tony, is that they can’t really strengthen their currency a lot. If they raise rates too much, their entire banking system comes under pressure because their banks, their pension funds, their endowments, all these different local insurance companies, they own trillions of dollars of zero and negative yielding GBs. They would face the same thing.
Brent Johnson
They would potentially face the same thing in Japan that the US banks faced last March. Rates go up, the bonds fall. If the banks then have to start liquidating those bonds, those JJBs that are now completely underwater, they could have… They can not out-hawk. They can out-hawk the Fed or some other on a short term relative basis, but they are not going to get to a point where their interest rates are higher than these other central banks because it would just decimate their economy.
Tony Nash
We’d have BTFP to the 10th power or something like that.
Brent Johnson
Right, exactly.
Tony Nash
Okay, so I want to take a look and all of you guys jump in here. But Brent, you say that 2024 is priced to perfection. What do you see as the biggest potential downside risks, and I’ll name a few, but let me just name a few things. Fed miscalculation, unexpectedly strong dollar, which you mentioned in a tweet, I don’t know, last week or something, US commercial real estate, US election related volatility. By that I mean fiscal overspending, political overreaction, that thing. Bank of Japan changing really anything. China real estate, CCP miscalculation, German de-industrialization, Middle East geopolitical risk, oil prices. There’s a lot out there.
Brent Johnson
That can- All that stuff. All of that stuff. And that’s the thing is I don’t know what it’s going to be. I just know that there’s all these potential things that you just rattled off. I mean, there’s a couple of dozen right there, and yet the markets are priced as if everything’s beautiful and there’s no potential problems on the horizon. Markets do, they climb a wall of worry. I’m not saying we’re going to have a collapse next year. I’m just saying that everything is priced as if all these cuts are for sure, as if Europe is not going to start cutting rates, as if there’s not going to be any problems in China or Japan, and as if geopolitics is all going to just take a rest and have no more blowups. And I just don’t think that’s the world we live in anymore. And I think it’s more likely than not that we’re going to have some an outbreak of volatility. Now, whether that takes place in the Middle East, which I think Albert is going to talk about, whether it takes place in Japan because they’re messing around their interest rates, whether it happens in the US due to commercial real estate, I’m not smart enough to know that.
Brent Johnson
What I do know is assets are all the way back to where they were two years ago. They’re back at their highs. Volatility is almost as low as it’s been, not quite as low as what Albert was talking about with the Ellen five or six years ago, but very low historically. History has taught me when everybody is doing the same thing, that’s about the time that they’re going to get hit upside the head. To me, it just makes sense to be prudent right now. Again, this is not advice, but just as an example. Right now, basically, every asset class is within 10% of where it was January first, 2022. And the VIX is very low. Now we’ve got interest rates at five and a half %. We’ve got geopolitical problems, all these things that you mentioned. You can buy a put on the S&P 500 that is 1% out of the money through June. Six months duration, 1% out of the money, and it will cost you 2% of your portfolio. Let’s pretend that I’m wrong. There’s no volatility in the first half of the year and markets rip another 15, 16%. Okay, so now you’re up 13 while everybody else is up 15 or 16.
Brent Johnson
That’s not horrible, right? You still made money. But if we do get some volatility and we don’t have this perfect market that everybody seems to think we’re going to get, and we have a repeat of the first half of 2022 and 2024, and equities are down 10%, 15%, 20%. Now you’re down one or two. I mean, to me, that’s a pretty good risk reward. With assets the way they are right now, I’m much more inclined to buy protection than to put on leverage.
Tony Nash
Great. Tracy, of those things that I mentioned, what are you… Or other things, what are you looking at as risks for ’24?
Tracy Shuchart
I think commercial real estate is definitely a risk. How that pans out in the market and does that cause a contagion in other areas? I think everybody sees that right now. That’s been an ongoing saga. But how that plays out will be very interesting. Will the treasury or the Fed have to get involved again? As they did in March with SPV Bank failing, are they going to let the commercial real estate market fail entirely? Or these banks that are backing the loans, I should say. I think that’s definitely something to watch out for, but I think that’s a freight train everybody’s already watching, to be honest. I do think that if the government or the Federal Reserve has to get involved on the banking side of the issue, they definitely will. But again, does that cause a contagion in other markets? We’ll have to see.
Tony Nash
I just saw a story. I mean, this is pretty common everyday. Some building in L. A, the value is like 50 % of the loan value. And so this is common, right?And so-
Brent Johnson
Well, Tony, I’ll give you a good real world. I’m back in San Francisco now for the holidays, and this is a hilarious story. The office that I used to work in when I lived here was in the old Federal Reserve Building in downtown San Francisco. Right. And it was privatized years ago. And in January of 2020, when I was still working there, the landlord of the building or the owner of the building sold literally January of 2020. Think about the timing on that, right? Perfect. And so he timed that perfectly. And now the owner, a couple of months ago, turned the keys back into the bank, just not making any money, can’t meet the mortgage, gave the keys back to the bank. I was going to go into the office, but I didn’t because the bank is now running the building and the heater blew up and they haven’t fixed the heater. So there’s no heat in the bulding.
Tony Nash
It’s always HVAC and stuff like that that these guys skimp on.
Brent Johnson
Yeah. That’s just one example. Now, does that mean that’s happening to every building? No, but I’m sure it’s not the only one either. My colleagues have already said that when their lease is up, I don’t know if it’s this year or next year, they’re not planning to renew it because they’re mainly working from home anyway or they’re working remotely, and the bank is not doing a great job of managing the building while they have it. Anyway, I just wanted to give that little anecdote.
Tony Nash
Yeah. No, this is what we’re seeing. A lot of this has happened because of work from home and people just aren’t filling these buildings to capacity or close to capacity like they had. Albert, what are you looking at for risks in ’24? You’ve been talking particularly about banks, US banks for a month or two. What are you worried about within US banks and what else are you worried about?
Albert Marko
A little bit of what Tracy was talking about the commercial real estate and the loans and whatnot. I think from what I hear, Bank of America is in pretty deep trouble. Whether they’re in Solomon or not is quite a question that probably we’re going to have to look at in 2024. Now, do I think they’ll fail? No, because Powell likes to bail everybody out. But any rumors or murmurs of Bank of America, insolvent would definitely cause the market to take notice.
Tony Nash
Right. Between big banks like B of A, between the regional banks, between commercial real estate, these are probably the things that you guys are looking at.
Albert Marko
Yeah. As layoffs kick in, loans start defaulting, debt starts going higher, credit card debt goes up. I mean, it’s just it’s snowballs at that point.
Tony Nash
Well, the other thing is we don’t have the perpetual noise every day of inflation is rising. Companies can’t go out and put a 5% price rise or 10% price rise or whatever like they were doing in ’21 and ’22 and even early ’23. I think I was looking at General Mills. There was something, so announcement from General Mills yesterday, and they were saying, Hey, we can’t change the price by volume anymore because consumers won’t take it.
Albert Marko
They had those tailwinds of inflation that helped earnings, but that’s certainly gone. Earnings in the first two quarters of 2024 are going to probably be really bad.
Tony Nash
Right. This brings me to a tweet that Brent that you sent out earlier. You said, One thing to remember is you don’t need a flood of new sellers or buyers for the stock prices to begin to fall or rise. You just need an absence of new buyers or sellers to show up. Whether that’s products for General Mills or whether that’s equities, if buyers don’t show up because of these risks or because we’re not getting this perpetual noise that we need to be afraid of inflation, we could see things change pretty quickly, right?
Brent Johnson
Yeah. Again, this is why when markets get to an extreme, whether an extreme high or an extreme low, that’s why they typically reverse, right? Markets don’t move in a straight line. I actually believe that we’re going to see equity, much higher equity prices in the years ahead, but I don’t think that we’re going straight higher from here because markets pendulum swing, and it’s when you get to clear to one side, that’s what provides the energy to then swing it back the other way. At the end of October, we do a weekly show with my friend John, and we were talking about how sentiment had gotten pretty low. It wasn’t totally low, but it was close. It wasn’t extreme, but it was getting pretty close to extreme negative. We said it wouldn’t surprise us if the market bounced a few weeks coming out of the Fed meeting because markets don’t go in a straight line. Now, since then, and so we got the two weeks, which I was expecting I was not expecting the subsequent three or four weeks that we have now got. But now markets are up until yesterday. Everything switched yesterday and we’ll see what happens over the next week.
Brent Johnson
But markets had gotten more extreme to the upside than they were to the downside as far as sentiment and relative strength and all these different ways to measure where you’re at on the positive or negative had gotten even more positive than they were negative back in October. And so the speed with which things move now, that’s something else that’s a little different. Over the last four years, the speed with which we swing from positives and negatives, I think, has increased dramatically from where we were 20 years ago. Yeah. Everything moves in unison. It used to be that you’d have a sell-off and maybe you’d stay down for two or three months, and then it might take six months to build all that back up. But now you get huge 10 % swings. It’s not that common to have 10 % months in equities. It happens at either. But typically, though, it typically happens in big bear markets because you’re rallying from oversold levels. I just feel like that the swings that we’ve had over the last four years, if you go back and look at the charts, they’re just like big Vs and Ws. There’s not a lot of use in there.
Brent Johnson
There’s not a lot of ends and use. I think that’s the world we live in because, again, we’ve gotten to the super debt cycle where the debts are so big that if the central banks and the monetary authorities and the governments don’t react quickly, you’re going to get some very, very bad things happen. I don’t know if that helps move the conversation at all, but I just think that that’s, again, where we’re different now than we were maybe 20 years ago.
Tony Nash
Yeah, absolutely.
Albert Marko
We’re seeing that in everything, even like oil. I’ve been watching oil a lot lately.
Brent Johnson
Yeah, perfect example. Perfect example.
Albert Marko
I’m like. How are we having 5% moves on day-to-day basis? This is crazy.
Tony Nash
Right. Albert, that is a perfect segue to move to Tracy. Tracy, let’s talk about crude quality and shale. I saw some stories earlier this week about how Texas is exporting a bunch of shale this month for tax reasons or whatever. You said it’s boring, which is fine, but it’s interesting to see those levels. I’m curious about shale and the quality of crude that we can get or that we’re getting from shale. On the screen, we’ve got an exchange between you and Ralph, who comes on the show pretty regularly on crude quality and gassy wells and this thing. Can you talk to us about that and why it’s happening and why it’s important?
Tracy Shuchart
Yeah, absolutely. When we’re talking about US shale right now, and we’re seeing all these rig declines, but we’re seeing US shale volumes increase because of better technology and whatnot. I won’t go into the minutiae of how they’re drilling these wells. But what happens is when you do that, yeah, you’re producing more, but what is happening is that what you are getting out of these wells is gas here and gas here. What I mean by that is that you’re producing more natural gas liquids, which is technically not oil. Those are things like natural gas, propane, and other things that you can use for chemicals, but you can’t use that as an oil substitute. Over time, what is happening, because we’re trying to stretch these wells out, these well productivity out, is that what we’re getting out of these wells just happens to be lighter and lighter and can’t be used for necessarily the same things that oil could be used for. In other words, you can’t use it to refine gasoline out of, but you can use it at a chemical company to refine chemicals out of. It’s a different makeup of what these wells are producing.
Tracy Shuchart
As they try to stretch this, we’re getting more and more of this type of product.
Tony Nash
Okay, so why does that matter? How much of what comes out of a well is used for gasoline versus other chemical products?
Tracy Shuchart
I mean, that’s a very loading question because it depends on, is it oil sands? Is it US Shell? Is it deep water? That’s totally going to matter because they’re totally different crew quality. But what that matters is that when we’re looking at these numbers, Shell is a 13 million barrels a day plus right now. Everybody’s like, Oh, Shell is back. They’re producing more than ever. But again, it’s not actual product that you can use for traditional oil-producing products and other. I mean, it’s great for the chemical industry because that means they can buy more and it’s cheap. It’s great for that industry.
Tony Nash
I just want to go back. You said if we see that, say, Texas is producing 13 million barrels a day, those barrels are not necessarily… It’s not necessarily oil.
Tracy Shuchart
Correct. They count NGLs, which are natural gas liquids, into the entire food production. This is what some people had a problem with EIA and how they were reporting it. They made a little bit of change that just came into effect this last month that basically they segue out the difference between what is actually an NGL and what is traditional oil, so to speak, within the weekly reports now. You can see that number even just over the last month has grown.
Tony Nash
Okay. What does that mean for these upstream companies in terms of profitability? If there’s more crude in those barrels, do they make more money?
Tracy Shuchart
Well, I think-
Tony Nash
Sorry to be so basic.
Tracy Shuchart
I just want to know. No, I think how you have to look at this is that… Really, I think it comes down to mergers and acquisitions right now, to be honest with you. If we look at this, we have a ton of big deals that went on this year. I think if you look at the Dallas Fed survey just released yesterday, 77% of all of those producers surveyed said, Yeah, we’re going to expect to see more M&A. You can see this. If you look at what’s the survey of how much do you want to produce, you see all these smaller companies are planning to produce as much as they can. All the majors don’t want to produce anything and are just looking for acquisitions. I think that’s really the dynamic we’re seeing right now is we’re having all these smaller to mid companies trying to produce the heck out of these wells, so they look productful so that they get bought out by the majors. I think that’s what’s happening in the industry as far as production is concerned. I think it all boils down to business right now.
Tony Nash
Okay. Why are they pushing to be acquired? Are they largely debt-funded as companies?
Tracy Shuchart
Not necessarily, but the deals that are going down right now are huge and way more than you’re making if you’re a small company that’s basically just producing NGLs at this point. If you make your wells look more productive, you get these billion-dollar deals going on. That’s very attractive to you.
Tony Nash
Okay.
Tony Nash
But there’s no bond- Go ahead.
Brent Johnson
The majors are buying them.
Tony Nash
Go ahead, Brent.
Brent Johnson
Sorry to interrupt. But the majors are buying them. They’re basically buying new revenue, right? Correct. Because they’re not growing themselves, so that’s why they’re okay.
Tracy Shuchart
Exactly.
Brent Johnson
Yeah.
Tony Nash
Great. Okay, that’s good. Thank you for that. I think it’s a lot more complicated than I’m used to seeing. I’m not an energy expert like you are. Sorry for the dumb questions, but I just need to make sure that this is happening.
Tracy Shuchart
No dumb questions.
Brent Johnson
Can I ask you a question? Can I ask you a question related to that? Is there a… I’m sure there is somewhere… Are you familiar with estimates of how long these shale companies can pump at this magnitude? Is it two years? Is it three years? Is it seven years?
Tracy Shuchart
I mean, those estimates used to be a lot shorter, but with new technology, they’re pushing that. It’s like energy, what is it? Gasoline efficiency. We’re just pushing out the miles. But you have to realize most of the tier one acreage is gone. We don’t have… We don’t have a new auction after yesterday until after 2025 because that’s gone. So as far as federal lands are concerned, and so basically, they’re pushing… It’s the pedal to the metal right now. It’s like, let’s get out everything when we can. How long that can last? I can’t tell you for sure, but I can say that it’s not forever.
Brent Johnson
In general, it’s lasted longer than a lot of people expect it. Is that right?
Tracy Shuchart
Absolutely.
Tracy Shuchart
Yeah, absolutely. That’s because of a lot of the new technologies that have come within the industry as well. You have to factor that technology in when you’re looking at these wells. Five years ago, we probably wouldn’t have been where we are today had it not been for… Probably would have already seen a decline in other words.
Tony Nash
Tracy, in the state of Texas, where I live, there really isn’t much federal land. It’s almost all private. There’s a small amount of federal land. When you talk about the federal auctions, how much does that impact a place like Texas where there’s a lot of fracking?
Tracy Shuchart
Well, it doesn’t necessarily. Most of your federal auctions are going to be in New Mexico, Wyoming.
Tony Nash
Colorado.
Tracy Shuchart
Colorado, Gulf of Mexico, offshore. That’s where most of your federal lands are coming from.
Tony Nash
Okay, very good. Okay, thanks for that. It was hugely informative. Thank you so much for that. Let’s move on to geopolitics. Albert. Okay, everyone’s a –
Albert Marko
Boring.
Tony Nash
Sorry.
Albert Marko
Boring, boring geopolitics.
Tony Nash
No, not at all.
Brent Johnson
Nothing going on there at all.
Tony Nash
There’s nothing going on here.
Tony Nash
Everyone’s a Red Sea expert this week, of course. Houthis fired rockets and vessels. You guys know the story. Now the US has a coalition that will protect ships in the area, supposedly. Several shipping companies, particularly Europeans, have opted to go around the Horn of Africa instead of transiting through the Red Sea to go through the Suez Canal. What’s going on here? I’ve heard some ideas that this coalition of European vessel owners is really trying to strong-arm DOD to do some things they don’t want to do, that thing. What’s really happening there and what are the impacts?
Albert Marko
Well, I mean, the Houthis, because of the Israeli-Gaza conflict, decided to enter the fray and show the world that they’re an actual force. I mean, realistically, they’re not. They couldn’t really hit Israel as much as they are yapping like dogs that they were going to destroy parts of Israel. So they started taking aim at ships that were destined for Israel. But they don’t really know which ships are going where. You’d have to be an expert with the-.
Tony Nash
Or just aim at Zim.
Albert Marko
Yeah, exactly. It’s just… It’s one of those things where the Iranians wanted to influence the area, and they used the Houthis as a proxy. I mean, it’s an age-old problem, going back 50, 60 years, where Yemen has been a launch pad for communist insurgencies within Saudi Arabia. So this is nothing new, right? The problem is these ships have insurance requirements, right? And once you enter a conflict zone, those insurance coverages evaporate. So for the ship owners, one, it’s not very safe to try to go through there and God forbid, a ship gets sunk and then you lose everything. And your insurance doesn’t cover it, you’re completely out of business at that point. Realistically, the cost of the Suez Canal passage versus the diesel that they’re using is pretty much even. It’s just a time factor at that point. There’s issues if you’re carrying oil to Rotterdam from the Middle East that the price can sway significantly in that time frame. Those issues are to be assessed by the ship owners. Now, I have a fear that the US might get a little bit brave and start attacking some of the Houthis positions with drones or missile strikes or so on and so forth, which would probably affect the price of oil going into the market.
Albert Marko
And the markets would probably sell off new US war. It was quote-unquote. But I don’t really give that more than a 50, 60% chance, but it’s still there. Certainly there.
Tony Nash
Their Air Force is like F-4s made in the ’60s or something, right?
Albert Marko
I mean, it’s a joke. I saw that tweet and I’m just like, They’re like, Bring it on, America. I mean, we can send some kids to PlayStations, hooked up to DJI drones to take those out. I mean, that’s a joke. Yeah.
Tony Nash
Right. So I remember this close friend going around for the past day or so where it’s George Bush from 2001 or whatever talking about the coalition. And then he says, Now watch my golf drive, or something like that, right?
Brent Johnson
Yeah.
Tony Nash
And it was like the perfect early 21st century American moment. And at that time, a lot of these countries jumped into the coalition, whether they felt forced to or supporting America or whatever. But the sense I’m getting is that the Europeans, although they have claimed to be part of the coalition, they’re not really doing that much.
Albert Marko
This is a perfect example of a unipolar world where the dominant superpower of the United States conducts maritime security globally. Nobody else can do that. And you can see that from the-
Brent Johnson
I’m glad you brought this up. I’m so glad you brought this up.
Tracy Shuchart
Seychelles jumped on this.
Tony Nash
Seychelles are the difference-maker in this coalition, right? They are going to-
Albert Marko
Yeah. This is why the US is a reserve currency. This is why we are a unipolar world still and for the foreseeable future. There is nobody else that can send ships and rockets and the helicopters and manpower globally to choke points that trade flows through. This is the United States’s world and we’re seeing it right now.
Tony Nash
Yeah, but the PLA has thousands of ships, 94 % of which are small fishing boats, right?
Albert Marko
Oh, yeah. tonnage matters at some point. Whenever you talk to a real military expert, tonnage matters. When you have 21 aircraft carriers versus 5,000 fishing boats, they’re not going to matter much.
Tony Nash
Right.
Brent Johnson
Well, I think this is important, I think, for people to think about because I obviously get in a lot of these debates regarding the US hegemony and still a unit of polar power and the US dollar. And I’ll often get the comment that aircraft carriers and Navy Forces are no longer important due to hypersonic missiles and all this nonsense. But here’s the thing. Number one, I don’t believe that that’s true, but let’s just pretend that it is. Let’s just give those people who say that the benefit of the doubt and let’s say that is true and some a large war scenario, they’re sitting ducks. Well, there’s a lot of stuff that goes on that’s not a large war scenario. And the fact is that the US Navy for several decades has kept the shipping lines open from things like the. Remember 10 years ago, Captain Phillips and the Ethiopian pirates? That has helped keep prices down for everyone, not just for the United States. Now, does it benefit the United States? It absolutely benefits the United States. They’re not altruistic in this, but it helps the rest of the world, too. And if the US was not the hegemon and was not doing this, prices would be higher everywhere.
Brent Johnson
Insurance rates would be higher everywhere. The lead time to get shipments from around the world would be much longer. And so I think that’s one-.
Tony Nash
And insurance would be higher, right?
Brent Johnson
The insurance would be dramatically higher. And so that has inflationary effects, right? And so this whole thing that Albert is talking about with the Red Sea, this has the potential to keep rates higher for longer with the Fed. This is how potentially Fed rate cuts might not happen as quickly as are forecasted, or even if the Fed cuts do come, may not have as significant impact on the markets because of what’s going on. In other words, they may have to be cutting in order to protect against deflation-based monetary forces as a result of market selling off because oil spiking and there’s more geopolitical conflict in the Red Sea and the greater Middle East. And so this is just another part of what I was saying earlier is that markets are priced to perfection based on monetary policy, but there’s a lot more going on than just monetary policy. And there’s so many different ways that this can go wrong. It doesn’t mean it will go wrong. It just means I think markets move on expectations and they are now fully expecting the markets are fully expecting several cuts. And if those several cuts don’t show up, markets are not going to be at the same levels they are right now.
Albert Marko
They’ve been wrong for two years on this pivot, pause, cut, so on and so forth. So I have no trust on these five, six Fed cut stories out there.
Tony Nash
275, basically.
Albert Marko
Okay, sure.
Tony Nash
Okay. Guys, I want to talk more broadly about geopolitical risk, okay? Because I don’t know that a lot of people understand. When the 2008 financial crisis hit, investment banks just gutted their geopolitical risk desks. Since then, I don’t know of really any major banks that have, maybe credible is too strong of a word, but credible geopolitical risk analysis. A lot of that’s been outsourced to relatively small firms. Am I wrong on this? I don’t feel like we really get a lot of credible geopolitical risk analysis from the banks, from the guys who should be able to price risk. Am I off there?
Albert Marko
They don’t. Goldman Sachs has a new geopolitical division. I really haven’t talked to them or seen what they’ve written, but just going on from previous interactions with the financial industry and geopolitical analysis, it’s been truly awful. It stems from them being so polar opposite, where finance guys absolutely do not believe that geopolitics makes a difference up until about six months ago. And now they’re flipping because they’ve gotten blown out in their portfolios and they have to blame something and it’s geopolitical. So now they’re all going towards the geopolitical analysis, but they’re not good. Still not good.
Brent Johnson
Well, not only that. You got to remember the investment banks that put out research and the big commercial banks, they’re basically sales pieces. It’s very hard for an analyst at a major firm to come out and say something very negative. It’s not impossible, but it’s not easy. And even when they do try to put out something negative, their higher ups will say, hey, can you smooth this out a little bit? Can you say this a little bit softer? Because at the end of the day, they want people invested. They want people buying things. They don’t want people to hunker down and do nothing, right? And so I tend to agree with your point, Tony. They don’t really have these groups to begin with. But even when they do, you’re not going to get the same unvarnished truth that you would at perhaps an independent geopolitical firm.
Tony Nash
And so we’ve got small geopolitical firms largely based in New York or DC or London. I used to be with one of them, and these are not people who have field experience, none. They’re basically, it’s secondary research. They’re largely reading, and I just want to make sure that our viewers understand this, they’re largely reading English language publications in these countries to come up with their assessments. They don’t really know what’s going on. It’s filtered through English language, whether it’s Reuters or some local newspaper or something like that. That’s really what geopolitical risk is today with the geopolitical risk firms that you know that can come out. We don’t need to name names, but the ones that come off your tip of your tongue.
Tracy Shuchart
Or even worse, the big think tanks.
Tony Nash
In the US. Sorry?
Tracy Shuchart
I said, Or even worse, the big think tanks in the US, and I’ll just say that and I won’t name names.
Tony Nash
Well, no. I mean, look, the big think tanks in the US, there are not a small number of their leadership who are boards of Chinese companies. They’re government funded as well.
Albert Marko
They’re just so bad, Tony. I just had a discussion this morning with a finance guy at a firm up in New York. And he’s furiously texted me because I think they were trying to make a bond position. They’re like, Oh, Lavrov’s plane landed in the United States. The Russian diplomat, the foreign minister. The war is over in Ukraine. I’m like, What the hell are you talking about, man? That’s most likely a taxi ride for the diplomats to go back for the holidays to Russia. That’s not some bond move. You’re completely mispricing everything and making assumptions where you don’t have expertise on doing, and they do that often, and that’s why they’re so bad.
Tony Nash
Right. Now, I want to bring us back to crude, Tracy. If we have geopolitical risk rising in the Middle East why are we seeing that in crude prices right now?
Tracy Shuchart
Well, first of all, this whole episode is a shipping move. I’ve reiterated that over and over and over again in Twitter because everybody said, Why isn’t oil moving? Because there’s no risk to oil. Unless you see the Houthis lobbying missiles at a Ramco again, there’s no risk to oil. Production is fine in the Middle East. Production is not interrupted. This is not an oil issue. Now, if you want to talk shipping and you want to talk, yes, now we have a shipping issue with not only containers, but also shipping with the tanker in oil and oil products market as well as they’re being diverted around Africa instead. In fact, we’re seeing tankers have been having to be diverted from Panama Canal for months now because of the things that are happening. It’s a shipping issue. You’re seeing shipping rates increase, and that you’re seeing a bounce in the container and the tanker markets. Right now.
Albert Marko
This goes back to what Brent was saying, though, with these outsized market moves, and this is what we’ve been seeing, any headline, geopolitical, economic, so on and so forth gets so blown out of proportion. And Tracy is right. This Hutho thing is not a risk to oil. This is ridiculous. They’re not going to start blowing up Iranian and Russian ships and Chinese ships. The Huthis rely on those people. So these outsized moves based on wacky headlines is here to stay, and it’s not definitely help.
Tony Nash
To my earlier point, people don’t know how to price this risk because geopolitical risk analysis is so bad. People don’t know how to price risks. You have all of this volatility around these items. Either they underprice and dismiss it, or they overprice it because people are sitting in suburban New Jersey or whatever. They have never been to the region, they have no idea what’s going on, and so they overreact. I know we need to wrap this up, but let’s just get into real nitty gritty on the Middle East for a minute, Albert, on this Yemen issue. The their allies are Iran, Qatar and really Oman, right? I mean, Qatar and Oman are Iranian allies. Is that fair to say?
Albert Marko
Yeah, the Russian. Well, yes, for the most part, but they’ve also had long-standing links with the Chinese and the Russians. I’ve even tweeted out that the Chinese have barges sitting offshore that sells arms to the Houthis, and nobody says anything about it.
Tony Nash
Right. Then the sitting on the other side of that is really the Saudi’s and the Emirates, right? Just in terms of Middle East dynamics, right?
Albert Marko
Yeah, and the israelis, yes.
Tony Nash
And the Israelis. Okay. But I doubt the Emirates and the Saudi’s would really say that Israel is their ally. They don’t really say that out loud, do they?
Albert Marko
No, it’s common knowledge. The Saudi’s and the Israelis have been defense partners for 30, 40 years. This is nothing new.
Tony Nash
Right. And so I think on one side of that, we have chaos, right? Iran and other stuff. And then we have order on one side, which is Saudi and UAE, very orderly societies, Israel, very orderly. So the one I can’t figure out, Albert, is Qatar, okay? Because very orderly place. There’s a massive US base in Qatar. So why are they allied with Iran?
Albert Marko
They’re not just allied with Iran, but they’re allied with Turkey on top of that. The little troika there sitting in the Middle East is because they see the Saudi as a threat to their monarchy. So they need to counterbalance that with the Iranians, the same way that the Indians counterbalance China with Russia. That’s just the basic layman’s terms of reason of why they’re aligned with the Iranians. They need a counterbalance.
Tony Nash
It’s just balancing out. It’s not that the countries are super empathetic to Iran. They’re just worried about Saudi. They’re enemy, my enemy, that thing.
Albert Marko
Yeah, exactly. That and the Iranians are also right across the street there. I mean, it’s not that far away. It’s just down through away. Their gas fields and the water are Yeah, exactly.
Tony Nash
Yeah. Okay, very good. Guys, this has been fantastic. Thank you so much for this. We’ve got a lot to think about going into 2024. Have great holidays and have a great week ahead and see you in the new year. Thank you very much.
Tracy Shuchart
Happy holidays.
Albert Marko
Merry Christmas, everybody. Happy holidays.
Brent Johnson
Happy holidays.