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This podcast was originally published by BFM 89.9 The Business Station. Find it here: https://www.bfm.my/podcast/morning-run/market-watch/magnificent-seven-us-fed-cpi
Guest speaker Tony Nash, CEO of Complete Intelligence, offers his insights on the market trends, particularly focusing on the impact of interest rates on sectors like banking, real estate, and construction. He discusses the potential outcomes of the earnings season, emphasizing the significance of passive investments in shaping market movements, especially in tech sectors and commodities like oil and gold.
Nash also touches upon the implications of decelerating inflation in the US on Asian markets, pointing out the role of international trade in influencing inflation rates. He underscores the importance of understanding market dynamics beyond mere forecasts, highlighting the interplay between global demand, asset valuation, and inflation expectations in shaping market outcomes.
The podcast emphasizes the resilience of markets amidst various uncertainties, showcasing the complexities of factors like interest rates, earnings reports, and commodity prices. The discussion sheds light on the nuanced relationship between market trends, economic indicators, and geopolitical dynamics, offering a comprehensive overview of the current market landscape.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. Bfm 89.9. It’s 07:06. It’s Friday, the 12th of April, and you’re listening to The Morning Run. And in front of me is Philip Sea. I got your name right this time. And I’m Wong Shauwning. Do I get a medal? In about 30 minutes, we’ll take a look at the performance of the Asian Pacific Aviation Sector. But let’s recap how global markets closed yesterday.
BFM
Tell you who deserves a medal, US markets, because They are on a tear this year. The DAO was flat, but the S&P 500 up 0.7 %, and the Nasdaq up 1.7 %. Over across in Asia, the Nikkei was down 0.4 %, Hangseng down 0.3%, Cheungai Composite up 0.2%, Singapore’s STI down 0.3%. Back home, FBM, KLCI, DC also deserves a medal. It was closed for the Raya holiday, closed on Wednesday at 1,553, down 0.6%..
BFM
Okay, but still up 6.8% on a year-to-date basis, so a little bit of cheer there. For some insights on where international markets are heading, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to speak to you. Tony, please tell me what is happening in US markets because PPI numbers, US producer price increased in March from a year earlier by the most in 11 months, but yet markets rallied. What’s What’s happening?
Tony
Yeah, I think from the quant trading perspective, the PPI looked muted. And part of the reason was energy costs looked like they fell, which is not what we’re seeing on the ground in the US. So some of these government data, when they come out, the algos trade these based on the data that come out, but the actual data on the ground is different. So what we’re seeing is algos trading because they believe other algos will be trading. You have to look at today as one of those potentially strange trading days. Friday in the US, we’ll start to really understand what people see through the PPI data. Obviously, we saw CPI come out on Wednesday in the US, and it was elevated compared to what people thought. It’s possible that we see inflation peaking, but the real question there is, how many rate rises will there be? Expectations are now down to one or two, where it was something like five just two months ago. It’s puzzling when we see, like today, we see tech rally, tech shares rally, when the interest rate cuts are being put further off, and there are fewer. So markets are a little bit out of balance right now, and we’ll only know in the next few sessions where things really start to settle.
BFM
In the meantime, US earnings season starts in full swing. Friday your time. I think we’ve got J. P. Morgan, we’ve got Wells Fargo, we’ve got Citigroup reporting their numbers. How do you think results will be this quarter?
Tony
Yeah, I think with trading being active and with interest rates rising, that leaves more than an interest margin for banks. So I think banks will report well. I don’t think there’s been a huge rise in bad debt. There’s definitely been a rise in bad debt, but it hasn’t been huge. Banks will probably report fairly well. The larger banks, the regional banks, they’re still having trouble. With the removal of the Treasury program to fund those regional banks, they’re going to have difficulty for the next few quarters.
BFM
Well, talking about then the sensitivity to interest rates, I wonder what’s your take on sectors like real estate and construction, where they were hoping for perhaps some relief there, but that might not eventually happen now, Well, yeah, it’ll take a while.
Tony
The problem is these are sectors that got used to low interest rates, abnormally low interest rates. We’re actually in a more normal interest rate environment. In the US, you have things like housing, which is largely undersupplied. You have commercial real estate, which is oversupplied. The commercial side is facing serious headwinds, probably for years. The residential side will see strength for years. So it’s a little bit mixed, but with interest rates not coming down at the rate that people had hoped a few months ago, it’s going to present a challenging environment.
BFM
And, Tony, looking at earnings specifically, according to Bloomberg Intelligence, the Magnificent Seven, the likes of Apple, Microsoft, Alphab, Amazon, NVIDIA, Meta, and then finally, Tesla, apparently are on course to rise 38 8 %. These are profits in the first quarter. What happens if it doesn’t? Does it mean that there will be sharp corrections in the magnificent seven, which will in turn bring down the overall broader market?
Tony
Well, it depends on a number of things. Yes, it would definitely turn things around, but the magnitude really depends on the passive income investment. So ETFs, say technology ETFs and other ETFs that people are invested in, those are passive instruments. And so people don’t necessarily have to pay attention to say NVIDIA every day when they’re investing in a passive instrument. But when people start to see their technology returns declining, they’ll rotate into other sector ETFs. We can’t underestimate the power of those ETFs, which are fairly passive. That’s actually more powerful than individual stock buys and sells.
BFM
Can we just have your perspective on commodities, particularly oil? I mean, it’s up around 17% this year. Just now you were already mentioning that the algos are not reflecting that accurately. What’s your take and prognosis on the future? If all continues to rise, what’s the broader implications to the global economy then?
Tony
If oil continues to rise, I saw somebody put forward a potential oil price of $1,000 a barrel a a few days ago. When we get to the point of the cycle where people are putting forward those types of ridiculous forecasts, we know we’re getting, I feel like we’re getting toward the end of that. We’re not there now, but it’s the beginning of the end when we start to see these ridiculous forecasts. If you remember in, say, 2020 when Crude was, obviously it went negative one day, but generally in the ’20s or ’30s, Citibank came out and said it would be at $10 when it trading, say, in the ’30s. So you know things are getting toward the end of that, either high or low cycle, when we start to see these extreme forecasts. So do I think we’re going to see $1,000 oil? No. I actually believe it’s going to trade sideways to slightly down for the next few months based on what we’re forecasting a complete intelligence. And we’ve been pretty right for the last year or so. So I’m not expecting to see, say, $130 a barrel of or something. I think we’re in the zone for the next few months.
BFM
But, Tony, we have seen a lot of other commodities, hard commodities, actually, Raleigh, Beat, Copper, Iron. Are those all indications of global demand improving, or is it just basically money chasing assets that hadn’t gone up so much?
Tony
Yeah, well, you see things like gold. You’ve seen the pop in gold because people are afraid that inflation is going to continue to to accelerate, which we’re seeing inflation rise, but it’s not necessarily accelerating. You see copper popping because people believe that that’s an extension of the AI boom and so on. So I think to some extent People are seeing what they want in markets, and that’s great. That’s how markets work. People come up with a hypothesis. But if inflation doesn’t continue to grow at a very rapid rate, we’re going to see gold slow pretty quickly. If things like, say, NVIDIA and other chips, Intel just came out with a competitive chip yesterday. If we start to see some of those AI names mute, we’ll also see copper mute a little bit. Some of these are self-fulfilling hypotheses, and those things will tail off as that hype declines.
BFM
Which then begs the question, I think what you’re saying is inflation is decelerating, right? It’s just not moving in the fast pace. What does decelerating inflation the US mean for Asian markets then?
Tony
Yeah, that’s a great question. I think, well, if we look at China, for example, there was an issue a few days ago where Janet Yellen was in China and scolding the Chinese about exporting Chinese electric vehicles at below cost or something. Now, for the US and Europe, and Southeast Asia for that matter, China exporting deflation is helpful for consumers. So that helps reduce inflation in the US. And the US benefited from China exporting deflation for 20 some years. So it could potentially bring down the cost of EVs, EV components, and so on, if China is incentivized to subsidize those goods and export them at below their cost. I’m not necessarily saying that’s the right policy move or the wrong policy move. I’m just saying the The reality of trade in markets is that international trade helps to bring down inflation. And if we see China and other places with a devalued Japanese Yen, we see Japanese products coming to market at much lower prices with a devalued JPY. Why? So these sorts of things help out consumers in the US, where we’re seeing persistent inflation, helps those consumers out over time.
BFM
All right. Thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence giving us his views on markets, saying that, oh, looks like gold is ripe for a correction. And results, he didn’t pay attention to that, although he doesn’t think that even if the Magnificent Seven disappoint, there might be a correction across the board because there’s just so much passive money in those seven names.
BFM
Yeah, he’s, I think, emphasizing the resilience of the markets, right? I mean, he’s saying, look, the bank earnings are going to be projected quite good. As you said, there’s still quite a lot of flood, cash, flood, flood, Floating around.
BFM
Yes, flushed. We’re just flushed. Flushed with cash. I personally know, but markets are.
BFM
I think all of us in the studio are not necessarily flushed with cash. So I think that’s interesting. The interesting thing also is about oil, I think, where there are all these outlandish forecast there, but it’s not about- Thousand.
BFM
I was like, Is that for real?
BFM
Yeah, but it’s not the actual forecast that matters, but it’s the trigger, what it means, right? That actually you’re near the specific cycle there.
BFM
Yeah, because all is one of those things. When prices go up, there is natural demand destruction. So there seems to be a ceiling. The ceiling can shift a little bit depending on geo-politics, global economy, but it doesn’t shift that much. You have been listening to a podcast from BFM 89.9, The Business Station. For more stories of the same kind, download the BFM app.
This podcast was first and originally published by Peter Lewis’ Money Talk. Find the Substack here:
https://peterlewismoneytalk.substack.com/p/peter-lewis-money-talk-friday-22-6c2
Topics discussed:
- Federal Reserve Chair Jerome Powell’s perceived dovish stance is critiqued for potentially leading to increased inflation and discontent among voters.
- Market reactions to the Federal Reserve meeting were positive, resulting in a broad rally across various asset classes.
- Concerns are expressed about the impact of new legislation in Hong Kong, particularly on foreign investors and the perceived shift towards authoritarianism.
- The potential implications of stricter laws on data privacy and state secrets in Hong Kong are discussed, raising concerns about its impact on the region’s business environment.
Transcript
Peter Lewis
Tony, what are your thoughts? I mean, it’s interesting, isn’t it, because he’s raised the inflation forecast. He’s raised his growth forecast quite considerably, but no change to the number of rate cuts this year, although we did get one taken off for next year, didn’t we? There was going to be four next year. Now they’re only talking about three year. So I suppose one of the rate cuts has come out for next year. But what are your thoughts?
Tony Nash
I think it’s silly, Peter. We can’t be raising our economic expectations, seeing wages rise, seeing prices rise, raising our inflation expectations and saying, oh, yeah, we’re going to make money easier. Right. And he even said during the meeting that they were going to slow the pace of the offtake from the fed balance sheet. They’re cultivating an environment for pretty easy money where demand seems to be right now. And that’s how markets took it. Markets took it after the meeting and they just ran with it because he came across as very dovish. In fact, Powell has a way of coming across either way too hawkish or way too dovish. And then other Fed speakers have to course correct in the following days. So I think he probably came off way too dovish. And I think we’re going to see fed speakers over the next week. Correct. More on the hawkish side to say, whoa, that’s not really what we meant. And I really think that that’s what’s going to happen is they’ll make the three interest rate cuts seem more questionable than they are. Although the vote was unanimous, we did see a slightly more hawkish trend in the dots.
Tony Nash
Not a lot, but slightly more hawkish.
Peter Lewis
And what was also interesting was out of the 19 FOMC members, nine of them, so a minority, but a substantial minority, actually think the Fed is going to cut less than three times this year. So I think that’s maybe Jerome Powell is sort of out on a bit of a limb there, isn’t he?
Tony Nash
Yeah, I think you’re right. I do think that he does over calibrate either hawkish or dovish, depending on the direction, and I think he’s trying to signal the direction, but I think he always overdoes it just a little bit. He doesn’t have an easy job. Everyone reads everything into the way he holds his papers, the way he clears his throat or whatever. Right. I mean, everything is overly analyzed with him. But again, we have seen this where he comes out and he’s overly one way or the other. And I think, yeah, seeing those nine voters say hey, we’re not going to have three this year. I think as we’ve been talking about, my team has been talking about a resurgence in inflation for over a year, and we’ve seen it over the past couple of months, and we’re going to see that accelerate. They try to present Jan, Feb as just an aberration, but it’s not. And so it’s going to accelerate. Their expectations are going to be probably even exceeded. And it’s very difficult to have an interest rate cutting environment when you have inflation rising because it’s an election year.
Tony Nash
And consumers love, and voters love to complain justifiably about prices and prices keep rising. What did we see after the Fed meeting? We saw commodity prices soar. A lot of commodity prices soared after the Fed meeting, and that’s going to hit consumers within two. You know, this very unnecessarily dovish talk out of Powell has resulted in inflation definitely being locked in for at least two months.
Peter Lewis
Tony, I’m wondering what you think about this. Is the Fed taking a risk here? Because they basically seem to be saying the economy can run faster without generating significant overheating pressures and they’re willing to cut even while they’re still away from their target.
Tony Nash
Well, this is very similar to like a 2020 2021 argument when things were actually doing okay in the middle of COVID at least in the US, and people kept saying, hey, let it run hot. Let it run hot. Right. And it seems like we’re replaying that again, where, although people may not be using those words, the subtext is let it run hot. And I think the problem is, as Andrew was talking about GDP, the quality of that GDP is not great. It’s overwhelmingly government spending in terms of the growth areas. Okay, so we’re not having private sector growth as a contribution of GDP in the US. We’re having government spending as a growth area in GDP. And so what we’re seeing is heavy fiscal and we’re seeing dovish monetary. And so that’s great, but it just means that we’re going to see more inflation. Inflation is going to come back. Well, it already has, but it’s going to continue to accelerate. If this is the world that policymakers are comfortable with and if this is the world that policymakers are comfortable with, it makes us voters very unhappy because their pay rises are not keeping up with inflation.
Tony Nash
Now, what’s interesting, public sector pay rises are something like twice the size of private sector pay rises. So public sector wages are keeping up with inflation, but private sector wages aren’t and so this is the problem with an election year. American voters are really tired of it and inflation comes up in almost every discussion I have.
Peter Lewis
And I wonder what American voters also think about what he said about labor supply. He sort of mentioned the strength of the data on labor supply, but then he pointed to the strong pace of immigration as helping on that front. That’s rather a hot political topic to.
Tony Nash
It’s a lightning rod, and it’s not a very positive discussion in most parts of the US, even in very heavily democratic parts of the US, which favor inflation in state Massachusetts, New York, it is just a sour topic for people and it’s a very sensitive topic. So when the Fed chair gets up and says immigration is helping the labor market, it makes Americans very uncomfortable and it makes them not really like him.
Peter Lewis
Tony, what do you make of the market reaction to this? Jerome Powell didn’t talk down the rally at all, did he? In his press conference in either stocks or risk assets. He didn’t even acknowledge that this is easing financial conditions and maybe making their job a bit harder.
Tony Nash
He did not. And I think he turned it from a tech rally to an everything rally. If you look across markets at the close in the US today, and as you mentioned at the top of the program with Hong Kong was coming on strong this morning, international markets coming on strong this morning. I think with this, I think overly dovish Fed meeting, he turned the rally from a tech rally to an everything rally.
Peter Lewis
Do you think this is going to continue?
Tony Nash
It’s possible. I think we have to see how things go into the end of the week. If things stay strong into the end of the week, then look out. But I think if we start to see things stall out Thursday and Friday in the US, then we could see things settle back to the levels we had seen a few days ago.
Peter Lewis
Tony, if you look at the reaction of the yen to this, clearly the currency traders don’t think that this is the start of a sustained period of rate increases in Japan. And there’s still going to be that wide yield differential between US rates and Japanese rates.
Tony Nash
Yeah, it wasn’t a big statement. ET seems to be very conservative. He doesn’t want to be seen as shaking things up at the BOJ. He almost acts like a caretaker. And so I think currency traders expected something a little bit more. They want a little bit more in the end, want a little bit more. In terms of markets being slightly tighter, he’s not a big bold move maker and this just wasn’t it. So to see the end continue to weaken on this was just really interesting for me to watch this.
Peter Lewis
Okay. Okay, Tony, what are your thoughts? You’re obviously looking at this from overseas. As Andrew says, it’s no surprise it passed, and it passed with unanimous vote in ledge coat. But now that it has passed, and foreign investors are going to have a chance to scrutinize it and see the impact of it, is there anything to worry them?
Tony Nash
Oh, sure there is. I think the law allows trials without a jury. It allows trials behind closed doors. It allows handpicked judges. So anybody forming a company, anybody who’s a board member, anybody who’s an officer in a company, in a jurisdiction like Hong Kong, you have to worry. Why don’t you have a lot of international companies centered in Beijing because of laws like this, right? So Hong Kong, which 1020 years ago, 30 years ago, was the place to have a company because it was the most business friendly city in the world. Today it’s not that way. And if you’re an officer or director in a company, it’s got to be a little know, give you second. You know, one of the attractors for Hong Kong for a few decades has been media. There is great media in Hong Kong, but it’s no longer a media center, it’s no longer an arts center. And the sad part about that is a lot of that stuff is moving, or has moved to Singapore, which is a pretty strong state in terms of control of messages. So people are so worried about the impact of this new law on Hong Kong that they’re moving to Singapore and seeing it as a freer place than Hong Kong, completely 180 degrees from the way things were ten years ago?
Peter Lewis
John Lee and the government will say, what this Article 23 legislation does is it brings stability to Hong Kong. So will foreign investors look at that and say, yes, Hong Kong is more stable as a result of that, and that’s a positive.
Tony Nash
No, it brings opacity and it brings authoritarianism, in truth. And authoritarianism generally is stable until it. And so, you know, Singapore is an authoritarian place and it’s stable. It’s marginally freer than Hong Kong now, I guess. But no, authoritarianism doesn’t bring stability necessarily, or the stability it does bring is short lived. And again, Hong Kong was very vibrant, very creative, very interesting business hub. And I don’t think it’s totally gone, but I think the risks to officers, investors, board members and so on are much, much higher than they were before.
Peter Lewis
Tony, you are a financial analyst. If you were based in Hong Kong, would you be worried about this state secrets legislation or this state street secrets article that includes economic information, technological information on Hong Kong?
Tony Nash
Yeah, absolutely. So I used to be with a company called IHS, and it’s since been bought by S and P. But twelve or 15 years ago, there was an IHS analyst who lived in China who had some information on crude output or something like that, crude storage. And this person, from what I understand, got it from an industry association or something because they used it in a business environment. The chinese authorities prosecuted him and put him in jail for a long, long time. And at the time, I was working with the economist, but we were shocked at what was happening, because you used to be able to do research, find information, and if you could find information, you could use it to your advantage. And part of using things to your advantage is to trade on it. Right. And so if Hong Kong is to remain a vibrant financial center and a vibrant trading hub, you have to be able to dig for information. But if the Chinese authorities are going to prosecute people for finding information, then Hong Kong as a competitive center is no more. It just isn’t.
Peter Lewis
I mean, that’s what some people are worried about is that Hong Kong is becoming more like mainland China in terms of things like data privacy, state secrets, and what constitutes state secrets?
Tony Nash
Well, there are huge data centers in Hong Kong, right? I mean, there have been for 30 years. And so those data centers, I don’t know, a lot of foreign companies that people have their servers outside of China for a reason, and they have their data stored outside of China for a reason. These new laws allow the government to look into whatever they. So, you know, that stuff that has remained in Hong Kong, I’m sure at some point will move elsewhere if it’s remotely confidential.
Peter Lewis
Okay, well, thank you very much for your thoughts this morning. Great to hear you. That’s Tony Nash over in Texas, USA, who is the founder of Complete Intelligence.
This podcast is originally published by BBC Business Matters in this link with title “Hong Kong’s lawmakers pass tough security bill”: https://www.bbc.co.uk/programmes/w172yzs33f96cxs.
BBC’s Description:
The new law broadens the definition of state secrets in a way that could scare away investors. Will the city be able to maintain its place as a top financial hub?
The British band Chumbawamba is trying to prevent its biggest hit from being used by a politician in New Zealand. The lead singer tells us why.
And Star Wars creator George Lucas steps into the boardroom power battle at Disney to support the firm’s CEO, Bob Iger. Will the Force be with him?
Transcript
BBC
The new law also broadens the definition of state secrets to include information about the economic, technological and scientific development of Hong Kong or mainland China. And this has caused concerns among investors. Tony Nash is the CEO of AI forecasting platform complete intelligence. He also ran the Economist’s research business and their Asia headquarters in Hong Kong.
Tony Nash
Do I think first, we’ve seen legal agreements move to other jurisdictions, so that’s an easy thing to do. They can write it with UK law or something like that. We’ve also seen financial services staff and multinational staff move to other locations, like Singapore. I lived in Singapore for 15 years, and it’s a great place, but Hong Kong always had a very special buz. It had a level of hard work, creativity, intelligence. That Singapore, although it’s a really great pace, it didn’t have that special buz that Hong Kong had. So this stuff has people moving, it has business moving, and sadly, that specialness of Hong Kong is going with it.
BBC
Do you think there might be some businesses that might stick around in Hong Kong, or do you think that the rules are just too much for them?
Tony Nash
Sure, Hong Kong’s not dead. Companies still need people to do work in Hong Kong, but I think the decision makers and the people who are, say, the regional heads or the sea levels or the board members, those people will want to be in other places because of the potential liability that they have. Traders can trade on all kinds of information, and so if something is deemed a state secret and a trader uses some information that they’ve heard, there could be criminal prosecution for that. And so this was never a part of Hong Kong. Of course, things like insider trading are illegal, but I’ve been in the research business for a long time, and there’s a company called IHS that probably ten to twelve years ago had one of their researchers in China put in jail for getting some information that was relatively easy to get. It wasn’t hidden, but it was later deemed a state secret, and that person was put in was.
BBC
Sorry to interrupt you, Tony, but that uncertainty is just going to make it very difficult to do any business out there.
Tony Nash
That’s right, it is. And especially if decisions are made after the fact. Right. So this person had this information, it was deemed a state secret after this person had it, and that person went to jail for a long time. So these are the difficulties that executives and business leaders and researchers and media people face as and if they stay in Hong Kong.
This podcast was originally and first published by Business Matters.
BBC Description
Polls are beginning to close across the 15 primary states in the U.S as Super Tuesday comes to an end. Our presenter Roger Hearing will be bringing us up to date on what the polls are saying.
We’ll be hearing from voters who have made up their minds and those who are still considering.
And we find out if the fact that the US economy is beginning to show signs of strength, will affect the outcome in November.
Roger will be joined throughout the programme by two guests: Tony Nash, Chief Economist, Complete Intelligence who’s in Houston and Laura Schwartz, former Advisor to Bill Clinton and democratic strategist, who’s in Chicago.
Transcript
BBC
Hello, and welcome to Business Matters. I’m Roger Herring. Coming up on the program today, millions of voters in the US choose their party’s candidate for the November presidential election on what’s called Super Tuesday. But how are they feeling about the prospect of Biden versus Trump round two?
BBC
Well, we’re going to be hearing from those who have made up their minds and those who are still considering and ask if the fact that the US economy is beginning to show signs of strength will affect the outcome in November. And I’ll be joined throughout the program by two guests, Tony Nash, chief economist, Complete Intelligence, who’s joining us on the line from Houston. Tony, I should say hello to you.
Tony
Hello, Roger.
BBC
Good to have you there with us. And, Tony, I mean, for the Republicans, it is pretty much a coronation, wouldn’t you say?
Tony
Overall, yeah, there’s nobody left. I mean, you may have the four republican voters in Vermont vote for Nikki Haley, but aside from that, I really don’t think she’s going to win much today.
BBC
All right. Fair point. Well, we shall see. She hasn’t said her campaign is over yet. We’ll talk about that. But let’s just bring ourselves up, just be, to what has been happening, because it has been the biggest day so far in the US election year. Millions of people voting in what’s known as Super Tuesday. And the idea is you decide who should be the Republican and who should be the Democrat candidate for November’s presidential election. Now, polling has been taking place in more than a dozen states. The results are only expected to reinforce, as we said, the near certainty that Joe Biden and Donald Trump will face each other again in November. Well, speaking to reporters a little bit earlier, President Biden was pretty defiant about his polling. All right. Well, thanks very much for the moment, Michel. We’ll come back to you in a little while, a little bit later in the program to get an update and see what’s happening and perhaps get some sense of other issues that may be working their way through this election year. But now let me come to my guests, Tony and Laura. So, Tony, first of all, let me come to you.
BBC
Do you get the sense then that this process, this primary process, isn’t really what we’ve had in the past, what we’ve expected, where there’s been at least an element of doubt as to the outcome? And so for that reason, is it more of a drama? Have any issues come up in the process that have been useful?
Tony
Well, one thing about your earlier conversation, there are states where you vote in a partisan primary, but you don’t necessarily have to be a member of that party. So we have, like in Virginia, according to Exopolan, I was just looking at half of the people who voted for Nikki Haley were Democrats. And so this is how the different parties game some of these. And I would say this is a pretty big issue, especially in this primary.
BBC
Sorry, just run that one past me. You’re saying that the Democrats, people who are registered Democrats, can vote for the Republican candidates in some states.
Tony
So I live in Texas. In Texas, you do not have to be a registered Republican to vote in the republican primary. And so this is something that’s been happening for, I don’t know, the past three, four election cycles where party members will go in and vote in the other party’s primary to kind of try to push things one way or another. So since there is really nobody running against Joe Biden because he’s the incumbent, it really is kind of open and fair game for Democrats to try to change the republican primaries. So I voted here in Texas. I’m a Republican. And there were all of the previous names on the ballot. It wasn’t just Donald Trump. There were, I think, seven or eight Republicans to choose from. So just so your listeners understand, Republicans don’t just walk in the door, and Donald Trump is the only name on the ballot. There are many names. If those names are submitted to the state and qualify in time for the primary.
BBC
Interesting. We’ll see about that. Tony, let me bring you in on this, because that point that Laura was making about the court case, and we do know that one criminal trial will happen at least before the election. How much do you think that actually will matter in terms of voters, particularly GOP voters?
Tony
Obviously, it won’t matter. I mean, honestly, I live in the suburbs. I know both men and women. I’m a relatively social person, and I don’t know a single person who that matters for. And so we see this as responses, but I haven’t heard of a single person. Donald Trump being a dog is. I mean, that’s old news, so nobody really cares. I think that the biggest issue that people are facing right now is immigration, and that’s what everybody’s talking about. And that will weigh on Biden more than anything else. More than his corruption, his son’s corruption, his brother’s corruption. Immigration will weigh on Biden. And that campaign more than anything else, because there was some news, I think, out today saying the administration flew 300,000 illegal immigrants into the US. They flew them in to avoid the optics of them crossing the border. And so american citizens are paying for that. They’re paying for these people to be illegally transported and to reside illegally in the US. So we see what’s happening in New York City. We see what’s happening outside of Boston. We see what’s happening in Chicago. These very traditionally democratic cities are having to contend with the things that people like me in Texas on the border.
BBC
Because, I should say, of the movement of people coming over the border, often by republican governors in the south up to these cities.
Tony
Yes and no. Yes. I mean, our governor in Texas has done a lot of that to start that, to bus people up to DC and New York and Boston and Chicago and other places. But the Biden administration itself has flown in 300,000 illegal immigrants into the US. This was just a story out today. So they’re paying airfare, they’re taking Americans off of planes, they’re flying on flights, and then they’re getting vouchers and debit cards once they arrive here. And that’s a massive, massive issue for.
BBC
So you think that will actually dictate where a lot of people go in November will be that issue more than anything else?
Tony
Yes. Especially as we see more layoffs from companies. The displacement that that cohort has for, say, inner city and lower wage workers is huge. And so, again, these are traditionally Democrat voters. And so that immigration issue, it just won’t stop and everybody is talking about it.
BBC
Well, we shall see. That’s a very interesting line that you put there and one I have heard as well before. Anyway, we’re going to move on to the next part of the program. We’re going to be looking at some of what the economy might do to that vote in November. We’re going to say, Tony, let me pick that theme up with you, because do you feel, as someone working in the US economy, do you feel that things are getting better? I mean, you can see, I guess, from the stock market is certainly seeming to reflect that.
Tony
Yeah. So there are a couple of different things. First is inflation. It’s undoubtedly, on average, things are, I think, 24% more expensive today than they were in 2019. So inflation is without a doubt another massive issue this year. The stock market is really about four concentrated stocks, okay? It’s about Microsoft, it’s about Nvidia, it’s about Amazon and it’s about Apple. So when we see the general indices move up and down every day. Money is so concentrated in Nvidia, Microsoft and so on, that’s not necessarily impacting the stock market as a whole. So these are people betting on artificial intelligence. If you look at general stock market performance on the year, it’s down, I think, high single or low double digits so far this year. The general stock market, if you take out those four stocks, and we do see a lot of layoffs, other things. So it’s hard to argue that we’re in a terrible economy. I’m not saying that’s the case at all. But when we look at inflation and when we look know if people are standing still, they’re losing money. Right. Why is that happening? Well, it initially happened because of Fed policy.
Tony
Loose fed policy. Right. And so today it’s happening because Janet Yellen is using the treasury general account as her own personal kind of campaign funds. She’s spending the treasury general account like wildfire. And that is helping to sustain the prices in the US and keeping things up. So Congress has very limited power to stop her from doing that. But Yellen spending from the TGA is one of the biggest issues that nobody talks about, and it’s really keeping inflation up in the US.
BBC
Okay, well, listening to all that, Tony Nash. Tony, I guess that didn’t really surprise you, the kind of things we were hearing there.
Tony
No, it completely validated things that I’ve been telling you for the last 45 minutes. I mean, people on the ground are feeling it. If you’re sitting in New York or Boston or DC, and if you, Roger, are interviewing a talking head sitting in one of those places, they’re not going to tell you this stuff. But you just interviewed two people on the ground and they’re telling you exactly the stresses that they’re feeling.
BBC
Okay, well, let’s. Nash in Houston. It is interesting to hear where these things are going and interesting that John Zogby certainly seemed to think that the legal troubles of Trump may be actually quite instrumental. And I know you disagree with that. You’re not convinced, are you?
Tony
I’m not. I really think inflation and immigration and the people I talk to, and they’re across, I have 20 somethings who work for me and I have a 60 year old who works for me and I talk to, of course, people who don’t work for me. But I get a cross section across every day and I’m not hearing Trump’s legal concerns as an issue. But I’m sure in places like New York or San Francisco or DC, it’s a major issue where media is. But I think, Roger, the major, I think issue this November will be who will show up to vote. And if people are ambivalent about Biden and they don’t show up, then Trump’s going to win. If people are ambivalent about Trump and they don’t show up, then Biden’s going to win. I think that’s a bigger fact than anything because we got a couple of 80 year olds running. It’s really hard to get enthused. You can’t have like an Obama wave.
BBC
Well, I think we seem to have.
Tony
2008 or even a Trump wave.
BBC
We’re just losing the line a little bit to you there, Teddy.
Tony
And with all this other stuff and.
BBC
The partisanship, people, I think we’re just losing the line to you slightly there. But yeah, just a final thought. Does it matter very briefly in a word, or could, we heard you there a little bit there, Tony, thanks very much there. The line getting in the way of that at the end. But I hope we got a decent picture there of Super Tuesday and what it means, just to let you know that at the top of the hour, polls will close in Colorado, Minnesota and Texas. And we’ll bring you up to speed, of course, with projections from that. But that’s it from this special edition of Business matters on super cheesy bye.
Categories
It’s Malaysia’s Time Finally
This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/us-market-valuations-india-undervalued-market-malaysia-strategy.
The BFM hosts provides a comprehensive overview of global markets and corporate earnings, covering major stock indices’ performance and specific company reports like HP Inc. and Salesforce. Analyst Tony Nash discusses market valuations, highlighting potential overvaluation of US stocks and undervalued markets like Poland and Israel. Discussions on tech giants Nvidia and Apple illuminate trends in the technology and automotive sectors. It also explores Apple’s decision to abandon electric vehicle ambitions, insights on emerging markets like India, and shifts in global supply chains. The segment concludes with an analysis of Salesforce’s earnings report, focusing on revenue growth concerns and the company’s strategic emphasis on AI technology for future profitability amid market changes.
Transcript:
BFM
BFM 89.9. Good morning. It’s seven o’ six a.m. On Thursday the 29 February. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Keith Kam. We are going to start the morning with the recap of how global markets closed overnight.
BFM
Wall street ended lower as investors were looking ahead to a key inflation report that’s due out later this week. The Dow Jones fell 0.1%, the S&P 500 was down 0.2% and the Nasdaq was down 0.6%. Earlier in the day, Asia was pretty much in the red as well. The Nikkei was down 0.1%, Hong Kong’s Hang Seng was down 1.5%. Shanghai’s composite index was down 1.9%, Singapore’s STI was down 0.6% and the FBMKLCI back home it ended lower, 0.9% lower at 1546 points.
BFM
All right, all in the red, surprisingly. But let’s take a look, maybe at some of the headlines coming out of corporate America. We have quite a number of companies reporting earnings with HP Inc. First on our docket, they reported first quarter results that missed estimates and this is really due to the ongoing slump in pc sales. Revenue declined 4% to 13.2 billion U.S. Dollars in the first quarter ended January 31, dismissed estimates of $13.6 billion. Profit, excluding some items, was share in line with Wall Street estimates.
BFM
If you look at different segments after two years of declining revenue in the consumer pc unit, analysts were hoping for a sales increase in the quarter. But instead consumer sales fell 1% to $2.76 billion, while pc revenue dropped by 5% to just above $6 billion. Its printer division revenue was pretty much in line with estimates at $4.38 billion. And that’s down by 5%.
BFM
Okay, so what’s the outlook? The company expects pc sales to increase in 2024. Basically, the new computers are now tied to Microsoft Windows eleven software, and there’s some modest impact from AI ready pcs. But if you look at the pc market right, it’s really going through a major downturn. Some people say it’s the unparalleled in the industry’s recorded history. Holiday shipments last year were the lowest since 2006. So it might be we’ve reached the bottom and then hence it’s going to be up from now. But very quickly, does a street like this name, what do they think? The answer is not really because there’s just eight buys, eight holes, three sells. Consensus price for the stock, $33.27. It was down eleven cents to twenty eight dollars and seventy two cents.
BFM
All right, we are going to take a look at more earnings, but let’s first take some discussion on what’s moving markets. We do have on the line with us Tony Nash, the CEO for Complete Intelligence. Tony, good morning. Thanks very much for joining us. The S&P 500 forward PE ratio has risen above 20 times for the first time in two years. Based on this, do you think us stocks are overvalued, as some analysts believe?
Tony Nash
Yeah, I think it’s possible, but we have to look at some of those stocks that are hitting those high levels. So if you look at Nvidia, which is a stock that everyone loves to talk about, Nvidia is contributing 23% of all of the S&P 500 earnings right now, all the earnings growth. So this is one that people love to point to and say, hey, it’s overvalued. But actually you have to pull back and look at the whole market and go, this one stock is actually propping up. We’ve all seen that meme where there’s this house falling over and there’s a log holding the house and fall on its own. Right? That’s Nvidia right now and maybe a handful of other stocks. So when we look at something like Warner Brothers, which is an old media stock, it’s got a massive PE right now. And that’s not technology, it’s just a firm specific valuation. So is it overvalued? Probably, possibly. But I think that’s a function of both earnings growth expectations and interest rate expectations. So there are a number of people here in the states who still believe the Fed is going to cut rates, and they’re factoring that into their equity valuations when those expectations keep getting pushed back and back and back.
Tony Nash
So at some point those rate expectations will catch up with the valuations and the pes. I think it’s also necessary to look at global forward pes. Okay, so the US is definitely in a weird place at, say, 21 times earnings, but if you look at, say, Denmark and India, they’re hitting 25. Those are two markets that are very highly valued. So when we look at the US, because of the strong dollar, we have a lot of capital being attracted to the US right now because of the strong dollar and because of the higher for longer narrative out of the Fed, those markets, they’re attracting some capital, but especially a market like Denmark. I’d be really concerned of the overall pes in a place like Denmark. And then finally, if we look at Malaysia, Malaysia has 15 times PE right now, so it’s not nearly as stretched as the US is right now.
BFM
Okay, so you highlighted us. Thank you very much, Tony, because we are usually nervous, but what other markets would you pay attention to which you think are, well, cheaply valued, undervalued.
Tony Nash
Cheaply valued, undervalued. Well, let me look at this list. Well, you’ve got things like, say, Poland. Israel is undervalued. Poland is undervalued. South Africa might be, Brazil might be. I mean, there are different types of risk in these markets, right? And we look at know people have really fled China as an investment market right now, really because of economic and policy risk in China. So if you look strictly at PE, China looks very undervalued, but you have to look at the other risks around that market to understand what’s loaded into that PE based valuation.
BFM
Tony, can I pick up on something you said about Nvidia just now? Its spectacular run is being compared to what we’re seeing with Cisco during the.com bubble. Is this a valid comparison and where do you think they are similar and different?
Tony Nash
Yes, I love that comparison. Because when you mention that comparison to anybody, anybody who watches markets, nobody is just kind of met about it. Right?
Tony Nash
Everyone either hates it or they love it. So I’m old enough to remember the Cisco run up. And so personally, I have some selection bias and I see a lot of parallels, but in reality, it’s both yes and no. So they’re both selling infrastructure to kind of the current thing. Right? So for Cisco, it was the first generation of the Internet. For Nvidia, it’s AI. Nvidia is spinning off much more cash as a percentage of overall market earnings than Cisco did back in the day. So it seems to be on much more solid footing than Cisco was. We also have Nvidia selling into the likes of Google and Microsoft. These are Facebook and so on. These are very large companies with very solid cash streams, whereas Cisco was selling to a lot of people and a lot of startups that really had money pulled when that Internet bubble. So I think there is some merit to that comparison. I think it’s an interesting one, and it’s one that I gravitate to because I live through that first bubble. But I think you can see both sides of it and definitely justify both sides.
BFM
Tony, can we take a look at recent news coming out of Apple? They dropped their decade long aspiration to enter the EV space. Is this a sign that the EV market is already reaching a peak in terms of competitor space as well as returns on investment?
Tony Nash
Yeah, I think for EVs, we’ve had a pretty long hype cycle for probably the past ten years, and Apple’s been talking about developing EVs for that long. And when we have a lot of the Chinese EV makers who are really making headway and they do amazing products, and in the US, you have Tesla that has huge market share, and we’ve got European brands and legacy brands and us legacy brands and Japanese legacy brands, all with EVs. I think from Apple’s perspective, it’s looking at that market and going, are we really going to bring something to the market that’s not there? And they do wearables, they do mobiles, they do software, they do other stuff. And I think from the board perspective and from the operating management perspective, they’re looking at it. There’s a huge capital expenditure risk of building automotive plants. There’s a huge supply chain on the selling end that needs to be built up. And then there’s a massive amount of marketing to get into that crowded space. So for them, I think it just makes a lot of sense to pull the plug. And I’ve been waiting for this for a long time, actually.
BFM
Okay, Tony, we’ve talked about China. We talked about Malaysia, some markets which are very unknown to us, like Poland and Denmark. But what about India? What are your thoughts on this market?
Tony Nash
Yeah, so we saw some announcements over the past couple of weeks of people moving manufacturing to India.
Tony Nash
And so I think India can definitely draw investment away from China in terms of manufacturing and supply chain investment. But I think that, say, China plus x strategy, whether it’s one, two, three, or multiple countries, that’s not something that people, major companies can execute right away. It’s something that takes time. And the problem that India has is Malaysia, Thailand, Vietnam are very, very good at what they do in terms of manufacturing. And so those are the competitors for India. So India has, say, very low labor wages, but the infrastructure and the services surrounding manufacturing aren’t as well built out as they are in, say, Malaysia, Thailand, Vietnam. So I do believe that India will provide benefit for very labor intensive, very scale oriented manufacturing. But again, for those guys, it’s really hard to just turn the tap on in India. They have to make a major investment, run it in parallel, and then maybe turn the tap on full. So I know India has been building this for a long time. Made in India started, what, twelve years ago or something. Right? So they’ve been pushing it for a long, long time, but there’s a whole ecosystem that has to be built out and I know they’ve made headway there, but it’s just not as built out as say Malaysia, Thailand, Vietnam.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. We have a little bit of time. Perhaps we can take a look at another earnings report that came out overnight. And that is Salesforce. Salesforce shares fell by 4% after it provided an outlook for sales that fell short of estimates, although results for fourth quarter surpassed estimates suggesting that new AI features for its software have yet to boost growth.
BFM
For its 2025 fiscal year, Salesforce expects adjusted earnings to be between nine dollars. Sixty eight to nine dollars. Seventy six per share revenue is expected to increase by about 9%, up to $38 billion. And analysts had expected $38.6 billion in revenue previously.
BFM
Okay, so what they’ve done is they’ve cut costs just like any other tech company and that has helped profitability in the past year. But now investors are saying where’s the profit really going to come from? Where’s the growth coming from? Especially since a lot of companies are tightening their respective spending on software. So they are, of course just like anyone else, investing heavily into AI. But that monetization path isn’t so smooth, isn’t so fast, right? So in the meantime, I think people were disappointed with their numbers. They however, have launched a copilot feature that uses generative AI to answers questions and to create new content. Now, does the street like this name? Do you remember this? Was a real darling during the pandemic? Still a darling actually if you ask me. 42 buys, 13 holes, just one sell consensus tile price $304.13 last and price $299.77 up. Love the ticker on Bloomberg. CRM says it all right.
BFM
Indeed. 07:19 a.m. We’re going to head into some messages and when we come back we’ll continue looking at the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9.
Categories
AI: More Hype Than Substance?
This podcast is originally and first published by BFM 89.9 The Business Station for their program called Morning Run. Find the original source at https://www.bfm.my/podcast/morning-run/market-watch/ai-hype-substance-sustainability-tech-stocks-monetary-policy
Investor excitement over AI has been driving up valuations of tech stocks, but to what extent is this optimism substantiated? Tony Nash of Complete Intelligence weighs in on the sustainability of the tech rally, as well as the outlook for Fed monetary policy, among others.
Key takeaways from this episode:
- Fed likely to delay rate cut to July unless significant economic changes occur.
- Market expectations of 3 to 5 rate cuts for the year but unlikely to be as aggressive as initial rises.
- Tech companies like Microsoft and Nvidia driving market rally, but concerns over valuations exist.
- Nvidia’s high valuation raises questions about benefit versus risk.
- US oil production impacts OPEC and Russia’s influence on oil prices.
- Japanese Yen weak against USD, potential for intervention due to undesirable levels.
- Cisco reports revenue decline, plans to cut workforce by 5%.
In this podcast from BFM 89.9, Tony Nash shares insights, indicating that the Fed views the hot CPI number as a sign of strong policy and hints at a potential rate cut in July 2024.
The conversation shifts to the stock market rally and the performance of tech giants like Microsoft and Nvidia. Tony highlights the concentration of the rally in specific stocks, raising concerns about valuations and market dynamics. He questions the sustainability of Nvidia’s growth and the risk associated with its current valuation levels.
The discussion then changes to the oil and gas sector, focusing on the US’s significant oil production and its impact on global supply dynamics. Tony explains how the US’s supply has influenced geopolitical risk premiums and natural gas prices, reshaping the market landscape. The conversation also touches on the Japanese Yen’s depreciation against the US Dollar and potential interventions by Japan.
Transcript
BFM
All right, for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. So, hotter than expected, US CPI numbers have dampened market expectations of a rate cut. How do you think the Fed will view those figures? And where do you think they’ll place the timing for the first rate cut of 2024?
Tony
Yeah, I think the Fed sees the hot CPI number as their policy just not having enough time to work. So jobs are relatively strong, inflation is reinserting itself. So it’s definitely higher for longer. There had been an expectation of, say, a March rate cut, but that’s definitely gone now. Markets have wanted an earlier cut, which is why we saw so much activity in stocks. So we’re seeing some stuttering in valuations, a lot of the choppiness in valuations at the moment as investors try to figure out where is fair value. So the next rate cut is likely July. So it’s pushed back pretty dramatically from what we expected, unless we see something change. If we see recession come in or job cuts or deflation or something like that. But what we’ve seen over the past couple of years is the Fed has proven that it’s determined and that it’s patient. So they’re not in a rush to cut.
BFM
What does this then mean for the quantum of cuts? Tony, I think market is expecting a range between three, probably now three to five cuts for this year. What are your expectations?
Tony
Yeah, I definitely don’t see cuts coming at the rate at which they started. Meaning, remember, those first two rate rises were 75 basis points. We’re definitely not going to see 75 basis point rate cuts unless we see some dramatic problems in, say, housing or equities or something like that. If it’s really just dialing down because inflation has slowed, then there’ll be minimal rate cuts and they’ll be spaced out over time because we’re really just getting back to kind of a normal rate environment. So we’ve been in a zero interest rate environment for so long that people are not accustomed to actually having a real cost of money, which is what interest rates are. And so we’re probably in a zone between, say, 4% to 5% where they may actually want to keep interest rates in that zone to have a normal cost of money and cost of risk.
BFM
Tony, with this in mind, and the stock market rally that we’ve been seeing in the past couple of weeks or so, along with how well tech companies like Microsoft and Nvidia have been doing, what do you foresee going into the coming weeks as far as the market is concerned?
Tony
Yeah. Companies like Microsoft and Nvidia are really in their own realm. You know, the mag stocks, they’re pulling the entire market. So when we see a rally, it’s not a market-wide rally, it’s largely concentrated in those stocks. Last week, for example, we saw Facebook rise by 21% in one day. That’s unbelievable. And for a company that size to see a 21% rise in their value, it’s really strange. So investors will have to see a dramatic change in news, or they’ll have to see investment funds dump shares before they give up their current positions. One telling factor, maybe Jeff Bezos’s sale of a large tranche of Amazon stock this week. He could be signaling that he thinks the market is at a top, so he’s cashed in for now. So if that’s what he’s communicating to markets, we’ll have to see if investors really receive that and what they do with those tech shares.
BFM
Okay, can I talk about Nvidia? Because that’s another stock that’s just gone gangbusters, right? It’s up almost 50% on a year to date basis. I’m looking at Bloomberg forward P’s of 60 times. It overtook Alphabet and Amazon. In terms of market cap, are we putting too much money and too much faith into AI?
Tony
I don’t think we’re putting too much faith in AI. I think we need to examine the earnings of those AI companies harder to understand the quality of those earnings. If Nvidia is rallying and other semiconductor companies are not rallying, we have to ask why and look really deeply into their value chain and understand what their sales process looks like. I’m not sure that a lot of these investors have really looked that deeply into what Nvidia actually does, what risks they actually have, what their value chain is like, how they get revenues and so on. It’s just that it’s seen as the picks and shovels for AI, which is great, but we all saw what. Well, maybe we didn’t. I saw what happened with Cisco Systems in the.com bubble in 2000, right. And some people were around for that. The underlying theory there was, well, Cisco has the picks and shovels for the Internet, and that’s great until it’s not, and then it loses a lot of value. So I think Nvidia is in a place where people are so bowled up on it. And my problem, I’m not making any investment recommendations here, but how much benefit is there versus the risk of the valuation?
Tony
I don’t know. That’s something that I try to run every day. I run an artificial intelligence software company and I don’t understand the upside left in Nvideo. You know, but maybe there is. I don’t compete with them at all. So this isn’t a jab at Nvidia. I’m just saying I don’t understand these valuations and I don’t understand where that additional alpha comes from with a company like Nvidia. But maybe I’m just missing it.
BFM
Can we turn our attention to perhaps the oil and gas sector, where we see the US is producing around 13 million barrels of crude per day, which is more than any country on the globe, including Saudi Arabia. How do you think this is affecting the influence of OPEC and Russia in determining supply factors such as price? And where do you see oil price trending over the next quarters or so?
Tony
Yeah, I think with oil prices. I think part of the reason we haven’t seen a geopolitical risk premium with the conflict in the Middle East is because of the supply that the US has put on the market. If the US didn’t have, let’s say we were in 2007 or something, and we had the conflict in the Middle East that we have, we would definitely see a larger geopolitical risk in the crude price. I also think that natural gas is a factor as well. So if we look at Europe, for example, the US provides, I think, more than 40% of the natural gas for Europe, which just two or three years ago it wasn’t anywhere close to that because they were taking Russian nat gas. But nat gas prices are declining and continue to decline because the US has put so much nat gas and so much lng on the market. So those prices are somewhat paired in European and Asian markets. And again, part of it is the geopolitical risk premium isn’t there because of supply the US has put on the market. The other part is the US has flooded the market with Nat gas in Europe. The US provides 21% of LNG to China and so on. So this supply has really helped to keep those prices down.
BFM
Tony, can we just look at the Japanese Yen? It hit high knots against the US Dollar. Well, the weakest against the US Dollar not seen since the 1990s. Nearly ¥151 to the dollar overnight. What’s your outlook on this, especially since the finance minister himself did give a warning that what he’s seeing is undesirable. Does it signal some kind of intervention, maybe?
Tony
Yeah, I mean, they’ve signaled that they’re not happy with this a couple of times over the past, say, quarter or so, but they change policy at the edges. They typically don’t make dramatic policy changes. So what I’d see is maybe a small intervention, but I think they’ll likely just talk about it. And I don’t think they’re necessarily going to fight the US data, CPI or other US data. We have to keep in mind Japan is really sandwiched between a booming US and a really faltering Chinese economy. And so they can’t get too tight on monetary policy because China is such a big trade partner for them and there are so many Japanese companies with manufacturing sites and even headquarters in China. And so they have to be really careful to play between the two.
BFM
The GDP data is coming out later this morning. Any idea what we can expect?
Tony
Yeah, it’ll probably be moderately strong. I don’t think it’s going to be crazy strong. If we look at it in Yen terms, it might look very strong. But if we look at it, say, in Dollar terms, I think it will be maybe moderately strong.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup.
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[00:00:22.650] – Tony Nash
Hi, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Michael Belkin, Tracy Schuchart and Ralph Schulheimer. A couple things we’re going to cover today. Our key themes. Michael is going to talk about giddy euphoria in us markets. Those are his words. I love those words. So giddy euphoria in us markets. Tracy, we’re going to talk through the geopolitical influence of us LNG. How much influence does us have can they exert through LNG? That sort of thing. And then with Ralph, we’re going to talk about Germany. First we’re going to talk about evs in Germany, and then we’re going to talk about some industrial policies and other things that Germany’s had that’s really resulted in them kind of hollowing out some parts of their economy. So, Michael, welcome back. Ralph, welcome back, Tracy, thanks again for coming on. Before we get started, I want to let you know about a new free tier we have within CI markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things for you. First, economics. We share all of our global economics forecasts for the top 50 economies.
[00:01:30.230] – Tony Nash
We also share our major currency forecasts as well as Nikay 100 stocks. So you can get a look at. What do our stock forecast look like? There is no credit card required. You can just sign up on our website and get started right away. So check it out. CA Markets free. Look at the link below and get started ASAP. Thank you. Michael, you put this note together, I think, last week where you really dig into a lot of the US employment data, and obviously you dig into markets and sectors and individual stocks and all sorts of things. You use the words giddy euphoria in us markets, which I think is great, at least for a section of us markets. And I want to dig into that. But first, I think we really need to look at jobs, which is what you start your piece with, and you look at BLS jobs. And in this cut that we have on screen, you talk about phantom jobs from the BLS, which is interesting. Can you talk us through a little bit of that? We’ve had Mike Green talk about that a little bit, but I’d like to hear it from your perspective as well.
[00:02:41.430] – Michael Belkin
Okay, great. So the jobs report, payroll jobs report last week said plus 353,000. And everywhere you see job market, hot blockbuster jobs report, blah, blah, blah, ever. CNBC, it’s unanimous. Like nobody looked at the numbers. Okay. That’s seasonally adjusted. Not seasonally adjusted was -5.6 million. And that’s not an aberration and it’s not a conspiracy theory. But what happens is the way employment works is a lot of people are hired in the last three months of the year for temporary jobs and retail and things like that, and then they’re laid off at the beginning of the year. That happens every year. So January is always down big in the millions. Right. And it was down more this time than last year.
[00:03:30.130] – Tony Nash
I just want to understand because that’s a big number, 5 million jobs. Okay. And I think a lot of people in markets put a lot of weight on these numbers that come out, these headline preliminary numbers that come out because they move markets for a few hours or whatever. Right?
[00:03:48.200] – Tony Nash
But when you say they seasonally adjusted 5 million jobs kind of into the market, how do you seasonally adjust that? And how does somebody look at that number and go, oh, yeah, that’s normal. Numbers grew. Jobs grew.
[00:04:02.430] – Michael Belkin
All right. So they add basically 6 million. So to get from 5.6 to plus three -5.6 to plus 3.353,000, it’s almost 6 million. They pad it again. It’s not a one off like they do that every year. They want everybody to think it’s a smooth cycle. It doesn’t go up and down. But that’s not the way the real world works. Now, going back, if you look at this historically, it usually takes about three or four months for the level of, in the jobs report, payroll jobs report, to get back to the December level. That’s in a non recession year. In a recession year, that’s like 20 01, 20 07, 20 08 or 2020. They don’t get back. So jobs decline and they head down into the economy, goes into a recession. That’s my forecast. So what I do is I have a time series analysis model which is actually similar to what they seasonally adjust the numbers with. It’s based on box Jenkins and Fourier analysis, which I studied at UC Berkeley and then I was at Solomon Brothers prop trading developed this model. Anyways, so my forecast says jobs are going down. And you just contrast that with what everybody’s, it’s unanimous, jobs are great.
[00:05:18.340] – Michael Belkin
And then even smart people go through, well, all these jobs were created in this kind of sector and this kind of sector, those are all imaginary, like they don’t exist.
[00:05:27.570] – Tony Nash
Well, are they adjusted jobs or are they real jobs? I have a chart from you showing your negative forecast for jobs. We hear about job cuts at meta and it seems to be concentrated in tech. We’ve also heard about a bunch of job cuts at ups and some other places. So these job cuts that we’ve heard about in tech and tech continues to kind of do well in markets. But will we see those go into the broader market, into other sectors?
[00:05:55.570] – Michael Belkin
Yeah. So meta is a case in point. Okay, so they cut 20% of their workforce over the last year or so, and their earnings were up 69% or something, right? So I can just see all these people drooling. Oh, boy, this is how to increase my margins. All these other tech companies, it’s a poster child for what to do. But I mean, think about it. When companies are cutting jobs en masse.Right, which is happening
[00:06:22.810] – Tony Nash
20% is on mass, right? I mean, it’s not like they’re doing a 3% marginal cut or whatever.
[00:06:28.270] – Michael Belkin
But.It’S all these other companies, they’re copycat. So, Snapchat, it’s become the thing to do, right? You lay off people so you can keep your margins up and keep your profits up. That makes the pie smaller. That’s what makes a recession. And it doesn’t happen instantly, but that’s going to be the theme this year, I think. Lots of layoffs in the face of slowing top line revenues. What are you going to do? I think it just drives the economy down again, it’s not instant Quaker oaths or something where it happens overnight, but the force is declining by basically it’s a recessionary, contractionary thing that happens to the economy.
[00:07:15.450] – Tony Nash
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[00:07:55.320] – Michael Belkin
We have to mention just stepping outside of AI about earnings and layoffs and stuff. So outside of tech, all these cyclical stocks are going down. So if you look at the Belkin report, I’ve been short air freight containers, packaging, all these paper products, metals and mining. So the cyclical stocks are weakening. They’re underperforming. There’s only been one thing holding the market up, a handful of big tech stocks, and even those are going like it went so going up anymore.
[00:08:24.650] – Tony Nash
Let’s get into that in just a minute. Michael, I want to make sure we talk through soft landing first.
[00:08:30.340] – Tony Nash
Because I think part of really interesting part of your discussion is on soft landing. And so can you talk us through in what context you say soft landings narratives often precede recessions. So I’ve got a chart up that you sent me about mentions of soft landings. So can you talk us through that? And then let’s also move into the Fed funds rate hike and how that plays into the soft landing narrative.
[00:08:58.340] – Michael Belkin
Okay, so if you look at the chart, we’ve got the biggest proliferation of soft landing quotes in media of all time. And the previous ones that were not quite as big as this came right before a recession. So basically, I think the psychology of the market is really messed up. Everyone, the sentiment is unanimous. It’s going to be a soft landing. I think it’s just an insane number, percentage, super high percentage of portfolio managers.
[00:09:28.720] – Tony Nash
I see it every day. I see people who are normally skeptics have changed to say, okay, it’s going to be a soft, I don’t know, the shoe is not going to drop. It’s going to be a soft landing. I’ve just seen over the last six months all of these people who are like, looking for the downside, except you, who are looking for the downside just kind of surrendering to the soft landing narrative.
[00:09:51.940] – Michael Belkin
Absolutely. So I think what we’re talking about is deviant psychology. So what people think. Okay, so you have to say the market’s always right, right? Well, was it right at the top of the tech bubble? Was it right at the bottom when people were bearish in 2002? Was it right when everybody was bowled up in 2007? Was it wrong at the bottom when everybody was bearish? My point is, you get these extremes of sentiment that you need to fade, and what happens is the psychology changes, and that is what drives the change in markets. A change in psychology where people suddenly, all of a sudden there’s some kind of a shock or something, and all of a sudden people say, oh, wait a minute. And so you see this change in sentiment, and that’s what drives investment flows, flows into different sectors and in and out of the market. So that’s why I think we’re set up a major change in psychology. Not overnight, but it’s coming.
[00:10:57.110] – Tony Nash
Right. And so a lot of what’s driving that psychology, it seems to me, is interest rates and so, you know, there has been an expectation, as we saw leading up to the last fed meeting, march rate cut and so on and so forth. And that’s been kind of destroyed for so, you know, we’ve seen it. We have a chart on screen from you showing, know, steepest rate curve or rate rises, all this stuff. So will that eventually erode the psychology we have in the market now?
[00:11:31.070] – Michael Belkin
Absolutely. So just to put things in perspective, take a look at this chart. So 525 basis points from March 2022 to now. I mean, it’s been on hold for a while. That’s the biggest Fed rate hike campaign on record. So when they started this interest rate targeting thing, that was greenspan. Before that, it was reserve targeting with Volcker. So going back to the. What’s that? It’s like 40 something years. And so I was delighted to be invited to this Vale symposium last week. I was there with a lot of heavy hitters, investment strategists, portfolio managers. And one of the things that emerged, David Rosenberg was there, and he pointed out that it takes, the average lag between the beginning of Fed rate hikes and a recession is 24 months. Well, guess how many months it’s been now since the Fed started raising rates. 23. So here we are in February. So March is going to be two year anniversary. That’s the average. So basically, people have just kind of swept that under the rug and said, oh, it doesn’t matter. It’s just the fed
[00:12:38.470] – Tony Nash
feels good.
[00:12:41.090] – Michael Belkin
But it hits with a lag. And we are setting up for basically the blowback, the delayed response from a serious, serious monetary tightening campaign that is going to slow things down. You see it in the cyclical stocks, not so much tech yet, but that’s what we’re setting up for. The oldest saying, marty Zweig said, don’t fight the Fed. Right. So people think that was back in 2022 when the Fed was raising rates. But the lag effect is about to hit. And if there’s one thing, another along with soft landing, the psychology in the market is unanimous. The Fed’s going to cut interest rates. That’s bullish. For know, everybody says, right. Well, that’s not what in, when it’s a recession, when it’s not a recession, if it is a soft landing, yes, you’re right. Stocks take off. If it’s a recession, the opposite happens. So stocks go down with Fed rate cuts because why earnings decline?
[00:13:46.710] – Tony Nash
Let’s get there eventually.
[00:13:48.390] – Michael Belkin
Yeah, we’re not there yet. I’m actually short bonds now, the model. So I think it’s going to take a few months for this to play out. So basically, I think where I was super bullish on bonds, if you remember back like in October and stuff, when everybody was bearish, my model, I’d been flat on bonds for a month or so. I just entered a short position on bonds. So I think the idea of a fed rate cut campaign was built into forward rates and everybody got too bowled up. So I think we’re going to have. Could bonds go down five or ten points from here? Yeah. So I think for a tactical move, two to three month move, I think bonds could sell off. Even though I’m bearish on the economy, I’m sticking with the model forecast on that.
[00:14:30.790] – Tony Nash
Interesting. So let me bring Tracy in. Tracy, we see a pretty tight fed or relatively tight fed, right. And we’ve talked many times about crude prices and things like geopolitical risk and all that stuff, right. And the impact on, say, evs, and we’ll talk to Ralph about that and green energy and, and it seems like there is kind of no cost to geopolitical risk when we’re in a zerp or nerp environment. But now that we’re in a five and a half percent interest rate environment, it almost feels with all this stuff happening in the Middle east and other stuff, that nobody knows how to factor that into things like commodity prices, crude prices, other things. Am I way off there or have people kind of not realized the cost of risk?
[00:15:37.290] – Tracy Shuchart
I think absolutely. That’s what you’re seeing right now across the commodity sector, and especially when we’re talking about metals and things that are really affected by the US dollar. Right. We’ve seen a rally in the US dollar, so that’s kind of very difficult for. That’s a very big headwind. Let’s say four metals per existence, for example. But if we look at crude oil, crude oil is actually more correlated to ten year yields than it is to the US dollar. It’s almost over 81% correlated. And so recently we have seen kind of a jump in the ten year. Right. Meaning yields have come down. So that’s also put pressure technically just on the sector. But as far as geopolitical risk is concerned, I think that I could go into the minutiae of that, where we can talk about there’s not a lot of oil tankers that actually pass through the Red Sea, even though they’re not going there, know there’s a lot of products that ship from Saudi Arabia, Qatar, everything kind of east of the Red Sea that uses the Persian Gulf which is a lot of product when you’re talking know gas and oil.
[00:16:56.990] – Tracy Shuchart
And so that is part of the reason. But I think know still the markets. I think bonds are applying pressure on the energy markets. And I also think that because there’s not a lot of transit through the Red Sea of oil and products and gas, that that’s also having people kind of dismiss what’s going on. That said, I think the risk is much broader now that we have not only the Israel Gaza issue, we also now have Syria’s back in, Jordan’s back know there’s a lot there and I think the market is highly discounting.
[00:17:51.670] – Tony Nash
Okay, so Michael, if we go back to markets in the US, particularly tech continues to be strong despite these rate rises. You’ve been telling us for quite a while that it’s time for a pullback. And in your report you’ve got semiconductors, software, hardware, social media, et cetera, kind of falling in your one to three month horizon. So help us understand when we see the likes of meta rise 20% in a single day last week and we see snap down pretty dramatically after earnings. Granted it’s down to November 23 levels, so it’s not down to historic multi year levels, but it’s still down 35% in a few days. So can you talk to us about where you expect the sector fund flows to move? I mean it’s overwhelmingly in this chart you sent me, overwhelmingly continues moving into tech. So where do you expect that to move?
[00:18:49.770] – Michael Belkin
Okay, first of, there’s within tech. The AI plays have been attracting all the attention, right? And there’s very few of those. So it’s Nvidia. Right. So those kind of stocks keep going up. I follow a broad bunch of stocks within the semiconductor software space and a lot of those are acting like dog meat. Okay, so the shorts are actually working, not massively, but things are underperforming. Things like cloud software. So those are sort of like tiger global favorite longs. Those are some of my top shorts right now, semiconductors. Outside of the AI space, demand for automotive, semiconductors and consumer electronics, all that stuff is disaster. It’s not good. So those are still shorts and those are working. It’s not, you look at the tech market, you think everything’s going up. It’s not. Portfolio managers know this. They’re getting squeezed into this small handful of smaller stocks. And the mag seven is down to like mag three or something, right? Amazon and meta and a couple of others. Okay. But anyways, the biggest outflows over the last year has been energy and the biggest inflows have been tech. So my model is saying time for a change.
[00:20:07.440] – Michael Belkin
Okay, so the flows are going to reverse. So what’s know. So Sir John Templeton said the time to buy is at the point of maximum pessimism. The time to sell is at the point of maximum optimism. And that’s really held up over time. For know you have to get it. Have my biggest buy signal in the model forecast, three month view at least for going forward. Buy energy, physical energy and also the energy stocks. So etfs, xop, oih, things like that, really depressed. They’re in the doghouse, right? And things that are up a know all the tech etfs. My favorite short is like clou. It’s not very liquid, it’s a cloud software thing. So basically you want to be long energy and short tech. Three month view. That’s what I’m telling my clients.
[00:21:00.290] – Tony Nash
That sound about right to you, Tracy?
[00:21:01.850] – Tracy Shuchart
I love it. I think its Fantastic. No, actually, we actually talked about that a little bit. So, with Mullen. I absolutely agree with Michael.
[00:21:17.020] – Tony Nash
Perfect. Ralph, what are you seeing in terms of just the general impact on markets and fund flows? What do things look like in Europe? Are people still super bullish tech? Are they coming off of some of that? Are they looking more at some more conservative sectors? What does that look like from your perspective?
[00:21:36.120] – Ralph Schoellhammer
Well, I think one of the things, and I know that Tracy is going to talk about this in greater detail, and I think it was just mentioned previously as well, what is underwriting would from a european perspective, still impressive resilience of the US economy is natural gas. I sometimes feel that we might not the four of us here in this group, but very often in public reporting, the impact of the shale revolution strikes. And still, as some would underestimate mean. If you look at the numbers, the role of natural gas that it plays in the US economy is astounding. If you take at electricity production and also heating in the chemical industry, in manufacturing, construction, not everything is rosy. Right. I think Albert is not with us. I think he would immediately shoot me down for any kind of optimistic or positive outlook. But I think that really is a huge issue. And this is something that we are currently lacking in Europe. I mean, there was recently a very interesting report in the Wall Street Journal that I find sums it up perfectly, which is the old saying that the United States innovates, the Chinese imitate and the Europeans regulate is probably more true than ever.
[00:22:43.300] – Ralph Schoellhammer
This is going to be a problem because I agree with what was said by Mike before, right. That maybe the AI thing is a bit of a hype. I don’t know enough about it to really make a qualified statement. But I think one thing we’re all going to agree on is whatever algorithms in the future are going to do is in order to have a good algorithm, they’re going to need a lot of electricity. Because in order for the algorithm to, I don’t know, distinguish between a cat and a dog, you have to show.Them a billion pictures of a cat and a billion pictures of a dog. And that means that the computer who does it has to be running. And while it’s running, it needs to be cooled, it needs to be supplied with electricity. So it all goes back. I don’t want to voice my inner Luke Groman, but in many ways, it all goes back to energy. In many ways. And this is still. I know I sound like a broken record, but this is still a huge problem in Europe. There are signs of sanity. I think once Germany was the role model. I think now they’re more the outcasts. So there is a shift in a new direction. I’m worried because the EU is like a weird construct. I mean, we have european parliamentary elections in June. So now, quote, unquote, they pretend to be much saner than they usually are. So we’ll see after the election, if they not all of a sudden say so all these little bit kind of winking and nodding at maybe we are okay with more nuclear energy and maybe we should find ways to allow more energy production in European Union, that once these elections are over, that they go back to saying no, well, the primary goal, of course, is the usual green goals, the green new deals, the climate agenda and all these kind of things. Interesting.
[00:24:14.900] – Tony Nash
First thing, I don’t believe the european parliament will be sane ever. Second, interest rates are going to dictate that they can’t really focus on green energy. It’s going to be really hard, and we’ve talked about that with you before and Tracy, and going back to the rate rise that Michael talked makes it puts a real cost to trade offs. Right. And it’s going to be really hard to subsidize that stuff at the cost of money that we have now, I think. And that cost, Michael, as you say, is forcing sector adjustments. And so let’s finally look at your earnings expectations. So your s and P 500 earnings index forecast is pretty negative. So can you talk us through what is your outlook on earnings, on quarterly earnings in the S and P compared to, say, where consensus is?
[00:25:05.890] – Michael Belkin
All right, so I’m a real lone voice in the wilderness here.
[00:25:10.050] – Tony Nash
Not the first time.
[00:25:11.510] – Michael Belkin
Wall street consensus is plus 11%. Last time I looked in 2024 earnings. So right now, we’re about halfway two thirds of the way through Q four, 2023 earnings reporting. So we haven’t even started into 2024 yet. Okay. So we’re tracking for about 52 64, according to standard employers operating earnings so far at two thirds mark, which is down, by the way, 7% from the peak. So s and P 500 quarterly earnings peaked Q four, 2021, two years ago. Does anybody know that?
[00:25:50.140] – Tony Nash
Yeah, I just want to back up 10 seconds, and I want you to say that again. S and P earnings, how do they compare to two years ago?
[00:25:58.080] – Michael Belkin
Down 7% quarterly. So the peak of operating earnings, according to index provider standard employers, was $56.73. Q four, 2021. And that, of course, coincided with the boom of COVID stimulus and all the extra money. So basically, corporations made a lot of money out of inflation. They raised prices, increased demand, and since then, we’ve kind of been dribling down, not collapsing yet. Okay, so basically, Wall street is looking for plus 11% to something like $224. I’m looking for 120. Down 40%.
[00:26:39.600] – Tony Nash
40%?
[00:26:40.800] – Michael Belkin
Yeah. Which is not ridiculous. It’s come from model forecast. That’s the typical decline in a recession. So there’s nothing conspiracy theory or licking my finger.
[00:26:53.890] – Tony Nash
I love that you say 40% isn’t ridiculous. I think that’s great, because I think it helps remind us where we are. Right in markets. And we had Alex Gurjevich on last week, and he talked about deflation and how that could impact some markets. So what that tells me is, are you expecting some deflationary impacts to hit companies ability to make profits and that then has an impact on markets?
[00:27:26.110] – Michael Belkin
Yes. But it’s complicated, okay?
[00:27:29.010] – Tony Nash
Oh, I know it’s complicated.
[00:27:30.570] – Michael Belkin
Definitely complicated. So the inflation decline that we’ve seen, by the way, I was super bearish on inflation when it was 9%. Model said it’s going down to 3%, which is basically what it’s done. That decline is over in the model forecast. So I don’t think we’re going to get any near term relief on things like the CPI next few months.
[00:27:49.910] – Tony Nash
You don’t expect a kind of deflation or nothing dramatic?
[00:27:54.080] – Michael Belkin
Well, I think the first thing, like, let’s just take it one step at a time here. Row of dominoes. I think, again, the forward rates overreflected. This idea of Fed easing that needs to get pulled out, I think bonds could sell off and actually short sofa and things like that for a trade two to three months later on in the year. Back to the point of your question. Yes. So demand falls, sales fall. The dynamic of a recession is retail sales fall, sales of the product fall, the company starts canceling orders, then the company that makes the stuff for that company cutting back, laying off people, blah, blah, blah, it goes on and on. And that’s deflationary. I think that won’t begin to surface for another maybe six months later in the year. That will become an issue. Right now, I think it’s more the inflation scare is back for a trade, and that kind of pulls the rug out of this idea that the Fed’s going to ease. By the way, one of the last comment on this, one of the best things to emerge from the Vale symposium that I was at was that Lakshman from the ECri Institute was there and he pointed out, I believe he said, that getting back to the idea of a soft landing, when the times that the Fed delayed cutting rates when the economy was weakening, that is what led to the recession.
[00:29:19.720] – Michael Belkin
So when the Fed is sort of preemptive and cuts rates, then you can have a soft landing. Not necessarily, but historically that’s been the pattern. But when they hold rates up, that almost ensures that we’re going into a recession, which is what’s think, you know, all this ironically, all these phony great economic stories from the administration, how great it is, vote for us. We’re doing such a great job on the economy, it actually ties the Fed’s hands and it prevents the Fed from cutting interest rates. So it’s actually going to have blowback. Instead of making people want to vote for the administration, it’s going to say, oh, wow, the economy is going down and it’s going to be too late to save it. So I think it’s going to be counterproductive. So phony strong economic story is actually counterproductive and it’s going to send the economy into a recession for sure.
[00:30:13.200] – Tony Nash
Wow, that sounds pretty tough. Thank you for that. I mean, it’s awesome. I love getting your view on things, Michael, because you’re right a lot. You have very solid analysis around what you say. You’ve run it through models. It’s tested over decades. And so I love getting your perspective. And it’s different from the, don’t worry, everything’s okay. It’s all going to be soft landing, different this time, all that stuff. Love getting that. So that’s great. Thank you so much for that. I guess one last question, kind of. Your model is generally, I think a one to three month horizon is like your sweet spot. So what is the biggest thing that you expect to happen in the next three months?
[00:30:57.170] – Michael Belkin
Okay. Energy goes up again. So that’s my favorite trade, long energy. If you want to be long something, don’t be long. Anything other than that. My longs are chicken longs, consumer staples sector, healthcare sector. But energy is really the number one long idea I have right now.
[00:31:13.880] – Tony Nash
Very good. Thank you, Michael. Thank you for that, Tracy. You must love that. So let’s switch over to you. I want to talk about U. S. LNG exports and its role in geopolitics. So you talked about the Biden administration’s LNG export pause earlier this week. And you talked about it last week too, when it was announced and all that stuff. So there was a hearing in the house this week, and you talked about this a little bit in one of your posts. So I guess what I’m really interested here is, is there a geopolitical importance or a geopolitical lever with US LNG exports? The US didn’t export much LNG until 2014, but by 2023, the US accounted for a third of european LNG imports and just over 20% of China’s LNG imports. So not a long time, but the US has become a pretty significant portion of the LNG imports of major economies. So what does that mean to geopolitics in the US’s, say, energy diplomacy?
[00:32:29.250] – Tracy Shuchart
Well, first. So US has become the world’s largest producer of oil and gas and the largest exporter. Right. Qatar will pass us because of their expansion program. But let’s just look at this right now. And so this is us energy leadership. And in fact, when Biden first suggested this, or first said that he was going to pause export licenses, we had twelve trade associations across the US, including the largest one, API, who basically said, this hampers us energy leadership, it endangers american jobs, and it also undermines efforts to reduce greenhouse emissions because obviously natural gas is a much better choice than, say, crude oil or coal, for example, to burn. It’s much cleaner. That said, now, when we look at this pause, it will not affect anything up until 2026. And so this is reversible, say, if there was a new administration to come into play, because everything that’s already been accepted till now, the build out to 2026 will still move forward. However, after 2026 are some of the biggest projects, and that’s where the problem lies. But I just want to say this. It’s not like an immediate threat, but it is on the radar as far as geopolitics is concerned, obviously.
[00:34:15.730] – Tracy Shuchart
First, let’s look at Europe. I mean, we basically said, stop importing russian gas. We will take care of you. And with this new revelation, Europe’s like, wait, what? You just said that you would be our main supporter and we look like we’re abandoning our allies. It doesn’t look good. In fact, Germany last week came out and basically said, how can we rely on the US if they say that we just changed up our whole energy source? We’ve built out infrastructure, we’re building out new infrastructure for our LNG hubs and capacity to import more, particularly with Germany, because they stopped nuclear. And so now there’s a bigger build out for gas capacity. Right. So that’s kind of shaken up the EU a little bit and led them to kind of question, well. How can we rely on you? So this looks terrible with our allies. It also obviously reduces our footprints in the global energy sphere. I mean, you’re not going to see the Middle east, particularly Qatar, the number one gas producer in the Middle east, stopping. They’re building out the world’s largest capacity out to 2028. I think in general, again, I have to quote API or the trade associations as saying this hampers us energy leadership and our place in the energy scope. I mean, natural gas is not going away. We’ve seen a million contracts over the last two years out to 2040, 2050. These are long term gas contracts. It’s not going away. And whether it comes to fruition or not, again, this won’t really affect projects until 2026. Should we have a new administration or should the bipartisan group that is now having hearings against this? And I want to stress it’s bipartisan. It’s not just the Republicans. We have time to overturn this, in other words, but the message it sends to the global community is bad.
[00:36:43.620] – Tony Nash
The message is out there. Ralph, as a European, how does that make you feel? I need your.
[00:36:54.690] – Ralph Schoellhammer
It’s a good question. Well, I mean, it makes a lot of sense. I mean, I’m worried as a european, not just because, as Tracy correctly pointed out, I mean, this is not going to have an impact as soon as some headlines seem to indicate. But I’m also worried because it is a terrible signal also, of course, to domestic us industries, particularly in this sector, because they want to make a profit. I mean, this is something I know we tend to forget. But most companies exist because they want to make a profit. So if you don’t allow them to export, that’s going to be a short lived sugar rush for the US economy because prices, we see it with the Henry hub at the moment, right? Prices are plunging in many ways. So gas is going to be pretty cheap for the US. But at some point, you stop investing. Why would you stop investing in more drilling, in more exploration if you can’t sell it abroad? So I think it’s also, as Tracy pointed out, this is a terrible signal. You cannot be the energy leader if you put like a cork into the bottle, so to speak.
[00:37:46.870] – Ralph Schoellhammer
Now, from a european perspective, I said this on your podcast many times, Tony. I’m still convinced of this. We’ll see what Tucker Carlsen’s interview with Vladimir Putin will reveal in the next couple of hours. But the Europeans will sooner or later return to at least partially. It’s never going to be as much as it was before, but they will return partially to russian gas as well because pipeline gas cannot be intercepted by the hooties. It’s not depending on a us administration that all of a sudden believes that they have to do something against fossil gas. I think that is still an attempt by the environmental lobby that they want to replace the term natural gas with fossil gas or methane, I think is also something that’s getting more popular because supposedly it sounds scarier. So these battles are still going on. So the energy sector that I find always the most important one in many areas. Tracy has recently posted about coal power plants in India. This is a very unique phenomenon. In the west. We have an ideological, it’s getting weaker, but there’s still an ideological crusade against the energy sector. And I can understand that this is unnerving for many who are active in that particular area of the economy.
[00:38:52.660] – Tony Nash
Yeah, that’s great.
[00:38:54.970] – Tracy Shuchart
I just wanted to add one thing really quickly, and why I say this decision will likely be overturned sooner than later is that I really think this is a boy for votes. I mean, the Biden administration literally said they want to win back younger environmentalists, and they literally, literally had 20 something social media influencers on exiting TikTok in a meeting with the energy board in the government. I mean, this is who they’re taking advice from.
[00:39:31.590] – Tony Nash
Honestly, we’re a two party system in the US. Who else are those guys going to go to?
[00:39:34.710] – Tracy Shuchart
They’re not going to go to, all I’m saying. And so I think it’s a ploy to get votes. I think that ultimately this will be overturned after the election. If the Democrats win, I think this will be given to pressure from, again, bipartisan pressure groups within the legislative branch. And this will be overturned. And I think it’s just a ploy for votes. However, that’s a big risk. You’re taking a ploy for votes versus your message to the global community. Not sure that was the best decision to make.
[00:40:11.490] – Tony Nash
We sure have done over the last two administrations a lot to erode institutional credibility in the US. Right. And from a geopolitical perspective, in terms of wanting to count on the US, we really destroyed a lot of over the last, say, 1520 years as a geopolitical partner. Right. As the US. So this does nothing to help the US geopolitically. Tracy, I want to ask you about China, because if we’re providing a fifth of nacas to China or lng to China, from my perspective, it seems like, I don’t think us necessarily holds China hostage with that. And I don’t think that would be any intention. But it does make sourcing energy from the US a factor within the China geopolitical. And so, you know, I think about Japan in World War II. I’m not making any serious analogy about Japan and China, but part of the reason Japan was so upset with the US is because the US cut off oil. And so I don’t think that the US would do that again and say, we’re not going to sell you lng, but it does become a factor in that. And I think from China’s perspective, there is always a healthy level of paranoia around that type of stuff.
[00:41:24.320] – Tony Nash
Right. So does the US have the opportunity to grow that much? Or do you think China will say, we love your lng, we’ll take 21% of our lng from you, but we’re not going to do a lot more because there’s too much risk in that.
[00:41:38.640] – Tracy Shuchart
I think they would absolutely say that. And I think they’re absolutely looking to Russia right now. Right. They’re going to expand the Siberia pipeline. You have siberian two pipeline. And that’s a double edged sword because does Russia become too dependent on China as a buyer? That’s a whole nother issue. We can get into another, you know. Absolutely. I think it’ll force China to look elsewhere. And they will. I mean, you can go to Qatar. Qatar is offering huge discounts right now. Right. We just saw them make a huge deal with India today, I think I posted. And so I think China would most likely say, yeah, we’re good with what we got, we’re cool, we can look elsewhere.
[00:42:29.480] – Tony Nash
Right. Okay. So there’s a little bit of a geopolitical lever there, but not a lot because the Chinese are going to stay on their guard. Okay, that’s interesting. I appreciate that. I think we have to look at markets and geopolitics together at times. Right. And so this is really helpful for me to think about this stuff. So, Ralph, let’s move on to Europe, which, I’m sorry, but it’s really easy to bash Europe, right? And so, no offense, it’s not you. I’ll bash on our american political leaders any day of the week, so it’s not your fault. But you talked earlier this week about Germany’s electric vehicle dreams fading away. Can you really help us dig into that a little bit? What were those dreams and what’s making them fade away?
[00:43:23.910] – Ralph Schoellhammer
I would just say one thing, Tony. Your president recently said that he talked to Francois Mitteron, who died in 96. So you’re bashing.
[00:43:34.930] – Tracy Shuchart
That’s not the only one, right? That’s the only instance lately.
[00:43:41.250] – Ralph Schoellhammer
Well, I think what we can observe, the Germans, in all fairness, I always get this criticism that people say, well, Germany is not Europe and Europe is not german. And that’s, of course, true. It is also true that german companies, for various reasons, particularly their car manufacturers, have somewhat slept through the EV revolution. I think that is also fair to say that they kind of could not really translate the advantage they had with the combustion engine into the electric vehicles. But there’s, of course, something else going on, and I think that connects nicely with the geopolitical issue, which is that I think many companies kind of had a business model with evs. And that’s true not just in Germany. That’s also true in Austria. That’s also true in Switzerland. That’s also true in France, where the idea was that they say, okay, the government is pouring so much money into subsidies of all various kinds that they officially talked about their EV strategies because they wanted to milk that cow as long as possible. And I think that is now slowly coming to an end. Germany has a huge budget hold due to a recent ruling by their supreme court.
[00:44:46.710] – Ralph Schoellhammer
We see the same in France. We see discussions in Austria, because now governments, a couple of years back, until recently, they subsidized evs. But now they start to realize, if everybody’s moving to an ev, we’re going to lose all these gasoline taxes. I mean, this was also part of the step in Germany because there is a sense that agriculture will not quickly move to battery driven tractors. So they tried to make new diesel taxes for the agricultural sector. But as all of you know, the farmers have not been taking it very well, to put it mildly. And in many ways, just kind of to add on a little bit to this street construction. Highway construction, of course, was for a very long time directly financed out of these diesel gasoline fuel taxes. But now we have this new situation where evs are significantly heavier. So the bearing tear on streets is actually going to be more than it was with the internal combustion engine cars. So you would potentially need more of these taxes to maintain and sustain and keep these roads in shape. Same with parking spaces in Austria and Germany, for example, in the inner city, you can park for free with evs.
[00:45:51.110] – Ralph Schoellhammer
Now, as more and more people have evs, this is a revenue source for cities. But even more than that, parking structures are not built for these significantly heavier cars. And that goes twice in Europe. In the United States, people are also driving heavy suvs and pickup trucks and heavy cars that are heavy, even though they’re not evs. But, you know, Americans always mock Europeans for this. But we had the kind of niche boutique small cars, and if they all get replaced with significantly heavier evs, this is going to have, down the road, unintended consequences. So I think this is where the shift is happening. And the other thing is, people bought it, particularly people with higher incomes, because subsidies were really great. You had subsidies on fueling them, you had subsidies on parking. You had certain insurance advantages. So there was a whole package of subs. It wasn’t just that they give you something that as well, that you got a direct financial incentive so that they give you €10,000. If you sold your gasoline, gasoline car and got an EV, there were all other kinds of incentives as well. And they are now slowly to break away.
[00:46:52.760] – Ralph Schoellhammer
And of course, now people are reconsidering whether or not they shall buy such a car. Now, one option would have been to say, well, then we’re going to buy all these new chinese cars because they overproduced. But the EU is already working on special tariffs on chinese electric vehicles. So that option, it will still be there, but it will get more difficult. So as things look at the moment, I think the mean this is always, and I know we talked about this on the show many times, sometimes it’s maddening if you listen to analysts. So I’m always glad that Tracy and Micah here to bring a sense of realism into this. People look at a development that’s like this, and then they take a ruler, put it on there and say, okay, if this was the development over the last two years, it’s going to be like this over the next 20 years. And then they draw this line and say, by 2040, everybody’s going to drive.
[00:47:37.170] – Tony Nash
An EV extrapolate today and forever.
[00:47:40.270] – Ralph Schoellhammer
Exactly. And this is not how it works. And I think this is not increasingly what we see. Plus, of course, another element that we have touched upon on quite significantly is dcvs need electricity, and Germany has currently less electricity production. I think it’s the lowest level since 2002. Listen, if you turn off all your nuclear power plants and promise, and then the promise doesn’t live up to the expectations that renewables will replace it, you have a problem in this area. So we see this already, that electricity prices are going up. And another element that is barely talked about is insurance for evs is getting crazy, right. Once the government support falls away, this is also an additional cost factor. So they are simply getting more and more expensive. And unfortunately, without being too facetious here, the evs are kind of falling down to the same category as wind and solar, right? There were these huge promises made, what they can deliver, and now it turns out that they can’t. Now, don’t get me wrong, in city areas, I’m a huge fan of evs. I can imagine that if you’re an apartment owner in a high traffic area of a town and all of a sudden everybody drives evs, that’s going to drive up the value of a property because there is no fumes, there is no noise.
[00:48:53.310] – Ralph Schoellhammer
So this is going to be great. But overall, a country that’s either spread out or like in Austria or Germany, where rural populations still commute significant distances to go to work, this is going to be a problem. And as I said before, this was one of the promises, like so many in that area that have been made in the past that are not being kept. And I think you also see a kind of, that’s more in Poland, but also in Germany as the last point, an emotional mean. People identify with cars, people identify with the car industry in Germany. And the ice bashing over the last couple of years, I think, now has a reaction that says, I’m going to buy a diesel car or a gasoline car simply because that’s german, right? In a sense. So I think at the moment it looks like that’s where the journey is going. Of course, always under the assumption that there is no major massive technological breakthrough that can be easily introduced to the market. I mean, this is what I always say in the energy area, if the Wanda battery that we hear about every two months is actually become a reality at any point in time, well, then all bets are off.
[00:50:00.510] – Ralph Schoellhammer
Then things will be different. But for now, we have been hearing the, that battery promise from time to time, I google it. I think it goes now back 20 years. The solid state battery and the salt battery, all these kind of things. And it’s like fusion. They exist theoretically, but so far, I think they’re not ripe for the market. Okay.
[00:50:19.900] – Tony Nash
So there’s real trade offs to be made and subsidies. People are tired of subsidies, it sounds like. And I guess generally in Germany, the business environment there has not. It’s deteriorated. Right. So you tweeted earlier this week that the AfD party said that the german government hates Germany. I think that’s the word they use. Or hate their own country or something like that. Can you talk us through that? First of all, who are the AfD for those of us who aren’t in Europe? And second of, like, what does this mean? Is that a mainstream german thought? Do most Germans believe that the government is not friendly to Germans?
[00:51:05.490] – Ralph Schoellhammer
I mean, the AfD that you just mentioned, right, the so called alternative for Germany. The alternative for Germany was a party that emerged during the euro crisis in 2008, 2009. And the name derives from a sentence that Angela Merkel said when she said, there is no alternative. Right. Whether it was from migration to the euro, there is no alternative. And then the party kind of came up originally as a kind of economic, libertarian, yet eurocritical party that has now morphed into what in the media would be called a far right party. I think if you take a closer look at their positions or their average positions, in many ways, I would argue they resemble common sense, which I believe is one of the reasons why they are very popular or growingly popular with the electorate. And the other thing, this was their leader, one of their two leaders, Alice Weidel, said that in the german Bundesstag, the german parliament, the current german government hates its own people. And I have to admit, if you look at the numbers, I mean, it is really, really very difficult to disagree with her. What the german government has done.
[00:52:04.410] – Ralph Schoellhammer
This is why I think it’s an interesting topic over the last couple of years, the so called ample coalition of the Social Democrats, the liberals and the Greens. It is the destruction of Germany as an industrial superpower. There’s really no other way to put this. I said, I don’t want to be hyperbolic here or be all, but I don’t know any other way to describe it. We talk about a country, and this is an issue we talked about a lot in the past that had paid off, built out world class nuclear power plants, and they turned them off for purely ideological reasons. There was no other reason. The reason is when people say, well, you exaggerate about Germany, I don’t know what to tell you. And you see the same now recently they approved, now, I think ten gigawatts of gas powered electricity power plants, again with this weird thing, in ten years they have to be run on hydrogen. It’s never going to happen. They’re either going to run on american lng or on russian pipeline gas. They’re never going to run on hydrogen. But again, they need to be built first. And the Germans are not as good in building stuff as they have been in the past.
[00:53:05.280] – Ralph Schoellhammer
And they have an electricity deficit for the first time since 2002. They are now a net electricity importer and no longer a net electricity exporter. And just to put it on a broader sphere of Europe, Europe doesn’t have that many net electricity exporters. It’s the Czech Republic, it’s Germany, and there’s another one and France, if the nuclear power plants are not in a state of renovation, in a comatose state. But the situation is very dire. I’m not saying the end is nigh because one of the beauties of democracy is that people can vote those in, power out and vote somebody else in. And I think this is increasingly what more and more people plan to do in Europe now. Will these parties then have silver bullets? I don’t think so. But we just recently one of the major and very old german washing machine refrigerator producers, Mile, has now moved production to Poland because that’s the other story nobody talks about. We have a manufacturing miracle in Europe as well, and that is Poland. So if a country pursues the right policies, economic growth is still possible, even know sometimes insane Europe. But what of course is worries.
[00:54:17.190] – Ralph Schoellhammer
Germany is still the major economy. The old saying is if Germany catches a cold, if Germany sneezes, the continent catches a cold. That is not entirely wrong. And as I said before, I have historically never seen a government pursuing policies at all costs and obviously against the will of the voters. It’s fascinating to observe, it’s very german, but it’s also very worrisome because of course, if the so called moderates are perceived as working against the interests of the people, then the people will vote for those who are not described as being moderate. But if they feel that they are more in line with their interests, they’re going to give them their vote.
[00:54:55.460] – Tony Nash
So is for people doing business in Germany or with Germany. Is there political risk in Germany now or is it just kind of like an inconvenient or uncomfortable discussion to have.
[00:55:10.470] – Ralph Schoellhammer
Well, I would argue, contrary to what you read also in german newspapers, I think the only political risk is if the current government would, at the election sign 2025, if the current government would get an additional period or maybe two additional periods. I think from a purely economic perspective, a rightward shift, maybe even including an AfD conservative coalition government, would be the best that could happen. If you look at the economic program of the AfD, that is a common sense, useful economic program. Again, yes, they have. Particularly in the German east. Let’s say they speak in a way that I would not speak. They use a language that I would not use. But I think the same was true in 2016 with Donald Trump and his presidential election. So this idea that if you have a right winger or a right wing party come to power, fascism is the next thing around the corner. This is not how this works. The german institutions are very stable. The german military, the german police is not going to participate in a right wing coup. Again, the same as in the United States. Donald Trump can say what he wants.
[00:56:11.400] – Ralph Schoellhammer
He doesn’t have the military, doesn’t have the national guard. He cannot erect a fascist dictatorship in the US. I know it’s a good headline. It’s great clickbait, but it’s not going to happen. But just as is Trump in the US, if you then pursue sensible economic policies, at least in some areas, you can create a boom, or a boom like economy. So, as somebody says, what’s the biggest risk for the german economy? I would still argue it’s the green party and the Social Democrats, because when it comes to the economy, they are insane. I mean, there is no other term to describe it.
[00:56:43.410] – Tony Nash
Well, it sounds to me like good old fashioned parliamentary consensus. Right? You’re going to be pulling this way, people pulling that way, and they’ll meet somewhere in the middle. And that’s just the way Europe works generally. I think so. Good. Okay. Well, guys, this has been fantastic. I think, Ralph, I don’t really think that much about Germany, but I need to think more about it. And I think what you talked about with the Mila factory moving to Poland, I had heard about industrialization, deindustrialization, mostly moving toward China. But to hear that things are moving to Poland now as well, I know that’s not new, particularly, but there just seems to be this real exodus from Germany, which is kind of sad to hear.
[00:57:28.740] – Ralph Schoellhammer
But this last point, the United States, the comparisons between the US and Europe, sometimes we are more similar than we think we have both in Europe and the US. I think we have a problem of political leadership, but there is still a huge amount of structural advantages. Now, the US have massive structural advantages simply because of the energy. But in Europe you still have a skilled labor force. The problem we have all from Portugal, partially, again, maybe not to Poland, but at least in France. In Austria and Germany, we have created a welfare system that incentivizes or disincentivizes labor in many ways, right? If part time work pays per hour, if you calculate it more than full time work, then people say, why should I work a full time job? If you have people who are 65 and say, I don’t want to retire, I want to continue to work, but the government kind of then sticks their hands so deeply into your pocket that you say, okay, fine, if my option is to make more money, not working or retiring, then earning money and continue to work, I’m not going to continue to work.
[00:58:31.620] – Ralph Schoellhammer
But these would be highly trade, highly skilled, highly experienced workers that actually the companies would like to hold. But under the current tax structure, it’s not so easy for them to do that. As I say, I don’t know how this in the US, but if you make 2000 after tax as an employer in Austria, Germany, you cost your employer over 5000, right? So this is with all the Social Security payments and so on and so on and so on. It’s similar in other countries as well. But this is the problem. We have created a structure that disincentivizes skilled labor just as a kind of. As a boomois, a sherry on top. And how is the discussion to say, well, maybe we should introduce the four day work week because then we will be competitive. So there is a lot of insanity going on. I blame law schools, because I think the only people who sit in parliaments these days went to law school and none of them ever went actually to found a business or to work in trade or to work a construction site, because they have this weird idea. I mean, it’s amusing, right?
[00:59:31.130] – Ralph Schoellhammer
They say, well, if you only have four work days, you’ll be so motivated that you easily make up for the one day you lost. Really?
[00:59:37.820] – Tony Nash
Doesn’t work that way? Sorry?
[00:59:39.960] – Ralph Schoellhammer
Have you ever worked on a construction site? You show me that you work more. That might be true. Yeah, that might be true. What is the famous us sitcom two and a half man, where Charlie Sheen was like doing these jingles for advertising. That might be true, right? That you can make more jingles in four days than in five days, but for construction, for police, for healthcare, please show me how a nurse that is working for four days can have the same effect than a nurse working five days.
[01:00:10.400] – Tony Nash
This doesn’t work that way.
[01:00:11.720] – Ralph Schoellhammer
It’s political insanity. But I think the people below the iceberg and below the waterline are still fairly sane, and I hope that they don’t lose the courage of their own convictions during the next elections.
[01:00:24.060] – Tony Nash
I love how you say they’re fairly sane. I think we can say that here in the US, most people are fairly sane. So with that, Michael, thank you so much for joining us. Tracy, Ralph, really appreciate your time. Thank you so much. Have a great weekend and have a great week ahead.
[01:00:38.640] – Tony Nash
Thank you.
[01:00:39.640] – Ralph Schoellhammer
Thank you.
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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup.
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[00:00:22.010] – Tony Nash
Hi, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Alex Gurjevich, Tracy Schuchart, and Albert Marco. We’ve got a few key themes. The first is spiraling deflation, and that’s based on a thesis that Alex has. And we’re going to go into that in detail. We’re then going to talk about coal and us exports and emerging market consumption of coal with Tracy and then with Albert. We’re going to talk a little bit about geopolitics with what’s happening in the Middle east. And we’re also going to talk about Venezuela with some sanctions going back on or coming off or kind of whatever’s happening. So, Alex, thank you so much for joining us. I’m always pleased know people like you or Tracy or Albert will spend time with us, and it’s just impressive that you’ll join us. So I really appreciate it. Obviously, best selling author. The next perfect trade was a fantastic book. I really appreciate. So. So again, thanks for joining us.
[00:01:20.490] – Alex Gurevich
Thank you for having me. I’m looking forward to it.
[00:01:23.630] – Tony Nash
Great.
[00:01:24.190] – Tony Nash
Okay, before we get started, I want to let you know about a new free tier we have within CI markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things for you. First, economics. We share all of our global economics forecasts for the top 50 economies. We also share our major currency forecasts as well as Nikay 100 stocks. So you can get a look at what do our stock forecasts look like? There is no credit card required. You can just sign up on our website and get started right away. So check it out. CA markets free. Look at the link below and get started ASAP.
[00:02:02.970] – Tony Nash
Thank you.
[00:02:04.630] – Tony Nash
So you put out a paper last August titled the real rates tsunami, and you outlined your expectation for the path of rates and inflation and other things. And I think that it’s still relevant, of course, especially as we watch the Fed play out their plan. Can you walk us through that paper and what your view is now? Has that changed much?
[00:02:37.970] – Alex Gurevich
Okay, I will try to do it in an abbreviated fashion, so feel free to guide me or ask me questions.
[00:02:43.720] – Tony Nash
Okay, great.
[00:02:46.770] – Alex Gurevich
At the core of the heart, what I was talking about is I was trying to understand what I got wrong in the yes, 2021 and yes, 2022. But that also informed me how I started to think about the yes, 2024 and 2025. Like, if you think symmetrically in 2023, I’m thinking both two years back and two years forward.
[00:03:08.240] – Tony Nash
Right.
[00:03:08.890] – Alex Gurevich
And two years is actually, by the way, key to everything, because I came to the conclusion that everything operates for the two year leg. We can get more into that, but that makes a lot of sense. That’s how I was thinking about the world. And I realized that one of the mistakes of team transitory, so team transitory was correct. Just to step back after Covid, that there were always supply shocks that will be unwound and where we’ll see the bull whip. And actually we have seen that bullwip. One of the very important realizations I came to, or like I pounded my table on, when we saw slowdown in economy or inflation in 2022. 2023, it had absolutely nothing to do, I will repeat again, absolutely nothing to do with the fed raising rates. It did not and could not have. Fed raising rates did not and could not have had any effect yet what was happening, just a natural unwind of certain post Covid shocks. Now, what I did not count on, what I didn’t fully comprehend at the moment, how pernicious the civilian negative real interest rate of 2021 would be. And it does not matter that it was for temporary reasons.
[00:04:32.410] – Alex Gurevich
But when you have severely negative real interest rates, it leads to further expansion of money supply. People have reasons to build inventory, blow up their balance sheets. Everybody wants to have a big balance sheet. If you have negative real funding rate, if you’re a business, you don’t have incentive to push for high labor productivity, you have no incentive to lay up workers. All of those factors created a very inflationary environment, which became sticky and continued on in 2022. And certain effects we’re still seeing now. So if you think of it to your leg, we’re still in the product of the environment of early 2022, which is the environment with rates only started to go up, which is the environment when inflation was very high. Now, the flip side of that is inflation came down. And people can say inflation came down for various, also transitory reasons, because there was unwind of the supply shock. But for whatever reason, the inflation came down, it created positive real rates environment. And this positive rates environment leads to further deflationary pressures. People have incentive now to contract their balance sheets. They have incentive to increase labor productivity, to start layoffs, to hire less workers.
[00:05:57.720] – Alex Gurevich
It’s a very slow process. It’s a multi year process. It’s not something that happens overnight. It’s not like guacamole. We think high inflation, let’s raise rate by 75 basis points. Inflation print will be lower next month. Same thing when people say if fed starts cutting rates prematurely, it has a risk of rising inflation. Honestly, I’m going to be disrespectful here. I will say this is absolute gibberish. That is gibberish. That is not even like a sentence that makes any sense to me, that cutting rate, because cutting rates now will affect inflation two years from now, it will have nothing to do with inflation. Come up this year or not. This is just, the evidence is overwhelming to that, that you cannot just affect inflation on a month to month basis. You maybe can affect a little bit headline inflation by pushing on commodity prices up and down. You can maybe affect some high frequency economic indicators with a several month lag by changing financial conditions and changing the sentiment, by pushing stock market around. But you cannot really affect what Fed is really looking at core PCE on anything shorter than one or two year horizon.
[00:07:04.450] – Alex Gurevich
And one year horizon will be very optimistic. So that is the core of my thesis. And since you ask him about real rate tsunami specifically, I’m going to share one chart, if it’s okay, and then start criticizing me or whatever. So this is the chart. You’ll see three things on the chart. There is one line, the wiggly line, which goes, can people see people well? Right, yes, wiggly line. This is the headline CPI. Now I use headline CPI, I calibrate it to whatever you want. You can use core pc, core pc deflator, core CPI. It’s all truly, it’s going to look similar no matter what you use. It’s the principle of it. I’m not going to do homework for everybody in terms of what to use and this line, but this is not just two years, this is average over two years, because remember, everything operates with two year lags. And this is the average two year software. So that just shows us the rates. Now those charts, well, familiar, don’t say anything. But what’s interesting is when you took the real rates calculated that way, and this is the yellow orange thing, and as you see, it shows us that right now we’re in an environment when the real, average real rates over the last two years were still close to negative 2% by this chart.
[00:08:25.910] – Alex Gurevich
So when people say the economy has withstood rising rates, again, I will call nonsense on that. I’m not saying, by the way, my thesis is not that recession is inevitable. My thesis is not that inflation will not be able to withstand high rates. My thesis is that it’s entirely premature to even start thinking about whether it has withstood the high rates, because what high rates, real rates, have been on average negative over the last two years. So everything has been stimulative. So, in fact, even this environment, we’re already seeing some moderation of job market and some disinflation. It’s tremendously deflationary in perspective, because when this thing will actually become positive, the deflationary pressure supposedly will dramatically increase. Now, why do I think it’ll become positive? Well, look at the charts. This chart is already not stoppable. Those jaws are closing. And we do know that average software keeps rising. Fed is not going to cut rates to zero next month. Right. So this line is going to keep going up and it’s going to go to like 4% or whatever, depending on how fast the cuts will go. But it will go higher. Inflation, we know, is going down.
[00:09:45.580] – Alex Gurevich
So there is really very little to stop because as high prints fall out of this, two years of inflation and low prints fall out of software, there was no stop to this thing from going. It doesn’t matter even what the Fed policy is now. That’s going to go positive. And that’s when we’re going to start having to start thinking about, okay, now, the average effect of positive real rate can be assessed. And I’m not saying we know what it’s going to be, but my inclination is to think that given what we’ve seen so far, that it will lead to further deflation. And just, again, not to take too much time. The core of my thesis, what I thought about this paper, that the sequence of events, I think is very different. That’s what Isaac Tony was asking. What is different? In the past, the thesis have been that we start with recession, then we get unemployment, then we get deflation. Now with the policy smoothing out, recessions we’re having, and post Covid whiplash, we’re seeing slightly different thing. The disinflation actually came first. Labor market is still robust, as we’ve seen today, particularly. Right? Yeah.
[00:10:53.470] – Alex Gurevich
There are some mixed numbers you can say, like, this is pro, this is a con, January report is volatile. This is what’s happening on joel’s. This is what’s happening with claims, tons of things. But overall, nobody, I will challenge people yet to say that the job market is falling apart. Yeah, for sure. Very tough.
[00:11:14.470] – Tony Nash
I want to cover some really basic question. Okay. When you say deflation, when we hear the word deflation, we’re kind of programmed to think that deflation is a bad thing. When you say deflation, does it have a good or bad connotation or is it just a fact? Deflation?
[00:11:36.590] – Alex Gurevich
To me, it’s more of a fact. First of all, I want to be very clear. I’m a trader. I’m not a policy person. When I always say, like, what the Fed should do, it should be taken with a grain of salt. I always think that fed should do whatever is best for my portfolio. I love that perspective because objective functions are very uncertain. I mean, deflation, I think leads to total society outcomes. Deflation probably leads to high wealth inequality. Deflation will probably will lead. And this is my thesis, that it’s not that unemployment will lead to deflation, it will deflation disinflation, which will have to lead to a loosening of job market.
[00:12:18.830] – Tony Nash
Right.
[00:12:19.300] – Alex Gurevich
Because people, under pressure of high real interest rates, people will have to raise productivity and maybe hire less people. Not everybody thinks it’s a bad thing. Some people could think it’s a healthier adjustment on the economy, but higher real interest rates, they kind of clean a lot of things and they could do it in a painful way, like they kill zombie companies who roll over their debt. They could just really help us to figure out who is who. So it’s not all bad, but it can also cause pain. And then inflation leads to unemployment and to high unemployment. And high unemployment leads to erosion of consumer confidence. Then eventually it can lead to economic slowdown. So that’s a very kind of unusual path. And I think this, however, since the changes that occurred in policy since 2008, I think this might be the new thing we’re looking for. Like recessions don’t lead to stock market falling, for example.
[00:13:23.680] – Tony Nash
Okay.
[00:13:24.930] – Alex Gurevich
And unemployment might not start with a recession, but might start with actually deflation first.
[00:13:29.840] – Tony Nash
So your order of things is deflation, jobs, then recession.
[00:13:35.970] – Alex Gurevich
If recession happens, which is not much, it might not even happen because by the time we have deflation and then job losses, the Fed can cut rate so much that they will have no recession.
[00:13:46.920] – Alex Gurevich
And right now, when people are saying, like, recession, I was like, what recession? Why would consumers stop spending? There is a great job market and positive real wage growth. Why would people not be spending? And if we have consumers spending, why would we have a recession? I don’t see it yet.
[00:14:04.190] – Tony Nash
Right.
[00:14:05.390] – Tony Nash
That’s interesting. Albert, what do you think about that in terms of that order of events?
[00:14:11.230] – Albert Marko
No, he’s right about the order of events. I mean, layoff is the key thing. We’ve talked about this for a long time. Wait for layoffs to happen to start triggering things. And I do think that initially I was on the pro, recession is going to happen, so on and so forth. But as the data has been trickling in and policies have been enacted. I don’t really think that we’re going to see a real recession just because things are so under control from the Fed’s perspective now. Deflation? Yeah, it’s coming. I have a dispute on the timing of it, because right now there’s no real deflation in the United States except for the commercial real estate market. I mean, look at China. However, China is in serious deflation, but that helps the US maintain its inflationary policies. The US has too much wealth versus manpower capacity in the economy, and additionally, fund flows are all supportive of north american markets, since a large chunk of East Asia is just uninvestable to passive investors. If I look at the data, we had rates jacked to 5% and wages are still growing 5% to 6%. So wages were secularly depressed in the US for years, and now it’s time for them to recover.
[00:15:28.980] – Albert Marko
And this is probably one of the policies that Janet Yellen and Leila Brainard has laid out for the time being. So until I see a change in the political intent of wages and whatnot, it’s hard for me to see a deflationary event in the next twelve months. After twelve months, it’s a different world, different thing. And I think that Alex’s thesis is going to play out over the next one to three years, in my opinion. So what do I know?
[00:16:05.030] – Alex Gurevich
I’m okay with one to three years horizon. Yeah. Do I have to say? My signals and kind of cycle indicators do predict peak deflationary pressure somewhere towards the end of 2024. But if it turns out to be like, you’re more of your timeline, I would not feel too wrong.
[00:16:25.580] – Albert Marko
Yeah. My only issue is it’s just Janet Yellen and Lail Breinard and the Biden administration, they have their hands on policy right now, and it’s been intent on keeping the markets of the economy looking rosy.
[00:16:40.500] – Alex Gurevich
And my opinion, it’s all, what can they actually do now?
[00:16:47.010] – Albert Marko
Not much anymore, but that’s my point.
[00:16:50.360] – Alex Gurevich
I don’t think they’re really like, fiscal policy is kind of fixed, it’s fairly expensive, but not the way it was in 2020. Right?
[00:16:58.710] – Tony Nash
Yeah.
[00:17:00.630] – Albert Marko
The only thing I could think of is really like, Congress wanting to boost the markets for their own reelection bid. So you’d see subsidies and legislation come out over the next six months. Short term, temporary garbage.
[00:17:12.400] – Tony Nash
But that’s targeted, right?
[00:17:16.490] – Alex Gurevich
This is actually. You probably know about this more than I do. Wouldn’t the Congress be somewhat locked pre election in terms of extreme fiscal policies, it would be not in the interest of challenging parties to put very big bipartisan plans out.
[00:17:34.550] – Albert Marko
It depends because it depends. In the past you’d be absolutely correct. But in the last election and this one that’s gearing up, I do see a lot of policy and some legislation looking to help the US workers and basically just give people free money. I mean, this latest piece of legislation gives people like $8,000 if they have a kid just to file taxes. These inflationary policies that they have is just, they’re troublesome to me and they just don’t care. They don’t care what happens in a year. That’s my only issue.
[00:18:09.310] – Alex Gurevich
Well, one of my theories is that fiscal expansion might be not so inflationary when it’s not accommodated. Because if the Fed is not buying. So if you spend deficit and sell more bonds and more bonds, but the Fed is not buying them and not lowering rates, then somebody has to buy them. So they crowd out other investments. They either have to bring in foreign capital and that will be capital surplus and then has to go up. Or though people talk about it’s all confusing because people might buy them but then hedge the currency. It’s confusing, but somehow in the big picture. Or they have to end up with end users because they cannot all end up on banks balance sheets because of tightening of banking regulation. Right.
[00:18:52.810] – Albert Marko
Yeah.
[00:18:53.520] – Alex Gurevich
So they have to go somewhere and some people will buy those instead of doing something else with their money.
[00:19:00.410] – Albert Marko
Yeah, no, valid points. Valid points. The only thing I do have, I was discussing something with a partner of mine and he brought up a good point, is like what if Yellen, her idea is using only two and three year bonds and having the fed purchase them. They’re talking about duration of all these things.
[00:19:19.040] – Alex Gurevich
But right now they’re not purchasing, they’re not selling. Tightening. Like if you would see quantitative easing, for example, if you combine fiscal expansion and quantitative easing, you could see this kind of inflationary mechanism going. This is very theoretical. I actually don’t.
[00:19:35.180] – Albert Marko
Yeah, of course.
[00:19:36.100] – Alex Gurevich
And I don’t have deep conviction. This is my kind of working assumption. And what I’ve seen is that fiscal expansions don’t actually seem to lead so much inflation impact if they’re not accommodated because then rates go up because the bonds have to clear. Like if the Fed is not buying them, somebody has to. All the bonds have to clear.
[00:19:57.230] – Albert Marko
Yeah, you’re correct. And you actually mentioned that earlier, except for commodities. And I say that’s one of the areas that I’ve focused on intently is commodity inflation probably rising, everything else. You’re absolutely spot on.
[00:20:12.950] – Tony Nash
So I think it’s fascinating that we’re talking about deflation so casually. I love it, because again, there’s always this lining of deflation being a terrible thing, and I love that we’re just talking about it. Yeah, it’s probably going to happen, and this is the order of what’s going to happen. Tracy, we talk about commodity prices. Do you see room for further kind of suppression or decline in commodity prices? Because we’ve seen huge geopolitical events and not much has happened with crude and net gas and other things. So what do you see on the commodity side with this kind of environment that Alex is talking know right now?
[00:20:57.220] – Tracy Shuchart
I think that this kind of environment is what investors are looking at right now. Right. And why they’re kind of scared to get into the commodity sector and not to mention what’s happening in China right now. I mean, we’re seeing a massive slowdown. I don’t care what they say their GDP is, we all know those are all fake numbers. And there’s a massive slowdown in the property sector, a massive slowdown in the manufacturing sector, and you can’t have domestic travel, I. E. Trains, planes, automobiles, et cetera, make up for what is happening in the big sectors of this industry, which I think is largely ignored. But that said, looking at China, I will have to say that I think the market is looking too much on China. I think we’re too dependent on China and looking at China for commodities data, China is doing bad, poorly economically speaking. Then we need to sell commodities. But there’s a lot of up and coming markets. And we’ve talked about this before, Tony, where I think know we’re going to see increases in India, we’re going to see increases in Africa, we’re going to see increases. And we’re already starting to see those increases, particularly in fossil fuels and metals, in those industries that are going to kind of make up for the China shortfall.
[00:22:27.720] – Tracy Shuchart
And so I think the market, in one respect, I think that we have to look at China because they’ve been the major driver of commodities for 20 years now. But I think it is time that investors start looking outside of China, maybe because I don’t think they’re going to be the main driver anymore, even though they’re still a huge country and a large consumer.
[00:22:52.190] – Tony Nash
Yeah, I think I remember when I was at the economist, I don’t know, ten or 15 years ago, and people were asking us, so what’s the next China? And for a decade, it was still China. What is the next China? Well, I don’t know. I mean, it’s going to be hard. That’s a once in a lifetime thing, and so it’s going to be really hard to create another China. And although they export deflation from a demand perspective, an investment perspective, not having another China, I think that strengthens thesis. Where does that demand come from? And we have all this installed capacity, but where does it all go? Because we have population declining in Northeast Asia, we have population declining in Europe. We have population declining in Russia. We have population growing in the US, but we don’t have population growing in a lot of other parts of the world, aside from, say, India and Indonesia, I think.
[00:23:50.330] – Tracy Shuchart
And Africa.
[00:23:51.710] – Tony Nash
And Africa.
[00:23:55.930] – Tracy Shuchart
I think it’s almost better that it’s diversified and that we’re not looking to one country to kind of fortify what we look at demand, particularly in natural resources, since that’s my primary focus.
[00:24:12.190] – Tony Nash
Alex, you said India is the next China. I hope India is the next China. I’m not convinced that. And know I love India. I’ve met with senior officials there. I’ve been there many times. I’ve done a lot of work there. I’m not convinced that India has the institutional capacity to do that. And I think foreign investors have been spoiled by. And this is the old anecdote of arrive at the airport, drive to the factory, and it’s a beautiful drive. The rest of the town can look terrible, but the drive from the airport to the factory is a beautiful drive. India hasn’t really got that down. And I think when foreign investors who are accustomed to investing in a place like China, where it’s a beautiful drive, when they go to India and you land in Mumbai and there’s four year olds knocking on your taxi door to ask for money, that sort of thing, it’s really hard for people to.
[00:25:21.510] – Albert Marko
Yeah, yeah, but Tony. But Tony, India has advantages over China in terms of legal system and the finance system. It’s more trusted than the Chinese would ever be. I mean, they’re based on anglosphere laws and regulations and whatnot. They’re more tied in with the western world than China. China, they can just confiscate everything you own and prevent you from leaving the country.
[00:25:43.230] – Tony Nash
As an investor, yes, but in India, you can be in a court case for 50 years, regardless. In India, you’ll have arbitration in Singapore or in London or something like that for whatever can be decided in a place like Singapore, they’ll continue to do that, but you’ve still got layers of kind of payoffs that need to happen and other things in India. But Alex, I am hopeful. I remember when, I think it was flextronics 15 years ago, made their first investment in Chennai and everyone was hopeful. That was India’s big breakthrough on electronics manufacturing, and it just pretty much fell flat. And now we have other things happening. I think Tata with the nano, what they did, what, ten or 15 years ago, really helped indian manufacturing and supply chains. But I’m just not quite there yet. Again, I’m a big fan. I want it to happen, but I’m not necessarily quite there yet on seeing supply chains in India be as robust as China was even 1520 years ago.
[00:26:42.690] – Alex Gurevich
That’s fair. I also think that when people think of what I’ve always argued, when people kept saying that China is doing in some ways unique, though, because I think China is unique in a way that China, what China did in the end of 20 century, beginning of 21st century, is what it has done several times over its several thousand years of history, which is reason to economic dominance or close to economic dominance in the world. Had a very big chunk of world population who had very good technology and innovative kind of approach, had a very organized authoritarian state make a bid to become a global power and failed at that bid.
[00:27:32.670] – Tony Nash
Yep.
[00:27:33.350] – Tony Nash
And I think that last thing you.
[00:27:34.950] – Alex Gurevich
Said is China did it several times in the history. So in some ways, the counterargument to what I said, India is the next China, which is saying, like, India is not the next China. India is the next India. The next China is China.
[00:27:49.040] – Tony Nash
Yeah, that’s a great point. Can I ask you something, Alex? A little bit. A little bit off topic, but we see this China Russia relationship, and I’ve said for years, because I did work in China for a long time, I don’t believe that the Russians and the Chinese trust each other. And I don’t think that’s an enduring relationship. Do you think those sides can really trust each other? And do you think that’s an enduring relationship?
[00:28:16.990] – Alex Gurevich
First, full disclosure, it’s outside of the area of my expertise.
[00:28:20.990] – Tony Nash
Okay, but just your personal view.
[00:28:26.050] – Alex Gurevich
I probably have the same skepticism as, you know, historically, like, you know how there are those books like this kind of geopolitical theory, geography, destiny, and typically us and Russia, natural allies. And Russia’s natural opponents are Turkey and China.
[00:28:50.970] – Alex Gurevich
Russia’s natural allies are us and England. There was only one time, I think, when England and Russia, for example, found themselves on the opposite side in the crimean war.
[00:29:03.090] – Alex Gurevich
And every other time they were basically on the same side.
[00:29:07.020] – Alex Gurevich
Us and Russia found themselves on the same side every single time, except for some proxy wars that can’t really count. And there are geographical reasons for that.
[00:29:19.010] – Tony Nash
Okay, yeah, that’s very interesting. I want to ask you one kind of last thing that you mentioned in your paper. You said that AI could be seen as deflationary. Can you talk us through that? You talked us through some of this job stuff. Can you talk us through how AI can be deflationary?
[00:29:36.170] – Alex Gurevich
Well, we’re in the early stage of singularity. We don’t know yet how the singularity, which, by the way, has already happened, will spread. And there is this whole thing that has been happening throughout human history that they will come up with some new technology and people will be like, oh, this will lead to job loss, but reality, every new technology just led to restructuring of job markets. So they got rid of stable hands, but now they have car mechanics. Right?
[00:30:09.270] – Tony Nash
Right.
[00:30:11.170] – Alex Gurevich
So drivers of car, whatever, people of sales, sailboats now work on whatever fossil fuel driven boats. Right. It’s the same. What I’m saying. Like any kind of advancement, technology led to actually rising levels of standards of life and created new job opportunities. This revolution could be a bit different because every single time, what happened is that the technology would replace the most manual, the least intellectual part of work, letting people do the more intellectual part. So making humans actually express more their human capacity. But this is kind of a displacement from the top. Like, there was an interesting presentation. I thought about that. Right now, the jobs most displayed by AI are not actually the highest paid jobs, not the lowest paid. Like, if you need some simple legal documents, like, I’ve already used AI to draft legal papers for me without. And saving a few hundred dollars here and there on lawyers.
[00:31:19.950] – Alex Gurevich
It’s not super critical. Chat GPT will draft you any legal template. I also use it continuously now for second opinions on medical questions. I will still go to a doctor, but if I want to get a second opinion, I use Chat GPT, and it gives very reasonable second opinion usually. Right. So it’s displacing those, really. It’s not displacing gardening. Like, I mean, Chat GPT cannot landscape your garden.
[00:31:48.260] – Tony Nash
Exactly. Yeah, it’s very interesting.
[00:31:52.130] – Alex Gurevich
Cannot give you a massage yet. Right. It’s not doing anything in that area, right?
[00:31:56.210] – Tony Nash
That’s right. Sorry, Albert.
[00:31:58.890] – Albert Marko
No, he’s right. I mean, the AI is definitely a disinflationary threat. I mean, 80% of finance jobs are just robot calculators, 70% of lawyers are just robot readers. It’s easier to replace those type of people, but I guess you can replace them with Walmart welcomer positions later on.
[00:32:16.410] – Tracy Shuchart
Go to tech school, kids. Go to tech school. Become a carpenter builder.
[00:32:21.600] – Alex Gurevich
Yes.
[00:32:22.650] – Tracy Shuchart
You can’t be replaced by AI.
[00:32:26.430] – Alex Gurevich
To replace physical labor by AI, they will have robots. But that technology is far away, and it’s not easy to implement because hardware is very hard to implement and it’s very hard to make it cheap. It will get there, but it might take the case. While displacement of intellectual professions happens within months, it’s just such a different timeline.
[00:32:51.350] – Tony Nash
I have a son about to enter high school, and one of the tracks that they have that he can specialize in is welding. And as silly as it sounds, we’ve thought about trying to convince him to take some welding classes because so much other stuff can be automated.
[00:33:08.460] – Tony Nash
And so we haven’t convinced him yet, but it is a real thought that we’ve had so that he can learn, have a trade to fall back on as other stuff is automated. Who knows, right?
[00:33:18.420] – Tracy Shuchart
Well, don’t you remember back in school, when I went back school, we had shop classes. We learned how to work with. I mean, that was like our required class.
[00:33:28.900] – Tony Nash
Tracy, I was Woodshop student of the year in 7th grade. Say that proudly.
[00:33:37.950] – Alex Gurevich
I will say officially, I was absolutely hopeless at shop. So nothing would have to do with. I would totally not survive in the society when you have to rely on dexterity of your hands or kind of your practical intuition. I am absolutely hopeless.
[00:33:53.460] – Tony Nash
Yeah, but you’ve got an amazing mind, Alex. So you make up for being.
[00:33:58.190] – Alex Gurevich
I’m under pressure. I mean, AI replacement, it’s something that I have to really seriously worry about.
[00:34:04.620] – Tony Nash
But that’s the reality of where we are. Everyone who’s a white collar worker should be worried. If they’re not worried, they’re not aware of what’s out there in technology.
[00:34:15.320] – Tony Nash
I’m worried. Albert’s worried, Tracy’s worried, you’re worried. We should all be worried a little bit. Otherwise we’re unaware.
[00:34:24.950] – Alex Gurevich
Yeah. It’s nice if you have capital, because what happens that AI only makes your capital have more value? Because capital means access to computational capacity, whether it’s a form of digital assets or whatever. But computational capacity will be key. If AI does everything right. That’s right. Then you need energy to fuel computational capacity. The energy efficiency, increase of energy efficiency will never catch up to the need for computation. So we’re going to need more and.
[00:34:58.460] – Albert Marko
More energy for that, which is interesting.
[00:35:01.970] – Tracy Shuchart
I’ve been writing about that, which is.
[00:35:04.310] – Albert Marko
Interesting because when AI starts flipping the script on renewable energy because it’s not efficient enough, there’s going to be all sorts of political problems happening.
[00:35:12.470] – Tony Nash
That’s a great segue. Let’s talk about cheap energy. Thank you very much for that. Before we get started, I want to let you know about a new free tier we have within CI markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things for you. First, economics. We share all of our global economics forecasts for the top 50 economies. We also share our major currency forecasts as well as Nikay 100 stocks. So you can get a look at. What do our stock forecasts look like? There is no credit card required. You can just sign up on our website and get started right away. So check it out. CA markets free. Look at the link below and get started ASAP.
[00:35:55.290] – Alex Gurevich
Thank you, Tracy.
[00:35:56.440] – Tony Nash
Let’s talk about coal for a little while. You had a couple of tweets about coal this week. We’ve discussed the problems with wind and solar companies over the past few months. As interest rates have risen while us coal consumption has fallen, us exports are rising. So we’ve got the tweet on screen. Is this coal headed to emerging markets or developed markets? What are we seeing in this data?
[00:36:19.790] – Tracy Shuchart
It’s mostly heading to Asia, obviously. And so emerging or semi emerging, I’d like to separate because I think know there’s kind of a difference if we’re looking at Pacasia or India, but yeah, most of that’s going to Asia because obviously they have made their plans very clear. They are emerging markets, they want energy security and they want cheap, reliable energy. I mean, if you look at Pakistan, Pakistan hasn’t even been able to afford that gas for a couple of years now and it’s been a persistent problem for them. And so you have to understand that these nations, they need energy security. That’s all they care about. And even India, which is. I’ve heard a lot of things. Well, India’s are. Why is India buying from Russia? Because they’re an ally of the US. Well, first of know, India is focused on their own energy security. For one and two, their relationship with Russia runs deep in its counterbalance to so in the region. So we really couldn’t say anything about that. But if we’re looking at coal. Yeah, absolutely. We’re seeing coal exports because if you look at our numbers, 2007 is really when we peaked at our coal usage.
[00:37:54.490] – Tony Nash
You mean in the US, or globally?
[00:37:56.500] – Tracy Shuchart
In the US. Okay, in the US. And that was mainly for electrical power. And since 2007, we’ve literally declined almost 60%, which is why I think it’s been a rapid decline over a very short time. We don’t use that much coal at all for any more electrical. And I would say it’s completely negligible in manufacturing. It’s nearly nonexistent anymore.
[00:38:27.350] – Tony Nash
Clean coal never happened. The alleged clean coal from the 2008 election never happened.
[00:38:34.100] – Tracy Shuchart
Yes, but companies have largely moved away from that domestically. Why not? Why not use nat gas? It’s a whole lot cheaper than coal, actually, and we have a ton of it, so let’s sell it overseas. And I think one of the reasons we haven’t really seen the big pushback from, say, environmental groups on exports like we have seen on LNG just recently, is because of the rapid decline in usage. And they’re just not really paying attention to it because it’s no longer a significant source of energy in the US anymore.
[00:39:14.760] – Tony Nash
Okay. It’s exports. And we still have. China is still 70 plus percent power generation by coal, is that right?
[00:39:23.690] – Tracy Shuchart
Yes, absolutely.
[00:39:27.110] – Tony Nash
For all the solar and wind and everything else we hear about China developing, they’re still over 70% coal driven for their power generation.
[00:39:36.220] – Tracy Shuchart
Of course. And what you have to understand when we hear all of these, you know, they’ve increased solar know, x percentage, and you have to understand what a low percentage they were coming from. So it makes it sound huge when you’re coming from such a low denominator.
[00:39:56.560] – Tony Nash
Okay, so you mentioned India. I want to go a little bit deeper into India. Modi is looking to coal to shore up energy security as indian power generation is growing by double digits. So going back to is India the next China or whatever, their power generation is growing really fast. So are these coal numbers from India? This is based on a tweet that you put out. Are these coal numbers from India just a blip or do you see this as more of kind of a medium term kind of intention for them to continue growing, using coal to have reliable, cheap electricity?
[00:40:34.980] – Tracy Shuchart
Yeah, I think it’s a medium term thing. I don’t think it’s anywhere part of their long term goals, but I think it’s a cheap interim, easy fix for them. Right. Because they already have plants, they can build that out really easily. They also becoming a really big buyer of LNG and a really big buyer of crude oil. And so I think that when you’re facing such a rapid deployment of energy and you need this for electricity, and you need this to run everything. You’re going to go to your. Go to. What’s the easiest thing that we have means available, then that’s what they’re going to go to. And they’re going to build out those plants. Do I think that they have plans for that forever? No. And they are building out some solar and some wind. But again, that’s not baseload possible.
[00:41:35.470] – Tony Nash
And going back to Alex’s deflation thesis, it looks to me, because interest rates have risen, so the alternative power, the cost of alternative power development is much higher, and so people are substituting with much cheaper generation sources.
[00:41:57.030] – Tony Nash
So that is, at least in terms of headline, that is deflationary. Is that right?
[00:42:03.030] – Tracy Shuchart
Yeah, absolutely. I mean, we’ve already seen. We’ve seen orsted quit plants, quit wind farm projects in the US off the east coast. You had BP literally just say it’s uninvestable in the United States to invest in wind.
[00:42:20.740] – Tony Nash
Beyond petroleum is saying that it’s uninvestable. Remember when they tried to go as beyond petroleum a decade ago? Or.
[00:42:28.830] – Tracy Shuchart
And so, you know, they’ve divested, and so does Ecuador. Ecuador also divested in wind assets of the know. It’s pulling on their balance sheets, it’s pulling down their numbers. It’s not only just rising interest rates, there’s also supply chain problems. You got to deal with China most of the time for a lot of your resources, and it’s just become a huge problem with them and a big drag on their balance sheets. And it’s just at this point, not profitable to sit in these assets. And we have to understand that these companies are here at the behold and are beholden to shareholders that are looking to them to perform well.
[00:43:16.130] – Tony Nash
They need to get margins somehow.
[00:43:17.320] – Alex Gurevich
Right?
[00:43:17.550] – Tony Nash
So they’re trading down in their feedstock costs. Alex, did you have something to add?
[00:43:22.030] – Alex Gurevich
Well, I have two thoughts. One of them is like something I’m using. Several years ago, I went to a science fiction convention. Yes. I go to science fiction conventions regularly. And one of the presentation was on the economics of terraforming Mars. And one of the key points of this presentation is. So in order to do terraforming projects, you need zero interest rates to begin with, because terraforming projects are so low that any kind of investment yield on such a long project only makes sense in a zero interest rate environment.
[00:43:56.080] – Alex Gurevich
So that’s kind of an inter. Like. It’s one of the conclusions was immediately derived.
[00:44:00.780] – Alex Gurevich
Because on any kind of positive real rates, 3% positive real rates, no. 100 year projects ever made sense. But another thought about energy. I have kind of going back to my AI thesis, if you allow me to stay a little science fiction, because it’s Friday and people want a little entertainment. Think about this. You set a group of people who are hungry, and they’re smart and productive and industrious and kind of scrappy. They’ll find food. They’ll start figuring out, okay, where can we hunt? Where can you plant food? What can I do? Now? AI is hungry, and food that needs is energy. No matter how you slice it, AI will start looking for energy. So now we’re having the rise of the greatest, most efficient, most scrappy intelligence, which will start looking for energy. And in my opinion, all paths lead to fusion. Because in the end, even fossil fuels will not satisfy, like neither wind power nor solar panels nor fossil fuels. They will not satisfy the hunger of AI. They will have to turn to nuclear energy. And if they find that nuclear fission is not enough, they’re going to have to eat fusion.
[00:45:16.490] – Tracy Shuchart
I’m all for it. Just tell me when it comes to fruition. I’m 100% for that. I mean, I love the idea. I just hope that we can discover that in time. But absolutely, I think that’s why we’re also finding a nuclear interest in the west that has been long disregarded, particularly after Chernobyl. And, you know, we’re talking about building out these huge data centers that are going to need power and we just don’t have it.
[00:45:53.520] – Tony Nash
Very interesting. Okay, thanks for that. Let’s move on to geopolitics. Albert, I’m really interested in the impact of this. The US approved new strikes on iranian targets on Thursday in retaliation for deaths of us military members. We’ve got the story on screen. Obviously, its proxy has been provoking the US and Yemen, Iraq, Jordan. So none of this is unexpected. But is it surprising that the response has taken so long and that the deliberation has been so visible? I have to believe that the US has kind of some existing list somewhere priorities, or else why would they have an intelligence service? So why did this take so long albert?
[00:46:37.870] – Albert Marko
Well, it’s taking so long because it’s the Persian Gulf area. I mean, it’s the mean. They can sit there and strike a couple proxies and erase a few of them, but what’s that really going to accomplish, especially if everybody in Congress is talking about Iran being behind it? All right? I mean, you can’t go and attack Iran because oil will be $300 the next morning and they’re not stupid. They know this. They’re keen to the realities of this. They’re taking their time. And honestly, as much as I’m critical of the Biden administration, it’s probably the right thing to do, is to take your time and just be more calculated and understand that there could be a wider conflict that you just don’t really want to get into going into 2024, especially with an oil hovering here at $72. Is it right now? Yeah, $72 right now. We could easily surge it. So it’s probably the correct thing to do. But they do need to have a serious response, and the time is ticking away.
[00:47:42.150] – Tony Nash
And also, refinery utilization is below 90% or whatever this month. Those crude prices will translate to higher gasoline prices really quickly if that crude price spikes up.
[00:47:55.830] – Tony Nash
So what are the next steps, Albert? I mean, we talked a couple of weeks ago, and we thought this will be a few months that the US will be involved in Yemen and kind of in the region. And of course, there may be a longer tail on it, but in terms of, say, kinetic action, it’ll be a few months. Do you still hold that view, or do you think this becomes a much more entrenched regional, say, medium term effort?
[00:48:18.420] – Albert Marko
No, I still hold that view. I think that the Biden administration is going to have to lean on the Chinese to put pressure on the Iranians. I’ve said this before, put pressure on the Iranians and even have the Russians put pressure on the Iranians to settle things down for a while. It’s just too much. The Houthis taking shots at ships, iranian proxies in Iraq killing Americans. It’s just too much. And there’s a lot of trade that has to go and don’t want to see any kind of problems going forward, so they’re going to have to. If I was the Biden administration, I would be on the phone with the Chinese immediately and tell them to lean on them. Lean on the Iranians.
[00:48:58.970] – Tony Nash
Do you think that’s already happened?
[00:49:00.890] – Albert Marko
Oh, yeah, for sure. I mean, they’re not that dumb. They’re not that stupid. I mean, I think we saw that a couple of days ago that they said the Chinese were starting to make calls to their reignings to settle things down. Without question, that would happen already.
[00:49:15.780] – Tony Nash
Yeah. I think the coordination is. It seems to me that the coordination is happening with the National Security Council rather than with state.
[00:49:26.870] – Albert Marko
No, not with state. State’s nothing but a postal service. They’re completely dismissive of State Department.
[00:49:33.750] – Tony Nash
Okay, so with the chinese playing ball, this could be a couple months or something and hopefully it’s over before driving season hits or something like that.
[00:49:44.890] – Alex Gurevich
Right.
[00:49:46.250] – Tony Nash
Okay, let’s also look at Venezuela. I know it’s kind of a minor story, but there’s been some news on the wires this week that the US is ordering business to wind down their transactions in Venezuela because of some election reforms that Maduro won’t do. So how much of an impact does this really have? I mean, the Middle east is a bigger geopolitical issue when it comes to crude prices. Does that have a major impact? Are we taking a lot of crude from Venezuela? Do they have the capacity to export to the US?
[00:50:20.000] – Albert Marko
Not really. I mean, this is more of a Tracy question, but I was talking to some of the oil guys and they told me there’s nine blccs still sitting there in port that have yet to make it to the United States. Right? I mean, we all knew that Maduro was going to go back on his word for this democratic election. I mean, it’s just silly, right? It’s just absolutely silly. And the things that I don’t understand why anyone doesn’t talk about, especially in geopolitical world, is the iranian connection in Venezuela, specifically Kaibo. They’ve been siphoning money and sending it back to the. You. Why don’t you take a look at that and start discussing that problem. But the reality is Chevron has to keep their waivers and their sanction waivers intact and that’ll go forward even though that the deadline in April will come and go. Right. And no more american companies are allowed to contract there. Chevron is going to be excluded from that. They still have their waivers and american refineries will be getting supply from chevron into the refineries there in North America.
[00:51:25.300] – Tony Nash
Okay, so tell us a little bit about Maricibos since nobody’s talking about it.
[00:51:29.610] – Albert Marko
Well, Maricibos, back in the, was it the 90s or mid 90s or. No, late 90s, early 2000s when Chavez came to power, he actually invited all the iranian linked groups that were in the tribal region of Paraguay, Uruguay and Argentina and shifted them up to Venezuela. Well, they took over and started siphoning narcotics, arms, oil trade and so on and so forth and shipping that money back. I mean, if you can go to the streets of Maricabo and you can see all the lebanese and iranian influence on the streets there, it’s plain as day. They even put one of the iranian narco terrorists as vice president of Venezuela about two years ago. He was for like six months. I mean, he’s a well known narco terrorist. So this is nothing new, especially to the intelligence community. Just media doesn’t want to cover it for whatever reason.
[00:52:23.860] – Tony Nash
Right. Wow. Okay. Well, guys, thank you so much. I can’t believe how much we covered today. Thank you so much for your time. Alex, thanks so much for joining us for the first time. We really appreciate it. Appreciate it, guys. Have a great weekend. Have a great week ahead.
[00:52:37.160] – Tony Nash
Thank you.
[00:52:37.910] – Albert Marko
Thank you.
[00:52:39.090] – Alex Gurevich
Thank you.
#China #Geopolitics #Silver
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Transcript
[00:00:22.090] – Tony Nash
Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Albert Marco, Vince Lancey and Blake Morrow. We’ve got a few key themes. The first one, when I went out to ask about this show, the first response I got back from Twitter was, what the hell happened in China this week? So that’s the first thing we’re going to cover. The second is, why was silver rallying? This week we’re going to talk to Vince about silver and gold. And then with Blake, we’ll talk about the Fed and the QRA. CI Markets has been recognized as one of the top stock forecasting tools for 2024 by Techopedia, a leading tech authority. Why? Because it predicts future price movements with a 94.7% accuracy rate. It covers over 1600 assets with weekly re forecasts of stocks, etfs, currencies, commodities and major equity indices. It has an easy to use interface optimized for web and mobile, and pricing plans to fit your needs, including a free option. Stop playing guessing games with your investments. Take control of your portfolio with CI markets. Learn more about CI Markets today@completeintel.com. Slash markets let’s get right into it, Albert.
[00:01:33.830] – Tony Nash
We’re playing kind of the where’s Albert this week. So I like your background. That looks really good, and I think you’re a great guy to answer the question, what the hell happened in China this week? So we had a pretty big turnaround in China in the equity markets. We’ve got a chart for Shanghai Composite on the screen. Of course, the Hong Seng did even better than the Shanghai composite. The central government just talked about putting a few hundred billion dollars into the markets. They didn’t actually do it. They greenlit corporate share buybacks to prop up markets. They reduced the Triple R, the reserve requirements so banks can push more cash out into the economy. And of course, we saw that pretty dramatic turnaround in equity markets. So all of this got markets back to where they were about two weeks ago. CNY gained a little bit. It’s off. Blake, maybe you can talk through some of those dynamics. But the question is this, what does this all mean? What did they do? Right, Albert, and what do you think they should have done that they didn’t do?
[00:02:38.850] – Albert Marko
What they should have done is a different animal altogether. But what was happening was the narrative was just becoming overwhelming for the chinese economy of systemic collapse of the chinese system from top to bottom. And they had to step in and guarantee, I know that they haven’t done it yet, but close to $300 billion is probably going to be levered up to five to ten times that to prop up the economy. And their entire gambit was to just change the narrative. They didn’t want those headlines that China was collapsing. They’re going to have to step in, for sure. They’re going to step in. There’s no question about that. And it was all to prop up the Hong Kong markets, really. They don’t really care about Shanghai, the mainland or whatnot. But this was specifically to prop up.
[00:03:30.310] – Tony Nash
The, you know, we’ve seen all these over the past probably six months. We’ve seen all these year on year comparisons. X is up triple digits in China for trade or double digits or whatever, year on year. And everyone knows the year before things were closed and these year on year things in China haven’t really matter all that much because they were closed for a year and a half or whatever. So I think what I’m seeing in things like global trade, the trade numbers actually don’t look bad, but things in China, we’re seeing deflation, we’re seeing really a lot of bad news. Politically, things are kind of sketchy. They’ve had two of their central committee members just kind of disappear over the last six months. So can money injected. I’m saying that diplomatically, Vince, can money being injected into markets solve that uncertainty? Or is this just kind of a first step? Like, have they just started and there’s a long term plan? Because we’ve been hearing about chinese stimulus for three years now and this is really the first. Aside from some kind of stupid rail investment or whatever, this is really the first tranche of cash that we’ve seen.
[00:04:43.210] – Albert Marko
Well, I mean, politically, G is taking advantage of the situation right now, getting rid of his opposition party members that are causing him issues or potentially going to cause him issues. I mean, that’s what anyone really in leadership would do to take advantage in this type of scenario. Yellen has her foot on their throats at the moment and she’s been hitting the sell button on China and keeping the dollar elevated. And rates being up close to 6% is almost the abyss for the chinese market. So they’re definitely playing the defensive. They’re trying to prop up the CNY, they’re trying to prop up the economy. Is it enough? No, absolutely it’s not enough. They’re absolutely going to have to keep going on for the next four to five years. This is not going to be a one year pop and it’s going to fix everything. This is going to be five years down the road of them doing multiple, staggered steps of stimulus to get the economy back in order.
[00:05:44.320] – Tony Nash
Yeah. I mean, if we want to make an analogy to the US, imagine if the secretary of state just literally disappeared five months ago. And imagine if the defense secretary just literally disappeared, right? And all of a sudden there’s some new junior person in their place. Right? and so the political uncertainty in China is huge. We saw massive shifts in chinese money into japanese and us etfs over the past two weeks. Right, and so the chinese investment itself is not showing support for the chinese markets. I was in China in June of 2015 when markets fell apart. And at that point, chinese mainlanders were encouraged by the government to put their money back in markets. They did it based on faith in the CCP. I don’t see that happening this time.
[00:06:35.390] – Albert Marko
No. And the outflows from China have propped up the bond market and the US equities. I mean, it’s been just absolutely staggering of how much money has left Asia and even Europe and flowed into the United States. And this was all calculated by Janet Yellen. I mean, she knows what she’s doing. She’s been the Fed chair. She’s got her fingers on all the buttons at the treasury. They know that if China starts taking off inflation, it’s going to be another problem right now. And I’m sure our guests will talk about silver and commodities, because that’s a big key part of it. If China is firing on all cylinders, commodities are going to skyrocket again. Lithium. Copper.
[00:07:14.330] – Blake Morrow
Albert, I want to jump in here just because talking about commodities for the markets that I follow, especially like the australian dollar. Copper. Unresponsive to all the actions for us traders in the currency space and the commodity space, we look at it as like a shotgun approach. Yeah, maybe this might have been more of a bigger slug, I guess, that came out of this shotgun shot. But still, you can see the muted response that we’re getting in commodities and currencies. And I think you guys draw a really strong correlation, which should definitely be noted, between the Nike, the market’s definitely shunning China in favor of the Warren Buffett, Berkshire Hathaway trade of Japan, even Germany, and a lot of european equities. And us equities, they’re all beneficiaries. But then again, if we do see China turn the corner a little bit, which I think it’s too early to tell, maybe that takes a little bit of the air out of some of the other markets around the globe.
[00:08:26.610] – Tony Nash
Can you talk to us a little bit about CNY dynamics, it really hasn’t moved much.
[00:08:31.360] – Blake Morrow
No, it hasn’t. I don’t focus on the CNY as much as my european counterparts do because my colleagues that traded. Because as a us based trader, it’s prohibited for a lot of brokers to be involved. But it’s a lever that China uses and one of the other things that if they want to really kind of kickstart their economy a little bit, they’ll weaken the CNH a little bit more. But we are up at dire levels because as Albert pointed out, this is more of a confidence, I think, topic. So if you start to see the CNH really come under pressure because the PBOC pulls that lever, next thing you know, yeah, it might help the chinese economy a little bit, but to what extent does it hurt sentiment, equities and sentiment in general? I mean, there has not been a time, I can’t really recall a time that I’ve seen a singular market so just shunned upon right now. Like you are seeing in China, right?
[00:09:44.590] – Tony Nash
Yep.
[00:09:46.250] – Vince Lanci
Can I go ahead?
[00:09:47.560] – Blake Morrow
Yeah.
[00:09:48.990] – Vince Lanci
The two statements, blake’s comment about the muted effect on commodities as well as the emerging market. Currencies, commodity currencies, and the comment about them being too safe. I guess what I’m trying to say is in the past when they changed the reserve requirements, I had seen commodity currencies and commodities do better than chinese stocks. It’s one data point, but this time chinese stocks, as low as they are, responded very appropriately. I’m wondering if the whole lack of buying of commodities compared to stocks this time is not a comment on China saying what China’s leadership saying. We need people to buy stocks and stop buying pet rocks like gold. So anyway, I think the lack of confidence in China’s economy has been one of the reasons they’ve been buying gold at the retail level anyway, or at the individual level, and they need to change that or they’re going to have a deflationary crisis. And I just think both those things are.
[00:11:04.790] – Tony Nash
Those are all great points. I think the Hong Shang was up between four and 5% this week. It’s still down like 20% over the last six months. Shanghai composite was up two point something this week. So we’ve seen a turnaround, but we haven’t seen a dramatic turnaround. Right. We haven’t seen a 15%. It’s not as if they’ve kind of backed up the truck, put in trillions of dollars. I think they’re being very careful fiscally because they do have to balance a huge amount of government debt that China has and, well, they can, but they’re very careful not to print right away. But my worry is, and if we look at the, you know, they’ve made arrr move, is that beginning, middle, end? Where do you guys think we are on that?
[00:11:59.190] – Albert Marko
Well, I mean, going back to what Blake said, we are only in stage one of a long game here of what China has to do to get back on track. It’s going to be years on down the road until anything meaningful really happens with the chinese economy. Of course, we’re going to get stock market pops up and down because that’s just the nature of the stock market globally at the moment. I mean, normally you would see, like Vincent said, commodities would just rip on any kind of chinese news, but that’s just not the case anymore. So, I mean, it’s going to be a nuanced approach from this point on.
[00:12:32.210] – Vince Lanci
Maybe if we stop buying chinese made laundry furniture, I mean patio furniture, they’ll stop buying commodities to make them. Maybe that’s what’s going on, right?
[00:12:42.210] – Tony Nash
Could be. I think it’s really interesting this week we’ve seen so many Asia equity analysts say, hey, China is a huge value right now. You need to get in and nobody’s buying it. I don’t know if anybody’s buying it, but I don’t see.
[00:12:54.580] – Albert Marko
No, there are, Tony, there are big funds buying it clandestinely at the moment they’re starting to get in because honestly, if you look at a systemic collapse of China, they’re not going to let that happen. The US nor China will allow that to happen. So at some point it’s a decent play, long term to get into China. Long term. Long term. I’m not saying next six months, but next two, three, four years. Absolutely. You would be wise to put a position on.
[00:13:23.070] – Tony Nash
Yeah, my biggest worry here has been that $278,000,000,000. The market looks at it and shrugs. And that’s kind of what we’ve seen. Right. And the problem with filling holes in markets is that if you don’t put enough in, they just get bigger and bigger and bigger and hungrier and hungrier. So is there a danger of that, of we open next week and markets just kind of yawn at the $278,000,000,000 and all of a sudden China has to scurry to put out a bigger number sooner?
[00:13:52.410] – Albert Marko
Well, I think we have to wait until the actual mechanism of what China is going to use to do that. I know they’re going to be using offshore funds and accounts and lever it up. So we really have to wait until the data comes out because I assure you it’s not going to be just 278,000,000,000. It’ll probably in the trillion, over the trillion range.
[00:14:10.930] – Blake Morrow
I also read, and correct me if I’m wrong, if you heard something different, that there’s a lot of calls being made to institutional, chinese institutional clients that stop shorting the market. Only be on the long side kind of throwing those warnings out, which is I find really interesting. But the sentiment is interesting. I’ve always found it my quarter century of trading the markets, a very interesting dynamic in the markets because sentiment, you could almost use the analogy, it’s like inflation. It’s that genie that you can’t get back in the bottle sentiment. When it’s sour, it’s sour. It takes a lot to turn. And you could look at the polar opposite of the US economy right now and the optimism that people feel and regulators understand what that is. And I think Xi has a very good understanding of that sentiment and why he’s trying to turn it.
[00:15:10.050] – Tony Nash
Great, okay.
[00:15:11.250] – Tony Nash
Hey, I’d like to make sure you know that you can access our AI driven market forecasting tool called CI markets for free, no strings attached, and it does not require any credit card information. Go to completeintel.com slash markets to subscribe. CI Markets is the perfect addition to your analysis toolbox. This free account includes Nikki stocks, major currency pairs and global economics. Of course, we offer much more in our paid account, but this lets you experience CIA markets before making a financial commitment. CIA Markets uses the power of AI to help you make better trading investment decisions. It’s absolutely free. Again. Go to completeintel.com slash markets to subscribe to. CI Markets free. Let’s move on to precious metals. Vince, you put out a piece earlier this week on silver. Okay. On Tuesday you’re talking about why you bought silver this week. I know it’s retreated as we’ve headed into the end of the week, but I’ve got a gold silver chart on screen. A lot of this has to do with China, which is really interesting to me. Can you talk us through why you got in, what levels you looked for and what are you looking for going forward?
[00:16:19.050] – Vince Lanci
Sure, I’m happy to do that. First of all, it’s a short term trade. It’s not a macro trade. It was more like a win for one day, win for a week and then just keep running with it. If it continues to win. It stopped winning yesterday as far as I was concerned. But we’ll get to that. The thing with silver and gold is they’ve completely diverged in the public eye. Looking at the china demand for gold, looking at the BriCs demand for gold, looking at using gold as an alternative to the treasury or maybe a little bit of a hedge for the treasury as a reserve asset, that increase, well that’s kind of left silver in the dust. That’s the first leg, right? Silver is not precious enough and it takes a lot more space to store it if you are having to deal with something like that. And so that’s one leg that gets kicked out on silver and this is all going to lead to why I bought it actually. And the second leg that gets kicked out on silver is very flow oriented. The last 1015 years of behavior in precious metals have been silver isn’t good for anything.
[00:17:32.590] – Vince Lanci
As a silver bug I have to see what the enemy says. But the reality of it is if you’re pitching an investment or a trade, if you’re saying risk off, you buy gold. If you’re looking at metals, right? If you say risk on, you buy copper because it’s an economic metal, right. And this is manifested out of China as well. For years, every time they throw a little stimulus out there, it’s like buy steel, buy iron by copper, and then eventually you buy silver. So that’s the pecking order in precious metals on the economic side.
[00:18:07.690] – Tony Nash
Never heard it put that way. That’s great, thank you for that. I’ve never heard it put that way.
[00:18:12.350] – Vince Lanci
Cool, thank you. So that’s how I used to trade it because I would. Whatever, oh, copper’s up. I’ll buy silver if it’s during Asia. If copper was up during the US, I would sell silver. It’s like a time trade, but bringing it back to why I actually bought silver, the commodity trading advisors, the CTAs, they tend to move in groups like a herd, and they frequently lose money on short term moves. And when they make money, it’s on big term move, long term moves. I would call them momentum. Most of them are momentum traders and they sell weakness and they buy strength. And right about the time people started talking about recession, your commodity trading advisors in the US started putting their clients into shorting oil, shorting silver, shorting copper and shorting aluminum. Those that did trade aluminum, and they do that. It’s kind of interesting because it’s so facile, but it works. Instead of selling their stocks, they hedge the economic exposure by selling commodities. And oil trended lower. They made money, silver trended lower. Despite gold’s strength coming out of China, silver was constantly beat upon and copper trended lower despite calls for a super cycle and what have you, which will come eventually, just not when we’re looking at it.
[00:19:41.310] – Vince Lanci
So when the markets get thin or when there’s not a lot going on, now you have a big cohort of shorts and silver and oil. I’ll put silver, oil and gold in this triangle here, right? So everyone at the CTA level, whether it be small managed money or medium sized managed money, is looking at gold having been shorted twice and gotten killed in a little bit of a shortcoming rally when the Ukraine war started and then getting killed when the Hamas Israel war started. They’re staying away from it, or they’re long. That’s their hedge. Right. Meanwhile, they’re, you know, silver, I think I’ll short that. So they’ll short that as well, economically. And when there’s nothing going on and people start talking about the Fed easing, where the Fed cuts, stocks go up and silver stops going down, oil stops going down, copper stops going down, and then one day you just see all those commodities have like a little bit of a v shaped bottom. Oil, silver. Well, oil wasn’t v shaped. Oil, silver, and the grains. Gold is nowhere, right? And they start to move up. And at that moment, I know from historical perspective and from analysis that I look at that the CTAs, which are the first to move, right, they’re the first to move.
[00:21:06.820] – Vince Lanci
They’re buying silver, they’re buying oil, they’re buying copper, they’re buying grains, and they’re probably selling gold, posing the whole thing out. And for three days, that worked out very nicely. And then the market paused today. So that’s why I bought it. Right? That’s why I bought. I thought, okay, maybe the Fed’s going to ease. I’m long stocks, I’ll buy silver. I kind of the opposite of what they do. And it worked for a couple of days, and then it just kind of flatlined on the flows that I saw. And I said, okay, ctas have covered, but they don’t have any money to put into it. And we talk about markets that climb walls of worry. Gold is up, stocks up over the last three years, and there’s just no, so much money on the sidelines in stocks, and yet stocks are up. And when you look at gold, it’s like, well, the macro investor speculators, they don’t even care about gold anymore, and yet gold is up. There’s such a lack of participation in silver on the american side, except for all the lunatics that think silver is going to go to the moon tomorrow, which they’re friends of mine, so I’m going to defend them, and I’m probably one of them, but I try and keep a lid on it for times like this. Nobody buys silver on the follow through. So I got out of my lungs today and I actually shorted a little bit of gold because I think China is going to get filled on their buying underneath.
[00:22:34.410] – Vince Lanci
So that’s it. I think in the short term it could continue to go higher, but it won’t be because of what I saw. I wouldn’t know what drives it higher in the longer term, I think if stocks drop, silver gets hit more. If stocks drop, gold gets hit. If stocks drop, oil should get hit. But oil is its own animal right now. It seems it’s got its own thing going on. So longer term, I’m very constructive on silver, but that was a trade that just came and went.
[00:23:04.650] – Tony Nash
We’re just looking for the catalyst. Right, I’m sorry, catalyst. We’re looking for the long term catalyst. So, Vince, you sent me a Goldman chart. Can you walk us through this? You’ve already covered some of this, but can you walk us through this Goldman chart? And then can you walk us through what some of the catalysts might be? And I’m also curious, what happens if we don’t see a rate cut in March?
[00:23:27.970] – Vince Lanci
Yeah. Okay. The chart that you’re putting up there, I think it’s basically a graphic depiction of what I described, and it confirmed what I had thought. The chart describes several things, but it’s basically a year of performance. And the dark blue part of the body, forget the wicks above and wicks below. I forget what they’re called. But the dark blue body represents how long, if you go up on the chart and how short investors get in these assets. And if you look on the left, you see oil there. And what we’re focused on for this conversation is this green star. The green star shows you that, generally speaking, of all the money that investors, that CTA investors, these are small and medium sized at best. This is a sentiment indicator. Actually, when you think about what Blake was talking about, this is a sentiment indicator. The oil people had been extremely bearish and short out the wazoo. Conversely, if you go to the right side of the chart, you’ll see that they’re also long gold, and that’s because of the war. What have you, SVB, bank or whatever the reason. And then you look at silver and you say, look at silver.
[00:24:47.030] – Vince Lanci
Silver on the far right is they’re extremely short based on how that star is positioned. And silver is behaving in the minds of the normal person. Silver is like copper. It’s behaving like copper.
[00:25:01.020] – Tony Nash
When they diverge like that, how long do they usually diverge like that?
[00:25:05.490] – Vince Lanci
Gold and, oh, they can diverge like that for months. And that’ll happen when the market is dominated by fed behavior, right? So if we’re just talking about domestic politics and rates and fed stuff and everything is fine in neo keynesian world, well then you’re going to see buy gold, sell silver, buy gold, sell silver, and they won’t even buy that much gold. They’ll just happily sell silver because every time they’re buying stock, they’re raising capital using something else. But when there’s a global geopolitical problem, doesn’t have to be a war. You had like Brexit was an example of one, Brexit was another one more recently. The guilt when they had the problem there with that mini budget. I forget what the actual. But anyway, what ended up happening there was, what ends up happening is everyone’s long gold and short silver and they’re just happy. And then one day they wake up and silver is $0.50 higher and they say, oh, maybe we should cover that. And so then they cover it. And so basically when the market is focused on american economics, that will stay stretched for a long period of time. But when an event happens, like the Ukraine war, for example, they all bought gold and they all sold silver at that moment.
[00:26:28.830] – Vince Lanci
And then a month later, gold kept going up, so they ended up buying silver. So those are your interesting domestic versus geopolitical, that’s what changes the don’t.
[00:26:38.450] – Blake Morrow
I don’t have a mean, aside from being, I come from the camp, I don’t like shorting precious metals. I like to own precious metals like physical, right? I try not to trade them on the short side. If I’m going to trade them, I like to be on the long side. But why? Just because I have my technical views and I actually think silver is going lower. Just throwing that out there.
[00:27:03.900] – Blake Morrow
I know I might be both, but why did silver outpace gold so excessively during the COVID lockdowns?
[00:27:17.390] – Vince Lanci
Yeah, well, during the COVID lockdowns, that was a special situation. The situation.
[00:27:26.380] – Blake Morrow
You can say that again.
[00:27:27.860] – Vince Lanci
No, but actually it’s directly Covid related. I mean, you’re basically right. This is kind of bizarre. And as a physical person, I think you’d appreciate this. There was an artificial problem, and it manifested more in silver than in gold. Then here’s what happened. It’s actually nice little story. The late George Giro and I were talking about this during COVID A lot of the flows in the US are, if you want to buy metal on the Comex, let’s say you’re going to take delivery on the Comex, right? If you’re going to take delivery on the Comex, what really happens is you buy it on the Comex, the bullion bank does an ARB, an EFPR, right? And they buy it on the Comex, and they end up taking delivery in London. They send it to a refiner to change it to Comex specs, and boom, it comes over here. If you’re the US mint, that’s what you’re doing. You have to buy domestic, so you buy Comex, and the bullion banks are just like they’re doing their arb, their little EFP, and then the London bullion market gives them the metal, they refine it there, and then it comes back here.
[00:28:26.870] – Vince Lanci
I don’t know, it’s blanks or whatever, even Spider man coins, who the heck knows, right? But that’s what happens during COVID and it happened for both sides, meaning gold as well as silver during COVID And I actually watched this like I actually had it on a map of it. Most of the refiners, most of the, there’s other words, smelters or what have you, they’re in northern Italy, in Switzerland. And so during that timeframe, in the Lombardi region of Italy, Lombardi was hit ridiculously hard during COVID They shut them down. You know what it was? It was regulatory arbitrage. You can see this, right? So you had these specs, I’ll use the gold one because it’s easier to understand. The gold bar in London is 300oz. The gold bar in the US is 100oz. They were not fungible, you couldn’t take. So during that time, you take the 300 ounce bar, you take it over to northern Italy, you have it broken into 3100 ounce bars, and you send it over. They were all shut. So, for a very short time frame, and you’re a trader, so you’re going to appreciate this for a very short time frame.
[00:29:39.170] – Vince Lanci
In the US, we had a venue short squeeze, so everyone wanted Comex gold and Comex silver, preferably silver. Why would they not take London? Because of the regulatory differences. And for a time frame, you could not take delivery of London silver and London gold in the US. And they fixed that by creating a swap contract. But for a time frame, you had deep backwardation in the Comex front, months to one year out, 5% spread. And then you had spot in London trading below because there was no one working. So that’s what happened then.
[00:30:17.340] – Blake Morrow
Interesting. Yeah.
[00:30:18.490] – Vince Lanci
And of course the whole kicker about the economics, the money going into the hot, but that’s what happened. And in fact, if you look back at history, if you look back at history, it was just fascinating because I was like, oh, look at that backwardation on the Comex. Silver and gold must be in the moon in London. Where is it? Plenty of silver here. Why don’t you send it over there? Can’t do that. You guys won’t take it anyway, so that’s what happened then.
[00:30:47.150] – Blake Morrow
Oh, thanks. That’s interesting to know. I know one of my partners at Forex analytics was all over silver, around $15, just buying the living Jesus out of it. And I was like, anyway, okay, great to know.
[00:31:00.930] – Vince Lanci
Thank you. That was the kicker. He was right for a different reason. I’m sure that was the kicker. Look, the silver market is a broken market. I’m going to say this about paper, and I’m not even going to get into the paranoid conspiracy stuff. What I mean is the contract is so big that you can’t buy a fifth of a contract. There’s no one who trades the micro. And so you accumulate, and then you’ve got a problem. It’s made for producers. Speculators are hung out to drive very frequently.
[00:31:32.120] – Blake Morrow
There. Got it.
[00:31:36.270] – Tony Nash
That’s great. Okay. A lot of detail there. Watch this.
[00:31:41.310] – Vince Lanci
To digest my first time, I had to. I want to be asked back. And so you can say, vince, you’re really cool. Thanks for coming.
[00:31:49.750] – Tony Nash
Of course, of course. Speaking of being asked, doc Blake, I’m always impressed when someone as respectable as you comes back on our program. So thanks for making your performance. I really appreciate that.
[00:32:00.070] – Blake Morrow
Thanks for having me and I appreciate the comments. Thank you.
[00:32:02.890] – Tony Nash
You told me that you’re watching Fed and QRA next week, and I think we’re all watching Fed and QRA next week. We saw Christine Lagarde speak this week at the ECB. They’re holding rates. I think there’s an expected cut in April or something.
[00:32:20.340] – Blake Morrow
Right.
[00:32:20.660] – Tony Nash
So Europe is a mess. I’m not really sure I really trust what they say, but I think they’re trying to do all they can to manage their market. So Europe is Q two in terms of a cut. Are you looking for similar messaging from the Fed next week?
[00:32:39.810] – Blake Morrow
I’m not actually first of all, I have to take a step back and say, what does the Fed have to gain by doing that?
[00:32:50.500] – Tony Nash
The Fed.
[00:32:51.290] – Blake Morrow
And you take, like Chairman Powell, he’s really good at telegraphing and giving the market what it wants. That’s, that’s, that’s a whole nother animal. But I’ve talked a lot with a lot of different macro analysts about financial conditions, and financial conditions have eased quite a bit for a lot of the United States and a lot of businesses, a lot of individuals. And you could actually even see the pending home sales today was just bonkers. Right. So the problem that you’re going to have, if you’re the Fed, is that you have to make sure you cap those expectations a little bit or the function of getting inflation sustainably below their 2% target is going to be a little bit more difficult. So I think if I was the Fed chair, I’d have to push back a little bit on expectations just to keep the market from getting too frothy. A lot of people might say that stocks are frothy right now. I mean, we are at all time highs. And you can’t ignore the fact where we’re at right now. And there is a thing called trickle down effect. Yes, the top 10% or 5% of americans own the majority of the stock market.
[00:34:15.250] – Blake Morrow
But if I feel wealthier, I’m going to spend more at this restaurant and it’s going to trickle down. And there is something to that. And it does ease conditions a bit. So I think the Fed’s got to walk a fine line. I don’t think they’re going to give us a whole lot. I think the bigger deal is going to be the quarterly refinance announcement, quarterly requirement announcement, QRA, the acronyms. And it’s late in the week. For me, the QRA is going to be more of the kicker that happens, actually, the morning of the FOMC and the markets, they got a bit of a gift. I was talking to one of my, they got a bit of a gift this last quarterly announcement in November that on top of the Fed, on top of Waller, who became a little bit more dovish. Now, if you think about where we’re at right now, and I was talking to one of my colleagues, a gentleman by the name of k man, he made a great point that Janet Yellen was know on the wires yesterday, she sounded pretty upbeat. She’s the lever puller, if you, you know, she could very easily tweak the QRA a bit because she’s feeling a little bit better.
[00:35:29.660] – Blake Morrow
About where we’re at. I don’t know if that’s necessarily going to be the case, but that’s going to be something that I think is going to be closely watched from that allocation of notes and going back over to bonds. And I don’t know if there’s going to be a change there, but I think the whole market is very queued up into it. And with the Fed, there’s a lot of risk. If you own stocks at these levels, you have to be nervous about next week. And I think if you own risk in general. One other thing I want to point out is the dollar is holding up exceptionally well in this current environment. So with that being said, I think currency traders, myself included, and I happen to have both short and long dollar exposure at the moment, but more long dollar exposure at the moment. On balance, I think if you’re short dollars, you’re going into next week a little nervous. And I think that the Fed and the QRA is going to have a lot to do with what happens not only in the currency market, but what happens in yields and what happens ultimately in equities as well.
[00:36:39.870] – Tony Nash
Yeah, I want to dig into that a little bit. First, let’s step back to the Fed for a it seems to me that you think that the Fed rates are going to be pushed or the rate cuts are going to be pushed back further than people. Vince said. If you don’t have a March rate cut, it could impact markets. Seems like you’re thinking the Fed’s going to cut after the thing, but tell me where I’m wrong on that. And second, you’re not QT. Are they going to ease off QT? Are we going to see it accelerate, stay at the same rate? We’re not going to hear about it anymore. What’s going to happen there?
[00:37:15.290] – Blake Morrow
I don’t see why they would change the rate of QT right now. Why? Because the market’s not broken at the moment, so why change the pace of that? But as far as rates go, as far as expectations go, I think what we’re going to see next week is we’re going to see a little bit of a shift. The market has been pretty, it’s been the talk of the markets for the last couple of months, and about market expectations, know what the Fed thinks? I think they have to bring those expectations down a little bit. But what I have to also add is equity markets and risk in general, you can call it, has been very nonchalant about adjusting their expectations regardless of what the Fed says. Looking at the US economy. And a lot of the talk about soft landing. I mean, how is the Fed supposed to allow expectations to continue to be inflated like this for a great cut in this current environment without making financial conditions even looser and making their job a little bit more difficult?
[00:38:32.610] – Tony Nash
PCe came in above expectations, housing came in above expectations, markets are rallying. Why do you need a cut right now? I just don’t understand why we keep hearing about cuts if all of this stuff is happening.
[00:38:45.880] – Blake Morrow
Well, because people think that the trajectory is going in the direction where inflation will eventually be below 2%. I look at, they’ve taken their revolver, I use a gun analogy, they’ve taken their revolver and they expended all their bullets, you know, years ago, bringing rates down to zero. They’ve currently loaded their whole chamber up now, and they could expend a couple of bullets, maybe prematurely, preventatively, if you will, because they’re looking into what’s going to happen, what potentially could happen in 2024. 2025. That would be the argument. I don’t know if I necessarily buy that argument. That’s why I think the Fed’s going to be fairly reserved in doing know, I like to use analogies. Quite a. You’re when know, running a marathon, and I’ve used this over the last six, eight months, you’re running a marathon and you’re trying to get to the very end of the marathon. Your last mile or two is going to be the most difficult, and that’s the fight against inflation. Naturally, it was coming down. Naturally, as we approach that 2% target, it’s going to be a little bit more difficult for the Fed. They’re not going to help themselves any further by not putting a cap on interest rate cut expectations, in my opinion.
[00:40:08.350] – Tony Nash
Right. Okay. And speaking of rates, as we look at the QRA, I’ve got marketable treasury debt on the screen. What do you expect? I mean, I expect going into an election year, Yellen is just going to expand. Her comments on Thursday seem to indicate we’re going to have a lot of fiscal this year to aid the administration. How aggressive do you think the forward look is with that QRA?
[00:40:40.030] – Blake Morrow
Well, first of all, I don’t want to just give you answers, just to give you answers. I’m not one that’s going to follow all the debt issuance, but I will tell you that as far as I know, and everybody else will tell you probably in the comments down below, there’s a lot of issuance coming forward. There is now the QRA is going to be what that balance looks like.
[00:41:03.480] – Vince Lanci
I’m sorry, can I ask you a question, just to clarify so we don’t have to go back, when you say coming forward, do you mean it’s coming up or coming up forward on the yield curve? Okay.
[00:41:12.820] – Blake Morrow
No, like all the issuance that’s coming out.
[00:41:15.290] – Vince Lanci
I mean, how much new issuance, right?
[00:41:17.210] – Blake Morrow
Yeah, new issuance is coming out. So as a result, we have to keep in mind that it is coming. And you’re right, it’s going to continue to expand. What the ratio is, is what the market is going to be focused more on. So like I said, I’m not a bond expert, but I do understand the fact that the Fed continues to auction off long term maturities and the takeup has been good. Bond auctions have been pretty strong despite a lot of people thinking they won’t be.
[00:41:54.420] – Vince Lanci
I have a question about the Fed. Can we circle back to that 1 second?
[00:41:57.420] – Tony Nash
Sure. Absolutely, Tony.
[00:41:58.300] – Vince Lanci
Or should I just wait a little bit, go for know, like, I feel like the market, this is a question I don’t have an answer to. So it’s not rhetorical in any way. When he seemed to come out as very dovish that first, know, a couple months ago when stock started to take market, the market interpreted that the initial comment was, everyone’s got a narrative in the story was, he doesn’t want to be seen as impeding Biden. It’s an election year. I personally don’t think they’re easing in. So that’s, that’s, I thought QT would maybe taper off, but that’s my bias. No, easing QT might taper off. That’s what I thought. But when he did that, and the markets really rallied and they started coming out, fed speakers started coming out, talking a little bit tougher, slowed it down a little bit, I couldn’t help but wonder. Your comment was essentially, he’s walking a line. The last mile or so are hard, and I guess he’s trying to let the animal spirits out without letting them rush out too hard. But how would this be different if we didn’t have an election year, if it would be different at all?
[00:43:24.830] – Vince Lanci
I feel like. Is he doing anything to make sure he doesn’t appear biased in any way, shape or form?
[00:43:34.770] – Blake Morrow
Well, first of, is JPAL political? I’m going to tell you this much. If I was JPAL, I wouldn’t want to face who I think I’m going to be facing coming up in about nine months. So he’s dealt with President Trump before. He’s probably going to be dealing with him again. And I have to imagine that I would assume and again, assumption that the Biden administration is not as forceful with JPAL as a Trump administration would. He’s, I think he’s actually genuinely trying to do what’s best for the people.
[00:44:16.690] – Vince Lanci
I don’t mean that I wasn’t being conspiratorial at all. I think so as well. I’m just trying to figure out if there were an election, would he not have talked nice before he got tough? I mean, look, I’m kind of threading needles here. I’m just kind of feeling like the market was so adamant for mtes that if he didn’t say something like that, it would have been like he was hurting Biden. And we don’t think he wants to hurt Biden, of course. But I’m just looking at it like it just seemed like such a departure for him after having gotten through SVB, SNB, and all these other problems, for him to just say, you know what, we might ease rates when really inflation isn’t under 2% yet. The six month outlook trajectory is definitely under 2%. But why would he do that? That’s what I understand.
[00:45:02.440] – Blake Morrow
Yeah. And I don’t know when you’re talking about inflation, first of all, why he came out the way as dovish as he was. It was a bit of a head scratcher for us, trading the markets.
[00:45:17.090] – Vince Lanci
A rare tactical error, I thought.
[00:45:19.080] – Blake Morrow
Yeah. And the other thing is, I hear all these debates, especially in the mainstream financial media, if you listen to Bloomberg or CNBC and they talk about people on the street, that they don’t feel like inflation is under control either. That’s because the average person doesn’t understand inflation. People don’t understand. They, they think prices go up, they come back down, but people don’t understand that prices go up and they stay up. Inflation is the rate that prices are going higher versus everybody’s like, oh, my cost of my bread has gone up to whatever it is, $4 a loaf versus $3 a loaf. So it’s eventually going to come back down to three. And that would be inflation is coming down, but that’s actually deflation. And that’s something that’s very rarely seen. So the problem that we are dealing with at this moment with inflation is people have these unrealistic expectations as Americans, just in general, because we’ve never dealt with inflation. For the majority of Americans, you can talk to anybody who’s 65 and older and they understand what real inflation is. But for us that are under the age of 60, which I’m in my 50s, we don’t know what it’s like.
[00:46:38.450] – Blake Morrow
And most Americans don’t know what it’s like.
[00:46:42.290] – Tony Nash
I’m going to push back a little bit on that. I mean, we’ve had average 24% inflation since pre Covid. So I’m not saying you’re wrong. I really do think people do understand things hurting their pocketbook. Right.
[00:47:01.370] – Blake Morrow
No, I agree.
[00:47:02.220] – Tony Nash
Germany, 1920, of course.
[00:47:04.630] – Blake Morrow
But the disconnect is when prices don’t come down. Right. That’s going to be the disconnect. And I think that’s what’s going to eventually bite the US. Consumer sentiment in general is going to be when prices don’t come down over a long period of time. And then you have the Fed that can’t reach that 2% inflation goal and then rates aren’t coming down and then consumer sentiment starts to turn sour. That’s where it all feeds together. And I think that hits somewhere in this 2024 year.
[00:47:38.660] – Tony Nash
Actually, no, I’ve never understood about the inflation discussion is gasoline prices go up and they go down. They go up and they go down. We never really hear about deflation in gasoline prices.
[00:47:49.130] – Blake Morrow
No.
[00:47:49.700] – Tony Nash
And so I hear these deflationary arguments, and what that means to me ultimately is that corporate profits collapse. Right. And as corporate profits collapse, wages are pulled back and other things. Right. So there is that follow on effect. But we have something that all of us buy every week, unless you’re on public transport in some big city or whatever, and there’s deflation in gasoline all the time. And it’s never really, I mean, this stupid discussion about gas prices falling is like a tax cut, which is ridiculous. But we never hear people saying, oh, there’s deflation in gasoline.
[00:48:28.390] – Blake Morrow
No, they don’t, because it’s the ultimate variable that’s moving around so quickly for most people, not even Americans. This is like globally, consumers, no matter where their benchmark is for what gas prices are, it’s the one that makes you feel better. Right. If I was just spending $100 to fill my gas tank and now I’m spending 65, that’s a huge savings to me.
[00:48:54.990] – Tony Nash
It’s a tax cut.
[00:48:56.280] – Blake Morrow
Yeah, it’s a tax cut. There we go. Right. And that’s why for a lot of people to bet against prices coming down during an election year, it’s a tough bet. It’s a tough trade. Right. Because if you’re a politician and you’re the Biden administration. Yeah. You want prices to come down because you want people to say, hey, prices have come down. I feel better. I’ll vote for you again.
[00:49:24.020] – Tony Nash
Your July 4 barbecue is $0.14 cheaper.
[00:49:27.290] – Blake Morrow
Right. Exactly. It’s crazy. But what I think is going to be a big shock for not just Americans, I think the global consumer is that prices for most things, they’ve risen and then they’ll stay higher. And if you look back in history and you go back to way back in the, could buy this for five cents and now it’s eighty cents. Well, there’s a reason for that.
[00:49:57.070] – Tony Nash
A lot more money now, right?
[00:49:59.230] – Vince Lanci
You’re old. That’s the reason.
[00:50:01.710] – Blake Morrow
We’re old.
[00:50:03.070] – Tony Nash
Okay, guys. So we have a lot to look forward. I think what you’re saying with Fed and treasury, and I don’t want to put words in your mouth, but we’re kind of at a point of uncertainty. Right. There are a lot of expectations in the market, but it doesn’t necessarily look like there’s the catalyst to change things one way or the other. Is that in general a takeaway from.
[00:50:24.330] – Blake Morrow
What you’re just, I’ll just add this, and I’m sure Vince wants to chime in here, this is a very pivotal week for the market. And I think people underestimate the gravity of how big this next week is for the markets in general. Whether you’re talking about risk stocks, china, monetary policy expectations, the dollar, precious metals, as Vince has been alluding to, this is going to be a very pivotal week for the markets. And this is not one to sleep on. This is not one where you’re going to go rearrange your sock drawer. You want to be in front of your computers managing what you trade.
[00:51:06.680] – Tony Nash
That’s right. Exactly. Vince, any closing thoughts on the week coming up?
[00:51:10.810] – Vince Lanci
Well, I don’t have anything to add to that. That’s pretty much it. You have a lot of events converging in March, and I think Fed policy will, Fed’s in a reactive situation, I believe right now. So they may want to or not want to ease. They may want to or not want to taper QT, but they need to wait. The data has been kind of choppy. This week was strong, but the data in general has been up and down. So maybe they’re just going to stay the course until they get a distinct trend in the economy weakening with the inflation weaker.
[00:51:48.910] – Tony Nash
Yeah, and I think staying the course was going to disappoint a lot of.
[00:51:53.330] – Blake Morrow
To, I forgot to mention this and just bringing it up. One thing that we have to also keep in mind, the FOMC is an open market committee. It’s a committee where he’s looking for a know decision one way or the, you know, going back to Vince, you asked about the Fed and why the Fed chair was so dovish. A lot of that thought back then and I’m just thinking about it now, but I wanted to throw this in there is because he wanted to appease a lot of the doves that were in the FOMC. And I think he’s done that and I think the market has responded to it. Obviously, in retrospect now I think he’s going to have to rein that in a little bit and be a little bit more hard stance and maybe a little bit more hawkish.
[00:52:47.410] – Vince Lanci
I didn’t think of it that way. So it helps to think of Powell as representing the committee. Yes, he may disagree with the committee, but he’s got to represent the committee.
[00:52:55.570] – Blake Morrow
Yes.
[00:52:56.360] – Vince Lanci
Behind closed doors he’s probably saying, told you.
[00:52:59.110] – Blake Morrow
Are you freaking? You know, he’s probably doing a lot of that. And I’m sure. And remember, when we get the FOMC meeting minutes, they do give us what we want to hear or what they think the market wants to hear, not necessarily what you.
[00:53:14.220] – Tony Nash
Highly edited. Heavily edited.
[00:53:16.250] – Blake Morrow
Yeah.
[00:53:17.020] – Tony Nash
Guys, thank you so much. This has been really informative. I really appreciate your time, all your thoughts, and I just hope you have a great weekend and a great week ahead.
[00:53:25.040] – Blake Morrow
Thank you very much for having us.
[00:53:26.130] – Tony Nash
Thank you.
[00:53:26.720] – Blake Morrow
All right.
[00:53:27.810] – Vince Lanci
Thank you. Have a good weekend.
[00:53:29.430] – Tony Nash
Thank you.