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Welcome to “The Week Ahead” with your host Tony Nash. Key themes for this discussion are:
- Supply Chain Risk: Middle East Conflict
Ross Kennedy leads this segment, diving into the critical issue of supply chain risk amid the current Middle East conflict. He explores the US’s supply chain capabilities in the face of geopolitical risks, including the historical context before WW2 and analyzes US political realities in Washington, D.C., and its intelligence gathering capability.
Ross also examines the US’s share of container shipping, the challenges of distance, and dependence on different shipping carriers and discusses the inhospitable nature of the Suez Canal and Eastern Mediterranean.
Further, Ross assesses the US’s reliance on European “commercial navies” and considers the potential impact on various commodities over the medium term due to ongoing political risks in the Middle East and beyond.
- Geopolitical Dovishness
Albert Marko takes the lead in discussing geopolitical dovishness. He examine how dovish statements by Fed speakers have unfolded in response to recent geopolitical events, such as those in Israel. Albert also analyzes the elevated PPI and CPI reports and their impact on market dynamics, including fluctuating yields. He also gave insights into the future of the Federal Reserve and Treasury activities, and how we can discern the direction they’re taking.
- Risk or Recession Back On?
Michael Belkin guides us through this segment and explores the dynamics of the tech trade and the recent resurgence of shares in companies like META. He takes into the intriguing analysis of a potential recession following a series of rate hikes and a 19-month lag.
Understand what he expects as the economy slows. What factors contribute to this scenario regarding the VIX (volatility index) and whether its movement is primarily influenced by recession expectations or other factors.
Transcript
Tony Nash
Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Ross Kennedy, Michael Belkin, and Albert Marco. It’s quite a lot happened this week on the geopolitical side, so we’re going to start there and we’re going to move into markets. The key themes this week, first are supply chain risks, looking at Middle East conflict. We’re also looking at geopolitical or the possibility of that. And then we’re looking at risk or recession, which one is back on.
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Tony Nash
So, Ross, thanks for coming on again. It’s a great week to have you on. I know you’ve probably had a lot of discussion with your clients this week, given the current level of geopolitical risk. So, given that does the US have the supply chain capability to weather the storm of the current geopolitical environment or potentially even more intensive geopolitical environments?
Ross Kennedy
Short answer, yes and no.
Tony Nash
Good.
Ross Kennedy
And it’s really scenario-dependent. Like any good analyst, there’s a wide range of outcomes that you look at and you say, What’s my confidence that one scenario will emerge versus another? As things stand right now, we’re talking about a significant amount of naval traffic and activity happening on water, of course, primarily very close to the Suez Canal. There’s obviously already been a significant amount of disruption to particularly the grains and the energy supply chains coming out of the Black Sea region since the Ukraine-Russian conflict kicked off February last year. So in a sense, you do have a bit of a one-two punch. A lot of it comes down to what happens next. We saw these just really horrific videos and accounts emerge over the weekend seemingly out of nowhere. Depending on the story, Israel was either caught flat-footed in some way or there were some other factors potentially at play. But at the end of the day, the claim that the situation is contained now, this does follow patterns that we’ve seen in the past. Certainly to my criminal mind, if you will, you could easily be seeing a situation where you have a surprise attack.
Ross Kennedy
You suck, allied and other assets into the region with the intention of creating more significant widespread follow on destabilizationment. So in a scenario where Hezbollah begins emptying their pretty substantial arsenal of anti-ship missiles and making it rain in the Eastern Med, now we have a real startling situation. Egypt will do everything they can to avoid the closure of the Suez Canal. They’ve deployed or called up very significant portions of their military to ensure that that scenario doesn’t happen. But the Sinai has not exactly been the most stable either, going back 20 years. It doesn’t get a lot of press here in the US, but that’s certainly been a challenge, if you will. And then given the conflict between ISIS and the Sinai, Hamas, very much at war with one another two on the border region of Gaza and Egypt. It is a powder keg.
Tony Nash
Okay. If we assume that the situation stays as it is right now, Israel and Hamas, West Bank, that thing, and there isn’t a wider conflict. Are there issues with, say, ags and supply chains and other stuff? It stays local. Is that risk fairly contained? I know that’s a big assumption to make, but we see the terrible footage on the news, our heart breaks. But does that impact supply chains, agriculture, energy, that thing?
Ross Kennedy
Not to a great extent. Rude certainly won’t be, I guess in my view, that impacted. Certainly the disruption we’ve already seen to the net gas fields in the Eastern Med is a major challenge. That’s something that other players in the region, whether it’s Turkey, whether it’s Saudi Arabia, Israel, Egypt, all of them have some skin in the game, particularly on the NatGas issue. So we could see some potential disruption there, even if hostilities don’t escalate further. Infrastructure becomes obvious targets in the event of a larger theater-wide escalation. That’s really where we go from zero to 60 on the risk calculation. As it stands right now, not bad.
Tony Nash
Okay, so let’s go to that. We go out concentrically. Now, you don’t have to go too far to have major issues. First is you go north and let’s say, Hizbollah gets involved in the north. What are the issues?
Ross Kennedy
Well, you’re talking about certainly a significant disruption to commercial maritime traffic in the region. All risk and insurance on vessels and war clauses and things like that only go so far. So you’re certainly, I think, going to see a lot of commercial carriers elect away from obviously Port calls in Haifa, Alexandria, Piraeus in Greece. And that’s just as the situation stands now. If we’re talking about a really significant disruption to maritime traffic in the med, you don’t have to blockade the Suez Canal to begin to see a significant portion of freight that moves on water through that corridor, whether it’s grains going south, crude going north, certainly manufactured goods out of the Indian subcontinent, things coming out of Africa that tend to move north. That two-way traffic slows even if you don’t close the canal just by virtue of the risk inherent in the med. Really, the other shoe I’m almost waiting to drop on the premise that a lot of this is sponsored by and organized by Iran.
Tony Nash
Hold on, hold on, hold on. Let’s not go there yet. Let’s not go to Iran yet. Let’s just stay on the north. When you talk about if things escalate north of Israel, that can have significant impact on the med. We saw, for example, say, grains coming out of Ukraine, restricted because of issues with Russia, Ukraine. Turkey really tried to get that trade moving. How much of an impact could Turkey have if things go north and you start to see issues in the, say, the northeastern men?
Ross Kennedy
Turkey gets negatively impacted by the fact that most of their major commercial ports from where they export a significant amount of heavy equipment, minerals, manufactured goods for industrial uses. They do face a risk to their. Turkey benefits, though, opportunistically from the ability to pretty expediently open overland corridors to and from the Black Sea, being able to provide some level of guaranteed safe transport away from the risk of conflict in Lebanon and Syria, and being able to get things on water if they can obviously defend their own waters as it will and provide that safe passage north of Cyprus between Greece. On net, I say Turkey probably has the ability, if they play it smart to benefit more from this than less or be negatively impacted. We’ve seen they’ve been pretty savvy over the last 20-something months and how they’ve managed the Black Sea corridors by using the Montreux Convention.
Tony Nash
Absolutely. It’s really easy to forget the impact that trip can have if things go north, right? But they actually really do have a lot of impact. Now, let’s go southwest. Let’s say things boil over into the Suez nightmare scenario. What happens then?
Ross Kennedy
Well, at that point, you’re talking about anywhere from 10-12 % of everything manufactured in the world transits to Suez Canal. Every year you’re talking about 30-50 vessel passages a day going through there. There’s really two key domains that I’m looking at there from a negative impact standpoint, because oil and that gas have the optionality of pipelines at some level through Saudi Arabia, up in Egypt. TurkStream is always available as well. So from an energy standpoint, it’s probably not as crippling. However, Saudi Arabia does have a pretty significant amount of extraction and refining and transload capacity to bulk carriers on their Western shores, which is inside the Red Sea. At that point, those vessels get redirected, flows begin to redirect as well anything that’s moving north. There’s also the issue of food in Africa in particular. We saw that and have continued to see that be a pressing issue from a food aid standpoint because so much of that traffic moves to the Suez and terminates in the Horn or in the Red Sea. The third challenge is going to be to the Indian subcontinent. The Suez is the major corridor for trade between India and the Middle East, India and Europe, and India and the United States.
Ross Kennedy
We’re talking about Navasheva, one of the largest container ports. It’s right outside of Madras. In all of Southeast Asia or the Indian subcontinent is located there. 90 % of something that’s vessel traffic is going to go that way. It’s going to move northwest into the Suez. So India has some real skin in the game on this issue too, not only because of its connections commercially and from an energy standpoint to Iran and to Russia. Iran is more tenuous. They’re pretty tied at the hip to Russia in a lot of ways. So India’s calculus in this is that right now they lose the Imek for sure, the Indian Middle East economic corridor. That’s a dead letter at this point until things change. But for them, a significant amount of their export trade is with Europe and with the United States. They face a dramatically negative impact because the only alternative options are things like double-trans shipments of containers through Singapore, you go west, you’re talking a 60-day transit now versus about 35, or they have to go around the Cape. You’re talking adding 10-14 days to your vessels there too.
Tony Nash
This part is fascinating. So talk about Turkey’s impact if things go north, talk about India’s impact if things go down to the Suez. India has positive relationship with Iran. They have positive relationship with Israel. They have positive relationship with Russia. They can pull some strings. I think the US in particular needs to stay close to India on this issue, and Turkey, of course, so that all of this stuff can be positively impacted, right?
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Tony Nash
Sticking specifically with the med, can you talk to me a little bit about… I heard you make some comments about the US being dependent on European commercial navies for activities in the med. Can you talk a little bit about how the US doesn’t really have the capability there to move things if needed?
Ross Kennedy
Absolutely. At one time, particularly in the first 20-30 years of PAX Americana, we had the largest commercial fleet in the world. And we were a shipbuilding powerhouse. Liberty Ships taught us how to make vessels that can move fairly fast and carry cargo. Quantity has a quality all its own. We’ve really eroded that advantage with the advent of steamship lines. We begin to optimize more for outsourcing, and so our shipbuilding capacity, our maritime, sea lift capacity, so vehicles, manpower, all of that has eroded not just the commercial fleet, not just the tanker fleet, were a shadow of what we once were. And so the reference to commercial navies is really the big three ocean carriers in the world are MSC, domiciled in Geneva, but owned by an Italian family, the Apontes, and then Maersk, based in Denmark, and CMA CGM based in France. And given that in the case of MSC is really an independent player, but certainly Maersk and CMA are major participants in US maritime trade, significant parts along with Hapag-Lloyd out of Germany, the auxiliary, essentially our ability to call up US flagships with these carriers and press them into service. But to the extent that we have the ability to have the optionality to be able to put our own stuff on ships with our own sailors, we don’t really have that.
Ross Kennedy
Not at any scale that can defend the supply chains in the US from major disruption, particularly in the med.
Tony Nash
Before we get to Iran, because I know that’s a sweet, juicy thing that you and Albert are going to dig into. Hey, Michael, what are you seeing in terms of transport? Does it look like appealing to invest in European transport companies or is there too much risk there?
Michael Belkin
I’m agnostic. I’m not familiar with some of the names that he just mentioned, but in terms of global shipping, Maersk and Hapag-LLoyd are the two big ones listed in Europe. They’re shorts for me, but not very high confidence. But that’s something else. That’s not Middle East. That’s just global trade is not doing well and freight rates are falling and ships are not being booked as heavily. So agnostic, but slightly negative on the only ships I follow.
Tony Nash
Okay, perfect. That’s great to know. Thank you. Okay, so Ross and Albert, given that these aren’t major oil and gas producers, but we also have the US SPR at a very low level, and we have already crude exports that have been accelerating over the past couple of years. Aside from the $6 billion that was announced, I think, earlier today that the US is going to hold back with the Qatari government. Do you think there’s a possibility of seeing new sanctions on Iran? Is that a possibility? And what would have to happen for that to be a possibility?
Albert Marko
I do think new sanctions will most likely be enacted by the US on Iranian oil. Do I think it’s going to matter much? Probably not. They do ship-to-ship transfers all the time by turning off transponder. God knows how much oil they mix in Basrah with Iraqi crude. So sure, we can pay lip service to that, but I don’t think it’s going to make much of a difference.
Ross Kennedy
Yeah, I’d concur with as much as I love a good fight with Albert or anybody else, hey, I’d probably lose. But certainly on both the premise and I think just the factors that are in play here. Do I think sanctions are coming? Yeah, absolutely. It’s an absolute layup for an administration that’s been rightfully dragged through the mud over the fact that they released $6 billion in funds to buy seven Americans back. It’s the obvious go-to move. It’s the last option, not a very creative one, but it’s the last option. But Iran has already demonstrated like Russia, significant capacity to actually move sanctioned material. But more than that, it represents a significant buying opportunity, particularly for China, who does not give a crap about anything that the US State Department or Commerce Department does with regards to sanctions. I think it’s inevitable if we sanction them. All we do is we simply depreciate the price of Iran and crude and increase the amount that we will see moving between Iran and the Pacific Rim.
Tony Nash
I mean, crude is on sale for Asia, right? Most of Iran and crude goes to Asia anyway, right?
Ross Kennedy
Absolutely.
Tony Nash
India, China, other places.
Albert Marko
I’m actually more keen on finding out what Turkey is going to end up doing with Iraq since that oil pipeline has actually been blocked to the Mediterranean for many reasons. They say earthquake. The other ones say a lawsuit, but it’s many reasons. I think that that thing is going to probably be important in negotiations going forward, especially in terms of the crude oil market.
Tony Nash
Interesting. In Iraq, Turkey pipeline?
Albert Marko
Yeah. Well, they already have it, but they shut it down because of lawsuits.
Tony Nash
Okay.
Ross Kennedy
It’s interesting that, Albert, I’ll interject real quick. It’s not quite on script. But there is a real dark horse factor here with the broader Kurdish population that occupies that region. It’s the only population that is spread out at scale in Iran, Iraq, Turkey, and Syria. And yes, there are factions within it and all of that. And yes, to some extent, they’re insulated from the larger conflict to the extent they don’t get sideways with one of the main governments. But the ability of these very substantial Kurdish minorities in all of those countries definitely could impact anything from a logistics and supply chain standpoint. Certainly, that has to transit on rail or transit over land. They sit right in the middle of the new Silk Road corridor that China and others have been cooperating on to connect Chinese trade on land through the Eurasian continent. So that definitely bears watching because depending on how each of these parties responds, the calculus of the Kurdish populations in these countries changes too.
Tony Nash
Interesting.
Albert Marko
A lot of the oil is out of the Kurdish area right now because the pipelines are shut down, it’s trucked back and forth into Turkey and whatnot. But like you said, if the Kurds decide to act up, that’ll get shut down pretty quickly. Those are definitely something to… I wish you didn’t say anything about the curves. It’s a whole Pandora’s box.
Tony Nash
Yeah, we can do a special segment on that.
Albert Marko
I really just…
Ross Kennedy
That’s its own episode.
Albert Marko
I want to allow Michael Belkin to actually talk to me.
Tony Nash
Right, exactly. Guys, let’s get into… Albert, I’ve been wondering, given what we saw the Fed and Treasury say earlier this week within the context of these events, we saw Fed speakers out early making very doveish comments early in their week. But we also saw elevated PPI and CPI reports this week. Yields fell for most of the week, but then came back up later in the week. What’s ahead? Given the geopolitical backdrop and given what we’re seeing with CPI and PPI and other prints, and then we saw some consumption data out today where consumption is down, US consumers, what’s ahead for Fed and Treasury activity? And how do they balance this?
Albert Marko
How do they balance? They haven’t been able to do anything properly in the past, so I don’t know how they’re going to be able to balance this. I mean, the auctions have been absolutely atrocious. They obviously knew what CPI and PPI and the Michigan sentiment was going to be because they had every single person they could throw out into the media say, inflation is over, like Krugman and whatnot, or this is a success. They know what they’ve been doing. They know that they’ve been making mistakes. Yellen, I think two weeks ago, was at a staff meeting, screaming of why isn’t the bond market bondholders paying attention to problem? Why aren’t they listening to me? Well, you got a geopolitical event, and now they’re going to listen to you. The auctions aren’t good. The economy is certainly not good. Inflation is starting to kick back up no matter what they do.
Tony Nash
Sorry, let’s go back. You said the auctions aren’t good. Can you walk us through that?
Albert Marko
Well, there’s no bids in the bond market, especially the long bonds. Nobody wants them at the moment. There’s no bids. The only people that are bidding on it is the government itself.
Tony Nash
Why are there no bids?
Albert Marko
No confidence? No confidence of what’s going on specifically policy-wise in this country? Why would you bid on it?
Tony Nash
Okay.
Albert Marko
From there, it’s just like I don’t see how we get out of this situation without a recession and a pretty sizable recession. I know they talked about soft landing and whatnot, but they’re going to really need a recession and unemployment to tick up to even start denting inflation going forward.
Tony Nash
Okay. In the background, I’ve been seeing headlines of Company X lays off 1,500 people, Company Y lays off 5,000 people, other things. That seems to be happening pretty quietly so far. We’re not really seeing the recession. We’re too much out there. Given where consumption, those consumption numbers that came out today and given the need, I hate to say it, but the need for a recession, do you think that the news of layoffs will be more prominent in headlines so that we start to see the table set for some of these Fed and treasure actions to really be appropriate?
Albert Marko
I really think that a lot of the corporations are trying to slow out these layoffs because they don’t want to catch the IRA of the Biden administration calling them and arguing a wireline of people. But I just think that the margins because of wage inflation just getting out of control is going to take over to the point where companies are going to face either bankruptcy or lay enough workers. And neither one of them are actually neither one of them are a good thing to happen and going into an election year. I don’t know who wins, to be honest with you. Until I see earnings start dropping and unemployments going to go up, I don’t see how the economy is going to be able to get itself right.
Tony Nash
Okay, so if you could architect a recession, when would it happen to be the most politically ideal for a presidential year?
Albert Marko
Right now. Before Christmas.
Tony Nash
Right now.
Albert Marko
Yeah, right now. Going Q4 maybe into Q1 and get it over and done with and try to rally the markets and the economy going into the election. That’s what I would do. If I was an architect.
Tony Nash
Okay. So Q1 recession. Again, we’re not saying this is going to happen.
Albert Marko
No.
Tony Nash
In your ideal plan, Q1, Q2, new stimulus plan, Q3, it gets out there. It’s in everyone’s pockets. Then election, everyone’s happy, right? Yeah. That would be an ideal runway.
Albert Marko
That would be an outline that I would play.
Tony Nash
Okay. What do you think will actually happen?
Albert Marko
I think they’re just going to try to maintain the facade that the economy and the market is doing great and slow walking into a soft landing. I think at some point something’s going to break or it just gets out of control for them. Whether that’s in 2024, I don’t know. But certainly after the election, they’re going to have problems.
Tony Nash
Okay. Great.
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Tony Nash
Speaking of things breaking, Michael, let’s get into some data and whether we’re looking at risk on or recession on. You’ve told us for a while that the technology trade is pretty played out. We saw shares like Meta earlier this week just rise pretty dramatically. There were all-time highs, I think, on Wednesday and Thursday. Why the pop this week? What’s happening there?
Michael Belkin
Okay, good question. Let me just set the stage here. The consensus believes that inflation and higher interest rates are the biggest threat to the stock market. I think that’s over. The downward impact of monetary tightening on the economy is arriving with a 19-month lag. The US money supply, M1, is declining at a 10.5% annual rate. That’s the biggest ever on record and Federal Reserve data. Same thing in Europe. European M1 declining at a -10.4%. That was the chart. We’re probably going to show that.
Tony Nash
Yeah, no, charts up on the screen.
Michael Belkin
Okay. So these M1 money supply declines suggest central banks are driving economies into a depression, not a recession. This is 1930 stuff. And blowback is the unintended consequences of a policy mistake. The 9 % CPI inflation rate and 11 Fed rate hikes are blowback from unnecessary stimulus that they did in 2020, COVID stimulus, way over did it. The blowback we are about to experience is an economic slump caused by monetary and fiscal tightening that they impose to rectify their previous policy error. It’s a doom loop of overreacting to previous policy mistakes. The stock market investors are so far from realizing this, it isn’t funny. Wall Street, Robot, trading machines, and individual investors firmly believe central bank interest rates cuts are bullish for the stock market. Nothing could be further from the truth. In the last two major Federal Reserve rate cut campaigns that was starting in early 2000 after the TMT bubble and then 2007, the credit bubble, the S&P 500 fell by 50 %, more than 50 % from peak to trough while the Fed was cutting interest rates. Why? Because the economy and corporate earnings collapsed in recessions. Tell that to the algorithms, this is how I’m finally getting around to answering your question here, who dominate day to day stock market trading.
Michael Belkin
Those who programmed the Algoes seem to have skipped the stock market history class. The ingredients of a global risk off moving financial assets are falling into place. In the last few weeks, emerging market currencies, EM debt, EM equities, junk bonds, and cyclical stock market sectors have toppled. The Israel attack comes at a vulnerable time. This was already happening before that. Let me be a little more specific here. One of my clients is an Alpha-captured fund. I hate to boast, but it’s a reality check because we have a 100-70, 180 contributors on there. I was number one in last quarter of 19 % market neutral. I’m also number one right now to moving target, up 4%. And what I am is I am short crappy tech stocks. Not so much Meta, but the Shopify, these really overvalued software stocks, Carvana. That has heavy short interest, but the list goes on and on. We don’t have time for the whole list. I don’t want to disclose it. But we have 50 positions on there. And what it tells me… The reason I say that, again, not to boast because boasting comes before a fall. But I can tell what everybody else has on that my competitors in this Alpha Capture Fund, I watched my ranking go up and down according to the market.
Michael Belkin
So earlier this week I was down, I was number 10 or 20 or something and I saw these others. So what I know is it’s a feeling of consensus. Everybody’s still buying the same crappy stocks. The same stocks that blew up Tiger Global. Of course, they’re buying the Magnificent Seven and everything too, and those aren’t going down that much yet. So beneath the surface, these lousy tech stocks are going down and I think they’re shorts. So this is not a quick flip for me. I think I’ve been saying this for a while. These positions are on. I think you should be shorting on balances like we had earlier this week. Sell in short. Don’t get squeezed and say, Oh, God, it’s going up. It’s time to cover my shorts. I need to go long. That’s a trap. I think the market is going down big time. Just to final note on that. I was hired into Solomon Brothers. My background came out of UC Berkeley Business School, Staff Department. I developed… Everything I do is based on this quantitative model algorithm that I developed, which is a forecasting model based on time series analysis. I was hired into Solomon in 1986, right before the ’87 crash.
Michael Belkin
In ’87, what happened is the bonds sold off, Greenspan came in as the new Fed chairman, raised rates. The bond sold off about 24%. The stock market went up all summer, peaked in August, sold off, rallied back in September, and then crashed. We’re following… Nothing’s ever exactly like anything else. I hate overlaying one chart without another chart, expecting the same exact thing. Never works out exactly. But we have something history, rimes. So this year, the TLT, T-bond ETF is down 22 % since I think March. It looks like it may have bottomed last Friday. The thing that would make a crash happen is a major asset allocation shift out of stocks into bonds. When the consensus is super hyped up and bullish on stocks and overloaded, when they get squeezed and then all of a sudden they push the sell button and then bonds start to rally, you get this huge gyration where bonds go up and stocks go down just because of asset allocation flows. I think we have the potential for that. I’m not standing out here saying the market is going to crash. It could potentially happen.
Tony Nash
When could that potentially happen? Tomorrow or April?
Michael Belkin
Soon. So here we are in early Friday the 13th, right before solar eclipse on tomorrow. Not that it has anything to do anything, but I think it’s setting up for that. Basically, it has to do with sentiment. Another one of my clients is a big hedge fund. All they care about is sentiment. When people are too bullish or too bearish, and I just think I don’t get it. A little digression here. So the definition of psychosis is when you think you’re the only smart person and everybody else is crazy. I worry about that because that’s what I think. I think everybody else is out of their minds for after 19 months after the Fed has started tightening, the money supply is shrinking and people can’t get enough stocks to buy? Hello? Have you ever heard the Don’t fight the Fed. I don’t understand where this ebullient, excessive exuberance comes from. I just think it’s misplaced timing, misplaced from the what’s going on underneath the surface of the market. By the way, one other little point here. We went really… In the Alpha Capture Fund and also in the Belkin Report, I’m long defensive sectors, which nobody likes, which have been underperforming until this week.
Tony Nash
They liked them on Monday. They were up 10% on Monday. Are you talking about Fed stocks or defensive sector?
Michael Belkin
No, defensive. I’m talking about utilities. So things that nobody wants to touch with a 10-foot pole. Anybody that’s really bullish on the market, utilities, forget about it. They wouldn’t even think about it. So utilities, up 4% this week with the S&P up one. So 3% alpha. TLT, the T-bond ETF, up 3% this week. So it’s outperformed the index by S&P by 2%. Here’s another one for you, GDX, gold stocks, and gold. So gold is up 5% this week, GDX up 8% this week. That’s up 7% more than the S&P. We’re getting this risk-off move into defensive stuff, GDX, utilities, and bonds and then the VIX you probably want to… We’re going to talk about that in a minute.
Tony Nash
Let’s talk about the VIX. You are expecting a higher move in the VIX or a move higher in the VIX. Is it largely due to recession expectations or what are the factors you expect in that?
Michael Belkin
My model gives direction, position, intensity. It’s a 12-period forward forecast based on my studies of Fourier and Box-Jenkins in the UC Berkeley Statistics Department and the business school. Nobody else was looking at this stuff when I was doing it. I was not happy with what I learned in economic forecasting. It wasn’t very powerful. So I developed my own algorithm. So that says direction up, intensity strong, position just starting. And again, it’s another one of these things where the bubble people, as I call them, whoever they are, whoever they are, love to bomb the VIX. The market goes up, the VIX goes up, out of the woodwork comes huge selling and they knock the VIX down almost every time until that right tail kicks in. All of a sudden, the VIX is not… They can’t do it anymore. And then the VIX goes up in their face and the ball sellers get squeezed out of existence. So I think that’s the potential where the VIX could go up. So when it’s down, by the way, options are cheap. And this is very complicated and I don’t have all the answers. So now there’s these zero-day options, and the institutions are selling those things and retail investors are buying them.
Michael Belkin
So options selling tends to depress the VIX, and option buying tends to increase it. But options are still relatively cheap. I would say put options on the Nasdaq, which I think is like 20, 30 % too high just for starters. I like put options on QQQ, put options. I think they’re cheap. I think it’s a good entry point. I think the index goes down, so the value of the option goes up and the volatility goes up. You get a double kicker. Is it going to happen this afternoon or today, tomorrow or next week? I don’t know, but soon. I think it’s setting up for that in the model forecast.
Tony Nash
Fantastic. Albert?
Albert Marko
I like that. No, I like his idea. I hear people trying to short the two and 10-year, which I think is lame trade, to be honest with you. If you think that 10-year is going to end up going to five and a half to 6%, you might as well just shorten Nasdaq and some of the tech stocks. I mean, you get more juice doing that. Michael’s right. I don’t really see how this market can stay so elevated with so many just policy errors and bad sentiment out there. It’s just crazy to me.
Tony Nash
Given the policy errors, and I know we’ve talked about this a few times in the last couple of months, but it seems to me also that what both Michael, you and Albert are saying is that a lot of these companies, their margins are really compressing. Is that part of the reason you’re seeing this rotation into these other segments?
Albert Marko
Is that me, Tony? The only thing I have about margins and earnings is inflation does inflate earnings, at least with the headline numbers and temporarily. But I just don’t… Like I said before, margins are getting tight and wage inflation is getting out of control. It’s an inevitable thing. Historically, you’re going to see this market retract to something where it’s fair value, whether that’s 3,200 or 3,900, I don’t know. I can’t answer that. I’m out of my league.
Michael Belkin
Okay, so margins are one thing, but top line is another thing. In my scenario, so we’re moving into earnings reporting season and the banks were supposedly good today. But if the economy is going to do what I forecast it will do, then we’re going to see warnings. So basically in the rear view mirror, it shouldn’t be too bad. Q3, right? You can say, Okay, good. That’s okay. Worked out great blah blah. Going forward, I think it’s going to be bad. And the way this works is the companies say we’re downgrading our forward revenue. Our sales are going down. You can see it across the board in retailers, industrial companies, things like that already. It’s not so much tech stocks yet. But if they say, Well, all of a sudden at the end of Q3, beginning of Q4, our orders started to fall. Then you get these Wall Street analysts downgrading the stocks. And then you get this Pi Piper thing where all these long only managers that only listen to Wall Street analysts and consensus earnings forecast all of a sudden say, Oh, you mean Micron, semiconductor sales aren’t going to be that good. Maybe I should sell.
Michael Belkin
So you get this snowball effect, right?
Tony Nash
Sure.
Michael Belkin
The brokers announce the portfolio manager starts selling, and then it turns into the snowball thing. And one final point on that. So today somebody mentioned this in passing, EM consumer sentiment down from 67.3 to 63 in early October. So that’s anecdotal evidence of what’s happening. So when consumer sentiment falls, willingness to spend falls, and if you look at the rate on car loans and and stuff like that, forget about it. I’m also short on home builders. Home builders had enormous rally rolled over a month or two ago. They’re declining. Auto makers, they’re not the greatest short. They’re not up a lot. I would prefer to short something. But anyways, the point is the financing cost for a house and auto sales are off the map. It’s unaffordable for so many people now, particularly subprime lenders. So that feeds into the financials, the banks. So we heard, JP Morgan, the city bank, and Wells Fargo today were okay, earnings are supposedly good. Let’s wait until we hear what’s happening with the regional banks, which are short for me. I think that we’re in for another round where the regional bank start going down liquidation, they start warning of loan losses, deposit outflows, all the same stuff as last time.
Tony Nash
Okay. We have geopolitical risk, rising geopolitical risks. We have rising market sector risks. We have risk with a Fed mistake. Sounds like a lot going on out there. Michael, this has been really enriching, just hearing how to apply this broader stuff within specific market segments. So guys, I really appreciate this. You’ve really helped us sort through a lot of the noise and action this week. So thanks very much for all of this. Thanks, guys. Have a great weekend and have a great weekend. Thank you.
Ross Kennedy
Thank you.
Albert Marko
Thank you.
AI
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