The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.
The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.
He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.
Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.
Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.
BFM
I get the hint.
BFM
Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.
BFM
After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.
CI Futures has S&P500, Nikkei, Nasdaq, Hang Seng, and nearly a thousand other assets across equity indices, currencies, and commodities. Subscription starts at $99/mo with a monthly commitment. Learn more here.
BFM
Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?
Tony
Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.
BFM
Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?
Tony
Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.
BFM
And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?
Tony
Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.
BFM
Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?
Tony
It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.
BFM
Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?
Tony
Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?
BFM
Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?
Tony
I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.
BFM
Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.
BFM
I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.
BFM
And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.
BFM
Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?
BFM
Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.
BFM
Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.
BFM
The iPad at home, but they’re quite old.
BFM
Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 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.
I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate.
The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.
Brent Johnson of Santiago Capital is credited with coining the term the “Dollar Milkshake Theory.” It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a “grand master plan” or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global huge recession.
Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his “slightly edited” words;
“The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say.”
He later added “The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting”
When you think about the true motivators driving this “system,” it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we “need them” to steer things forward for the “greater good.”
While Johnson’s remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see;
In this episode, Ross Kennedy of Fortis Analysis, Ralph Schoellhammer of Webster Vienna Private University and Albert Marko joined Tony to discuss three main themes: supply chains in 2023, the existence of China in 10 years and Germany’s dependence on Russian gas.
Ross Kennedy led the discussion on supply chains in 2023, and he explained that although supply chain issues have appeared to normalize over the last 4 months, with trans-Pacific shipping rates falling to levels at the start of the Covid pandemic, there are still things to watch out for in the upcoming year.
Albert Marko led the discussion on the prediction that China will not exist in 10 years. This claim was made by Peter Zeihan, a geopolitical analyst, during his appearance on Joe Rogan’s podcast. He went on to say that some of Zeihan’s predictions sound impressive, but he and Ross Kennedy both have doubts about the validity of this claim.
Tony pointed out that similar predictions were made by George Friedman in his book “The Next 100 Years” (2009), where he said that China would split into 5 countries. However, both Albert and Ross argue that China’s economy, military, and political power are too strong for this to happen in the near future. They also highlighted the fact that China’s growth and development have been hindered by the pandemic, but the country has managed to recover quickly and is still a major player in the global economy.
Ralph Schoellhammer led the discussion on Germany’s ongoing dependence on Russian gas. He wrote about how the green push in Germany has led to a decrease in the country’s dependence on Russian gas, but there are other considerations. He explained that the Russia-Ukraine War had a major impact on Germany’s dependence on Russian gas and that when the war stops, it is likely that Germany will welcome Russian gas again. He also highlighted the fact that Germany’s dependence on Russian gas is not just a matter of energy security, but also a matter of economic and political considerations.
Key themes: 1. Supply Chains in 2023 2. Will China exist in 10 years? 3. Germany can’t quit Russian gas
This is the 49th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by two new guests. We’ve got Ross Kennedy. You may know Ross as Huntsman on Twitter. He’s with Fortis Analysis. And we’ve got Ralph Schoellhammer. Ralph is at Webster Vienna Private University. And we have the honor of having Albert Marko with us again today. So there’s a lot that’s happened really over the past couple of years around supply chains. And we’re going to kick off talking about supply chains in 2023, and Ross is going to lead us on that. But next we’re going to look at China. There have been some claims made about kind of existential claims made about China over the past couple of weeks, and Albert is going to walk us through those. And then finally, Ralph is going to help us talk about Russian or sorry, German energy and German dependence on Russian gas. So let’s get into it, guys. Thanks for joining us. Ross, you know, I’ve seen a lot on Twitter. You’re you’re talking quite a lot about supply chains. And in 20 and 21, you really opened a lot of our eyes to some of those issues.
So I’ve wanted to have you on the show for a long time. On the screen right now, I’ve got a chart of shipping rates, Asia to us, west coast seafood rates, and those obviously ballooned up in 21, came back down in 22. And we’re kind of now down to about where we were in Q, one of 20. So the last four months, things have really started to calm down in terms of the costs.
But I guess really what I want to get into with you is, are supply chain risks a thing of the past? You know, what should be we be looking for in 2023? I guess that’s let’s just start with that. Are they a thing of the past? And what should we be looking for in supply chains in 23?
Ross
Yeah, I think supply chains have changed in terms of the scope of risk. Certainly it shifted from one to the other. We had a short term risk that was very systemic as far as manufacturing in China being completely disrupted, the ability to ship out. And then we had the entire issue of people changing their buying habits basically by force as far as lockdowns from a lot of events, a lot of entertainment, a lot of things where their dollars are being spent on, not physical things that actually have to be chipped. And all of a sudden, everybody took that spending, they took the stimulus money, and they just began buying things that were feathering their nest or occupying their attention. And so you had the disruption not only of lockdowns, not only of that, but you had this very enormous shift in purchasing from experiences or non tangible things to physical things that have to be shipped. That’s why you saw the run up in stock for Amazon and numerous others, it was because people were doing that right. So we had this enormous crunch that was driven by that fundamentally. And now we’ve seen we have the bullet effect.
Ross
Inventories were dramatically over ordered and now we’ve got inflation happening. So inventories are full and demand is down, particularly on the transpacific trade to the West Coast, the US. China. What we have seen, though, is that there has been container volume shifted to the Gulf. It’s also shifted to the East Coast because we’ve had the risk really since July of last year of longshoreman strikes. And then you have the concurrent risk of rail strikes coming off the West Coast. So we have seen some volume that’s still in place shift. But depending on who you are as a company, we’ll determine if that has actually your supply chain problems have begin to unwind a little bit or if they have really only begun or if they’ve just changed as far as what they are. If you’re a retailer in the US, you really just started shipping over the East Coast if you’re concerned about West Coast risk and you still have to move inventory. But that’s assuming that now the lockdown, lockdown, lockdown, no lockdown, back to lockdown and now no lockdown again with people out sick right in front of the Chinese New Year, if that hasn’t dramatically impacted your business.
Ross
There are some sectors that have been heavily hit by that hard. The impact is less to China in some ways because they’re heavily subsidized in a lot of their industries. The impact is more so, I think, felt by the US. And I know Albert will talk about the China side of that factor. But what we’ve seen now is a dramatic disruption, really, to the way things are. Not in a foreseeable way, not in a way that a lot of people know how to forecast. In a very I would say very unexpected way where you’ve got this sort of well, not unexpected to this group, but unexpected through a lot of supply chain and planners and executives of. They went from huge amounts of demand to very little demand due to inflation here in the US. And then you also have the supply side disruption in Asia. So that’s sort of the twin monsters that a lot of North American companies and European companies are dealing with related to planning this.
Tony
It sounds to me like we have a couple of things in general that are helping to alleviate this. First is price, right? Things are more expensive and so that’s pushing down demand on a volume basis. But we also have China opening up and so that is alleviating supply chains on the supply side. So those two dynamics seem to be really helping us into 23. Have we also seen I know there’s been a lot of talk about this, but to what extent are we seeing rotation of manufacturing locations? Is that a major effect or are we in the early stages of that?
Ross
I think we’re in the very early stages of it. It takes multiple years if you’re going to uproot a semiconductor foundry, for example, which everybody’s made a big deal about, the chips act and all that. And I think Nancy Pelosi had a great run financially because of that for a while. But it takes three to four years, even five years, from soup to nuts, be able to get the process of moving something halfway around the world from one location to another. You have to make a lot of things before you install them and then begin making chips. Other things that are able to transition very quickly are doing so. Things that are fungible, where you’re essentially reprogramming a machine to print a T shirt in China versus Vietnam, that stuff is already shifting. You’re already seeing demand pick up for things like garments and textiles in Southeast Asia and India and Bangladesh. Pakistan also has gained a little bit on the textile side, but things that are energy intensive to manufacture, things that require critical raw materials or certain types of inputs that China does very well. We’ll probably talk a little bit about Zahance hypothesis with regards to China, but China is very dominant in a lot of raw material sectors, and assuming they continue to have the energy and labor available, it’s going to be a lot slower to ship that type of stuff away from China.
Ross
But things that can shift. Are you’re seeing more tires produced outside of China again, for example? So, again, it’s very sector dependent, and a lot of people want to make projections or economic plans or suggestions about the way things are on a macro scale without really understanding that in certain ways, china still very much holds the whip hand. And you won’t see manufacturing shift in other ways. You’re seeing it shift very rapidly away from China and that’ll have an impact on them as well.
Tony
Okay, so let’s take a step back to, say, 2019. Okay? We had Trump, who was trying to get different things out of China and bring things to the US. And reduce China’s centrality or centricity to supply chains. And then we have COVID come in, and that really disrupts supply chains. And then there’s this wake up call for people to kind of regionalize manufacturing, right? So this reminds me a lot of, say, 2007 eight, when it started with Japanese companies doing a China plus one, china plus two, China plus three strategy, right? That’s happening again. But after we got through the financial crisis, everyone just was like, China is easy. Let’s just go back and do that. Are we going to see that again? Are people just going to kind of shrug shoulders at the end of the day and go, people are inherently lazy. I don’t want to have to do the work to have three different sites to manufacture this stuff. So let’s just put it back in China. Is that likely to happen? Or was this wake up call the one that really pushes people to have resiliency in their supply chain?
Ross
I think, again, from a sector dependent standpoint, it’s yes and no. To the extent that if the stakeholder, if the primary stakeholder of a company is the US. Let’s say a Honeywell, for example, they will have to pull out US policies. We have reached a point that even if the US has a company is US based and they’re like, we’re going to still try to manufacture there for whatever reason, it is too much of a lift to pull out of there. In a lot of respects, xi Jinping has a vote on that too. If he wants a company out, or if he wants to just see that company’s manufacturing capacity or whatever, he’ll do it. Right. So the bad guy always has a vote on how the fight goes too. So that is one group of companies that very much can be expected to either leave on their own or be forced out in other sectors where a company can be co opted or the US. Isn’t really paying attention. Yeah, I think you’ll see the impetus to just kind of try to hunker down and ride out this ten year sort of economic cold war, if you will.
Ross
In their mind, they’ll do that as well. But again, so many of the unknowns that are driven here are the fact that China has a vast ability, if it chooses to, to leverage its own strategic advantages to push us around the anchor companies there if they want to, to kick them out if they choose to. And for whatever reason, really, outside of a relatively small group of Natsych types and people that do analysis really well, they’re not discussing what the calculus is on the other side. They’re just discussing what the US. May or may not be able to do through our own policy. At the end of the day, particularly when it comes to energy, anything that’s super energy intensive to manufacture, it’s not attractive to restore to the US right now because the Biden Administration, the Department of Energy, particularly FERC, they’re not going to get out of the way, and they have not proven to do that. So we’re not going to be able to make the fertilizers and fuels that we need to if we are continuing to drive them away with terrible energy policy and drive the price of energy sky high.
Tony
And as a Texan, I will tell you, we have all the raw materials here, right? There’s no reason for us not to do that. A lot of Americans may not like Texans, but generating wealth here really does help all of America, right?
Ross
So in my view, particularly when you talk about the Gulf, the raw capacity is there from a transportation side, from a labor side, from a raw material side, particularly energy, to to turn the south MidSouth all the way down to the Gulf into a manufacturing mega region. That that would be one of the great economic success stories of all time anywhere in the world. And that’s a policy issue. It’s certainly not a capability or capacity issue.
Albert
Yeah, the problem with that is the EPA makes a lot of manufacturing in the United States inefficient and uneconomical, just something yeah, we can’t get around it. It’s the problem.
Tony
Okay.
Ross
And Europe has done very well with a lot of that stuff as well, too. But again, it’s subsidized in Europe, some of those offsets, if you will, they’re heavily subsidized. And so the companies don’t bear that burden to the extent that they would in the US. Where that type of thing is just as heavily regulated and penalized with zero subsidy.
Tony
Right. So since we’re talking about supply chains mostly into the US. Since we’re often here, let’s talk a little bit about Germany. We’ve seen German politicians go to China over the past couple of months, and German heads of industry go to China and kind of almost double down on their commitment to China and double down on their dependency. And it almost feels like Germany is having the opposite conversation from a policy perspective that the US. Is in terms of the US. Is trying to reduce its dependence on China. It seems like Germany is just going all in. Is that a misread, what’s going on there?
Ralph
Well, yes and no. There have been voices in Germany getting louder, particularly when it came, for example, to the Chinese buying parts of the harbor in Hamburg or a German Chip producer. So there are some voices that are getting more critical, but overall, the Chinese market is still crucial for German exports. So kind of when the German Foreign Minister, Angelina Bieberk was in Asia a couple of months ago and she said, we will stand side by side with Taiwan in the case of a conflict. That kind of was immediately backpedaled by other German parliamentarians who said, well, the Taiwanese didn’t ask moral support, so we have no intention to give tomorrow support. So I guess it would be very similar to the Russia Ukraine thing. I mean, in a sense, I think what’s always very important when we look at particular German foreign policy, they are not really for or against someone. They primarily want to maintain the status quo. So they want to maintain as much as they can the 1990s early 2000s status quo. That is true in the Asian case. It’s also true in the case with Russia and Ukraine. Right. Because some people say, why are the Germans not more supportive of Ukraine?
Ralph
Or are they all in the pockets of the Russians? I don’t think that’s the case. I think German policy is to maintain a status quo when it comes to exports in China, when it comes to energy with Russia and everything that quote unquote disturbs the peace is seen as a nuisance, and they usually kind of bet on the party that they hope can end that nuisance as quick as possible. And then I think was a little bit the miscalculation in the Russia case that they originally believed that this is going to be a war like Georgia, like other earlier conflicts, that this is going to end very quickly.
Tony
And we can all pretend it didn’t happen, right? If it ends quick, it didn’t happen.
Ralph
Precisely.
Ross
And that didn’t happen too, that are like leading indicators of German behavior with regards to China. BASF is one of them. Not only is BASF not recognizing its potential position of dominance on the vitamin and specialty chemical side, it’s actually doubling down on China and expanding its manufacturing operations there, not retracing from it. And if you look at Mercedes, for example, I love Mercedes Benz as a company, and I think they make some of the most amazing machines in the world. But you’re not going to tell Mercedes, get the hell out of China. They’ll do, and they can.
Tony
But they have got Volkswagen cans. Mercedes can.
Ross
Volkswagen can.
Ralph
And as a quick second point of this, the German energy planet, we’re going to talk about this a little later in more detail, but they still want to double down, particularly on solar and wind. And they need China as a partner to have good relations with China because they control most of the supply chains in these areas. So as long as Germany doesn’t really have this often announced but never actually materialized u turn in their foreign and domestic policy, this is not going to change. So I think, as you guys correctly point out, whatever the headlines say, whatever the Sunday speeches by politicians are, I think the underlying indicators still strongly point towards not just Germany, I would say all of Europe kind of being at least economically very benevolent towards China. And I think sooner or later, with the exception of some Eastern and Central European countries, I think many Europeans would be more than happy to renormalize relations with Russia as much as possible.
Tony
Let’s get on that later.
Ralph
Okay.
Tony
Before we move on, what do you see in supply chains that people aren’t talking about, that we need to know about? What is a thing where you’re just like, gosh, why don’t people see this? What is that? What’s supply chains?
Ross
It’s food. Probably the biggest and most obvious one that comes to mind. Everyone’s talking about semiconductors. That’s an obvious one too. But that gets beat to death. And frankly, the US. Really holds some major strategic advantages with that as well that don’t get discussed enough when we talk about that issue. On the food side, though, particularly with regards to China and Russia, russia is an enormous manufacturer of certain fertilizers. That’s very true. Now. The US. Has tremendous optionality with Canada next door. We make a tremendous amount of nitrogen. We have the ability to make more. We do find for ourselves on phosphates. We have significant phosphate reserves on the potash side. Canada has the far and away the most reserves in the world and an untapped capacity to move more to the US. So I don’t subscribe at least as far as like Europe and the US are concerned to the macro nutrient issue of NP and K that you’ve heard recently and for a long term elsewhere, that Russia and China control the world on it. They don’t. We do find out fertilizers amino acids are an enormous issue. Vitamins and micronutrients. And those are the ones where, when you’re talking about there’s roughly ten major vitamins that go into animal and human nutrition, but particularly into animal feed to keep them alive, to help them grow faster, to help them produce higher quality meat and eggs and milk.
Ross
Almost all of those vitamins are 90% or more manufactured in China, most of them at 100%. When you talk about key minerals that needs to go into their diets, whether it’s a zinc, calcium, or you see sometimes manganese and magnesium added in as well. Other than Turkey, India and Brazil, most of that stuff comes from China, too. And then you talk about the big amino acids. The US. Is far and away the largest meat producer in the world per capita, even more so than China. But we make about 40% of the amino acids needed in the diet. So we make far and away adequate supplies of DDGs or soybean meal that we use as the crude protein and the crude fiber. But the other 20% of that is completely, almost completely controlled by China. And then BASF and one other company based in Switzerland. And so if they turned off the tap on that, I hope you got it, that she’s not watching this, they turn off the tap on that, it would be crushing for our food sector.
Tony
So is there anybody who’s talking about rotating that production elsewhere? Any company is making that?
Ross
Adm and Cargill talk about it because they’re the only ones that actually make the stuff in the US. In ADM’s case, they manufacture in house. In Cargill’s case, they’re actually the glucose or dextro stream that gets fed into that fermentation cycle to make aminos. You have Ivana and Blair, Nebraska. You’ve got two companies in Iowa, korean and Japanese. And that’s CJ and International and Naji Namoto. They are also an over the fence agreement with an extra cargo, corn mills. That’s it, really, as far as that type of product in the US. We could expand that capacity relatively rapidly. But we have seen amino acids in particular go through so many expansion contraction, volatility cycles that to an American company, particularly one that’s publicly owned, one like Adm, the juice isn’t there for them. They’re not going to take a 20 year investment risk on something that on a year to year basis could lose a lot of money.
Tony
Okay, but if they had to, how long would it take to get that up and running?
Ross
It takes less than two years to build a wet corn mill. But if you were to expand fermentation capacity at any of the already existing wet corn mills in the US that are making, let’s say, high fructose corn syrup, I think of Golden Growers, which is a 50% joint venture with Cargill up in the southeastern corner of North Dakota. All they’re making up there is high fructose corn syrup for food. They can easily convert that stream into fermentation inside twelve months or less. So we do have a dormant quick to market capacity, relatively speaking, the faster we could get that type of thing online, you could do it with subsidies, you could do it with some market protections, you can do it in the food bill and just add certain things in there that favor that type of production. So these are not unsolvable problems. Vitamins. We are, pardon the language, if China really does decide to cut us off on that, that becomes very problematic in a hurry because it’s three to five years to get vitamin production online. If you’re talking synthetic vitamin production, all of that is adjacent and utilizes coproduct from the petrochemical industry.
Tony
Okay. So when I hear this stuff, it makes me wonder, with all of the money that the federal government puked out in 20 and 21 and early 22, this seems like a relatively small investment.
Ross
And it’s very small. A couple years to build a massive vitamin plant? Yeah, you could co locate a vitamin plant right next to Port Arthur, any of the places that are along the Gulf that are very dense and natural gas, and within 24 to 36 months, depending on permitting, if you put a fast lane in place, you could do it in 24 months. And the expertise exists in the US. To build that.
Tony
Okay, thanks for that frustrating example, but it’s something we need to talk about, right? And people need to know about it.
Ross
Albert will tell you this. It’s not talked about much in DC. I’ve briefed numerous Senate committees over the last year on this. A couple of House committees, a whole lot of staff members and Congressmen to their faces. And I show them the charts, I show them the numbers. And it’s really outside of anybody who’s part of the Midwestern congressional delegations. They have no idea. It’s completely foreign to them, and it’s really one of our pacing. Strategic risk.
Albert
Yeah, there’s like deer in headlights when you start bringing up these complex issues, supply chains and asymmetrical responses that the Chinese hold against us, it’s just nothing. It just doesn’t register.
Tony
Yeah, it’s terrible. Okay. Thank you, Ross. Sober, let’s move over to you. And I want to since we are talking about China, let’s talk about, I guess, a Twitter discussion that you and Ross had last week where you invited him on the podcast to talk about some of Peter Zaan’s comments about China.
So, just so everyone knows, I tried to connect with Peter Zion on Twitter and invite him to come on, but he’s very popular and we’re really small time for him, so I don’t blame him for not coming on.
Ross
But anyway, he just doesn’t want to be challenged, maybe.
Tony
Well, possibly. Look, the guy is a great speaker. When I watch him speak, I wish I could speak that well. Right. He’s obviously very smart and he says some stuff that sounds really impressive. Big old predictions, all that stuff. So, having said all of that, he was on Joe Rogan last week and talked about China and basically said that China won’t exist in ten years. Right. Now, this, to be honest, is a derivative of George Friedman’s hypothesis in a book called The Next Hundred Years that was published in 2009, where Friedman said that China would split into, I think, five countries. You know, part of it owned by Japan, part of it, you know, whatever. It’s it’s a really interesting book where he talks about a research in Turkey, a stronger Mexico, all that stuff. I definitely recommend that to people. Some of the stuff doesn’t sound real, but directionally it’s interesting. But Albert, both you and Ross have opinions on this, and you can talk about any of the stuff that Peter Town said. But I guess, broadly, do you see China as a nation state by 2033?
Ross
Of course I do.
Albert
It’s an absurd comment to say that it’s going to break apart within ten years. I mean, you’d have to have something cataclysmic to break up some major industrial nation into ceasing to exist. I don’t understand how that could possibly even come to come to fruition. I mean, China has a strong economic growth. They’ve brought up a middle class, they have a CCP that’s a centralized government that can initiate policies and stimulate the economy at will. They have a grasp on the country, they have a good grasp on the population. Everything that you see that comes out of these protests or whatnot, that’s something that the politicians in China allow you to see. And it’s a messaging thing. I was on here what is it, like, a month ago with Atlantic Council guys, and they’re about the COVID lockdowns and whatnot, and I said, this is your signal that China is opening. And literally, I think it was like a week later, they opened. The thing is, people look at China and they take things at face value with politicians and with data that comes out of China at face value, and you simply cannot do that.
Albert
As much as we blast the Chinese for their belt and road initiative, the key component of that is they have food security coming through that. They have farmlands in Africa, they have meat coming through the South American border. And even if we were to cut off their meat supply, by some measure or another, they still can fish the Sea of Japan, that has 5% of the world’s fish. So they have options for feeding their population in a pinch, and they have the stability and the military and the police force to keep people aligned. So I don’t see how, barring a meteor hitting the place or barring some kind of like, supercharged COVID starting to kill millions and millions of Chinese people, I don’t see how it’s even possible, even logical, to say that it can end up ceasing to exist in ten years. Just the asymmetrical challenges that the world would have to bring China down if they tried to would be devastating for the global economy.
Tony
Yeah. Ross, what do you think there?
Ross
Yeah, I think almost every discussion about the demise of China ignores one simple thing, and that’s not unique to Communists. Will to power is certainly very baked into the cake when you’re talking about communism. But in terms of strategic optionality, china has done a better job than any communist country ever at reinforcing their flanks strategically in a lot of different ways. And so you have to account for that. You have to account for the agency, again, of the adversary, which I think a lot of the discussions about the decline of China do not account for. It at least makes it incredibly complex and certainly is by no means is anything certain one way or the other. On the demographic time bomb issue. I have a very cold hearted way to say this. I don’t think they care. I don’t think they care. When you look at an enormous number of people that are, on the one hand, potentially would die off in some sort of food shortage, certainly with the reopening the percentage of people that at least from the people I talk to and deal with in China on a daily basis. It’s not a lot of young people, it’s not a lot of the productive workforce.
Ross
Again, just like in the US. It’s a lot of people that are unhealthy or older or both. And so you’re talking about people that already have significant respiratory issues in the cities, then getting hit with any sort of cold that’s beyond a basic cold, it’s going to be a problem for them. Right. So even if they survive, you’re still talking about a percentage of the population that in the communist mentality are viewed as less productive or drains on the state’s resources. They don’t really care if a lot of these people die. They truly don’t. And some level of very minor famine where they have the ability to begin to marshal resources and shepherd them a certain way where they can even target who wins and who dies, that type of thing, we will see in that sort of scenario. And they will be able to almost indefinitely put on not indefinitely, but for a much longer. Period of time be able to put off the more severe impacts of a demographic time bomb. And the other issue is, of course, too, they’re atheistic, right? They don’t recognize Christianity or a Jewish god or an Islamic god or whatever.
Ross
So they’re really unbound by any sort of traditional moral or ethical constraints that we have in the west. And so who knows what sorts of technology, what sorts of medical procedures and things they’re pursuing that will in addition to things like automation, they’re now one of the top 15 most automated manufacturing economies. A lot of the robots in the world have shifted production to China from Europe. So they’re dealing with things in a way that all these other models talk about the demographic time bomb don’t account for. They’re going to be a smaller population, but I think long term that also may be baked into their calculus or even serve the interests of what they’re looking towards. Absolutely.
Albert
Yeah, I could have said it better myself for us, I mean, the Chinese are pragmatic. They don’t make foolish mistakes when it comes to their existence. They went out and bought grains for a year and a half. They went out and secured meat for a year and a half. They took advantage of the Ukraine war and secured energy supplies for a year and a half. I mean, they’re not some kind of blind entity that’s going to be taken by surprise. They know their challenges. They understand these problems. There’s something that it’s not as simple. The population goes down, they’re in trouble, they cease to exist. Those dots I just can’t connect.
Tony
Sorry, Ralph, you had some comments.
Ralph
Yeah, just that I fully agree with Albert and Ross said, and I think the demographic part what is often overlooked. I mean, imagine you as a dictator, right? What kind of population would you like to have? One that is on average in the early 20s, or one that’s, on average in the late 30s or early forty s? I think an older population is easier to control because we see this in the Middle East and in Palestine. In these areas, it’s young men who are the biggest problem for social stability. If you can find this golden middle ground of late 30s, early forty s, I think that actually could be to the advantage of the stability of the political system. The only thing because Ross, you mentioned the religion part. I mean, I don’t know if this is still true. It was definitely true a couple of years ago, right, that China had the fastest growing Christian minority in the world. So that doesn’t matter if it doesn’t penetrate the political system or the political leadership. I’d be curious. That’s kind of the only scenario where I would see major changes if all of a sudden kind of these ideas, for whatever reason, start to penetrate the inner circle of Chinese leadership in a kind of ancient Roman scenario.
Ralph
Where all of a sudden the Roman Empire became Christian in an exaggerated fashion. But otherwise, I think you guys are completely right. The I think the the rumors of China’s immediate demise are strongly, strongly exaggerated.
Tony
Yeah. Let me let me add a couple things here. I think when when people make comments about the demise of China, I don’t think they understand modern Chinese history. If you look from, say, the mid 50s until today, certainly well, I guess the 19 teens until today, right. The the volatility that you’ve seen in China’s social structures, the conflict you’ve seen, the famines you’ve seen, the deaths you’ve seen. And certainly in the CCP area, the tolerance that the population has had for leadership, whether that’s coercive tolerance or whether that’s genuine tolerance, they have tolerated a lot. Okay? Now, when we look at, I think, part of the pressure on the CCP, maybe not China as a nation state, but the CCP as a ruling party is through much of the CCP’s existence. The population was very poor and not very educated. And this was Deng Xiaoping was really the one to say, hey, we need an educated leadership. Because until then, most of the people kind of dumb and not really well educated. And a lot of the universities were closed down in the 60s. Right. And so they really started having this educated leadership in the an educated business class starting in the 90s.
Tony
Right. And so you now have a very widespread level of education, and you have a pretty widespread communications platform where people can understand what life is like in other parts of the world. And so I do think that there will be more pressure put onto the CCP to open up and to do things like respect individual rights, whether that’s Christian or not. It’s something that with wealth comes an expectation that individual rights are respected. Right? And so if somehow there was some sort of economic regression where people were poor again, fine, but that would make people really angry. But as people get more wealthy and as they get more educated, I think that does put more pressure on the CCP to be more responsive to the population. Because in the past, people would go into their government guy or woman and they didn’t really have any ability to push back, say, intellectually necessarily. Right now they can go into their government representative and go, oh, that person’s stupid. They don’t know what they’re talking about. And we do that in the US. And we do that in Europe, and we go, our politicians are stupid.
Tony
Right. And so that’s happening more and more in China. And so I don’t think that it leads to the demise of China as a nation state. I think it leads to heavy pressure to the CCP to evolve into something different. And I’m not sure what that is, but I think the pressure on the CCP to evolve will become immense over the next five to six years. And maybe that’s what Dion meant and he just kind of simplified language.
Albert
I don’t know. The CCP morphing into something slightly more liberal is obviously going to happen. I mean, they’ve used actually done quite a good job of promoting national unity. If you want to give them any sort of praise, you know, national unity within China has risen over the past five to ten years. The CCP, like I said, they’ve been around for 70 years. Tony, you said that they’ve got a grip on the country, and I just don’t see it releasing anytime soon under any circumstances.
Tony
Let me just go back and say one thing. We’re all disagree with you. It’s a rare moment of disagreement, Albert, but I actually think the CCP are terrible planners. They’re terrible, yes, they bought things for a year and a half at a time, but they’re just terrible planners. And because they have such a heavy current account surplus, they have the money to make up for their mistakes. And that’s been their situation for the past 30 years. But I think in general, central planning is horrific, and I think Chinese central planners are incredibly awful. So the belief and I’m not accusing you of having this belief, but I think there is among kind of Western intellectuals, there is a belief that Chinese are amazing planners. And central planners, they’re really thoughtful, and I think that’s garbage because it’s just not true. They make a lot of mistakes.
Albert
Oh, no question about that. When you start talking about, like, central piloting and strategic moves, the Chinese have not been historically not been good. You’re right. But those are like 2030 years out, right? I’m talking about four or five years out. They usually don’t make mistakes when it comes to their own domestic politics within the country itself. I mean, they’re they’re still around 70 years. Nothing’s, you know, nothing’s changed, really, in 70 years. So in that respect, I would give them credit to, hey, for national unity’s sake, if they keep themselves in power, they’re done a good job for everything else.
Tony
They do a terrible job. Yeah.
Ross
Again, the dog not barking so much for China when they talk about this stuff. This is the first time we’ve ever seen any sort of synergy between the PLA and the CPC leadership. There has historically been a significant externally, people don’t realize it, but if you’re in the game, you give it. There has always been a historical significant antagonism in a lot of ways between PLA senior leadership and the CPC, the civilian Mandarins, if you will. And this is the first time that we’ve ever seen. And going all the way back to Mao and before him, any sort of cohesion, whether it’s enforced at the barrel of a gun or not, but cohesion because of all these corruption purges that she’s been on since he took power in 2012, going all the way now to today. We’re seeing for the first time, really, the output of a unified PLA CPC kind of mega deep state, if you will. And that gives for the first time, the civilian side a lot more control over what has historically been a multi trillion dollar dark economy and revenue engine of China. And that’s that massive network of shell companies and enterprises that the PLA owns through everything that they’ve got.
Ross
And I’m not saying necessarily we can predict yet what this means, but if that cohesion, if that’s some sort of maybe for the first time unity, if you will, from a political side and from a commercial side, the more that’s.
Tony
Going to look like, the more that happens, the more fragile that whole infrastructure becomes. It becomes so inflexible. And I think for the adversaries of China, that’s a great thing. So go down that path as fast as they can because it creates a very fragile infrastructure within the Chinese government.
Albert
I’m glad that Ross brought that up because I actually had a Tweet thread today about something similar where Xi has been messing with the CMC, which is the PLA Navy’s group that kind of operated away from the CCP and was instrumental in dialogue with the US navy. He’s like, pretty much eliminated those leadership and starting to put his own people in there. So there’s room for error. When you put civilians inside of a military complex.
Ross
That’s a path that I would say if we see a decline of China as an actual aspiring global head of mine, if you will, I think it’s more likely to come from that vector than it would be any sort of demographic time bomb considerations.
Tony
Yeah, I don’t disagree with you. Okay, guys, let’s move on to Germany. Ralph, you had sent a Tweet earlier, I think you sent it a couple of days ago talking about the German energy mix and the push for clean energy in Germany and how ultimately that will lead to more demand for Russian gas.
Can you talk us through that hypothesis? I know you wrote a detailed thought piece about it. Can you talk us through that and then help us understand when the Russia Ukraine war stops, how long before Germany goes kind of rushing into Russian gas again?
Ralph
Yeah, I think the first and most important takeaway is that the underlying German energy strategy has not changed despite the war in Ukraine. And maybe just to sum it up a little bit, in 2021, where we have the most recent numbers, right, about 40% of German electricity production came from coal and nuclear, all kinds of coal. So lignite and black coal. And they want to phase that out in the next ten years. Actually coal, they want to phase out now faster than originally planned. So that means they have to replace 40% of their electricity production. But at the same time, until 2030, the expectation is by German industry that they will have an increase in 20% of demand. And what is the German plan to kind of meet replacing the lost coal and nuclear and meeting this new demand of 20%? The plan was always gas fired power plants and that plan is still in place. So they still want to double their gas fired power plants. And of course the question is where’s the gas going to come from? Now, the quick answer is always it’s going to be US LNG, but I think this is just going to be an affordability problem at some point.
Ralph
The Germans spent $440,000,000,000 only for energy related matters this year, just to give you a comparison, the entire EU spent $700 billion as the so called relief package for COVID. So just to give you a dimension, we are just talking about Germany here, so this is not sustainable. That’s 12% of their domestic industrial output, so they cannot do this forever. And secondly, kind of the more geopolitical thing, I think they prefer close cooperation with Russia than being dependent either on the US or being dependent on Italy or Spain and these areas where LNG would also come through. So I think that on the medium to long run, if there isn’t a window of opportunity to reopen the gas flow from Russia, which is of course still going on, to other pipelines, I think they will jump on it. And the last point, which I find quite intriguing, because everybody says Nordstream Two, Nordstream One, that was sabotaged by the Americans, but apparently, if you look at it, one pipeline of the Nord Stream Two net is still operational. So to me this looks more if I would speculate, but of course I’m speculating here is that the Russians say, no, we cannot destroy Nordstream One.
Ralph
We leave a bit of Nordstream Two in place because then we have to start at some point Nordstream Two and then kind of when this is already happening, we just also start Nordstream One again once it’s repetitive because that was always in place. So I think the underlying energy outlook is still the same and I think as soon as there is a ceasefire or something, this is going to happen. At the very last point, we talk a lot about gas, but of course there’s still the unanswered diesel question when it comes to energy between Russia and Europe. So, as I said, I think if there is a chance to re engage in the energy market with the Russians, I think Germany primarily, but I think other Europeans as well would be very happy if they could re engage in this area with Russia.
Tony
Perfect. I’m going to stop you real quick and I know Ross has to jump in a couple of minutes. Ross, what thoughts do you have on that, on Germany’s dependence on Russian gas?
Ross
I think it’s obvious if you work in the commercial world, if you deal with German companies, whether it’s a buyer or a seller or supplier, whatever it may be. I do think you’re seeing a play out the clock scenario here. There is obviously positive alignment at a global scale between Russia and China. And there’s disagreements or things where maybe one surprises the other with some of their behaviors, but in general they’re positively aligned. Major German manufacturers doubling down in China is actually an adjacent indicator. Russia is still the cheapest source of natural gas that Germany itself can get its hands on. And it’s not I say this somewhat facetiously, but also sincerely, it’s not like the Germans and the Russians don’t have a history of secret relationships or conflict benefit maybe them or conflict. So I do think that as long as there is a strategic alignment on a long term basis of Germany and through infrastructure and through relationships that have really been built deeply since the end of the cold war connection to Russia, I think it would take a lot to really completely sever that completely. Because on a long term basis, if they don’t have replacement energy capacity, which they don’t not at this point, germany would stand to be tremendously disrupted by that.
Ross
I don’t think they’re going to let it happen, not for NATO, not for the EU.
Ralph
And maybe to add something, since Ross is still here as a supply guy, the other thing is even the idea they would have to double their renewables, including wind and solar. And the problem is, wherever they can build those wind turbines, they cannot get those transmission lines built basically from the north to the industrial heart or in Bavaria, for example. On one hand is because the lines are too expensive and too long at the moment. And the other thing is nobody wants them in their neighborhood, right? Nobody talks about this. So on paper it’s easy to build them, but every little municipality, every local politician says, sure, you can make those transition lines, but not here. And then this has basically been on ice for a long time now. So as Ross also says, I think at some point it’s either continue spending oodles of money, which at some point I think will just get too expensive, or find ways either openly or secretly, to increase imports in the energy sector from Russia.
Tony
Ross, I know you have to jump. I just want to thank you for your time. We’re going to continue the conversation, but I look forward to having you on again. Thank you so much. Thank you very much.
Ross
Thanks gentlemen.
Ralph
Thanks Ross.
Tony
Ross, one of the things you said was that Germany would rather source gas from Russia than from southern Europe. Can you help us understand why that’s the case?
Ralph
Yeah, because I think this is one thing that has been overlooked in the entire debate when it comes to the Russian position. Let’s also Twitter a little bit for the French position that a shift towards the east in focus both economically and politically is not in Germany’s interest. So as many I say now fantasizing. But I don’t mean it in a disrespectful way of a new kind of Baltic Polish Ukrainian alliance under the military protection, let’s say your military cooperation with the UK and the US. That is not something that Germany is particularly interested in because they want to remain the major power in Central and Eastern Europe and a new formed bloc with 44 million Ukrainians is not something that they are particularly interested in. And the same is true with kind of shifting the energy focus, let’s say towards Italy or towards southern Europe. It’s the same thing. I think this is not the kind of power shift that they want to see. And just as a quick add on to this is often forgotten, germany together with the Czech Republic as a smaller player, particularly France, they have been the major electricity exporter in Europe.
Ralph
They in some cases quite literally had the hand on the light switch and I think this is also something that Germany doesn’t want to lose. Now, I don’t know to what extent they are aware of this themselves, but I think if you look at German behavior towards Ukraine, towards Russia in this entire conflict, even now, at the moment, right, where they say, yeah. We might deliver Main Battle tanks if the US delivers them first. And if the Polish deliver them first, then maybe we’ll do it as well. I think this hesitancy is not just facetiousness on part of the Germans. I think it is kind of being concerned that the power could shift further towards the east into this kind of Polish Baltic Ukrainian new power center and it would be economically weaker but it’s already militarily potentially significantly stronger. So I think Germany is playing a kind of geopolitical game here that is not we can have a moral debate whether we agree or disagree but I think from what they are trying to accomplish it’s at least partially understandable and it’s a truly last point. There was a moment if they would have really kind of switched entirely their energy policy in February continuing the nuclear power plants and shifting other areas, I think then it would have been credible that they say they want to kind of emancipate from Russian energy, from Russian gas but they didn’t do anything of that kind.
Ralph
So this is why I think that on the long run, on the medium to long run relations between Russia and Germany will improve, whatever that means for other players.
Tony
I think it’s so interesting that the Polish Baltic Ukrainian that is such an ancient political entity from centuries ago, right? And so it’s just interesting that these things are coming back. But I want to push a little bit harder on that. As much as you say they would rather source from Russia than from southern Europe, why are they so hesitant to source gas from southern Europe? Because it’s a part of the EU, it wouldn’t be a political kind of lever that the south would pull.
Albert
It would be Tony. It would be because the Germans have Spain, and Italy is indebted to Germany a significant amount of money. Right. So that upsets the political dynamic from the Germans being able to counter the French and what are they doing within the EU? So you have a political economic dynamic here where Germany just does not want to give money back to the Italians in the space.
Tony
Okay, so what you’re saying is Germany would rather empower a hostile Russia. I would rather enrich a hostile Russia than give up the political power that they have over the south by giving them money. They would rather have the thumb on southern Europe and control them politically than actually help enrich their fellow Europeans. I wasn’t aware of this.
Ralph
I used to do this 20 years ago.
Tony
I don’t as much anymore.
Albert
I would do the same thing because Russia is not in my political sphere, and there is little to zero chance that the Russians are going to attack NATO lands. So from the German perspective, I get cheap power from Party A, and I still control Party B and C over here under my thumb. Why would I change that dynamic? I would never do that.
Ralph
The German area or the German sphere of interest that they are interested in is central. It’s Europe. Whether it’s the European Union, they don’t really care what’s going on in further to the east or, for example, between Russia and Ukraine, which they have shown quite openly up until February. I think Albert is precisely on the money here. So this was a very good deal for Germany.
Tony
Wow. Just another reason for me to think that the EU, as I’ve thought for the last 30 years, is just a cynical political grouping rather than a functional union.
Albert
It’s very nation states have their own interests at heart. Always first and foremost, before you want to talk about globalist or community.
Tony
Sure, yeah, absolutely. Okay, guys, this has been great. Can you just before we kind of end this, can you guys help us think? What are you looking at, let’s say for the rest of January, kind of the week ahead, the next couple of weeks ahead? What are you guys looking at with, say, ECB or Fed or markets? What are the things that are on your mind right now that you’re looking at for the next week?
Albert
I don’t know about the next week. I think Opex is next week, so it’ll probably be pretty muted before the Fed in February. But honestly, I’m looking at Russia whether or not they desire to have a new surge into Ukraine, albeit a smaller one, more tactical. But they need a win for the PR before they actually try to come into actual peace negotiations, because it’s just not sustainable, what they’re doing right there right now.
Tony
So do you think there will be peace negotiations, say, in March, April, something.
Albert
Like that, as plausible at least June, July, maybe?
Ralph
June, July.
Tony
Okay, ross?
Ralph
I’m kind of looking at the German economic numbers at the moment because they have all been very celebratory, because in the fourth quarter, apparently it grew by 1.9%. My suspicion is that these numbers were particularly pushed because Germany was simply pumping so much money into the economy. This is something oliver, you mentioned this a couple of times on your Twitter feed as well. This is something I don’t think enough people talk about that whatever the ECB does, a lot of this is going to be offset by European programs of pumping money into the system via alternative means. So kind of the celebratory mood that now it’s, I think, just 7.7% inflation and not 10% inflation, I think that’s just going to be temporary. And the same is about economic growth. So this idea that there will not be, as I think Goldman Sachs said, and a couple of other economists as well, that there will not be a recession in Europe next year, I’ll be very surprised. I prefer not to be that one, but at some point I know Albert has said something similar ones, but I’m growing increasingly suspicious of these numbers because they don’t add up with anything.
Ralph
When you talk to people in the industry, when you talk to the banking sector, they tell you it’s not all doom and gloom, but it’s definitely not. That all. Next year we’re going to grow beyond our expectations.
Albert
The celebratory chance for the Europeans right now completely missed the fact that they are dormant. They’re in a zombie state. There’s nothing going on in Europe at the moment. So once they start kicking things back up and manufacturing and demand inflation is going to go right back up to where it was a year ago.
Tony
I never trust a preliminary economic data release. Never. Always wait for the second or third revision. So when markets move on a preliminary release, it’s moving on the belief that other people have expectations around it. Right? And so it’s just this reflective, expectations based move rather than based on the numbers themselves. And I always will often say this on my Twitter feed wait for the revision. Don’t trust the initial preliminary data release because it is PR. It’s nothing more than PR. Maybe it’s directionally correct, maybe, but those preliminary releases are PR. So on that optimistic note, guys, I want to thank you for your time. This has been fantastic. We’ve had such a great, deep discussion. So thanks very much. Have a great weekend and have a great week ahead. Thank you.
The minutes from December’s FOMC meeting have been released. Tony Nash, CEO of Complete Intelligence gives us his insights on what this means for the pace of rate hikes in the US. He also gives us his views on the oil prices as black gold has fallen by 9% in the last two trading days.
In this episode of BFM 89.9’s “Morning Run” podcast, hosts Shazana Mokhtar and Wang Xiao Ning recap how global markets closed overnight and provide insight on where they may be heading. They also interview Tony Nash, the CEO of Complete Intelligence, to get his thoughts on the state of international markets and trends to watch for in 2023.
The hosts turn to their interview with Tony Nash, who is on the line to discuss the Fed’s intentions on rate hikes and the impact on the dollar. Nash mentions that the Fed’s notes from the December FOMC meeting clearly communicated that there is no expectation for a rate cut or pivot in 2023, as no participants anticipate it would be appropriate to begin reducing the federal funds rate target in 2023. Nash also notes that while markets ended higher, people will realize that there will likely be a number of 25 basis point hikes in 2023 to ensure that inflation subsides.
Wang Xiao Ning then asks Nash to explain what’s happening with the dollar, as it gave back half of Tuesday’s gains despite the hawkish FOMC minutes. Nash explains that it is not only the Fed that is affecting the dollar markets. He adds that treasury actions and hopes for a stronger China also play a role, as well as concerns about China’s slower opening, which has hit the dollar as there were hopes that an accelerating China would help to strengthen US exports and economies around the world.
The hosts then ask Nash to share his outlook on some of the trends that have dominated 2022 and how they might play out this year, specifically the Ukraine conflict and its impact on agri and metal commodities. Nash explains that if we assume no major escalation, no major drought, and a relatively status quo war continuing, he expects wheat prices to rise by 15% to 20% between now and Q2 2023, however he doesn’t expect wheat to show any rise by the end of the year and expects slight down pricing. Additionally, he expects industrial metals prices to drop as a result of the slower China open and recession expectations around the world, while oil is expected to remain relatively stable.
Overall, the podcast provides a good overview of the current state of global markets and insight into what may be coming in 2023. Tony Nash provides expert analysis on the Fed’s plans for rate hikes and the impact on the dollar, as well as trends to watch for in commodities such as wheat and industrial metals, and the ongoing conflict in Ukraine.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station.
BFM
The World Market Watch is brought to you by CIMB Preferred.
SM
BFM 89.97 06:00 a.m. on Thursday 5 January 2023. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wang Xiao Ning taking you up to 10:00 a.m. This morning. But as always, let’s kick start the morning with a recap on how global markets closed overnight.
WXN
Oh, it was a much better day in the United States because the Dow was up 0.45%, and SP 500 was up by 0.8%. NASDAQ was up by 0.7%. Meanwhile in Asia, a bit of a mixed day. Nikkei was down 1.5%, Hang Seng was up by a whopping 3.2%. Shanghai was flat because it was only up by 0.2%. Same for the Straits Times Index. It was down 0.1%. And our very own FBMKLCI was down by 0.3%.
SM
So for some thoughts on where international markets could be heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. And a happy New Year to you. Now, we’re going to start with what news is coming from the US. The minutes from December’s FOMC meeting were released last night. Did they give any clues to the Fed’s intent on rate hikes in the coming weeks?
TN
Yeah, the Fed notes are communicating that hopes for a rate cut or a pivot are over-enthusiastic. So the minutes, and this is a quote from the minutes they say “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” So there isn’t a single one. Even the doves who are on the Fed are not thinking about pulling back rates in 2023. So I think markets ended higher. But I think as that settles in, I think people are going to realize that we’re going to see a bunch of 25 basis point hikes going into 23 to make sure that inflation subsides.
WXN
Okay, but Tony, help me understand what’s happening about the dollar because the FOMC minutes were more hawkish, yet the dollar gave back half of Tuesday’s gains. What’s going on here? It’s rather strange, isn’t it?
TN
It is. I think well, if you see, sorry to say here, I think what’s happening is there’s treasury action that is reducing the dollar value. I also think that we’re not necessarily seeing the full impact hitting the dollar markets. Now, if you look a DXY, that’s mostly looking at the Euro values, of course. Right. So we’ve seen the Euro strengthen and the pound strengthen. So I think there is concern about China’s opening slower that’s also hitting the dollar because there have been hopes in the US that an accelerating China would help to strengthen, say, US exports and economies around the world. So that could be hitting the dollar. Other mechanics are happening, but I think generally it’s not necessarily the Fed that’s hitting the dollar today because I think these are just, I guess, forward-looking expectations. Nobody thought there would be a rate cut, say, in the next three months. People have really all been talking about it, say, in the six-month horizon or longer. And what you’re seeing in dollar markets isn’t necessarily reflecting Fed comments because it’s kind of long-term.
SM
And let’s take a look at some of the trends that have dominated 2022 and how that might play out this year. If we look at the Ukraine conflict, it caused massive supply shocks for Agri and metal commodities when it began last February. What’s your outlook for those same commodities as the war drags on into 2023 with really no foreseeable end in sight?
TN
Yeah, if we assume no major escalation, no major drought, those sorts of things. So a fairly status quo war continuing, we do expect things like wheat to rise to go into Q2. We expect a 15% to 20% rise between now and, say, sometime in Q2. But we don’t expect wheat by the end of ’23 to show any rise. We expect a slight down pricing in wheat by the end of the year. Industrial metals prices, because of the slower China open and because of recession expectations across the west, there is a feeling that industrial metals won’t necessarily come back in ’23. So, again, it’s a fairly moderate outlook for industrial metals. If central banks were to change their course, that would, of course, change the industrial outlook and the consumer spending outlook. But as things look now, they don’t necessarily look either industrial metals or AGS don’t necessarily look to accelerate as they did in, say, Q2 or Q3 of ’23.
WXN
Okay. The other thing I want to look at is oil prices, because on a year-to-date basis, if we look at brand crude down 9%, WTI is down 8%. That’s quite a shocker, considering it’s only 5 January. Can you help us understand what’s driving this weakness?
TN
Yeah, again, there’s been a lot of expectation that China opening rapidly would have an impact on things like jet fuel, petrol, on crude oil. And as we see that openings slow down because of rising COVID cases, there is fear that the demand side of the market won’t necessarily come back. There have also been some pieces here in the US. Come out over the last, say, a few days talking about the demand. Expectations for crude have been a little bit exaggerated. And today there was a prominent investor out saying that he expects crude to fall pretty dramatically this year. So, you know, I think what we’ve seen over the last, say, six months are expectations that going into ’23, we would see a shallower recession and we would see supply side factors that would push crude prices up. I think right now, you’re seeing investors take another look at that and question that hypothesis.
SM
A spike in oil prices would negatively affect a lot of oil-importing countries in Asia, like Japan. With the Japanese currency already under severe pressure, would this be the last straw that breaks the yen’s back?
TN
Well, I don’t think so. No. I think our outlook at Complete Intelligence is for crude to hit about $100 by, say, April. Certainly in the second quarter. I don’t think $100 or say $130 crude would hurt Japan. The BOJ and the Finance Ministry have plenty of resources to deal with. One hundred dollars to one hundred and thirty dollars crude oil. If we were to see something like $300 oil, which would be extreme and very much outside of our view, that would stress not just Japan, but it would stress a lot of countries, not just in Asia, but across the world.
WXN
But what’s your outlook for the Japanese economy, though? Because if you look at them as a country, the first time you’ve ever seen inflation rates rise, the Bank of Japan has taken a slightly more hawkish tone. So what’s your outlook for their economy?
TN
Well, yeah, I think that move in Japan, the slightly more hawkish tone was more about preparing for the next BOJ head instead of a dramatic policy change. So there was a little bit of preparation for the next person so that they could maybe change the policy slightly hawkish if they wanted to. So in general, for Japan, in terms of growth, we see the first half around one and a half, one to one and a half percent. But in the second half, we see it slowing slightly to, say, just over 1%. So in general, look at about a 1.41.31 .4% growth in 23 in Japan. So it’s not a stellar year, but it’s not a terrible year either.
SM
Tony, thanks very much for speaking with us. 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 and for the year ahead, covering things like the Fed interest rates, oil price trajectory, as well as the outlook for the economy in Japan.
WXN
Yeah, well, the year started quite rocky, especially for oil. But I do keep hearing more and more analysts saying, look at the commodity space, especially when it comes to the metals because China is reopening. But even on a year-to-date basis, metals, actually most of them, are still down. The only ones that are up at the moment are nickel and gold, which is just up. Nickel is up 3.5%, while gold is at 1.6%.
SM
So if we take a look at some of the other headlines that have caught our eye this morning, I see that Salesforce is planning to cut jobs by 10% and close some offices after rapid pandemic hiring left it with a bloated workforce amid an economic slowdown. They hired too many people, and now they need to cut jobs to maintain their bottom line.
WXN
Okay, so let’s remind everybody, what is Salesforce? They are a cloud-based software company. They were one of the winners during the Pandemic. It was a work-from-home kind of champion. But since then, their share price has come under a lot of pressure. And I think the question is, this type of company, were they too aggressive when times were good? And the answer is yes. But it looks like they weren’t the only ones, right? Because Amazon also did it. There’s now job free. There’s no more hiring. When it comes to Microsoft, it’s the same at Meta. So I think all these technology companies are kind of looking ahead and saying, hey, the outlook isn’t so positive. So the one thing we can control is our cost. And in the US, actually firing people is extremely easy. There’s hardly any legislation or protection. So that’s what they’re doing.
SM
And a question I think everyone’s asking is, when will these job cuts start to affect the unemployment rate in the US? And that’s when we start to see the unemployment rate go up, inflation goes down. I think that’s sort of where the Fed will then maybe start to look at reducing its rate hikes or starting to cut interest rates again.
WXN
But the point is, there’s always a lag effect, right? And the question is, how long is this lag effect? And then by then, would the Fed have been overly hawkish? Would it have raised rates by so much that it has paralyzed the economy? So that’s, I think, the challenge that the Fed is facing now.
SM
Indeed. Indeed. All right, 717 in the morning. 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, the World Market watch, is.
BFM
Brought to you by CMB Preferred moving forward with you, visit cmbpreferred.com for their preferential services beyond banking.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same, download the BFM app.
Natgas is down 63% from its high in late August. The average price before Q2 ’21 was $2-3, so we only have 7% more to fall to below $3. While we saw Natgas rise – along with every other commodity – in 2021, prices had begun to fall until Russia invaded Ukraine.
Russia and Ukraine are still at war, but we have this issue with the restart of the LNG terminal. Tracy Shuchart tells us what’s behind the fall in Natgas prices and what she’d look for before expecting prices to stop falling.
The Fed pivot has been wishful thinking for quite a while and Sam Rines has been repeating this for months or so. As the Fed’s minutes were released last week, Sam pointed out that NO MEMBER saw the need for a rate rise in 2023. He stated many times that the Fed has been very clear about its indicators. We see this so often that it seems obvious. Why is this so difficult for some people to see? Sam Rines explains that in this episode.
This week, Sam also made the point that the Fed is maybe “stuck in the middle”. Literally, employment in the middle of the US could be a factor that keeps the Fed from slowing down. Sam explains why the middle is so important.
We’ve seen a lot of chatter in research notes, op-eds, and tweets over the last week stating that the future is a multipolar world. This seems largely based on a call for the decline of the USD and the rise of the petroyuan, etc. Albert Marko walks us through this.
Key themes:
1. Natgas sub $3? 2. The Fed Pivot is Dead 3. Multipolar, Post-USD World
This is the 48th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. This week we are joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thank you guys for taking the time to join us this week.
It’s been a pretty volatile short week, and there are a number of things we’re talking about. First is Natgas. We’ve seen Natgas come off pretty dramatically this week, and we’re going to talk to Tracy about whether or not we’re going to see Natgas below $3 soon. Also the Fed pivot. There’s been a lot of statements from the Fed, and Sam’s covered that in detail, so it looks pretty dead. But we want to find out from Sam what’s going on. And we’ve also seen a lot of coverage of or a lot of commentary about a multipolar world in the last week or two, which sounds like 2006 era rhetoric or something, but we’re seeing a lot of that kind of rear its head again, and we want to talk through that with Albert. Thanks, guys. Tracy, let’s jump into it with with Natgas. Natgas is down something like 63% from its high in late August. I’ve got a price chart on the screen right now.
The average price before Q two of 21 was in the two to $3 range, 260 or something like that. So I only have 7% more to fall below $3. So we’ve seen it rise with every other commodity in 2021. But of course, with Russia invading Ukraine, we saw that spike up. So Russia and Ukraine are obviously still at war. And then we have this issue with an LNG terminal in Texas with Freeport. So we’ve got that story from Bloomberg up on the screen right now.
Can you tell us what is behind that Nat gas price fall, and what are you looking for in that market for that to stop?
Tracy
Well, first, again, Freeport, since you already put that up right, which went down in August, and people have been waiting for that facility to reopen because it’s an export facility. What happens is that since that facility is shut down, that landlocked US. Nat gas or that pushed downward pressure on US. Nat gas. Originally they were supposed to reopen in October. Then it was November, then it was December, and now it’s mid January. So that does contribute to a lot of problems. We’re also seeing warmer weather right now in the EU, and stocks are full in the EU. This market has become very complacent. That said, if we’re looking forward, there is a cold front coming in, I think January 22 to the EU. It’s supposed to be really cold for a few weeks. So what traders will be watching is to see how much does their build bring down during that time. But again, yes, the markets have become very complacent. They think that they’re indicative that this crisis is over, but that’s not necessarily true. We’ll have to see this winter how much stock is brought down in Europe due to cold weather.
Tracy
And you have to remember that in 2022, half of their storage came from cheap Russian gas pipeline. Right. So looking forward to when we have to refill this, they’re going to have more expensive LNG coming in, and that takes longer and it’s more expensive. And then we look at US. Export capacity. It’s still not built out enough for the contracts that we actually signed with the EU. So that may put pressure on US. Nat gas, but that would put upward pressure on European nat gas.
Tony
So does that pressure, does it drive the price up or does it just hold the price steady? Is there a mean reversion at some point where we go to, say, 260 or 270 on average and kind of some of these weather issues and Restocking just kind of maintains it? Or do you expect things to go back up to $9 or whatever?
Tracy
I think we could see a spike. Again, there’s a lot of mitigating factors in this market right now, and we really have to see how much is pulled from storage in Europe at this point. And hopefully Freeport is supposed to open mid January. We’ll see if that happens.
Tony
Okay.
Tracy
But that would really leave a lot of the downward pressure on prices in the US. Market because it would open us up to being able to export that.
Tony
We also saw the Japanese buying a US. Nacas company this past week. Right. Can you talk to us a little bit about that?
Tracy
Yeah, which makes sense. I mean, Japan has been one of the largest natural gas importers in the world, and they’re very concerned right now about energy security, as most countries are, particularly in Asia. They’ve had some problems with their deal with Russia because they have a joint project together, and due to sanctions, there are some problems involved in that. And so I think that was a very smart move, again, for Japan to kind of secure energy. I mean, they’re looking forward, much more forward than I would say Europe is.
Tony
Okay. Very good. So it sounds to me that there’s not really anything decisive coming up in the near term to change the direction, but the magnitude may slow.
Tracy
Is that yeah, technically speaking, we are very oversold at this point. That said, what we really are going to have to be looking at, or what traders should be looking at moving forward is do we have this reopening of Freeport mid January and this cold front coming in? If it does, traders will be looking at how much draw is is going to happen in in Europe or Bill stock? Okay.
Albert
Not to mention, Tony, that planting season for 2020, late 2023 and 2024 is coming up in Fertilizer. You need that gas fertilizer. So that’s that’s something else to look at. I’m not sure exactly how much it weighs on it or a bullish case from that gas by any means, but something will keep your eye on.
Tracy
Right.
Tony
But we have had some fertilizer volatility over the past couple of years, right? Oh, yeah. Russian invasion.
Albert
Yeah, I’ve been a big mosaic fan, which is a phosphate play, but also nat gas is the other component on the other side for the fertilizers that they use.
Tony
Great. Tracy, what’s your thought on fertilizer?
Tracy
Yeah, absolutely. I mean, I think we’ve seen that obviously pull back, but we’re heading into planting season again starting in the spring. So again, that’s going to be another factor as far as not gas is concerned. And the fertilizer analysts that I’ve talked to say they expect another price spike coming into about March.
Albert
Yeah, I believe also there’s going to be a price spike on the fertilizer front because the soil that the farmers haven’t used can’t sit as from what I’m told, can’t sit around not being used for too long. So 23,024 they’ll have to be replanting, those fields.
Tony
Interesting. Okay, well, good to know. Thanks for all of that. So let’s move on to the Fed. Sam, you’ve put out a few notes this week about the Fed and the Fed Pivot. Obviously, you’ve been saying for about nine months that the Fed Pivot is kind of wishful thinking. You’ve said it over and over and over again and there haven’t been hasn’t been a lot of kind of listening to it or people really haven’t heeded that necessarily as we see kind of run ups and and hope that we’ll see a pivot. But Fed minutes were released this week and you pointed out no member saw a need to raise rates in 2023. So that from your newsletter is on the screen right now.
So you’ve stated many times that the Fed has been very clear what their indicators are. And honestly, we’re seeing what you’ve said many times, that it’s vu and nominal wages. So vacancies and unemployment as well as nominal wages as well as core services, excluding shelter inflation.
And those have been very clearly stated by the Fed chair in his briefings. So why is it so difficult for people to see these things that seem to be very clearly stated by the Fed?
Sam
It’s personal preference. Right. The presuppositions and the initial conditions that you want based on the way you’re positioned. Right. So our brains really like to be correct. So if we can convince ourselves that the Fed is doing the wrong thing and should do something else and ignore the Fed will do something different, then it makes us feel a little bit better. So I think that’s part of it. But I do think that there’s something to be said for when no member of the FOMC sees the need to cut rates in 2023. That should be heated. That’s a pretty one sided trade. And you listen to some of the members of the Fed this week, bostic, who could be considered one of the more dovish individuals. He was still somewhat indeterminate between hiking 25 and 50 at the next meeting. When the most dovish member that I can kind of come up with or one of them doesn’t know if they’re going 25 or 50, that’s, that’s problematic. Right? That’s, that’s something that I think people are somewhat ignoring, particularly market participants, is that the Fed is not the Fed is not pivoting towards being dovish at this point.
Right. That the narrative that they have put out for the last six months has not changed. It has been very consistent and it has been very clear that vacancies to unemployment is a problem because one, when you poach people, you have to pay them a lot more money. So instead of call it the ADP report is really intriguing because they release what the pay rates are for people who aren’t switching jobs. It’s somewhere in the seven percentage range and the people who are switching jobs are getting 15% pay bumps. So the differential there is somewhat stark and somewhat shocking. I think that is somewhat underestimated by people when they look at what’s going on in the labor market. We have had a very good year for job creation and we just finished it off with a number that was well above expectations. And, you know, you can kind of nitpick and say, well, the average hourly wage was only up 30, basis points 0.3%. And you know, that’s that’s a positive for the Fed. Well, yeah, it’s only going to be up .3% because the vast majority of jobs were created in lower paying industries.
When you create jobs in leisure and hospitality, those are below the median. So you’re going to drag down the wage growth just naturally on that front. So I think a lot of it is going to be evolutionary for the Fed, right. They’re going to have to evolve their rhetoric at some point, but they’re not going to do it yet and they’re certainly not going to do it before the February FOMC meeting and they’re probably not going to do it until after the March 1. And that to me is probably not priced in at this point. And what’s really not priced in is the Fed just not really caring about the data until sometime in early 2024.
Tony
So you mentioned that in one of your newsletters, I think it was yesterday, talking about on Thursday most recent employment report. You talked about the Fed being stuck in the middle and literally you put some maps, which I put on screen.
Employment in the middle of the US could be a factor that keeps the Fed from slowing rate rises or at least from kind of pivoting. So why is the middle so important? We get so much coverage of what’s happening in Silicon Valley or New York or whatever, but why is the middle so important? And why is the Fed paying so much attention to the middle?
Sam
Sure, so the regions to the west were the only ones that lost jobs, according to the ADP report, which is pretty interesting. And the rest of the country made up for it and made up for it in spades. So while all the tech layoffs get a lot of headlines, you never really hear about the opening of XYZ plant in Kentucky or Tennessee, or the building of a plant in Tennessee, right? Those don’t get the headlines that Facebook laying off a few thousand people get. Quite frankly, who cares about a bunch of people getting laid off from Facebook? They probably shouldn’t have had jobs in the first place. Even say I’ll say it about alphabet. I’ll say it about all the tech companies. They overhired and they overhired in the wrong area, and now they’re laying them off. I mean, that’s what happens. It’s called the tech cycle. It’s not that difficult. But middle America is more than making up for it, and it’s making up for it in spades. And I think the Fed actually might be getting caught by the middle of the country. And it’s kind of the revenge of middle America, right?
Middle America always takes the brunt of the BS from the coast in terms of being dominated on monetary policy, being dominated on economic policy, and now they’re the ones kind of driving the ship. And I think that’s really underestimated within people’s frameworks that when we’re isolated to New York and California and see people getting laid off, that doesn’t really matter to the Fed as long as it’s being made up for by people in the middle. And people in the middle are making more money and they continue to spend. And there’s a lot of states in the Midwest and call it just flyover states. There’s a lot of states with a two handle on unemployment. A two handle. So if you want to hire people in middle America, guess what? You’re going to have to pay up if you want to hire a tech worker on the West Coast. Maybe you don’t, but that’s what’s going to get the headlines. But you’re going to have to pay up in the middle.
Tony
Well, you may not have to in terms of the rise on the West Coast, but the wages there aren’t necessarily coming down, are they, on the West Coast?
Sam
No, they’re not coming down, but it’s all about wage growth at this point. As long as you have a pretty sharp deceleration, you have some people on the market to hire. That’s important, right? Nevada and California have two of the highest unemployment rates in the country.
Tony
So is it fair to say that the middle is not say perfectly, but in some extent kind of catching up with the coast in terms of, say, real wages or something or no. No. Okay, so it’s still pretty cheap, but still just wage growth. Okay, very good. What else are we missing? Because look, you have been consistent on all of this. And you have for anybody who’s either listened to us or read your stuff for the last nine months could have seen this play out pretty much exactly as you’ve laid out. So what are people missing? I think the Fed has been fairly boringly, consistent, and you’ve said they would be, and that’s what’s happened. So are there any lines to read between that we should be looking at right now?
Sam
Yeah, so I laid it out about a week ago that I think what you really want to look for is the Fed going from a hawk to a grackle, hawkish to grackleish. And if you live in Texas, have lived in Texas, grackles are the worst birds ever because all they do is squawk. They wake you up and you can’t shoot them. They’re not like dubs, so play that all the way through there. But Grackles are an incredibly annoying creature. And when the Fed goes from being pure hawkish to really starting to grackle up its communication, squawk, squawk, squawk. You have no idea what they’re looking at. You have no idea what the metrics are. That’s when they’re getting ready to pause and pivot. And frankly, we have seen none of that right. Until the Fed process is not hawk to dove or dove to hawk, it’s dove, grackle, hawk, hawk, grackle, dove. And until they really begin to confuse their messages, they’re not changing shape. That we simply haven’t seen them begin to change shape. I do think that sometime this year, probably in the call, it the May to June time frame. That’s when you’re really going to begin to see the Grackles come out.
And a lot of confusing language about what they’re watching. A lot of confusing talk about the balance sheet. A lot of confusing talk about the future, the path of Fed Funds rates. And that’s really when I’ll get a little more bulled up on a Fed pause in the length and the structure of the potential to pivot. I don’t think there is a reasonable case to be made at this point. The Fed is going to cut in 2023. If there is a credible argument, it’s that the Fed breaks something and has to cut a lot. Right. So it’s it’s a little bit of a call. It a convex play here that if the Fed does cut, it’s not it’s not cutting 50 basis points, it’s cutting two or 300. And if and on the other side, you know, if nothing bad happens or nothing very bad happens, the Fed is just going to hold it there. So I think there’s a little bit of skew here.
Tony
Great.
Tracy
Okay, thank you. I have one question. Yesterday we had, like, Fed george came out and said the Fed, quote unquote, Fed, still has a lot to learn about how balance sheet policy works. Can you explain that to the audience? And would that not be one of your grackle birds? What is it called?
Sam
No, I think it was actually George just being honest. I think we had this convers we had this conversation a few weeks ago, Tony and I, with a guest that the Fed really doesn’t understand or doesn’t have quite the concept to pinpoint exactly how much tightening or additional tightening to Fed funds. Quantitative tightening does that’s, that’s what George was getting at. She’s a little bit behind the curve there. The Fed does have a proxy rate that I pointed out earlier this week in a, in a note. The Fed has a proxy rate that they publish that’s sitting at about 6.4%, give or take. So it’s about a 260 basis point spread, 2.6% spread to the current Fed funds rate. I think that’s something to kind of pay attention to, is that the Fed does have measures. I think it’s more that if you’re out there talking all the time, it’s difficult to get into the math.
Tony
They’re not stupid, they’re just annoying at times.
Sam
Exactly. They’re not stupid. They’re really not stupid. They know how tight they are. They know they’re sitting at about six and a half percent, 6.4% on an overall tightening basis. They don’t care that’s number one. They don’t care that it’s that tight. Number two, they’re going to continue to do it until they actually achieve their mission. Right. And it’s a multipronged process. And as long as markets seem to be fixated on what’s going on with the Fed funds rate and not going on with the entirety of tightening, that’s going to continue to be an issue for them. Like today, when everybody’s like, oh, look, we printed 223,000 jobs. Maybe this gives them reason to pause because average hourly earnings didn’t go up that much. Guess what? I mean, you can’t rip markets 2% and have financial conditions loosen like that and have the Fed go, yeah, I think we’re accomplishing our mission. Inflation is still high and unemployment is at 3.5%. Yeah, it sounds like a great time to pivot. Yeah, that’s the dumbest thing I’ve ever heard.
Tony
Right? Yeah. Okay, that’s great. Speaking of stupid not you, Sam. Albert, let’s talk about multipolarity.
Albert
One of my favorite.
Tony
Yeah, so we’ve had a lot of op eds and research notes and tweets over the past week or two stating that the future is a multipolar world. And this seems to be based on a lot of talk about the decline of the US dollar or the rise of the petrieon or something like that, around Chinese crude purchases from the Middle East or whatever. So, Albert, you put a series of tweets out, which I’m showing right now on screen about this very diplomatic, as you always are.
So can you walk us through this and help us understand what’s going on? And I’m going to try to play devil’s advocate as you lay.
Albert
No, that’s fine. I mean, you can play devil’s advocate if you want, but when it comes to multipolarity, it’s not simply a financial or economic thing that you need to look at. There’s multiple variables, including legal frameworks of the nation that is the currency issuer, the military strength of the reserve currency issuer. There’s multiple, multiple variables for it. And for some reason we have these economists that come out and say, oh well, the petroleum is coming into effect and that’s going to destroy the petro dollar and therefore the dollar is going to fall and blah, blah, blah. I’ll let Tracy get into the petrowan stupidity, but the dollar is simply the lifeblood of all trade in the financial system. You’re talking about for me, it’s like taking out your blood into Transfusion and putting in Mountain Dew and saying, oh yeah, everything’s healthy, you’re going to be fine. The whole system is raring to go. It’s a dumb argument. It just boggles my mind how people can sit there and even claim multipleity when there’s literally no alternative on a global scale for anyone to be thrown.
Tony
So let’s take this bit by bit. Okay? So a lot of these people are saying that the CNY will become more powerful partly on the back of crude coming out of the Middle East and crude coming out of Europe that could be denominated in CNY. Okay, so let’s take that. Tracy, can you talk to us about the Shanghai benchmark for crude? How successful has that been?
Tracy
Not at all. Even the futures market hasn’t been successful.
Tony
What percent of world order oil, just as a wild guess, do you think is traded on the Shanghai benchmark?
Tracy
2%.
Tony
2%. Okay. And it’s been around for how long? Two years?
Tracy
Yes. And if you look at their futures market, which has been around since 2016, we’re still only saying that domestically traded, you’re not seeing big players come in and hedge like they do with WTI or bread. So that aside, China came to Saudi Arabia with a suggestion after this new summit, the latest summit that they just had, and said, yeah, we would love for you to we could trade this on Shanghai and this could be traded in yuan. Saudi Arabia still has not yet come back with an answer. And so everybody jumped to conclusion saying it’s a petrol. Saudi Arabia is giving up dollar denominated oil. This is not true. I’ve talked to a lot of people in Saudi Arabia about this. I’ve talked to a lot of journalists. I actually had a spaces about it. So this is not true. And even if Saudi Arabia did decide to sell some oil in yuan on the Shanghai exchange, for whatever reason, all that would happen is they would be paid in yuan and instantly changes into dollars. Nobody wants you.
Tony
Wait a minute, let’s dig into that. Why does nobody want CMY?
Tracy
Well, because it’s not globally traded like the dollar is. Everybody wants dollars. People don’t want you on it.
Tony
Not freely convertible.
Tracy
Right. At all. Right. And especially if you’re in a merging market with USD denominated debt. You on. Nobody wants you on. Nobody wants you on. Right. And it’s not really free floating, right?
Tony
It’s not at all. We talk about crude and the ability for the Chinese purchase crude. We talk about their currency, CNY. But behind the CNY and the lack of convertibility is the PDOC, right. China central bank. So ultimately, if you trust a currency, you ultimately trust their central bank. So is there a basis for people globally to trust the PBOC? That’s a sincere question. It’s not a cynical question.
Tracy
No, I think people are not trusting central banks anywhere, but especially in China right now. People don’t believe what’s going on in China right now. People haven’t believed the data in China right now. And so, again, there will be a small amount of oil traded globally in yuan if China wants to do so and another country chooses to do that. Right? Russia has india was brought up for them, but that’s a very small 1% to 2% of globally traded oil, which is certainly not going to put the U on in a position to overtake the dollar in traded markets.
Tony
And something I’ll point out is the PBOC has literally, at times, used numerology to determine their benchmark rate. Okay? For people who go down this path, that the CNY is a rising currency. If you’re going to trust a currency, first of all, it has to be convertible. But second of all, you have to trust the central bank. And you can’t have people using numerology. I know we all complain about the Fed, right? But at least there’s a standard approach and there is a level of transparency as to the way decisions are made, right? Everybody knows what the Fed says, what minutes are released and all that stuff. But when you have a central bank that has at times and it’s rare, but at times use numerology by raising by anything that ends in eight or whatever, something like that, I mean, this is just stupid. And it’s not a credible central bank when those sorts of things are happening. Okay, let’s go on to multiplarity, to have defense. Okay? So is there a defense to enforce decisions that are made? So does China or whatever other multipolar places that these people are talking about have the ability to enforce their decisions overseas?
Albert
No, none. None whatsoever. I mean, even to take the Saudis as an example, right? The Saudis rolled out the red carpet for the Chinese, and the Petrowan argument started coming out all over research papers. But what will happen when Iran decides to press the Saudis once again in Yemen, or just through airspace violations and threatening missiles? Do you think that Riyadh is going to run to the Chinese? Are they going to run to Moscow? Or are they going to call up the Pentagon and say, hey, we need more, you know, Patriot missile batteries, you know, we need your support.
Tony
You tell me why. I think I know the answer, but I want to understand why.
Albert
The US. Has the most advanced military hardware there is on Earth by far.
Tracy
Right?
Tony
But why would they not call, let’s say the Chinese.
Albert
Do you want an effective defense system? What are the Chinese have for defense system? Are the Chinese able to put Chinese troops to defend against Iran if something happens or against the Yemenis? I mean, they failed in every single aspect of China.
Tony
Just some basic questions. Does the PLA have the logistical capability to get their resources to Yemen if needed?
Albert
Zero. They couldn’t even invade Albania if they wanted to. That’s how ridiculous it is.
Tony
I’m sorry.
Albert
How are you going to move 250,000 troops across the world, right? You have no ability. The Russians can’t even barely invade Ukraine. That’s on their border, and we’re sitting there talking about multipolarity. For an example, is the United States took out Manuel Noriega. That’s because he was in the Panama Canal area and he was screwing around. If that situation happened, do you think the Chinese or the Russians did hop on over there and take it out? They cut it.
Tony
Noriega fell out of a building, which is plausible.
Albert
Well, that’s the Russian way to fix things. But, I mean, this is just a silly conversation. I have no idea where this multiplarity is coming from unless it’s investment banks putting their analysts out there to help their clients get out of gold or get out of crypto or something. We know with the whole death of the dollar thing coming, what are we.
Tony
Missing on multi polarity? Is there something that we’re missing from this discussion on either side?
Sam
I don’t think we’re missing much. I mean, there’s always the want for multipolarity if you’re not the United States, right? Everybody wants it, but to the point. You have to have a credible currency, you have to have an open account, you have to be willing to have a deficit, trade deficit, period. And you have to have incredible military and defense. And guess what? In this world, the only country that ticks those boxes is the US. And if Europe ever got its act together, maybe it could have the military part, but that’s it. China simply does not have the capability to be a global offsetter to the US dominance. That’s simply what I would call fantasy, at least for the foreseeable future. Could it become one down the line?
Tony
Maybe.
Sam
We were all concerned about Japan 20 years ago. Look how that worked out. Then we were concerned about the Euro. Look how that worked out. I mean, it happens. Yeah, it happens on a cyclical basis. Every 20 years, we come up with a new thing to be concerned about on the multiplayer front, and every single time, nobody has the willingness to do what the US does. Somebody call it the exorbitant privilege. Right? It’s not. It is. Actually a pretty big load to bear, particularly on the military and spending front. So I think that’s wildly overlooked. And I think the other thing that’s overlooked is oil for dollars will persist for a meaningful amount of time. Nobody wants oil for Trinkets.
Tony
Right?
Tracy
And another thing I have to mention, does China even want to open up enough to be the world? They like to be shrouded in kind of secrecy, right? And they have to be secret. Whatever. If you’re world current reserve currency, you have to be completely open to the world, and they don’t seem to like that.
Tony
Well, part of it is they don’t want to be embarrassed. They don’t want to be seen to be making a mistake. It’s easier to point out other people’s mistakes. If they had transparency and they made a mistake, it’s embarrassing. If you remember, in 2015, they tried to devalue a little bit, they messed up and they way overshot, and it was really embarrassing. And then they did nothing for, like, four years. So they don’t want to be embarrassed. That’s a huge issue.
Albert
These are all complexities that have to be taken into account. And like Sam said, there’s only one nation at the moment that ticks the box. And listen, I’d be the first one to throw out warnings, red flags. If there was a competitor stepping up in the US’s shadow, they’d be the first person to say this, but just not right now. None of the components are there at the moment.
Tony
Right? And I mean, having said all this, I don’t want this to sound super pro American. Like, we’re all Americans, and I think we can all agree that the US is kind of a lumbering idiot around the US at times. Well, this is not trying to say raw, raw US. We’re just saying the Pragmatism of the moment is this.
Albert
Yeah, there’s so many different details that have to be looked at. And I spoke with Mike Green on this in our podcast and our spaces. It’s like the United States has water, has geography, is isolated from the rest of the world, has a military, has this, has that. It’s nothing to do about RA America. It’s just the way things have been laid out at the moment.
Sam
We’re lucky in that.
Tony
So if anybody’s watching and has a counter argument, please let us know. Honestly, we want to hear it and put it down there, and I’ll try to talk to Albert and see if he can come back to you. You may be careful what you wish for, but we’ll try to get Albert to come back to you. But let us know seriously, if there are valid counterarguments that encompass all these issues, just let us know in the comments, and we’d love to engage. So, guys, thank you very much. Really appreciate your time and all the thought you put into this. And have a great weekend. Thank you.
In the current Week Ahead, Harris Kupperman (Kuppy) of Praetorian Capital discusses his hypothesis that crude oil prices may reach $300 per barrel due to a decrease in supply resulting from environmental regulations, a lack of investment, and government actions. Kuppy also argues that high demand for housing in the US, driven by population growth and migration, will lead to a positive outlook for the housing market. However, he notes that high mortgage rates could impact the market, but a pause on interest rates or an acceleration of inflation could lead to a more favorable outlook. Kuppy suggests that the US housing market may see a shift towards lower-priced homes with fewer amenities in order to accommodate growing families. He also highlights the attractiveness of housing markets in emerging markets due to high interest rates and positive real yields on property appreciation.
Next, Brent Johnson of Santiago Capital discusses recent policy changes by the Bank of Japan (BOJ) and the market’s reaction to them. Brent argues that the changes, which included increasing the amount of quantitative easing (QE) and widening the range within which the yield curve control operates, were not a real policy change and that the market misread the situation. He suggests that the BOJ is trying to avoid a repeat of earlier this year, when rising interest rates caused chaos in the Japanese banking system and the market had to be halted. He also discusses the challenges central banks face in balancing the bond market and the currency market, and the impact of these challenges on the yen.
Finally, Tracy Shuchart of High Tower Resource Advisors talks through the relationship between oil demand and household savings during economic recessions, stating that past recessions have not significantly impacted oil demand. She also covers the potential long-term effects of declining population rates on global energy consumption, then comments on the potential for energy consumption to increase in the short-term, citing data from the International Energy Agency and discussing the impact of economic stimulus on household savings and consumption.
Hi, everyone, and welcome to the Week Ahead. My name is Tony Nash. Today we’re joined by Harris Kupperman. You may know him as Kuppy on Twitter. We’ve also got Brent Johnson and Tracy Shuchart. Kuppy is with Praetorian Capital. Brent Johnson, of course, is with Santiago Capital. And Tracy Shuchart is with High Tower Resource Advisors. So, guys, thank you so much for joining us. I think this is going to be a great discussion.
Hi, everyone. Wanted to let you know about a promo we’re having for our CI Future subscription product. This is our Inflation Buster sale. We know that prices are hitting you everywhere and it’s holiday time. So I want to give you a big break on our CI Futures product.
CI Futures has thousands of assets that we forecast every month. We do commodities, currencies and equity indices. Every single week, on Monday morning, there are hundreds, almost 800 of those that we forecast every week updated on Monday morning. We forecast economics variables every month. Those are available on the first of every month. In total, it’s thousands of assets.
We show our error. We are the only product out there, the only forecasting product out there that actually discloses our error. You can see our historical error and you can see a year’s forecast at monthly intervals. Right now, we’re offering 50% off of CI Futures. You can actually get it for as low as $25 a month. We have different arrangements based on the commitment. You want a full year or say, going month to month. So you can get it anywhere between $25 a month and $50 a month with our current offering.
So please check it out. Please click on the site. If you need a demo, let us know. Thanks very much.
We have some key themes here. The first, really looking at some of Kuppy’s discussions lately, looking at $300 crude, and kind of still with a question mark, bullish housing? I think that’s the first thing we’re going to jump into.
Then we’re going to look at Japan’s normalization. We had some news this week with BOJ Chair, kind of starting to normalize the Japanese money supply environment. So we’ll jump into that with Brent. And then we’re going to look at recession on oil demand elasticity with Tracy.
So, guys, thanks again for joining us. I’m looking forward to just a great discussion today.
So, Kuppy, you know, you have posted quite a lot about $300 oil in your newsletter and online. And, you know, there are a lot of, we had a show last week that was full of oil bulls. I don’t know that anybody particularly said $300. So I’m really curious about your $300 call. Can you walk through your thesis and just help us understand what you’re thinking?
Kuppy
Yeah, sure. I mean, overall, oil is just like all the commodities. It’s supply and demand. And since 2014, no one’s really invested and the supply side is really constricted. You have ESG mandates. You have lack of capital from institutional investors. You have banks that won’t lend. You have governments around the world that are canceling pipelines and canceling permits. And now you have UK talking about excess profits, taxes. That’s not an environment for guys to go explore and drill. And the thing about oil is that if you’re not drilling new wells, they decline over time. And so the question keeps being, where does the oil come from? People just think that the US. Shale, you can flip a switch and barrels show up. And maybe that was the case a decade ago, but that’s not how it works anymore. We’ve really hit the best acreage.
And from here on out, not only are you working mostly at tier two locations, but you’ve seen massive inflation in terms of oilfield services and those wells that everyone used to lie about and say it had 100 IRRs at 60, what we learned is they don’t break even at 60. And now you have massive oilfield inflation. I don’t know if you have decent IRRs at 80 or maybe even 100 in a lot of these places.
And I mean, it’s no secret why no one’s drilling. The numbers don’t work. And then, you know, you flip it to the other side on the demand side. Look, 6 billion people want the same standard of living and the same energy per capita utilization that all of us have. And you could have said this decades ago, but what’s changed is that they’re all in that part of the S curve where their per capita consumption explodes. I mean, look what’s happened in India. We’re having, I guess, a global recession this year, but demand is up teens.
You look all around the world, Africa, LatAM and demand is up. Even in the US demand is up. And so demand grows one or 2 million barrels every year. And where is the supply going to come from? What we’ve seen, like I said, is the supply is restricted. And even if you try to add supply, it takes a couple of years.
And so I think you’re going to have a massive mismatch. And what’s hidden that for the last year is that China has been offline. That’s two or 3 million barrels. The SPR is globally of about a million, million five. So you’re really looking at, let’s call it four and a half million barrels. That that’s been kind of like subsidizing the balances.
And, you know, you could debate, you know, exactly what the number is, and it moves around some. But for the most part, you’ve had this weird subsidy to the oil price, and I don’t think that’s going to be there next year. China has been pretty clear they’re opening and the SPR is empty. Meanwhile, Russian production is in free to fall after the US firms left. That’s another million. And like I said, global demand grows a million or two a year.
And I don’t think we can see much growth on the supply side. I think you’re going to have a four to 5 million barrel deficit, and that’s one of the biggest deficits in 40 years. And it may even be as large as we saw in World War II as a percentage of total consumption. And I think the price is going to scream out of control. I don’t think 300 is the clearing price long term, but I think you could get there in a super spike, especially given how much structured products out there that’s synthetically short. So that’s how I see it, and that’s why I’m so bullish.
Tony
Okay, so is your time frame for ’23 for the $300 price, or is that just kind of a longer term target?
Kuppy
I think it’s like the next year or two.
Tony
Okay.
Kuppy
Like I said, we’re going to have massive supply demand mismatch next year, and I think it’s going to scream out of control. There’s some things we could still do. They’re going to jump some more SPR. Maybe there’s some things around the margin they can do. But in the end, if you’re structurally short oil and there’s no oil to be had, I think the price goes crazy. And you always have a geopolitical kind of upside there to whatever happens to the price of oil, because it’s never really the downside, but it’s usually the upside if something crazy happens.
Tony
Right. Okay. We just had Zelensky speak to US Congress this week here in the US. And it doesn’t really sound like the war there is slowing down. Maybe it is, maybe it isn’t. I don’t know that we get a clear picture anyway, but I think there are a lot of assumptions that that will calm down next year for some of these guys who aren’t seeing super high oil prices. If that war intensifies, does that speed up your $300 price target, or does it affect it at all?
Kuppy
I don’t think it affects it at all. I mean, Russian oil is still making its way to the market. But US technology for the Russian oil fields isn’t. And so Russia is going to be in slow motion decline in terms of production, and I don’t really see what would change in the Ukraine situation. I think it’s very likely that as soon as the ground freezes there, those half million conscripts will be set loose behind the Ukrainian army and kind of surround them all. The only reason that Ukraine is still in the war is really just because it’s been kind of warm there. I think it doesn’t look very good, but that’s like more of a personal view. But I don’t think it really matters who wins this war. In the end, Russian production is rolling over.
Tony
Right, okay. And is there a possibility of, let’s say, a load of investment going into Venezuela in the short term and that volume that supply, hitting markets to save markets? I’m just trying to kind of figure out, is there a near term supply side solution?
Kuppy
Not really. I mean, who wants to invest in Venezuela? You can get a bunch of pieces of paper with guarantees, but the history…
Tony
Chevron does, of course.
Tracy
No, but it’s absolutely true. I mean, it would take billions. And it’s still the problem is geology there? And what’s going on…
Tony
Explain that. When you say the problem is geology.
Tracy
It’s not only their infrastructure which is decrepid after, it’s also geology. Right. They have very sludgy oil. It’s very hard to get out of the ground. So even with investments, you’re facing an additional challenge of the geology there being very, very difficult. And so that’s just going to add. So anybody thinking that Venezuela oil is going to change this dynamic is off base, in my opinion.
Tony
Okay, and then Africa supplies other stuff. There’re Brazil. There isn’t really anything that can be accelerated on the supply side. I’m just trying to poke through this, guys, just to get a better view.
Kuppy
I think you’re going to see an increase in offshore oil production around the middle of this decade. Guiana, Suriname, West Africa, Brazil, it’s all coming online. But it doesn’t come online fast.
Tony
Right?
Kuppy
Well, you have a lot of places that are rolling over or really struggling just to stand in place. I think we should look at is what’s happening in Saudi, where they’re frantically procuring every jackup that could be had globally. They’re going off into the Gulf. I mean, if their oil production was stable or they thought they had more onshore, which is the cheap stuff, they’d just be drilling more onshore. The fact that they’re going into the Gulf, it’s an increase in complexity and cost means that their existing fields are now getting old. And it’s obvious they’re old. They’ve been going for 70 years, but they’re finally seeing that water cut really pick up and they’re starting to panic. No, I think you have a lot of problems everywhere. Plus you have some swing places. Iraq, Libya gets cut off again from exports. You have a bunch of places where you could lose a million barrels in a hurry.
Tony
Okay. No, it sounds pretty ominous, actually. So I’m trying to find ways to push back on that. But again, we have some really smart folks last week, including Tracy, who had a similar thesis, maybe not 300, but a similar thesis. And I think what you’re saying, Kuppy, makes a lot of sense.
Kuppy
I think the pushback is really that something could happen on the demand side where you have a global economic crisis. They lock us down for monkey pox or the next pox they invent. Something like that is what I’d be looking at in terms of the wild card where demand falls off. But all it really does is postpone things. I mean, look, it’s December. 2023 budgets are being set at all the majors, and they’re being set in the context of mid 70s WTI. Do you think board of directors are going to approve an increase in spending? Like, I think 2023, and as a result of ’24 production, at least onshore US, is kind of baking the cake based on @75 price today.
Brent
Hey, Tony, I typically would defer, and I will defer on all things oil to Kuppy and Tracy, but I would say that to be completely truthful, I actually shorted a little bit of oil this morning. And it’s just a tactical thing. It’s not a huge deal. If it goes against me, we’ll stop out and it’ll be fine. But what Kuppy just said, I think could happen. The interesting thing is I think it’s possible we do get this demand shock right, and we get some kind of a global slowdown in the first half, which could potentially push oil a little bit lower. But if that were to happen, I would then, well, I already do agree with Kuppy’s thesis kind of medium to longer term. I think he’s kind of nailed the overall structural issues and why it is. And I would just say that if we do get kind of a short term demand drop that pushes the price lower, that could actually help to cut supply even more because firms go bankrupt or they can’t invest or whatever it is, and then it constricts supply even more, and then you get a military action. And in my opinion, that’s how you get oil at $200 or $300. I tend to agree with the Kuppy’s overall position.
Kuppy
You’re just talking about the slingshop, right?
Brent
Yeah, that’s exactly right.
Tracy
Absolutely. And you have to realize that if we have the lower oil prices we have and gasoline prices we have, that increases demand in a supply side constricting environment. So that’s where you get your selling shot. So it really depends on, I think, how you’re trading this definitely depends on your time frame. If you’re longer term, that’s one thing. If you’re shorter term, I think oil is going to be volatile for the next few quarters.
Tony
So because we’re actually talking about $300 oil, I think it’s Citi who always does the extremes in crude. So now we’re going to have a Citi report that says $500 oil. Right. Thank you.
So, Kuppy, you also had a very interesting call on housing. And when I sent out the Tweet about this recording, I had some questions about your housing call, your bullish housing call. And I want to ask, are you still bullish housing? And can you go into that thesis a little bit either way? What’s your thinking on US housing now?
Kuppy
I’m bullish US housing. Structurally, you have a shortage of 5 million homes. This is population growth, especially people my age a little younger that are starting families and they need homes. And there’s been a lot of migration in the US. And so you need a lot of homes in Texas and Tennessee and Florida and not where these people are fleeing from. And so as a result, there’s just strong demand for homes. At the same time, if you take mortgages up to 7%, no one could afford a home.
And so we’re having a bit of a pause as the Federal Reserve kind of intercedes in the housing market. And it’s kind of like a Brent Slingshot in oil. All you’re going to do is make the problem worse if you’re not building enough homes for the demand. Because the demand keeps growing, the population keeps growing and so they’ve kind of postponed us a little. You’ve seen rent spike out of control, though. That’s kind of stabilizing a little just with the economy kind of slowering. But no, I think the housing market is going to do very well, but it’s going to need a pause on interest rates or an acceleration on inflation.
I mean, you could look at a lot of emerging markets where you can’t borrow for 30 years, you can’t maybe get five years and you’re going to pay 15% interest rate on that. But you know what? They’re having huge demand for housing because if inflation is 20 and you fund it at 15 and you get put a couple of terms of debt on that, well, you’re making 20 30% on your equity. That’s a good place to be as a 25 year old guy or 30 year old guy with a family trying to get a home.
Tony
Yeah. When people don’t understand why real estate is so attractive in Asia and why, say, Hong Kong homes or Chinese homes or whatever, why you always have this inflationary environment in real estate in Asia? What you talked about, Kuppy, is exactly why. I think it’s very hard for people in the US particularly to understand why real estate in Asia is so appealing. And it’s exactly for that reason.
Kuppy
Yeah, LatAm and Africa too, where interest rates are high, but you still have a positive real yield on owning your property because it’s appreciating.
I think the other thing I’d say in the US and I think people kind of lost the narrative here. Guys are complaining that when their parents, like my parents were buying homes, it used to cost two or three years of salary and now it’s eight years or ten years of salary. And they say homes are really expensive.
Yes, homes are really expensive. But the guys got buying a McMansion today. It’s like a 4000 square foot home in the suburbs. If you look at what the people were buying in the 70s and 80s, it was like 1200 square feet, it was a two bedroom with a little kitchen. Now the kitchen has $200,000 of appliances in it. Like right. The reason these things got really expensive and, and unaffordable.
I think you’ll see some reversion back to a lower price point home with, with less amenities because you got to put people into homes as they were to put them. And so, big picture, I’m super bullish you know, you, you can’t go indefinitely with, you know, having a family with three kids and they’re in a two bedroom that’s 1200 sqft.
They need space, but that’s going to take until rates come back and as soon as rates peak out and start dropping or when inflation accelerates again, I’m going to be all over housing.
Tony
Great. Okay, that’s good. Thanks for that clarification. I think that’s really interesting, but in the near term you’re not necessarily bullish on housing in the near term, while rates are rising?
Kuppy
I think housing is going to do just fine because the tailwind is so strong, but at the same time, I think there’s better stuff to own. I’d much rather be in things that are pro inflation. I really just want to stick with energy. Uranium. I think those are trends that do well really in either market environment, but just because of the supply demand imbalances of the next year or two, I think they just work idiosyncratically no matter what. And I don’t know, I just think it’s easier trades.
Tony
Great. Okay, we did have some questions actually about emerging markets, so I just want to ask you first Kuppy, but then the rest of you guys, what emerging markets are you looking at and why?
Kuppy
I’m not really looking at any, so I can’t say. I will say I have a lot of friends that specialize in emerging markets, and they could show me a bunch of metrics that say emerging markets haven’t been this cheap in a very long time on cash flow, book value dividend. And there’s some reasons why maybe they deserve to be cheap. But those things come and go in terms of the why. But you buy cheap assets, things usually happen to you that are beneficial over time. I see Brent laughing, so explain.
Brent
Okay, to be clear, I’m not laughing at Kuppy’s answer. I tend to agree with, if his friends are telling him these things, I’m sure that’s true because they tell me the same thing. I just kind of laugh because I feel like every year for the last seven years, the trade of the year at the beginning of the year is to short the dollar and go long EM. It’s always the trade, it’s always the big idea, and to me it just never plays out. And I don’t think it’s going to play out right now.
I personally am not looking at any EM other than to stay away from it or perhaps to go on vacation to it. I don’t want anything to do with it from an investment perspective. Probably, not surprisingly, I don’t think the move in the dollar is over. And I think if we get a slowdown in the first half, which I think we will, I think that will play out in the Euro dollar market, and the emerging markets just as much, if not stronger than it will in the US markets. I don’t see an environment where EM outperforms the United States right now
Tony
In dollar terms.
Brent
In dollar terms. Yeah. Maybe in local terms. In local terms, that could easily happen. I mean, take a look at Turkey, right?
Tony
Right.
Brent
Turkey stock market has gone up two or 300% in the last 18 months, but they’ve got 80% inflation in local terms.
Tony
Right. So you have to.
Brent
So you have to yeah, right.
Tony
So Brent, can you talk us through you mentioned the dollar and you know, everyone always wants to know what your thoughts on the dollar? Can you walk us through what you’re looking for, say, over the next three to six months with the dollar?
Brent
Yeah, so, I mean, over the next three to six weeks or a couple of months, I don’t know, maybe it just goes sideways. But I think by, if not the end of Q1, beginning of Q1, kind of April-May time frame, I think the dollar is much higher than it is right now because I think that, you know, I sent out a tweet earlier today where because I, was kind of laughing.
I was talking to somebody and they said, well, rate hikes are over, so the dollar is done. And I was like, well the, the dollar can go up for reason other than rate hikes. And he was like, what are you talking about? And here’s the thing. From 2008 to 2019, the dollar went up 20% and there weren’t any rate hikes. I mean, there was a few in 2018. And in 2014, in 2014 and 2015, the DXY went up 25%. There were zero rate hikes. It’s because there was a global slowdown, right.
And when dollars aren’t circulating and the world needs dollars, there’s a dollar shortage. Supply, demand, it pushes the dollar higher. And so I feel like the move of the dollar in 2020, I’m sorry, in 2022 was all about rate hikes. Interest rate differentials, right. And maybe that is potentially over.
But the dollar can move for reasons other than interest rate differentials. And I think people have forgotten that if we go into a recession or if we go into a global slowdown, all that debt that is issued in dollar still needs to be serviced. And so I think perhaps the run in the dollar due to rate hike differentials is over. But I don’t think the run due to dollar shortage, due to a global slowdown and the need to service dollar debt is over.
Now, if I’m wrong, I don’t think that the Fed will come out and totally flip until they’re forced to do it. And the only reason they would be forced to do it is if the dollar was higher and all these asset prices were lower. So is it possible by the end of 2023 the dollar is lower? Sure. But I think at some point in 2023 we’re going to get another run in the dollar. And I think it’s probably in the kind of the March to April-May time frame.
Tony
Well, I think what people also forget is that the Fed has eight plus trillion dollars on its balance sheet, and if they start to sell it off in any sort of volume, that takes dollars out of circulation, right?
So that’s a big assumption because they’re shrinking it on a small basis now. But if they accelerated that, that would take dollars out of circulation. That’s bullish dollar as well, right.
Brent
Well, the other thing I want to make this point because I think this is a critical point. And I was speaking to, I went to a conference in October, and I’m not going to pick on this conference because it’s happened at every conference I’ve gone to. And I had so many people come up and me and say, what’s going to happen with the Fed? How’s the Fed going to get out of this? How’s the Fed going to get out of this? They’re trapped. Nobody has ever come up and asked me how the ECB is going to get out of it.
Nobody’s ever come up and asked me how the bank of Japan is going to get out of it. Nobody’s ever asked me how the Bank of England is going to get out of it. And the thing is, they’re in worse shape than we are. I hear you, and I understand all the problems associated with the dollar. Listen, it’s a horrible currency. It’s just better than the other three jokers.
Tony
Gold or CNY, Brent. Gold and CNY solves everything.
Brent
Exactly. So my views on the dollar are not just based on what the Fed is going to do. A lot of it’s based on what these other central banks are going to do. And I just don’t think their leaders are any smarter than ours.
Tony
Perfect.
Brent
And I think they’re trapped even more than we are. So anyway, not to go off on a whole tangent, but that’s why I don’t want to have anything to do with emerging markets.
Tony
That is not a tangent. In fact, that’s a segue to our Japan normalization discussion. Right.
So thanks for that. So we saw Kuruda come out, talk about changing policy a little bit, and markets reacted with a stronger yen and yada yada. Right.
So is this, do you see this as a real change? I see this tweet that you sent out earlier this week saying if you think happened to think today’s move in the BOJ is going to work out for Japan, it’s not.
So can you talk us through? Is it just preparing for the next BOJ chair to reduce risk if they change policy? Is it a real policy change? Is it going to work out? What do you see there?
Brent
I don’t really think it’s a policy change. And if you actually look at a lot of people, just see the headline and just react, and they don’t even think about what the headline means. And I think the market has got into a habit, and people in general have got into a habit of reading into it what they want to read into it. So I think very much the world wants Japan to get out of this, and they want the dollar to go down. And so anything that shows that another central bank is going to outperform the dollar, they ultimately want that to be true, whether it is or not.
If you read what they actually are doing, they’re actually increasing the amount of QE that they’re doing. So if you just read that sentence, you’d say, holy cow, the end is going to go even lower. Because not only did it have a horrible year this year, but now they’re going to increase QE. But at the same time, what they said is that we’re going to let the bond, the yield curve control, the band with which in yield curve control moves, we’re going to widen that.
So we could have interest rates in Japan go up to 50 basis points rather than 25 basis points. And so the market kind of interpreted that as, okay, they’re actually moving towards rate hikes. Now, they didn’t say they’re moving towards rate hikes. They didn’t do a rate hike. But everybody wants to believe that they’re going to raise rates.
But here’s the thing. Earlier this year, and I think it was March or April, interest rates in Japan, because of inflationary pressures, are now actually even hitting Japan. Long term rates in Japan moved up 25 basis points. And because the two to five to ten years prior to that, they were doing QE and negative rates. The banking system is chock full. And when I say the banking system, the banks, the hedge funds, the endowments, the all the institutions in Japan have all these zero yielding bonds, Japanese bonds on their banks, and because, and they’re long term bonds.
And so when yields even go up 25 basis points, the convexity makes the balance sheet of all these institutions go upside down. And so when interest rates went up 25 basis points in April, it caused all kinds of chaos in the Japanese banking system, and the market had to be halted, and the Bank of Japan had to come in and promise to do more yield curve control in order to keep it from blowing up.
And two days ago, or three days ago, whenever that announcement was, they made that announcement, the market took it as an interest rate hike. And guess what happened? They had to halt the Japanese bond market again. So I understand if they do raise rates, that would strengthen the yen.
But the problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is, if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say. I think the yen is going much, much lower.
Tony
Okay, interesting. How long do you think it will take before markets call their bluff, is that?
Brent
Maybe a couple of months?
Tony
Really?
Brent
Again, I think we’re going to have a lot of problems by the end of Q1 all over the world, not just in Japan, not just in the US, not just in Europe, but everywhere. I think we’ve been slowly moving towards this crisis, and I think we’re almost there.
Kuppy
Brent, I think a lot of the move in the yen over the past couple of weeks is really just guys degrosing. That was the funding currency for all the risk assets, and risk assets went no bid, basically all year, and guys are finally getting redeemed from their hedge funds, and it’s year end redemptions. You got to pay it out. It’s got to unwind your yen to unwind your Tesla, which is also in free fall.
Brent
That plays into it as well. Yeah, I see your Tesla queue there. That’s a good timing.
Kuppy
I’ve had this, what, five years? Six years. It’s probably coming due today.
Tony
When is the Twitter Q month coming?
Kuppy
I don’t know.
Brent
Oh, they should have one of those, shouldn’t that’s a good idea. We should start selling those.
Kuppy
I’m a little conflicted here because I feel like Elon might be doing the right thing on the Twitter side, whereas Tesla is still like the evil empire. So I don’t know.
Tony
Okay, we’ll have another discussion about that at some point. Brent, you talk about things coming in Q1. Can you share a little bit of your thoughts there around markets, potential recession that might…
Brent
Well, yeah. I mean, in general, it’s kind of amazing. Now, let’s reverse ten days ago to the Fed meeting. At that time, the Fed had raised four and a half, almost 4% for the year, and markets were down, but they weren’t down that much. Now, since then, they’ve sold off another 5% or 10%. So now they’re getting close to the lows of September again.
But this is what I think. I think a lot of people are surprised that the market hasn’t crashed more than it has based on the four and a half percent or, or 4% rate hikes. And I think what sometimes people forget is that we may not even be feeling the effects of the very first rate hike yet, because oftentimes rate hikes take nine months to a year to actually.. The effects of the rate hike to show up in the economy and work their way through the economy.
Tony
Powell talked about that a lot in his last…
Brent
Well, no, exactly. And the first rate hike was nine months ago. It was in March. So it really wasn’t that long ago. Right. And now they’ve raised four times since then. So I just feel like by the time we get into February, March, that stuff is going to have started to show up, perhaps dramatically. And I think the Fed is going to continue raising until they just can’t raise anymore.
Now, whether they should or not, whether you believe Powell or not, again, that’s kind of a separate subject. I just think he’s going to do it because he wants to do it, and the last thing he wants is for inflation to reaccelerate on his watch. Right. And if he crashes the market, then everybody will be begging him to do QE and he can go do QE and be the hero. So I just kind of see that that’s how it’s playing. And I think that probably a lot of people agree with me on that. I don’t think that’s any kind of a crazy view right now. I think a lot of people think he’s going to hike until it crashes the economy, but I don’t see him slowing down until he has to.
Kuppy
Brent, I got a question. Lagarde has been super dovish for a very long time. Depending which country in the Eurozone you’re at teens, maybe even high teens inflation all of a sudden, last week, she just came out swinging.
Brent
She did.
Kuppy
And what do you think changed? Did someone just whisper in her ear? Did she look at a debt bad data point? Did a politician be like, hey, the peasants are upset about the price of bree? Like, what happened?
Brent
I think it’s a little bit of that latter. I’ve talked about this before. I think we all know that financial repression is the name of the game for governments. That’s how they get out of these big debt, these big debts that they, you know, they want to inflate it away over time. The problem, though, is what they would ultimately like to do is to get very steady rate of inflation at four or 5% a year for ten years right. And inflate away 50% of the debt. The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right?
And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting. But when you’re cold and you’re hungry, that’s when you revolt. Nobody revolts when they’re full and warm and have a great job and going on vacation. Why would you revolt in that environment? But when things are going against you and they start pushing back politically. And so I think that the pressures in Europe are a little bit just too much for them to not at least acknowledge it publicly. Now, whether they actually do anything and follow through on it, that will be interesting to see because, again, ultimately, I think they will save the currency rather than save the bond market, or I’m sorry, they will save the bond markets rather than save the currency. But I do think it’s a little bit of why Lagarde came out as strong as she did.
Kuppy
Do you think she follows through or?
Brent
No, she’ll try again. And it’s like Powell. Powell will keep trying it. Well, eventually the markets will push back on them and won’t let them, but I think she might try. But I think Europe is just screwed for lack of a better word.
Tony
So let me ask you guys and Europe, are we in a position where we have to approach what Japan is doing, where eventually the central bank will come in and buy up equities and they’ll buy their debt? And this is a cycle that just can’t stop? Is that what’s going to happen in the US and Europe as these central bankers are put in a quarter? And are we getting closer and closer to kind of D Day?
Brent
I think we probably are. Now, and I think there’s many people who believe that there’s nothing that central banks can do to squash inflation. I actually think that’s wrong. I think they could cause a depression which would have put a damper on inflation. Now, I don’t think that they can engineer a soft landing, but I think that’s what could happen at the end of kind of Q again, Q1, Q2. I think we could get some deflationary pressures coming through the markets due to the rate hikes that central banks have been trying and we’ll force them to U turn.
The biggest question I have, to be really honest, I’m not sure how this plays off, is whether or not we can get one more cycle of QE of risk on before they have to kind of reset the whole system. I could see a thing where we just have a couple maybe things just go down from here and a year from now they have to reset everything. But I could also see a scenario where we again have a bad first half of 2023. They reverse everything, we get another QE cycle that takes us into 2023 through the election five.
Yeah, exactly. And I don’t really know how that one plays out. I could see it kind of going either way. But ultimately to your point, Tony, I think the central banks will have to reverse.
It was funny. For several years, we were in a currency war where everybody was cutting rates to weaken their currency. Now, in the last couple of call a year, they’ve been raising rates to kind of strengthen their currency to try to fight against the inflationary pressure. So now the currency wars, who can outhawk the other one? It’s all going to end in tears.
Tony
Sadly. I think you’re right. Speaking of tears, Tracy.
Brent
No. Are you going to cry?
Tony
As we talk about difficulties
Tracy
every day?
Tony
…Recession and consumption and Kuppy started talking about oil at the start and oil demand. You posted a chart about looking at oil demand elasticity and household savings as central banks take different actions. Of course, that changes as stimulus have stopped. If it doesn’t come back on, there are changes to household savings, these sorts of things. So you posted a really interesting chart about household savings and can you talk us through a little bit of that and a little bit around oil demand elasticity?
Tracy
Yeah. What I think, I think there is a misconception that when there is a recession, that oil demand suddenly falls off a cliff. Right. Everybody has a very short memory and they look at COVID when we literally shut down the planet, but that’s not the reality. So if you look at past recessions in general, 2008, the most recent one, great financial crisis.
Now, we did see a dip in demand, but it was only about 2%, and it was only about 2% for two quarters. And then by the third quarter, demand increased over what it was before the great financial crisis. And so when I talk about the fact that everybody talks about savings, rates are going down, credit card rates are going up, nobody’s going to be able to afford oil, everything’s going to shut down, there’s a lot of fears running around. We’re going to have this global recession and nobody’s going to use oil anymore. And that’s kind of been the prevailing narrative. And we’ve seen this in open interest.
We’ve seen many funds sort of lose interest over oil. That’s been a great year for them. They shed their positions. But this prevailing narrative that we keep hearing in the media, “oh, it’s a global recession. Nobody’s going to use oil again.”
It’s just not a fact. We look at the data, we look at every recession. Recessionary pressures really have not taken much demand off the market. And every time that demand has been taken off the market within a very relatively short period of time, we’ve seen demand increase over that prior level. And so to use this kind of as a narrative, I think is not correct if you actually look at the data.
Tony
Okay, so we had this weird kind of almost recalibration of expectations with COVID where really everything came to a stop, right? So demand just cratered compared to, say, 2008, 2009 crisis. And so kind of the base effect of demand coming back has been really impressive, kind of year on year growth each time, right? And then we’ll continue to see that as China comes back.
But there are some real concerns for example. China’s population peaks out, peaked out in 2022 or ’23 or something like that, right? So their population is peaked out, and it’s all downside from here, right? Unless there’s real growth in their consumption. Europe’s pretty peaked out. Japan’s peaked out. The US hasn’t peaked out.
But we have some of those long term trends, and we have a recession. I’m just trying to play a little bit of devil’s advocate here. How much of an impact do you think those have on consumption, on the consumption dynamics, particularly with regard to savings and how, if people don’t have rising incomes and their saving rates decline just to make ends meet, which wasn’t necessarily the case in say, 2010 eleven. Can all of those things come together to really impact kind of the overall consumption trend or is that just not really a concern?
Tracy
I think there’s two separate things. If we’re talking about declining population rates, that’s sort of a long term view. We’re looking 20-50 years out, does that trend continue? And of course, at that point, you’re talking about global energy consumption decelerating, obviously.
Tony
And we’ll have nuclear powered flying cars right by then. So.
Tracy
Absolutely. But if we talk about, you know, shorter term things or near term things, things that we’re looking at, you know, over the next, say, you know, year to five years to ten years, I mean, there are still, regardless of a recession, we still are seeing year to year global consumption increasing. And in fact, we just had IEA, which I know is a WEF show, but we just had them completely revised their whole global oil growth demand system going back to 2014. They redid their entire numbers and added millions of barrels. And the media really likes to use that IEA data. They just repackage it and whatever. And they’ve been completely wrong at that point.
This goes back to when we had missing barrels and everybody was talking about that back in 2014. But the fact is that by any measure, global consumption is rising, right? Because you still have emerging markets that are trying to get out of the darkness. You look at countries like India, which they’ve had the strongest global demand increases so far this year. So there is always demand coming from somewhere, and the problem always goes back to supply.
In fact, we just don’t have the supply catching up with the demand. So even if we look at the Western world and even perhaps China years out, I mean, you still have to understand they’re still increasing demand, even though they’re absolutely even if their population is elderly and declining, their consumption energy wise is still on the uptrend.
So we still have these huge markets that are still on an uptrend. We’re going to see this in emerging markets. We’re going to see this in India, we’re going to see this in South America. We’re going to see this in Africa in particular, because BRI, suddenly they got a lot of money from China. They can build out this infrastructure, and they need, there is more demand there. So even though the west may be looking towards this green energy transition, we have to realize that that green energy transition also has not been working out. We just saw the biggest increase in coal demand in the EU in ten years this year.
Tony
Yes.
Tracy
Incredible that energy policy is not.
Tony
Reporters on sarcasm. Green energy transition. It’s on sarcasm.
Tracy
Really what we have to boil this all down to, long and short of I know I always talk in, like, broad picture, but really it all boils down to the data. What is the supply coming online? What is the demand going forward? And so far, demand outstrips supply. There is no way around that right now.
Tony
Okay. And it’s fairly inelastic it sounds like.
Tracy
It is fairly inelastic, even if you have, you know, again, look at the data. Anytime we’ve had a recession, demand is bounced back very quickly, and we’ve only seen a 1 to 2% pullback in demand. It’s not like COVID where everything crashed.
Tony
Okay, so we started and ended with crude. And I usually finish up guys with kind of, what do you see for the week ahead? But I’m going to change it up a little bit. As we go into 2023, with regard to markets, what keeps you up at night? What is that thing that you think about and you’re like, well, Account Odd sees this, and it’s obvious to me. What is that thing that keeps you up at night, Kuppy? I know you’ve got some amazing things in there. So what is that thing? And I know none of us see what you see.
Brent
You can’t say bourbon. That’s not a legitimate answer.
Kuppy
I think next year is the year that oil matters. We’ve lived in this world where oil has been sort of range bound, really for eight years. And people just got used to energy being cheap. I mean, we had a little bit of an energy scare in Europe, and I say “little” because that should have been the wake up call. And instead, I think you’re about to see the big one and you’re going to see energy as a percentage of GDP go to some crazy level like in the 1970s. And I think as a result, most of the Q sips on my screen are going to get smashed and everyone’s worried about JPowell. But in the end, JPowell is not the world central banker, oil is. And JPowell is going to chase oil higher on the screen for a while. He effectively has been chasing oil higher on the screen. And when oil rolled over from the summer onwards, that’s what cooled off the inflation. It’s not Fed funds rate that kind of helps. It’s really just oil. And as oil reaccelerates, JPowell is going to chase it higher on the screen and it’s going to get to a price where he’s going to have a dilemma.
He could either keep chasing oil higher or he could bail out the real economy with the rest of the economy. And I think he’s going to bail out the rest of the economy by cutting rates and sending oil parabolic. I think that’s how you get to my 300 number. And I don’t think people realize that oil at 90. Who cares? Oil got to 120 for a couple of weeks this summer. Who cares? What if oil is consistently in the high 100 and it just stays there? I think it just dramatically changes the arithmetic for every other QSIP on the screen. Absolutely. Aren’t plugging that in.
Tony
Okay, good. Thank you. Tracy, what keeps you up at night?
Tracy
I actually think that looking at 2024, I think that the metals markets are going to make a huge comeback. I’m not talking precious metals, I’m talking basin industrial metals only because I think that oil plays a part in that. If we have higher oil prices, we’re going to have higher metals prices. And because the west, in particular the EU, does not seem to want to be giving up on this green energy policy. We’re going to need a lot of metals, we’re going to need a lot of copper, we’re going to cobalt, nickel, whatever, if they want to continue down this path.
Tony
Sorry, you’re saying you need more industrial metals for batteries and other infrastructure for the green transition?
Tracy
More than we’re currently. In fact, we don’t even have the known reserves to get to the 2030 goals right now. If we were talking about copper. And certainly the mining industry has suffered the same problem as the oil industry has a lack of capex for the last seven years. And so we simply just don’t have that. So what I’m looking at, I think that oil is a big story and will continue to be a big story in 2021, 2022, but I think metals are going to start to come into play in 2023 and ’24. And what I’m worried about is we literally, again, no capex, and we don’t even have proven reserves anywhere. So that’s what I worry about. The metals based in industrial metals.
Tony
Okay, so so far it’s commodities keeping you guys up at night. Brent, wrap us up. What keeps you up?
Brent
It’s kind of interesting. I think that the underappreciated risk, even though the dollar made a hell of a run this year, is that we could have a funding market problem in the euro dollar market. And to be honest, it doesn’t keep me up at night because I’m kind of ready for it. I’m expecting it.
You know what keeps me up at night is these guys in Washington and Frankfurt and DC, and Tokyo and Beijing figuring out how to extend this game because they’re masters at keeping the plate spinning. And I’m always trying to figure out what are they going to do next to keep this whole house of cards going. And to me, that’s the wild card. I feel like I can kind of figure out markets. If markets are just left alone, I can kind of figure them out. The wild card is when the masters of the universe are the powers that be, however you want to describe them, come in and start messing with things, because that can change things, at least for a day or a week or a month, and sometimes that’s enough to wipe you out.
Tony
Yeah. Okay, guys, thank you so much. This has been really enlightening. I really appreciate the thought we put into this. Want to wish you all the best for the holidays and a fantastic 2023. Thank you so much.
Gasoline prices have continued to decline in the US. Big Fed meeting. 50bps. JPow insists the terminal rate is 5.5. Markets seem to want a rosier picture. How do you trade this? Bob Iaccion shares his expertise.
We’ve seen some weakness in crude prices, of course, and consumers are seeing a bit of a break with energy prices. Jay Powell doesn’t see inflation abating soon – he seems to believe it’ll be persistent. Part of that must be with energy. Our Complete Intelligence US headline CPI forecast looks at a reacceleration in early Q2. Is that around the time Josh expects energy prices to re-accelerate or does he have a different expectation – and why?
Tracy posted a really interesting chart recently. We’ve been talking about the SPR releases for a long time, but this chart is super stark. She walks us through what this means.
Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by, by Bob Iaccino. Bob is with Path Trading Partners. We’re also joined by Josh Young. Josh is with Bison Interests, and Tracy Shuchart, who is with High Tower Resource Advisors. Guys, thanks for joining us today.
And Bob, I know this is your first time to join us and I really appreciate you taking your time. I’m always really shocked by the the quality of people who will talk to us, which is just amazing. So it’s, it’s great to have you here. And Josh, this is your second time and you have just hit a lot of home run since your fund started. I think you’re up 140% or something while the industry index is down like 20% or something. Is that right?
Josh
I can’t talk about my performance.
Tony
Okay. So I think you’re doing pretty well. So I’m just really grateful to have you guys here. We’ve got a few key themes here.
Of course, there’s been a lot of macro data out and some of that stuff has been classified by a few people as kind of widowmaker trades. So let’s get a little bit into that with Bob.
We’re going to look at energy and inflation and Josh is going to lead on that. And then we’ll look at WTI and the SPR with Tracy. So Bob, let’s start. You had sent this tweet out from Emma a few days ago where she says that markets kind of are believing what they want to believe and it’s really a trap and some of them are kind of widowmaker trades.
So can you talk us through that? Of course. We just had the big Fed meeting with a 50 bps rise and JPowell now insists that the terminal rate is 5.5 or somewhere around there. We saw PMIs come out today that were a lot lower than expected. We saw a downward revision in unemployment by over a million jobs sorry, of employment by over a million jobs. So why do markets continue to want to see a rosier picture or where are we right now and where is it going?
Bob
Well, it’s interesting, Tony, and again, thanks for having me. When you’re looking at equity markets specifically okay, let’s just talk when we talk about markets in a general sense, we’re usually talking about equities, which is one of the things I think the mainstream gets wrong.
But when we’re talking about equities, you’re talking about just a natural upward bias. There’s many millions and billions of dollars that go into 401ks and long only mutual funds every single month that people don’t even look at. So when all else is equal, you have a slight upward bias in equities.
And therefore it kind of stands to reason that people in general, investors, retail investors, want things to go up. And I suspect when somebody starts trading I remember I gave a speech pre COVID and somebody came up to me and said, I don’t understand how you trade the ES, which is S&P futures. I said, what do you mean? They said, well, stocks always go up, right? So sometimes you can be short ES. And I’m like, oh, my Lord, let me show you a chart. Stocks don’t always go up. If you take a look at an equity chart going back to 1920 or however long you want to be, yes, it is angled this way.
But when you see what’s going on right now, there’s a lot of old adages in the markets that I honestly can’t stand. But one of them gets repeated a lot is, you can’t fight the Fed. And most people are trying to fight the Fed. And Jerome Powell keeps coming out there and says, why are you guys fighting me? So the more and more stern Jerome Powell gets about interest rates, the more and more the markets get comfortable with what the Fed is doing and saying, sort of, and I’m paraphrasing what I think the market would be saying as a whole, “okay, we know what you’re doing now, so we’re comfortable with it, and we’re just going to buy stocks.”
And that seems to me to be troubling. It’s interesting because I’m bearish medium to long term, but I own the S&P Futures right now. I actually bought them on the first day of the fourth quarter with a mindset toward this type of activity. I said, okay, the fourth quarter is going to be higher than the third quarter, so I can go ahead and buy a small ES position within the context of my thesis that toward the end of the first quarter, beginning of the second quarter, I think equities dump again. I don’t think that the lows that we saw in October are the ultimate lows for this particular bear market.
Tony
So you’re saying that selling out of Trump’s NFT doesn’t mean we’ve hit the bottom yet or whatever.
Bob
I took screenshots galore of that Trump Superman thing with the laser. I’m like, if he could have a body like that, so can I, right? By eating McDonald’s and drinking Coke. I thought that was amazing.
No, I mean, again, these kinds of things a lot of people would think is peak bullishness just in any market overall. It certainly is probably peak bullishness, at least in the short to medium term and NFTs that that happened.
Tony
Hi, everyone. Wanted to let you know about a promo we’re having for our CI Futures subscription product. This is our inflation buster sale. We know that prices are hitting you everywhere, and it’s holiday time, so I want to give you a big break on our CI Futures product.
CI Futures has thousands of assets that we forecast every month. We do commodities, currencies, and equity indices every single week. On Monday morning, there are hundreds, almost 800 of those that we forecast every week. Updated on Monday morning.
We forecast economics variables every month. Those are available on the first of every month. In total, it’s thousands of assets.
We show our error. We are the only product out there, the only forecasting product out there that actually discloses our error. You can see our historical error and you can see a year’s forecast at monthly intervals.
Right now, we’re offering 50% off of CI futures. You can actually get it for as low as $25 a month. We have different arrangements based on the commitment you want — a full year or say, going month to month. So you can get it anywhere between $25 a month and $50 a month with our current offering.
So please check it out. Please click on the site. If you need a demo, let us know. Thanks very much.
Why do you think we’ll continue to see ES rise through, say, first quarter? Like, what are you seeing? Is it sentiment or is it some of the data coming out?
Bob
It’s the data being done and it’s the big events being finished. So, again, as I mentioned the beginning of this conversation, Tony, all else equal equities have an upward bias. And I said to myself, okay, we’ve got one more Fed meeting, one PCE, one CPI, a couple of small to medium sized business PMIs in the form of the S&P PMIs, and then not a whole lot.
So given that backdrop, people say, okay, we’re still near enough to the lows, or this is probably the lows. Even some of the people that I respect a lot think that the October lows are the lows, and I just happen to disagree with them going into next year. But they’re probably, they’re likely this is not a bold statement, the lows for 2022. It’s not a very scary thing to say considering we’ve only got, what, ten trading days left, 20 trading days left at the most.
So from that perspective, I feel very comfortable with the buy at the end of the third quarter and sell somewhere near the beginning of the first quarter position that I put on and I have a break even stop. I mean, I’m not going to lose money on this trade, which means I’m not going to pay a whole lot of attention to it anymore.
Tony
Right? Okay, very good. So, Josh, let’s talk about the data for a minute. Josh highlighted a chart that was sent out today looking at the difference, say, the divergence between hard and soft economic data. And hard economic data is still relatively positive, significantly more positive than the soft data.
So can you help us understand what’s the difference between hard and soft data and then what’s your view of the divergence between hard and soft data?
Josh
Yeah, so I focus more on sort of the energy side than the general broader market data side. But it is interesting. So the hard data and my understanding of this is the measures of actual activity and the soft data is more measures of sentiment or sort of modeled or forecast activity. And then I guess where I sit on it is I’m looking at actual oil and gas consumption data, and it looks a little weak. And so when I look at it looking a little weak, and that doesn’t mean I’m bearish I like the supply situation a lot. It’s very bullish, and that probably overwhelms. But from my perspective, tracking oil and gas consumption, it looks like maybe some of this ostensible hard data isn’t as hard as it’s represented. So that’s my take on that.
Tony
Let’s talk about that a little bit. Bob, you seem to be a little bit skeptical of some of the hard data.
Bob
Yes.
Tony
What do you think is a little bit overstated right now?
Bob
Well, I’ll give you an example. This past non farm payrolls report. Negative 40,000 on retail jobs. When have we seen that going into a holiday season? It’s likely that a lot of it has to do with seasonal adjustments in my view, because how do you correctly adjust for seasonality that changes every season, along with technology changing every single season at a rapid pace what seasonality may or may not look like?
So I’m not a conspiracy theorist by any stretch of the imagination, but hard data produced by the government is where there is possible manipulation. I’m not accusing anyone of manipulating anything. I’m just saying that’s where it’s possible. In sentiment data, that is the survey respondent sentiment. That’s what it is. And that generally shows up in hard data.
Josh mentioned in his tweet about this divergence between hard and soft. Right now we have a divergence between iron ore and crude oil prices, right. Which has a very positive correlation over time. We can look at the data. Josh can look at the data, and so can Tracy better than I can, and say, okay, I believe these will converge, and I think this one will leave because it’s data.
Sentiment, you can’t say, that’s not the respondent sentiment, whereas data coming out of the government, if you believed the government’s data isn’t manipulated, then the data is what it is. But when you look at something so strange as retail employment falling going into the holiday season, that’s either economically catastrophic. Is that a word? Economic catastrophe?
Tony
Sure. Catastrophe.
Bob
Economic catastrophe. Or it’s wrong. One of the two. Catastrophic. That’s what it’s right.
Tracy
And we have all these huge revisions and the employment data every month, right. Going back, they’ll revise two, three months back.
Tony
They’ll revise two years back, Tracy. There are generally four revisions on OECD country data, and so they’ll go two years in and revise stuff. And whenever I see an initial kind of print of economic data, I always say, and you see this regularly on Twitter is I say, I’ll wait for the revision. And it’s not the first revision. It’s typically the second or third revision.
My view is that the first two say the initial print and the first revision are really PR for every macroeconomic print. Not just in the US. Globally. And then we start to kind of see back adjustments of what really happened. So I just don’t understand why initial prints of economic data move markets. I don’t understand why the financial media make a big deal about these initial prints of data because they’re wishful thinking. In the same way, Bob was talking about how investors have a rosy view of stocks always going up. Macro data typically has the bias of those government statisticians either too negative or too positive.
Okay, good. So is the view, guys, that the soft data will pull the hard data down? Is that kind of where we’re kind of falling on this?
Bob
It’s definitely my view. I mean, again, if that’s your sentiment, something has to happen to flip that sentiment. I always like watching the politicians. I don’t make political statements on shows like this. I make political statements, unfortunately, at the dinner table. But when you’re talking about political statements, you’ll see jobs are strong and you’re making enough money to pay for the inflation. That doesn’t change the reality on the ground for people. You’re not going to actually have somebody say, well, the President said, I have the money to pay for this, so everything is fine. So I always believe that the sentiment is much more reliable than the data, even though it shouldn’t be that way. It really should be the opposite.
Josh runs a fund and he can’t talk about his performance even though the performance is real data. That’s what his performance is. I was at a fund of funds years ago as part of the investment committee. We had nine full disclosure, was a low volatility fund. So our biggest up year was about 90 basis points. But we never had a down year. I’m sorry, 3.9 basis points, 390 basis points. But we never had a down year in nine years.
And our auditors and our regulators said we couldn’t publish that performance. And when we said why, they said, because it implies that you can’t have a down year. Well, yeah, if you’re stupid, it implies that.
But, you know, this was our actual performance, but we can’t put it forward. Josh has great performance and can’t talk about it. And this is the same kind of thing where to me, the sentiment will pull the actual data down and then you question whether that’s going to be manipulated for political gains or not by either side.
Tony
Right, exactly. Not one party or the other. It’s both parties.
Bob
Absolutely.
Tony
We don’t figure that anybody individually.
Tracy
I mean, I think the employment data has been wrong all year, for two years now. You just look at labor force participation rate and how many people are multiple jobholders, not single job holders. And we just had that huge revision of 1.1 jobs.
Tony
Yeah. So we saw jolts turn over a couple of weeks ago and then we have this downward revision of jobs. So if we look at the Fed’s mandate, they’re kind of not really doing either, right? Either they’re not doing either or they’ve already achieved the job stuff which they said six months ago that they hadn’t achieved and they continue to persist that they haven’t achieved. So is it fair to say that with the downward revision and employment data and the downward trend in jolts data that they’re kind of getting there already? So this is kind of a bad news is good news thing potentially?
Tracy
Potentially if the market chooses to read it like that. I don’t think the algos know how to read it that way. But yeah, I mean, it’s possible. We already are at 4.5% with all these revisions on unemployment.
Tony
Right? Okay, very good. So we’re going to get off the macro data for a minute. We’re going to move to energy prices. Actually, we’re going to stay on some macro data for a little bit. I put on the screen our Complete Intelligence CPI forecast and what we’re looking at potentially is a gradual rise of CPI accelerates a bit in April and goes into the summer.
So it’s possible, according to our forecast, that we do see a second bump in CPI. I have to say there is no human intervention in this. This is all machine driven. And so we’re reading things in the markets or the machines are reading things in the markets that are saying we could see a second bite of inflation coming in, say end of Q1 or early Q2.
So Josh, the question for you is we’ve seen some weakness in crude prices and consumers are seeing a bit of break with energy prices, gasoline prices and so on. But we saw from the Fed meeting that JPowell doesn’t see inflation abating anytime soon. So it seems like it’ll be fairly persistent. How do you expect energy prices to fit within that?
Are you seeing energy prices accelerate quickly or do you expect energy prices generally? Of course, I know there are different segments, but generally do you expect them to kind of accelerate quickly or do you see kind of a delayed acceleration of energy prices?
Josh
This is a great opportunity to run real briefly a potential economic analog to where we are in some respects. And the potential economic analog is the Asian financial crisis, the ’97 and ’98 scenario. And where that might be real similar to what we’re seeing now is one, we’re actually seeing consumer deposits start to fall with loans increasing. We’re seeing mortgage rates start to fall even though the Fed reset or keeps raising rates. And so we’re seeing the housing markets start to clear and then we have this very low labor force participation, sort of similar to what you saw in prior periods.
And you see this, they say, what is it that good times lead to weak men, and then weak men lead to bad times, and bad times lead to strong men. And sorry for the gender aspect of that, but just sort of the general idea. When I see all this, I think that there’s a real chance that we see much higher consumption of real goods and real inputs. And then when I tie that so that’s relevant for the inflation question as well as for oil and gas in particular, because there is this huge non participating aspect of the labor force that is increasingly likely to participate as NFTs and crypto and various day trading, tech stock and other sorts of speculative activity comes down.
And then there is this other aspect, which is that with oil and gas starting to come into China more, and other commodities potentially coming into China as they reopen and restimulate, there is the potential for inflation on raw materials and deflation on consumer goods and other stuff that China exports. And so it’s a sort of very weird, messy time. I’m not sure, I think that tech equities rebound like they did after that ’97, ’98 time frame. But other than that, it looks like sort of the most similar to maybe that plus 2003, something along those lines.
And I’m interested in your guys take on that, because it seems like we have room, actually, for significant uptake in demand, not just in China, for oil and gas, even in the US potentially, as employment potentially improves, just because you have all these people, you have all these open jobs still, especially in the low end, and you have a lot more people who maybe are relevant for those jobs and more interest in them now.
Tony
Yeah. So when you talk about uptake so if we look at China, for example, there were zero international flights going into China from, say, 2020 until, what, this month, right? Something like that. International tourist flights. And those are restarting. And so that’s just one kind of proxy indicator of, say, trade, the economy, travel, other things. Right. So do you have a view on that, on, say, passenger flights into China, tourism in China and how that would impact, say, crude?
Josh
So I have a better view on China to China flights than China to international. It actually does look like there’s a lot more bookings for international to China and vice versa flights, but there’s not a lot more actual flights yet. But there are way more China to China flights. We’re actually up from a low of two weeks ago or two and a half weeks ago.
We’re up about 100%, actually, maybe even more than 100%. And again, the data is not perfect, but I’ve been posting daily seven day average lag data just to to sort of show a moving average, and the moving average is up over 100% for that. So just those China to China flights, it looks like, represent about 200,000 barrels a day of jet fuel consumption and jet fuel is very oil intensive.
You use more than a barrel of oil to get a barrel of jet fuel because of the energy component and because of various other aspects of that refining process. And so also, jet fuel consumption historically has been a good proxy for oil and gas consumption in an economy. If you’re using more jet fuel, you’re using more gasoline, you’re using more diesel, you’re using more coal and natural gas and various other things.
It’s a great sort of real time economic proxy. And there’s lots of this is one of the places where I disagree on the sentiment surveys. I’m an economist by training and education. And the problem with surveys is that there’s no money in them, right? So people just tell you whatever they think, whereas consumption is actual money. It’s a buying decision. It’s not a speaking or a writing decision.
And the consumption matters more. So these real time actual consumption indicators are very promising, it looks like, from China, even as there’s headlines of Beijing is totally shut. So the headline is that and then the consumption data is that the consumption is way higher. I’m going to go with the consumption data, and that looks very promising. Again, that’s only part of this theory, and I’m interested in your guys take on it to the extent that you’re.
Tracy
Open to talking about bob was talking about iron ore earlier, and they came out overnight, actually, and said they have a state buying purchasing iron ore is how they purchase it now. They started about a year ago, and so they said they’re going to start buying iron ore again. So really, to me, that does say they are really getting ready to sort of push this stimulus, and they really want that 5% GDP for next year because of how much it has come down and how much has been lagging over the last two quarters, including this quarter.
So to me, hint, not that just them saying no more COVID passenger. I’m looking for real things that they’re actually doing. So look for them to start buying hard assets and buying sort of in the material sector and that’s kind of to me, that, okay, we’re ready to stimulate this economy.
Tony
Okay, that’s fantastic for everyone, right? I don’t think anybody in the world wants China to fail because it hurts everyone. There’s such a big economy, and especially their Asian neighbors, but also their big trading partners like the EU and the US. So I hear a lot of kind of sour China sentiment and people kind of cheering China failing. And I don’t think anybody in reality wants that to happen because it would hurt all of us.
So since we have three energy experts on, I guess let me ask you about China’s position with their crude reserves. Are they pretty tight? Do they have a lot in storage? Do they have stuff contracted? Like, if they grow, how will that impact the spot price.
Tracy
Well, they will have to buy more because when oil prices were at their peak just a few months ago, even though they were closed, and even into 2021, when oil prices really started to spike higher, they used a lot of their SPR, especially starting in summer of 2021. So they started using a lot of their SPR because they like cheap commodities and oil prices were Spiking. And so I do know that, you know, from what we can tell, you have to remember, we only know what’s above ground that we can see by satellite. We have no idea what’s underground for for what they have in storage.
I just want to preface that, because a lot of people say you don’t know what time. So we do know some storage. So what we can see is that they have drawn down their SVR quite significantly. If they start opening up and they need to purchase more, especially with kind of these oil prices lower and then being able to strike deals with Russia right now, I do think we’ll start to see them purchasing a lot more, not just for consumption now, but to refill their SBR.
Bob
Again, I’ll defer to Josh and Tracy more about China. I’m actually much more knowledgeable about Japan than I am about China, but from a perspective of what they’re likely to do there’s, the interesting sort of component of Chinese culture can be quite monolithic. And if you have sort of spikes in COVID cases and it brings about this sort of I mean, they obviously protested Lockdowns, but there were reports overnight about Beijing looking like a ghost town today because cases were spiking again.
And you could see this potential sort of spike in demand and then drop off in demand. And that would likely be the last drop off where I suspect that the demand that we saw here in the US. China’s demand, would increase three and four fold of the spike that we saw here in the US. Which is why I kind of agree with Josh’s overall bullish sentiment, even though we haven’t quite reached my downside WTI targets that Tracy and I talked about a couple of weeks ago. From that perspective, though, there is an interesting possibility of this downturn. But to Tracy’s point, I don’t think the Chinese government stalls their purchases because of their SPR usage.
It’s called an SPR globally, but they certainly use it quite a bit more than we do here in the US. To manage their it’s almost like a hedge account for them, where they sort of buy and sell much more rapidly in store. And they do the same thing with copper. And it’s interesting because when the copper market started really getting into the headlines and Spiking three years ago, there was all this talk about copper inventory and copper being used as a currency in China. You can store copper for quite a bit longer than you can store fresh crude oil. It’s got to be rotated.
Tony
So that’s a great point. That’s great. Okay, so speaking of SPR, Tracy, you punched out a chart this week on WTI versus SPR, WTI price versus SPR, and it looks like that divergence is pretty stark.
So you guys just mentioned China drawing down their SPR. The US. Has drawn down its SPR. So can you talk us through what this chart means and really what it means for crude prices?
Tracy
I mean, really what it’s showing is it’s showing all of the times that we’ve pretty much needed to tap into the SBR because of an actual emergency. You can see the difference between when we had to tap the SDR and say war or Katrina or Libya, right, how little that was compared to a non emergency event, that we drew it all the way down.
Now, Biden has said this really just showing the magnitude of this SPR draw for literally no reason. But if, you know, Biden did say that he was looking to refill it at 68 $72, we have gotten down on that in that area. We haven’t really been able to stay there. But it is possible that we could be looking at, by our calculations, Q2, they could possibly be looking to repurchase if oil prices are down there, which there’s no guarantees with China reopening and sort of seasonal tendencies and what have you. Generally, we see about mid February through summer really starts to kick in higher demand season, and you start refining for summer grades and things of that nature. But it is possible that we could see the US.
Kind of start at least thinking about repurchasing Q 223 again, that would buoy oil prices as well and kind of put a floor underneath it.
Tony
Okay, so that kind of reinforces the headline CPI data that I put out there saying, say, March, April, May, things really could tick up. I think it’s silly to expect crude to be down at that level, especially, as you guys say, if China is opening up, if they’re refilling their SPR, if the US. Is refilling SPR, that sort of thing. So that’s all super interesting. Is there anything on energy that we’re missing right now, guys? I just want to make sure going into the end of the year that we’re covering the areas we need to COVID on energy. What are we missing?
Josh
So I’ll jump in on this just real quick. On inventories, there’s a lot of uncertainty. Like Tracy was saying, we don’t really know how much oil is in storage in China right now. The way I approach it is just to assume the worst to some extent to to underwrite to that and then, you know, understand sort of upside. And the worst case is, is somewhat bad. Like it looks like for, for oil prices, it looks like there might be two or 300 million barrels of oil and storage in China.
More than some of the most optimistic analytics services or whatever are showing. And it is, in theory, possible, right? They have big caverns. They could store it like we do. It’s possible. To the extent that that’s the case, it still might not matter, because as China reopens, to the extent on the low end, again, of Chinese consumption, maybe you get another 2 million barrels a day or so of consumption versus where it’s been. And maybe they were importing a million barrels a day to store up until this point.
So you still have a delta of a million barrels a day. And so if you have 200 million in storage, 200 days from now you’re out of storage and you’ve been importing, you end up with this, like, million or 2 million barrel a day need to draw on world inventories.
But world inventories are really low ex China. So you end up with a situation where on the low end for recovery, you end up with an undersupplied situation. And that’s not assuming any Russia disruptions on the high end, if you end up with a sort of three or 4 million barrels a day.
Again, what Tracy and Bob were saying about the imports of iron ore and some of these other indicators, if those are right, and we end up on that sort of higher end of demand, which we also saw in the US. As we reopened, I mean, things could get crazy real fast, and China could end up looking like the world leader in oil trading from having imported and stored all of this oil to the extent they have it.
And then the last thing oil was in Biden’s buy target range, and they were selling from the SPR, not buying it in the last week or two. So that tells me it’s very unlikely that there’s repurchases of oil into the SPR anywhere close to these price levels and anywhere close to these economic circumstances.
Tracy
I mean, I think most people agreed they probably won’t buy back in the SPR, but they say they will. But I think if that even happens, we won’t see that until at least three of 2023. But again, prices will probably be higher than where they want them to be to purchase it anyway. But I do lean towards the fact that it’s going to be a very long time before they actually start repurchases.
Tony
Okay, great.
Bob
I have a couple of closing things, if I could, because first of all, I like Josh until he told me he was an economist. But I think that’s more of a strategist. We’re like a strategist, and we’re like the little brother of economists, and we’re always jealous of that. They get to put the economists, find their name and strategists. I could just say I’m a strategist. No, I don’t have to show a degree to do that. But from a perspective of the SPR, I worry about the political, the future political implications of what the administration did. If you look at the exact somebody sent me the exact definition of what the SPR is supposed to be and I guess in that context he used it correctly, right?
But I think I know at least Tracy and I agree that it was used incorrectly here because it was just a price increase. It wasn’t really an emergency. Prices were coming off on their own. Biden’s own. Treasury put out a report in July that said the SPR release only affect prices somewhere in the range of $13 to they revised that from about $28 to pump.
So it wasn’t even that big of an effect through Biden’s own. Treasury said this it’s not me saying this, but I worry about the future of prices are up, let’s dump a bunch because we’ve got midterms coming. And then next thing you know, there’s a massive outbreak of some sort of geopolitical problem in the Middle East and there’s a real emergency and we don’t have what we need. So that’s my concern about that. The last thing I’d like to say isn’t really energy based, it’s more about CPI.
I was on a Twitter space yesterday waiting for the mic. I never got the mic, and I heard somebody who I won’t mention say prices are decelerating at an accelerating rate when the exact opposite is actually true. Prices are accelerating at a decelerating rate. They’re not decelerating an accelerating rate. People forget. First of all, I don’t like the Consumer Price Index, but that’s a whole nother podcast. CPI is exactly that. It’s the consumer price index. It’s an index. If you go to the St. Louis Fred website and you look at a chart of CPI, it’s basically always increasing, right? That’s why the Fed’s target is a 2% increase in prices.
If we’re in the midst of disinflation, not deflation. And I think sometimes the public doesn’t realize, they’re like, oh, prices are coming down. No, they’re actually not. The rise in prices is actually slowing down, but they’re still rising. It’s like if you went to buy a car for $22,000, I don’t know where you’d get that, but and you go the next month and it’s up $23,000, and then you go the next month, that’s up 23,100. Prices didn’t go down, they just increased at a slower rate. And I’m going to be saying this everywhere I appear from now because I think the public’s misunderstanding of what’s happening with inflation, maybe I’m going to affect sentiment if I say it too much. Josh, I don’t know. But that’s the issue I have in terms of CPI specifically, and energy is obviously a huge part of that.
Tony
Well, I tweeted out almost the exact same thing this week about CPI, about inflation, and inflation isn’t falling right. The rate of price rises is slowing and there’s just a huge misunderstanding of that. So before we close up, as we go into these last ten or so trading days of the year. What are you guys thinking about over the next couple of weeks? Is there anything that’s on the top of your mind as the year closes? Josh, let’s start with you.
Josh
Sure. So people have talked a lot about this. We haven’t talked about this yet. The divergence in between oil prices and oil and gas stock prices, especially on the large cap and mega cap side. And I think people forget that commodity prices other than the spot price are not predictive. The forward curve is not predictive. It’s terrible. It’s used as a hedging mechanism that’s used as a prediction mechanism. Equities are forward looking and they’re not perfect, but they’re one of the best prediction mechanisms that we have.
And so energy stocks, oil and gas stocks are telling us that oil prices are likely to be higher, similar to your analytics software and the pundits and what. The sentiment is terrible in saying that oil prices will be lower and the price has deviated in the short run with the equities. So it does look like the more likely scenario, just even using that heuristic, is that oil prices go higher again, ignoring all the fundamentals and whatever. And so the interesting thing is, if that’s right and oil prices go higher, it might send those oil and gas stocks even higher.
There’s sort of this sort of soros reflexivity that happens with those sorts of things. So I think it’s worth touching on. Many people are posting about it, talking about how they need to converge. And actually I just think you got to understand what they are and what they are.
Tony
That’s a good point. Tracy, what are you thinking about going in last two weeks now?
Tracy
That chart is everywhere. To be honest, I’m still looking very closely at open interest in the oil and gas mark, oil in particular. A lot of length has come out of that contract. People just aren’t interested. A lot of people took profits because it was one of the more profitable commodities. Right. Over the last year or two years, we haven’t really seen anybody actively short that market short.
Open interest has actually declined a little bit, but not as much as length. So if people get interested in this market again, there’s a lot of room to the upside if people jump in because that length has been taken out of the market. So I’m watching that towards the end of the year in particular, see what happens after the beginning of the year. See if this market find some more interest.
Tony
Okay, all three of you are being pretty subtle about your expectations for energy prices. Bob, why don’t you close out? What are your expectations going into the last two weeks of the year?
Bob
First of all, I agree. I think there’s almost I shouldn’t say this, but I think there’s almost no way energy prices continue lower on the crude oil side and natural gas is doing what natural gas is going to do. So I think overall energy prices go up. Electricity prices are going up. And given that backdrop, if the three of us are right, by the way, if I mischaracterize what you two think, please jump in. If energy prices go higher, there’s very little chance in my view, that of the three possible scenarios for the Fed that the right one can come true in the Fed’s view.
So I’m actually more looking at EPS estimates for equities need to come down, earnings estimates need to come down, and the Fed is either going to have to a admit to a higher inflation target or B accept a higher level of inflation without saying so, or equities have to make a new low. And when that low happens, if that low happens, I should say if it’s a very good opportunity for industrials and consumer staples to sort of get in and kind of ride the recession wave back up as the economy itself restrains inflation by us going into some sort of a shallow or deep recession.
The other two things I would say is there any way I can get an economist title without putting in the work that Josh did? If anyone knows how to do that, absolutely. Just put it on your bud, Josh, don’t let me do that. You actually worked for it. And then the last thing I would say, if anybody wants to send me a bottle of Blantons, I’m willing to give you a free trade that is guaranteed to either make or lose money.
Tony
Hey Bob, just kind of latch on to what you just said about energy prices rising and industrials. So we’ve seen through 2022, a lot of industrials and retail firms raise price. Okay. And consumers have accepted that price. But if you’re saying that commodities are generally going to rise yes. Does that mean that we’ll see margins compress for those industrials okay?
Bob
So in the short term, consumers are.
Tony
At a threshold where they can’t accept higher prices soon.
Bob
So if you guys remember, you look back to the Great Recession in 2008, the last thing people did was let their car be repossessed. That kind of shows you the inelasticity of energy demand in general. People were defaulting on their mortgages before they let their car payment go into default. So from that perspective, people might be overestimating how far demand for energy can drop even in a recession. I’m making a correlation that probably isn’t accurate, but just anecdotally that’s something that we’ve seen. And it’s the same thing with heating and cooling your home.
People are probably less likely to stop heating their home. They’re probably more likely to accept cooling at a little bit hotter of a temperature. So going into summer it may not be as apparent, but I do think that when we come out of it, industrial utilities, energies and consumer staples are going to lead us as most times coming out of recession simply because of the first things that people start spending again on and they’re the last things that people stop spending on. So I like those things coming out of what I expect to be a fairly decent drop and end of the first quarter, beginning of second quarter next year.
Tony
Very good, guys. Thank you so much. I really appreciate your time. This has been fantastic. So have a great weekend. And have a great weekend. Thank you.
The spread between the 2-year and 10-year US treasuries has widened with markets saying that a Powell recession is here. We speak to Tony Nash, CEO of Complete Intelligence as to whether he agrees. We also ask him if the recent aggressive job cuts by the tech and now finance sector will be part of the Federal Reserve’s decision-making process at the next FOMC meeting.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. The World Market Watch is brought to you by CMB Preferred.
BFM
BFM 89.9. 7:06 Thursday, eight of December. And of course, you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. But in the meantime, let’s recap how global markets closed yesterday.
For US markets, the Dow closed flat, the S&P 500 was down by 0.2%. It’s the fifth consecutive day of declines and the Nasdaq was down 0.5%. In Asian markets, they were all in the rip. Nikkei was down 0.7%, Hang Seng was down 3.2%, the Shanghai Composit was down 0.4%, the Straits Times Index was down 0.8% and the FBM KLCI was down 0.3%.
So joining us on the line to tell us where markets are heading, we have Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to speak to you. I want to start with Treasuries for a change, and the two-year and ten-year treasury rate spread is currently very wide. Is the bond market already telling us that a Powell recession is here?
Tony
Well, yeah, I think that’s part of it. I think that’s contributed to a lot of the discussion around the kind of perceived inevitability of a recession in 2023. And what we’ve been saying for months is we’re already there. We already saw negative GDP numbers in the US in the first two quarters of this year. The holdout is jobs. And now that we’re starting to see, some say, turnover in the jobs front, meaning it’s still strong, but it’s not as strong as it was two months ago, there is a feeling that we’re definitely headed in that direction.
BFM
And Tony, I like to tap your expertise on all market. The market is quite divided as to what the G7 price cap and the EU ban on Russian seabourn all will do to oil prices and crude supplies in the coming months. Can you give us some insights?
Tony
Yeah. So what’s happening actually today, Xi Jinping landed in Saudi Arabia for a meeting with GCC leads and Saudi Arabian government. So what’s happening in the oil market is the OPEC countries are being very open about the fact that China is the main price setter for global oil markets. And that really is kicking off with that meeting in the Middle East today. That’s been known for some time, but it hasn’t been as explicit and overt as it is today. We’re seeing more supply with things like Venezuelan crude coming on for the US. But we’re also seeing the price cap for Russia and which we know, pretty much know won’t work. Europeans will find a way to circumvent it, Russians will find a way to get crude on the market. And so that’s why we’re seeing weakness in crude prices.
BFM
But at the same time, Tony, we are seeing more positive news coming out of China. They are easing a range of COVID restrictions, including allowing people to quarantine at home rather than in centralized camps, suggesting that the economy is slowly easing out of the Zero COVID policy. Shouldn’t that be a reason for all prices to go up then?
Tony
Well, I think it will. And if you look at futures I looked a few days ago and a few months out, there’s definitely expectations for higher oil prices. But right now, if we’re looking at spot markets, there really isn’t that much expectation of things moving. So when you look beyond February, for example, there is an expectation that China opens. And yes, that is very positive for crude prices and that is one of the most important economic events in the world. We’re waiting for it, we all need it, whether you’re in Asia or the US or Europe. China opening is good for everybody, but it will be positive commodity prices and it will push those prices up.
BFM
Okay. How else can we position for this eventual reopening in terms of our portfolio? What should we be looking at?
Tony
Well, if we look at things like industrial metals, like copper, we’ve seen some really interesting action copper over the past few days on expectations of China opening up. Over the past, say, probably three or four days, we’ve seen some interesting action in Chinese tech and there’s expectation that Chinese tech and consumer goods will be very positive in the coming months. So we’re seeing that in equity prices right now. So those are some areas that I would look at and be paying attention to because they’ve already proven to have some positive traction. But that will likely improve as China’s opening accelerates.
BFM
And Tony still sticking to the topic of oil and energy commodities, the UK instituted a windfall tax on oil and gas recently. Why have they decided to go down that route? And what effect will that have on energy companies with major investments there?
Tony
Yeah, this came right after the COP meeting and it was a very populist move by the UK government, very populous move by the UK government. It didn’t make any sense commercially and it doesn’t make any sense in terms of energy strategy. We’ve already seen companies like Total and Shell pull back on announced investments that they plan to make in the UK and it’s already making energy prices higher in the UK. So I think the UK government’s calculation there was, we’re going to make a populist move and get some voters behind us, but it was really a really stupid move and they’re going to have to do an about face on that within a few months.
BFM
Okay, let’s talk about job cuts or the possibility of it. Yesterday we saw a raft of top US bankers warning of layoffs and freezing when it comes to hiring. What does this then mean for the US labor market?
Tony
We already saw this start in tech a couple of months ago and it’s just kind of cascading out to other industries. Right. And so first they announced job freezes. Then they announced job cuts, usually, right? And it’s in things like in banks, it starts in mortgages because house buying has slowed. And it’ll go into other areas, of course. And we’ve seen this in media, too, with BuzzFeed, and there are issues at other media companies because they’re having to compete in those CPM rates, meaning those advertising rates are declining because places like Facebook and Netflix and other places are getting more competitive on advertising. So it just means that companies have to get more productive.
So whether they’re tech companies or banks or media firms, companies are having to get more productive. What we saw through COVID generally, was margin expansion for companies. A lot of companies profits through, say, mid 2020 continued to expand because companies didn’t have to pay for certain things, but they could charge higher prices because people were working from home. They didn’t have to pay for certain things, but yet they could charge higher prices. What we’re seeing now is with wages rising as fast as they are and staying there, companies are having to pay more all around.
And the markets like mortgages or advertising or tech or whatever, they’re not where they were a year ago. So they’re having to cut heads. And you look at Facebook cutting like 13, 14% of their workforce. Look at what these other guys are doing. They’re realizing they’re way overstaffed given where we’re going in 2023.
BFM
Okay, so how does this then inform the Fed decision when they meet this month for the FOMC meeting? Because employment is another indicator that they watch is part of their twin mandate, isn’t it?
Tony
It is. It’s one of their mandates. So there are a couple of things that I’m watching. So first, last week we saw the jolts. This is the job openings, okay? And with jolts, we saw that really turn over, meaning the job openings has declined. Now, it’s still strong, but it’s really turned over in terms of we’re not the highest anymore. That was probably two months ago. So we’re starting to see a decline in the number of job openings and the rate of growth of job openings. And when you look at the employment data that came out, the strength in jobs is really in, say, lower level services and health care. Okay? So it’s not necessarily in the higher level, higher earning jobs as it was, say, a year ago. So we’re seeing I’m sorry to put it this way, but kind of lower quality jobs come through, and that’s when we can tell that it’s weakening. Those are the last to be strong before going into recession. They’re the first to be strong as you’re coming out of it. So what is the Fed looking at? Well, Powell talked about the lag effects of monetary policy at his Brookings speech last week.
And so I think the Fed is being really sensitive to the lag effects of their policy, and they’re likely going to still go with 50 basis points this month and next month.
BFM
All right, thank you very much. That was Tony Nash, CEO of Complete Intelligence, telling us at least forecasting what the Fed is going to do at the next FOMC meeting.
But very quickly, I want to talk about one stock that was really a bit of a COVID pandemic winner, and that is Gamestop. So their fiscal third quarter sales declined while its cash pile sharply dwindled as the brick and mortar retailer had been working to expand its digital presence. Now, for no reason, this stock actually went up. A lot to do with retail investors who just wanted to like, very bullish on this counter. But although the fundamentals weren’t great, there.
Was a documentary on this Gamestop, actually on Netflix. I watched. It was really interesting. So if you’re interested to see what really happened and how they actually lure retailers in and the retail battle between institutional investors and all the renowned hedge funds and how retailers actually trumped in the end, but maybe not in the end, for the moment, it is actually a very interesting documentary or show to watch on Netflix.
Well, because it’s one of those odd stocks, there isn’t much coverage. There’s actually three analysts, they all have a sell on this. Target price is $6. This morning. During regular hours, the stock was actually down one dollars and $0.13 is $22.26. And if you’re wondering whether who won in the end, don’t think the retailers won because on a year to date basis, the stock is down 40%. But up next, we’ll cover the top stories in the newspapers and portals. Stay tuned for that. BFM 89.9 the world market watch, is.
Brought to you by CMB preferred moving forward with you, visit CMB preferred.com dot my for their preferential services. Be banking.
You have been listening to a podcast from BFM 89 nine, the business station. For more stories of the same kind, download the BFM app.
This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.
Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?
Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?
We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.
Key themes 1. How low will gasoline go? 2. Inflation/Recession worries 3. The day after Japan hits 2%
This is the 45th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.
So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.
We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.
And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.
Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.
Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.
Albert
Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.
Tony
What are you hearing? We’re in Houston, energy capital of the world.
Sam
What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.
You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.
Tony
So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.
Sam
Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.
Mike
I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.
Albert
Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.
Tony
Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?
Albert
I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.
Sam
I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.
Sam
They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.
Tony
Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?
Sam
No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.
Mike
We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.
Tony
When you think about how long it.
Mike
Is to legislate get permits, it’s a decade.
Sam
Yeah, absolutely.
Mike
So it’s got to be some major catalysts.
Tony
Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?
Sam
There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.
Tony
It’s a tax cut. I’m kidding.
Sam
The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?
Tony
Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.
So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?
Sam
I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.
Tony
Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.
Albert
That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.
Tony
Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?
Sam
No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.
Albert
The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?
Sam
I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?
Tony
Those of you who aren’t in the US.
Sam
Year, right?
Tony
For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?
Sam
So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.
So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.
Tony
And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?
Sam
No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.
Tony
And it’s positive in not a small way.
Sam
Correct.
Tony
We’re not talking about 2% price rises. We’re talking about 18% price rises, which.
Mike
Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.
Sam
Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.
Albert
It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.
And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.
Sam
Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.
Tony
Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.
Sam
Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.
Tony
You said this a month or so ago. It’s a matter of the number of 25 that we get.
Sam
Yes, it’s 25 delays.
Tony
Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.
Sam
Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.
Mike
I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.
Tony
Right. You’re not public servants. Right. Exactly. They don’t like you.
Albert
It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.
Tony
Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.
Albert
The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.
As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.
Tony
Now, yes, but I’m tired of talking about it.
Albert
I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.
Tony
Okay, sam, what do you think?
Sam
Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.
That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.
Albert
You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.
Sam
Completely controlled by the federal government.
Albert
And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.
Sam
You just have to raise taxes.
Albert
Yeah. So so masters at that. Yeah.
Tony
So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.
Sam
I haven’t 130 yet.
Tony
136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?
Albert
Yes.
Tony
Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.
Albert
I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.
Mike
Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.
Sam
If you think about it, a few.
Mike
Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.
Albert
50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.
Mike
Condition as to.
Sam
No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.
So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.
Tony
Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.
Albert
Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.
So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.
Tony
And I thought they were the fed.
Albert
Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.
Tony
Fan of that one.
Albert
But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.
Tony
Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.
Albert
Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.
Sam
It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?
Tony
Okay. So let’s talk China.
Albert
I wasn’t going to do that.
Sam
Tracy.
Tony
You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?
Albert
Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.
Tony
But kind of everyone told me on Twitter that democracy came to China.
Albert
Yeah.
Tony
Okay.
Albert
Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.
Tony
So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?
Albert
Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.
Tony
Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?
Sam
No, not at all.
Tony
Hi, Tracy.
Speaker 5
Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.
Tony
Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.
Speaker 5
That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.
Tony
So they’ll touch the crystal ball.
Speaker 5
Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.
Tony
Right. So when you talk about military deals, what do you think about that? Albert?
Albert
I’m not really sure Saudi Arabia will.
Tony
Do major military deals with China.
Albert
I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.
Sam
To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.
Albert
No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.
Sam
Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.
Tony
Right.
Sam
So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.
Tony
You don’t hate that, right?
Sam
If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.
Tony
Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?
Speaker 5
I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.
Tony
Okay.
Albert
No, they wouldn’t do that.
Tony
Right.
Albert
There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.
Tony
Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.
On Wednesday, Jay Powell talked and said “The time for moderating the pace of rate increases may come as soon as the December meeting.” The JOLTs data that came from Wednesday showed a slowing in job openings and the employment data from Friday was still strong but moderated a bit. With China announcing some changes to lockdowns, how worried should we be about commodity prices, given the “moderating” Fed? Albert Marko leads the discussion on this.
We also saw the UK announce windfall oil & gas taxes last week. We’ve seen a slew of announcements to halt investment. This is something that Tracy called out well before the windfall tax was announced. What will the impact be and how did the UK government think this would go over? Tracy explains this in more detail.
Given the LME nickel issues, FTX, etc., credibility is a concern at times. Why do these systems fail? What should people who trade know about exchanges that nobody tells them? Josh shares his expertise on what it’s like to build an exchange.
Key themes: 1. Fed “moderating the pace…” 2. Windfall oil and gas taxes in the UK 3. What’s it like to build an exchange?
This is the 44th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week ahead. My name is Tony Nash. Today we are joined by Josh Crumb. Josh is the CEO of Abaxx Technologies, a former Goldman Sachs, and just a really smart guy who I’ve watched on Twitter for probably eight years. We’re also joined by Tracy Shuchart, of course, and Albert Marko. So thank you guys so much for joining. I really appreciate your time this week.
We’ve got a few key themes to go through. The first is the Fed talking about, “moderating the pace.” We’ll get into that a little bit. Albert will lead on that. Then we’ll get into windfall taxes, windfall oil and gas taxes in the UK. And finally, we’ll look at exchanges. Josh’s started an exchange. I’m interested in that, but I’m also interested in that within the context of, say, the LME and other things that have happened.
So, again, really looking forward to this discussion, guys.
Albert, this week on Wednesday, Chair Powell spoke and he talked about moderating, the pace of rate rises. He said the time for moderating the pace of rate increases may come as soon as the December meeting. Of course, it’s a conditional statement, right?
But with China announcing some of the changes and lockdowns with things like the jobs number out today, I’m really curious about your thoughts on that moderation. So if we look at the Jolts numbers, the job openings numbers from Wednesday we showed that really come off the highs, which is good. It’s moving in the direction the Fed wants.
If we look at the employment data out today, again, it shows a little bit of moderation, but it’s still relatively strong.
So what does all of this mean in the context of what Chair Powell was talking about Wednesday?
Albert
Well, I mean, the Federal Reserve and the Treasury have been really precise in the wording of using soft landing over and over and over again. And let’s make no, let’s not have some kind of like, a fantasy where they don’t see the data a week ahead of time. And all the words and all the phrases and whatever they leak out to the media, like the Wall Street Journal are tailored to try to get a soft landing.
Powell knew what these job numbers were. So for him to come out uber hawkish, which he has to do because the economy is still red hot at the moment, if he came out uber hawkish Wednesday and knowing what these job numbers are and knowing what the CPI is possibly going to be next week, we’d be sitting there at 3800 or 3700. And they don’t want a catastrophic crash, specifically before Christmas. And also the mutual funds and ETFs and rebalancing of this past week.
So from my perspective, they’re going to keep the soft landing ideology. The only thing that could throw in a wrench to this whole thing is retail sales. And if I think the retail sales start becoming hotter than they really want to see then obviously 75 basis points and maybe even 100 is on the docket for the next two months.
Tony
For the next two months? So 50 December, 50 Jan?
Albert
That’s the game plan at the moment, 50-50. If CPI or retail sales start getting a little bit out of hand, they might have to do 75 and 50 or 75 and 25. But again, this is all like all these leaks to the media about softening or slowing down the pace. It’s just another way for them to “do the pivot talk” and try to rally the markets again. So that’s all it is.
Tony
Okay, Josh, what are you seeing? What’s your point of view on this?
Josh
Yeah, so I’m probably not in the market day to day the same as the rest of you from a trading perspective. We’re obviously looking very closely at commodity markets and the interplay between particularly what’s going on in Europe and how that affects energy markets, which I know Tracy and yourself have spoken a lot about.
Yeah, look, I think the last OPEC meeting, I think the Saudis in particular caught a lot of flack for the supply cuts. But now, looking in hindsight, I think they were exactly right. And so I think there really is a softness, particularly that part of the crude markets and of course, in a very different situation downstream in refining. I think that it would be consistent with a softening economy. But I agree with Albert that the Fed, I think, can’t really afford to change their stance, even though even today’s employment report was a very, very sort of lagging indicator, late-cycle indicator.
So I feel, personally, particularly just coming back from Europe, that we’re really already in recession and I think that’s going to be more obvious next year. But I don’t think they can really change their tune for the reasons that Albert laid out.
Tony
Tracy, we had a revision to Q3 GDP this week, and I was looking at those numbers, and exports were a big contributor to that. And crude was a huge portion of those exports in a revision of Q3 to GDP, it was revised up slightly, I think, to 2.9% or something. Now, a large portion of those exports are SPR, and that SPR release is contributing to, say, lower oil prices and lower gasoline prices here in the US, right?
So SPR release theoretically stops this month in December, right? So it tells me that we’re not going to be able to have crude exports that are that large of a contributor to GDP expansion. First. It also tells me that we’ll likely see crude and gasoline prices rise on the back of that if OPEC holds their output or even slightly tightens it. Is that fair to say?
Tracy
Yeah, absolutely. I mean, I think that everybody’s pretty much looking at they’re going to hold a stance. I mean, they’ve already said this over and over again over the last month. After that Wall Street Journal article came out and said they were thinking about increasing production for the bank. You had all of them come back and say, “no, we’ve had, this is what we have in play to the end of 2023. We can change this, obviously, with an emergency meeting, et cetera, et cetera.” But I think at this meeting, I think they’re probably going to be on a wait and see, or, again, like you said, slight and tightening. Maybe $500.
Tony
I stole that idea from you, by the way.
Tracy
Maybe $500,000. It really depends on what they’re looking forward to, is what they have to contend with right now is the oil embargo in Russia on December 5, and then the product embargo comes in on February 2023. For the EU, also, everything is a lot. It’s predicated on China coming back because that’s another 700 to 800,000 barrels per day in demand that could possibly come back. But I think we all agree, as we’ve talked about many times before, that’s probably not until after Chinese New Year, which would be, you know, March, April.
But those are all the things, along with the slowdown, with all the yield curve inversions, not only here, but also in Europe, everybody’s expecting this huge recession coming on. And so that also has a lot to do with sort of sentiment in the crude market. And we’ve seen this in open interest because what we’ve seen in looking at COT (Commitment of Traders), CFTC data, is that we’ve had a lot of longs liquidating, but we haven’t really seen shorts initiating. It’s really just trying to get out of this market. And so that’s what the current futures market is kind of struggling with right now.
Tony
Hi, everyone. I wanted to let you know about a promo we’re having for our CI Futures subscription product. This is our Inflation Buster sale. We know that prices are hitting you everywhere and it’s holiday time, so we’re going to give you a big break on our CI Futures product.
CI Futures has thousands of assets that we forecast every month. We do commodities, currencies, and equity indices every single week. On Monday morning, there are hundreds, almost 800 of those that we forecast every week, updated on Monday morning. We forecast economic variables every month. Those are available on the first of every month. In total, it’s thousands of assets.
We show our error. We are the only product out there, the only forecasting product out there that actually discloses our error. You can see our historical error, and you can see a year’s forecast at monthly intervals.
Right now, we’re offering 50% off of CI Futures. You can actually get it for as low as $25 a month. We have different arrangements based on the commitment you want. A full year or say, going month to month. So you can get anywhere between $25 a month and $50 a month with our current offering.
So please check it out. Please click on the site. If you need a demo, let us know. Thanks very much.
Okay, so you mentioned the China issue, and earlier this week we did a special kind of show on what will likely happen in China. Albert was a part of that. We had two journalists as a part of that, long-standing China journalist as a part of that. So we’ll put a link to that in this show. But if China opens at an accelerated pace, Albert, we all expect that to impact inflation, right? And we all expect that to impact crude prices.
Tracy
Not any prices across the board, actually, you’re going to be in especially industrial metal.
Tony
Exactly. So how much of Powell’s kind of “moderation” is predicated upon China staying closed through, say, Feb-March?
Albert
Oh, it’s all of it right now. All of its predicated on it. I mean, right now they’re under the impression that China won’t open until April. But I push back on that, and I think at this point, they might even announce an opening in February. Once they announce it, the market looks ahead for three to six months. So things will start taking off at that point.
I do have a question for Tracy, though, for the Russian price cap, right? I know you know the answer, Tracy, but a lot of followers of mine have always asked me about this in DMs is like, why does it make the price of oil go up? Because from my understanding, is because it limits the supply globally. And then as demand comes back, the supply sector actually shrinks. And I wonder what your opinion was on that.
Tracy
Yeah, absolutely. I mean, I think what you’re going to see with the price cap is that people are going to in Russia already said we’re not going to sell to people that adhere to the oil price cap. Now, again, if it ends up being $60, that’s not really under what they’re selling it for currently at the current discount to Brent. So that’s not that big of a deal. If it’s lower than that, then obviously, yes, that will make a big deal. But they also said that if we have an oil price cap, then we’re going to stop producing, right? Not entirely, but they’ll curb back production, which will in turn make oil prices higher globally, even if that price cap in place. And so that’s kind of their hit back.
But that said, again, I don’t think as much oil is going to be taken off the market with a price cap, particularly at $60. And Russia has already figured out a way around secondary sanctions, obviously, in June as far as shipping, insurance, and certification is concerned. And you have to think, realistically speaking, you’re going to have a lot of shippers, especially Greek shippers, that this is their major business that is going to say, yes, we’re shipping this oil at the “price cap.”
Right. So you just have to keep in mind the games that are played in the industry. But, yeah, some oil will definitely be taken off the market. And Russia also could decide to pull back on production in order to hurt the west to make oil prices rise in the west.
Tony
Europeans love to violate their own sanctions anyway, right? They’ll just buy through India or something, right? And they’ll know full well that it’s coming forward.
Tracy
They’re buying Russian LNG. It’s not piped in right now. Right, but they’re still buying LNG. They’re having it shifting, and they’re paying massively.
Tony
Let’s turn off the pipeline and raise prices on ourselves. Okay.
Albert
They learned from Bible in the keystone, right?
Josh
Maybe I’ll add one more perspective here. You have to remember that oil is Russia’s economic lever and gas is their political lever. And so I actually believe that Russia is actually trying to maximize, we haven’t lost a lot of Russian barrels since the beginning in March, but I think they’re actually trying to maximize revenues right now because not that I want this to happen, but I could see much more extreme gas measures coming from Russia through perhaps some of the gas that’s still coming through the Ukraine as soon as January. You know they want to maximize those political levers, and they’ve already been sort of playing every game they can to contractually even break contracts and minimize gas even since end of last year. So, again, oil is the… They’re always going to want to maximize their oil exports for revenue and maximize their political power with gas.
Albert
Yeah, they do that often, especially in North Africa, where they try to limit the gas that comes in there using Wagner and whatever little pressure they can to stop it. They’ve done that so many times.
Tony
Great. Okay, let’s move on from this and let’s move on to the windfall oil and gas taxes in the UK, Tracy. We saw the UK announced this last week or two weeks ago.
Tracy
November 17, they announced the increase. Yeah.
Tony
Okay, so we’ve seen a slew of announcements, and I’ve got on screen one of your Tweet threads about Shell pulling out their energy investment and Ecuador doing the same and Total doing the same.
So can you talk us through kind of your current thinking on this and what the impact will be? And how on earth did the UK think this would go over well?
Tracy
Well, I mean, that is a very good question. How did they think this would possibly go? I mean, we know that if you’re going to place the windfall tax, they raised it from 25% to 35%, which is very large. And that’s in addition to the taxes that companies are already paying, which in that particular country is some of the highest in the world. Right. And so this is just an added on. So, of course, you have Shell and Ecuador now rethinking what they’re going to do with huge projects going on there. And Total literally just said, we’re cutting investment by 25% entirely in that country.
And so what happens is what’s interesting is that this whole thing occurred after COP27. And what we saw is kind of a change in the language at COP27, where countries were more interested in energy security rather than green energy. Of course, that was part of the discussion, but we did see sort of a language change and people start worrying about countries start worrying about energy security, which makes sense after the Russian invasion of Ukraine and everything that has happened.
So for the UK to kind of do this on the back of that without realizing the implications of what’s going to happen. What’s going to happen is that they’re going to see less investment. Obviously, we already have majors coming out saying we’re just not going to invest here. Right. And that’s going to raise prices in particular for electricity in that country. We’re not just talking about oil and gas, but everything attached to oil and gas, you know, the secondary and tertiary things that are attached to oil prices and gas prices within that country. And so that, you know, that’s going to keep inflation high in their country and, you know, and it’s a very dangerous territory if you’re talking about energy security. Right.
Because UK is an island and they have assets right there. So everything else that they cannot produce there, they have to import. And that’s not cheap either. So you have to think about that. And this all comes at a time where Capex is already dangerously low since 2014 in this particular industry. So it seems like it’s self inflicted harm not only on the citizens that are going to have to pay for this via inflation higher, right. But also their energy security is compromised. Yeah.
Tony
I love the irony of a French company telling the British that they’re taxed are too high.
Albert
Yeah, it’s actually amazing because, like, the Swiss today has stalled all electric vehicles from being registered or imported to secure their grid from blackouts.
Tony
Wow.
Albert
Yeah, that was just maybe like an hour or two ago.
Tracy
And they said that they’re prepared to have like a four tier energy system and basically if you have on your third tier, they’re cutting you off of like you can’t charge a car in third tier.
Albert
Like Tracy was saying, nobody thinks about the second and third order of things, like the electrical grid going out and industrial sector having to buy diesel generators so the power doesn’t fluctuate and ruin their machinery. Nobody thinks about these things, they only think about the marketing material out of Tesla.
Tracy
Right.
Josh
Probably maybe add one more lens to look at this through. And that’s the geopolitical and political lens. I think we’ve had enough three decades of sort of Laissez-faire economics that any politician knows the effects of announcement like that. So I don’t think this was a naive approach, particularly as Tracy mentioned, that this was coming on the back of COP.
I think this was something to sort of give to a sort of a populist base around inflation and we’re going to go after big energy. But at the end of the day, I totally agree with Tracy that everything’s pivoted to energy security and almost wartime footing. And so I think we’re not used to looking at policy announcements or sort of economic policy announcements in that lens the last 30 years. But increasingly we’re going to have to look at all of this through almost a wartime footing way of thinking. So what are they likely doing there? In my view, again, I think they’re kind of giving a, you know, buying some goodwill on the populist front and maybe environmental front while at the same time realizing that they’re going to start having to maneuver all they can to secure hydrocarbon supply. So that’s the way I might read something like that.
Albert
Yeah, I could have said it better myself. Josh I mean, the thing I try to stress to people when you’re looking at foreign affairs and foreign politics is you need to see what’s happening domestically in the country first because that’s what writes the script for what their international needs are.
Tony
And it’s interesting that you both say that populism drove this, it seems in the UK, although it’s impacting the electricity prices, we see populist movements in China, we see it in Pakistan, here in the US. I think a lot of people thought populism died when Trump lost in 2020 and it’s just not true. There is just so much of a populist drive globally. People are tired of the current structures and they want more. So it’s interesting to see and it will be interesting to see the fallout. Tracy do you see other companies moving in that direction of a windfall tax?
Tracy
We did see India, they enacted a windfall tax as well. They’re kind of pulling back on that right now. We have Germany talking about a windfall tax, but at the same time they’re giving subsidies out like candy. But then again, that country is like an enigma right, as far as energy policy is concerned. But I think that’s… What’s interesting about the UK is now they’re also talking about a windfall tax on green energy.
Tony
Oh, good. Interesting.
Tracy
So they are talking about that too, and they’re talking about almost a 90% tax because of all the subsidies they’ve been receiving that will be end up. So we’ll see if that comes to fruition or not. But that would really I mean…
Albert
They going to have to give them loopholes because everyone is going to look at what’s going on in Germany and then spending tens of billions of dollars to bail out the energy company that supplies all their consumers. It’s just silliness. They’re just playing through the populous voice at the moment.
Tracy
The US talked about a windfall tax too, over the last year, but it has just not found footing yet.
Tony
Don’t do it.
Tracy
I don’t think it’ll pass. I didn’t even think it’ll pass with if you had even with like a Democrat-controlled Senate, I still don’t think that’s going to pass because you have too many of those senators in Hydrocarbon that represent Hydrocarbons states.
Tony
Okay, great. Let’s move on to the last segment, which is really looking at exchanges. And Josh, your company has built an exchange, continues to build an exchange. We’ve seen some real issues around exchanges. Well, for a long time, but really most recently with say, the LME and the Nickel issue. And we’ve seen FTX kind of called an exchange and we’ve seen FTX fall apart. I’m really curious first of all, can you help us define what is an exchange and then why do these problems emerge?
Josh
It’s a great question and thanks for that. So I think maybe I’ll step back and just mention kind of how Abaxx have been thinking about because we went out and set off to build a regulated exchange and the first physical commodity focused clearinghouse in Asia about four years ago. And for us, we looked at an upcoming commodity cycle. I had a view that we really bottomed in the energy cycle around 2015, 2016, but we still had to wear off a lot of excess inventories. And probably ten years ago, the market was spending almost $2 trillion a year in energy infrastructure. That number has fallen down to something like one and a half trillion a year. So even though population is increasing and wealth is increasing, we’re actually spending less and less on our infrastructure. So it was only a matter of time until we kind of wore off any excess capacity from the last commodity cycle. So for me, I looked back at you go through these cycles, but the market inevitably is always changing.
Josh
So if you think back to, you think back to sort of 2007, 2008, and that part of the commodity cycle. We were still mostly focused on WTI. Brent wasn’t even a huge price marker. It was really only 2010, 2011, 2012, when you started increasingly see the markets changing. So our view is that this commodity cycle, for all of the reasons and the green energy transition, the focus on net zero, we thought a whole new set of commodity benchmarks was going to be needed because different commodities were going to be featured more prominently this cycle. So that’s why we set out to build the exchange. And I will answer your question. I just wanted to kind of walk through this history.
The other thing that I think happened over the last two decades is with the digitization of the trading space. Again, remember, it wasn’t that long ago that commodity trading was floor trading and people yelling and pushing each other in a pit, right? And so you always have to look at the evolution of markets that kind of evolved with the evolution of communication technology and software and really what’s happened since everything went electronic is we had a massive consolidation of the exchanges and the exchange groups across the world. There used to be like the Nymex itself, which is obviously the core of the Chicago Mercantile Exchanges energy business that had something like five contracts for like 100 years and now there’s thousands of contracts.
Right? So there’s always this evolution of markets. There was this consolidation in markets, but in our view, the exchanges themselves got away from specializing in the industry or the product they serve. And so we think it’s a little bit of a mistake of history that the two biggest energy markets in the world were acquired markets. They see me buying the Nymex and Ice buying the IPE, which was the Brent markets. And so in our view, we actually don’t think the physical market builders really exist in the big exchange groups anymore.
So we saw this sort of classic opportunity. This economy of scale or whatever to actually hyper focus on physical commodities and the physical commodity benchmarks that are going to be needed for the next commodity cycle.
So getting back to your question. So what is an exchange? Again, this problem of the digitization of everything, we end up creating a lot of conflicts between what is a broker, what is an exchange, what is a clearing house, you know, different entities playing on both sides of the trade. And of course, I have my Goldman Sachs background, so that was always the big debate about Goldman in the 2000s. They’re on every part of the trade.
And really we used to be in this market infrastructure where you really separated all the conflicts in exchange itself for a long, long time as a nonprofit organization, almost like a utility. And you bought seats again to push each other in the pit. That’s where the private entities were, were in the exchange memberships.
So now what we have today is we have broker dealers like Coinbase calling themselves an exchange, even though they’re applying for an FCM license, a Futures Commission license, which again, it shows that they’re a broker, they’re not an exchange. So I think there’s a lot of confusion on what an exchange is. And what you really want to do is separate those conflicts of interest.
An exchange should never have a house position. Exchange is really just the place that matches trades. And a broker dealer is the one that’s someone that nets two clients and then puts that trade onto an exchange. So there’s been a lot of regulation, particularly after DoddFrank and after a lot of the problems in the financial system in 2008, to try to separate these conflicts out. But unfortunately, with crypto and other things, we’ve been starting to consolidate everything again into a conflicted model. So we’re trying to get away from that and focus very much on physical commodities and an unconflicted model.
Tony
Is it possible to separate those things out? I know it’s conceptually possible. But since we’ve gone beyond that separation, I know that’s what you’re trying to do as a company, but how hard is it to convince people that these aren’t the same things? Because obviously there’s conflicts if they’re combined. Right. There’s margin, I guess, in those conflicts, right?
Josh
Exactly. So we wrote a risk net article on this because FTX actually came to the CFTC proposing that they bring their highly centralized conflicted model into the CFTC. And to their credit, the CFTC and the Futures Industry Association, I think they recognized this problematic approach, that they wanted the exchange in the clearinghouse to be separated from the Futures Commission merchants. And at the end of the day, you know, the FCM’s, which is really the prime broker that connects to the clearing house, they do more than just handle administrative work and collect margin.
At the end of the day, they’re the ones really looking and really knowing their customers’ overall position. So if you look at something like the LME problem, what it really was is you had this big OTC position in one of the brokers that was sort of Texas hedged or had a bad hedge into what was actually so it was a Ferro nickel. It looks like it was a Ferro nickel and sort of integrated stainless steel producer that was hedging against the deliverable contract in an LME nickel that they actually couldn’t deliver into. And there’s actually nothing new about that.
That’s actually how the Nymex really came to be the top energy market. You had the Idaho Potato King, hedging into a main potato that he couldn’t deliver into and cause an epic short squeeze. So this stuff is not, there’s nothing new in these markets. And the main thing is we want to maximize decentralization. We want to maximize the amount of FCMs involved in managing that delivery risk and knowing what their clients’ positions are, and the exchange having enough knowledge to know where the risk sits as well.
So it’s that check and balance. If you leave all of the risk to one entity or to one regulator, it becomes very problematic. That’s why we have the separation of all these pieces of market infrastructure, so that everybody is looking at the risk from their perspective, so that overall we can try to minimize the risk in a more resilient system.
Tony
Okay, Josh, I’m just curious, what should people know about exchanges that nobody tells them? I know that’s a really broad question, but it seems extraordinarily simple. But there’s got to be something that people should know that nobody ever tells them about what an exchange is.
Josh
Yeah, I think that an exchange should never have… We like to say that the exchange should be the scoreboard, not the referee. The exchange should really only be transparently, showing a price, showing that data, executing the price, but it should never have a position and it never should be telling the market what to do. The exchange is the scoreboard, not the referee.
Tony
That’s a great statement. Albert, what questions do you have?
Albert
As soon as he said that I was in absolute agreement. Everyone that knows me knows that I abhor crypto. Right. And what they’ve done. That’s an understatement, I know. But I’ve always said, if you want to do something with blockchain digitalization, you have contracts, whether it be real estate, whether it be commodities, something like that, to create transparency and trust in the system.
Exactly what Josh is talking about, because I’ve seen and personally heard of manipulation in the oil futures and commodities market that is just outrageous. Absolutely outrageous. And it’s not fair to people like me that trade futures where for some reason I can’t buy a contract because the prices, like the price discrepancies, are just outrageous at the moment. And everyone knows the brokers are intermixed with the exchanges and so on and so forth. But something like this, where it’s digitalized and you’re just a scoreboard, is a great idea.
Josh
Yeah. And I think the other big problem is we look at every price for different assets and think all prices are fair. And if there’s anything the last two years has taught us, that efficient market hypothesis is not right. And so, you know, we look at these prices like they’re all the same. You see a WTI price, you see a nickel price, you see the price of Google, you see the price of a ten year, you see the price of a real estate bond. At the end of the day, it’s the market structure, and you can’t fundamentally change the liquidity or lack of liquidity in a market. Right? And so one of the other problems that we saw, again, this is why we exist, is we think that the commodity markets have gotten hyper financialised and digitized, where people have gotten away from what is the actual underlying price.
So LNG is where we’re focused. We think LNG is the most and this has been our view for five years before, most people didn’t know what LNG was before it was front page news, is that LNG was the most important commodity for probably two decades. And at the end of the day, what is the price of LNG? There is not a clean, transparent price of LNG. LNG is not the Dutch title transfer facility. LNG is not the five people that report on a voluntary basis to the JKM. Right. There really isn’t a price for LNG. And more importantly, right now, there’s not a buyer and seller of last resort market. You can’t go in and buy futures and go to delivery in LNG. That doesn’t exist.
And next year, I think it’s going to be absolutely critical because there’s going to be an all out bidding war for probably the next 30 months between Asia and Europe for that marginal cargo of LNG. We haven’t seen anything yet this year. Next year, and the summer of 2024 is when it gets really bad.
And we need a market that actually, as one of my former colleagues used to say it needs to be a knife fight in a phone booth. Right. You need absolute market discovery. And that physical price has to converge with that futures price. That’s the only fair price. It’s the only fair benchmark. And that’s what we’re doing is doing the hard, hard work to figure out what is a physical long form contract look like to go into delivery of these hard commodities like LNG.
Tracy
And I just want to add on that because everybody’s talking about how European storage is full right now. This year was never going to be a problem. It’s next year there’s going to be a problem. Because you have to realize that they were 50% full. Russia got them 50% full on piped natural gas really cheap. Now that’s gone, right? And so they were paying higher spot prices just to get LNG shipped in. Right. Those cargoes are going to be, next year is where you’re going to see a real problem because a lot of other countries already have long term contracts. And as Qatar said, we have to service the people that we have long term contracts with first. You’re secondary sorry, Europe. Right?
Josh
In Europe, I think, also loses something like 8 million tons per annum capacity up from longterm contracts next year as well that roll off. So there’s actually more spot market bidding. And then on top of that, China is likely to be back in the market. And China last year became the largest LNG importer and they really weren’t even in the market this year. But the one thing that they did do is they’ve been buying all the long term contracts. So even though they’re not buying the spot cargoes this year, they’ve been the biggest player in buying new long term contracts so that they have the optionality. Look, at the end of the day, you know, heating is always going to demand, particularly residential heating in the winter is always going to demand the highest premium because there’s just no elasticity there. You can cut industrial demand. You can probably substitute and power substitution. But if I’m China, I really want the optionality of having that long term agreement. And if prices are high in Europe, I’ll just divert the cargo into Europe or I’ll divert for political reasons diverted to Pakistan or India.
So they’re buying all the optionality, whereas Europe is not buying the long-term offtake. And in fact, they’re buying very short term infrastructure because they’re very focused on, oh, it’s going to be a stranded asset under 2030. So we needed to convert it into hydrogen or something else, right. So there’s a lot they’re really handcuffing themselves, which is going to be again, we need better market infrastructure so the market can sort this stuff out.
Tony
It’s great. Guys, you never disappoint. Thank you so much for this. This has been fantastic. Josh, thanks for coming on. I know you’re a super busy guy. I really appreciate it. And thanks, Tracy and Albert really appreciate this. Have a great weekend. Have a great week ahead. Thank you very much.
