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This podcast was originally published by BFM 89.9 The Business Station. Find it here: https://www.bfm.my/podcast/morning-run/market-watch/magnificent-seven-us-fed-cpi
Guest speaker Tony Nash, CEO of Complete Intelligence, offers his insights on the market trends, particularly focusing on the impact of interest rates on sectors like banking, real estate, and construction. He discusses the potential outcomes of the earnings season, emphasizing the significance of passive investments in shaping market movements, especially in tech sectors and commodities like oil and gold.
Nash also touches upon the implications of decelerating inflation in the US on Asian markets, pointing out the role of international trade in influencing inflation rates. He underscores the importance of understanding market dynamics beyond mere forecasts, highlighting the interplay between global demand, asset valuation, and inflation expectations in shaping market outcomes.
The podcast emphasizes the resilience of markets amidst various uncertainties, showcasing the complexities of factors like interest rates, earnings reports, and commodity prices. The discussion sheds light on the nuanced relationship between market trends, economic indicators, and geopolitical dynamics, offering a comprehensive overview of the current market landscape.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. Bfm 89.9. It’s 07:06. It’s Friday, the 12th of April, and you’re listening to The Morning Run. And in front of me is Philip Sea. I got your name right this time. And I’m Wong Shauwning. Do I get a medal? In about 30 minutes, we’ll take a look at the performance of the Asian Pacific Aviation Sector. But let’s recap how global markets closed yesterday.
BFM
Tell you who deserves a medal, US markets, because They are on a tear this year. The DAO was flat, but the S&P 500 up 0.7 %, and the Nasdaq up 1.7 %. Over across in Asia, the Nikkei was down 0.4 %, Hangseng down 0.3%, Cheungai Composite up 0.2%, Singapore’s STI down 0.3%. Back home, FBM, KLCI, DC also deserves a medal. It was closed for the Raya holiday, closed on Wednesday at 1,553, down 0.6%..
BFM
Okay, but still up 6.8% on a year-to-date basis, so a little bit of cheer there. For some insights on where international markets are heading, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to speak to you. Tony, please tell me what is happening in US markets because PPI numbers, US producer price increased in March from a year earlier by the most in 11 months, but yet markets rallied. What’s What’s happening?
Tony
Yeah, I think from the quant trading perspective, the PPI looked muted. And part of the reason was energy costs looked like they fell, which is not what we’re seeing on the ground in the US. So some of these government data, when they come out, the algos trade these based on the data that come out, but the actual data on the ground is different. So what we’re seeing is algos trading because they believe other algos will be trading. You have to look at today as one of those potentially strange trading days. Friday in the US, we’ll start to really understand what people see through the PPI data. Obviously, we saw CPI come out on Wednesday in the US, and it was elevated compared to what people thought. It’s possible that we see inflation peaking, but the real question there is, how many rate rises will there be? Expectations are now down to one or two, where it was something like five just two months ago. It’s puzzling when we see, like today, we see tech rally, tech shares rally, when the interest rate cuts are being put further off, and there are fewer. So markets are a little bit out of balance right now, and we’ll only know in the next few sessions where things really start to settle.
BFM
In the meantime, US earnings season starts in full swing. Friday your time. I think we’ve got J. P. Morgan, we’ve got Wells Fargo, we’ve got Citigroup reporting their numbers. How do you think results will be this quarter?
Tony
Yeah, I think with trading being active and with interest rates rising, that leaves more than an interest margin for banks. So I think banks will report well. I don’t think there’s been a huge rise in bad debt. There’s definitely been a rise in bad debt, but it hasn’t been huge. Banks will probably report fairly well. The larger banks, the regional banks, they’re still having trouble. With the removal of the Treasury program to fund those regional banks, they’re going to have difficulty for the next few quarters.
BFM
Well, talking about then the sensitivity to interest rates, I wonder what’s your take on sectors like real estate and construction, where they were hoping for perhaps some relief there, but that might not eventually happen now, Well, yeah, it’ll take a while.
Tony
The problem is these are sectors that got used to low interest rates, abnormally low interest rates. We’re actually in a more normal interest rate environment. In the US, you have things like housing, which is largely undersupplied. You have commercial real estate, which is oversupplied. The commercial side is facing serious headwinds, probably for years. The residential side will see strength for years. So it’s a little bit mixed, but with interest rates not coming down at the rate that people had hoped a few months ago, it’s going to present a challenging environment.
BFM
And, Tony, looking at earnings specifically, according to Bloomberg Intelligence, the Magnificent Seven, the likes of Apple, Microsoft, Alphab, Amazon, NVIDIA, Meta, and then finally, Tesla, apparently are on course to rise 38 8 %. These are profits in the first quarter. What happens if it doesn’t? Does it mean that there will be sharp corrections in the magnificent seven, which will in turn bring down the overall broader market?
Tony
Well, it depends on a number of things. Yes, it would definitely turn things around, but the magnitude really depends on the passive income investment. So ETFs, say technology ETFs and other ETFs that people are invested in, those are passive instruments. And so people don’t necessarily have to pay attention to say NVIDIA every day when they’re investing in a passive instrument. But when people start to see their technology returns declining, they’ll rotate into other sector ETFs. We can’t underestimate the power of those ETFs, which are fairly passive. That’s actually more powerful than individual stock buys and sells.
BFM
Can we just have your perspective on commodities, particularly oil? I mean, it’s up around 17% this year. Just now you were already mentioning that the algos are not reflecting that accurately. What’s your take and prognosis on the future? If all continues to rise, what’s the broader implications to the global economy then?
Tony
If oil continues to rise, I saw somebody put forward a potential oil price of $1,000 a barrel a a few days ago. When we get to the point of the cycle where people are putting forward those types of ridiculous forecasts, we know we’re getting, I feel like we’re getting toward the end of that. We’re not there now, but it’s the beginning of the end when we start to see these ridiculous forecasts. If you remember in, say, 2020 when Crude was, obviously it went negative one day, but generally in the ’20s or ’30s, Citibank came out and said it would be at $10 when it trading, say, in the ’30s. So you know things are getting toward the end of that, either high or low cycle, when we start to see these extreme forecasts. So do I think we’re going to see $1,000 oil? No. I actually believe it’s going to trade sideways to slightly down for the next few months based on what we’re forecasting a complete intelligence. And we’ve been pretty right for the last year or so. So I’m not expecting to see, say, $130 a barrel of or something. I think we’re in the zone for the next few months.
BFM
But, Tony, we have seen a lot of other commodities, hard commodities, actually, Raleigh, Beat, Copper, Iron. Are those all indications of global demand improving, or is it just basically money chasing assets that hadn’t gone up so much?
Tony
Yeah, well, you see things like gold. You’ve seen the pop in gold because people are afraid that inflation is going to continue to to accelerate, which we’re seeing inflation rise, but it’s not necessarily accelerating. You see copper popping because people believe that that’s an extension of the AI boom and so on. So I think to some extent People are seeing what they want in markets, and that’s great. That’s how markets work. People come up with a hypothesis. But if inflation doesn’t continue to grow at a very rapid rate, we’re going to see gold slow pretty quickly. If things like, say, NVIDIA and other chips, Intel just came out with a competitive chip yesterday. If we start to see some of those AI names mute, we’ll also see copper mute a little bit. Some of these are self-fulfilling hypotheses, and those things will tail off as that hype declines.
BFM
Which then begs the question, I think what you’re saying is inflation is decelerating, right? It’s just not moving in the fast pace. What does decelerating inflation the US mean for Asian markets then?
Tony
Yeah, that’s a great question. I think, well, if we look at China, for example, there was an issue a few days ago where Janet Yellen was in China and scolding the Chinese about exporting Chinese electric vehicles at below cost or something. Now, for the US and Europe, and Southeast Asia for that matter, China exporting deflation is helpful for consumers. So that helps reduce inflation in the US. And the US benefited from China exporting deflation for 20 some years. So it could potentially bring down the cost of EVs, EV components, and so on, if China is incentivized to subsidize those goods and export them at below their cost. I’m not necessarily saying that’s the right policy move or the wrong policy move. I’m just saying the The reality of trade in markets is that international trade helps to bring down inflation. And if we see China and other places with a devalued Japanese Yen, we see Japanese products coming to market at much lower prices with a devalued JPY. Why? So these sorts of things help out consumers in the US, where we’re seeing persistent inflation, helps those consumers out over time.
BFM
All right. Thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence giving us his views on markets, saying that, oh, looks like gold is ripe for a correction. And results, he didn’t pay attention to that, although he doesn’t think that even if the Magnificent Seven disappoint, there might be a correction across the board because there’s just so much passive money in those seven names.
BFM
Yeah, he’s, I think, emphasizing the resilience of the markets, right? I mean, he’s saying, look, the bank earnings are going to be projected quite good. As you said, there’s still quite a lot of flood, cash, flood, flood, Floating around.
BFM
Yes, flushed. We’re just flushed. Flushed with cash. I personally know, but markets are.
BFM
I think all of us in the studio are not necessarily flushed with cash. So I think that’s interesting. The interesting thing also is about oil, I think, where there are all these outlandish forecast there, but it’s not about- Thousand.
BFM
I was like, Is that for real?
BFM
Yeah, but it’s not the actual forecast that matters, but it’s the trigger, what it means, right? That actually you’re near the specific cycle there.
BFM
Yeah, because all is one of those things. When prices go up, there is natural demand destruction. So there seems to be a ceiling. The ceiling can shift a little bit depending on geo-politics, global economy, but it doesn’t shift that much. You have been listening to a podcast from BFM 89.9, The Business Station. For more stories of the same kind, download the BFM app.
This podcast was first and originally published by Peter Lewis’ Money Talk. Find the Substack here:
https://peterlewismoneytalk.substack.com/p/peter-lewis-money-talk-friday-22-6c2
Topics discussed:
- Federal Reserve Chair Jerome Powell’s perceived dovish stance is critiqued for potentially leading to increased inflation and discontent among voters.
- Market reactions to the Federal Reserve meeting were positive, resulting in a broad rally across various asset classes.
- Concerns are expressed about the impact of new legislation in Hong Kong, particularly on foreign investors and the perceived shift towards authoritarianism.
- The potential implications of stricter laws on data privacy and state secrets in Hong Kong are discussed, raising concerns about its impact on the region’s business environment.
Transcript
Peter Lewis
Tony, what are your thoughts? I mean, it’s interesting, isn’t it, because he’s raised the inflation forecast. He’s raised his growth forecast quite considerably, but no change to the number of rate cuts this year, although we did get one taken off for next year, didn’t we? There was going to be four next year. Now they’re only talking about three year. So I suppose one of the rate cuts has come out for next year. But what are your thoughts?
Tony Nash
I think it’s silly, Peter. We can’t be raising our economic expectations, seeing wages rise, seeing prices rise, raising our inflation expectations and saying, oh, yeah, we’re going to make money easier. Right. And he even said during the meeting that they were going to slow the pace of the offtake from the fed balance sheet. They’re cultivating an environment for pretty easy money where demand seems to be right now. And that’s how markets took it. Markets took it after the meeting and they just ran with it because he came across as very dovish. In fact, Powell has a way of coming across either way too hawkish or way too dovish. And then other Fed speakers have to course correct in the following days. So I think he probably came off way too dovish. And I think we’re going to see fed speakers over the next week. Correct. More on the hawkish side to say, whoa, that’s not really what we meant. And I really think that that’s what’s going to happen is they’ll make the three interest rate cuts seem more questionable than they are. Although the vote was unanimous, we did see a slightly more hawkish trend in the dots.
Tony Nash
Not a lot, but slightly more hawkish.
Peter Lewis
And what was also interesting was out of the 19 FOMC members, nine of them, so a minority, but a substantial minority, actually think the Fed is going to cut less than three times this year. So I think that’s maybe Jerome Powell is sort of out on a bit of a limb there, isn’t he?
Tony Nash
Yeah, I think you’re right. I do think that he does over calibrate either hawkish or dovish, depending on the direction, and I think he’s trying to signal the direction, but I think he always overdoes it just a little bit. He doesn’t have an easy job. Everyone reads everything into the way he holds his papers, the way he clears his throat or whatever. Right. I mean, everything is overly analyzed with him. But again, we have seen this where he comes out and he’s overly one way or the other. And I think, yeah, seeing those nine voters say hey, we’re not going to have three this year. I think as we’ve been talking about, my team has been talking about a resurgence in inflation for over a year, and we’ve seen it over the past couple of months, and we’re going to see that accelerate. They try to present Jan, Feb as just an aberration, but it’s not. And so it’s going to accelerate. Their expectations are going to be probably even exceeded. And it’s very difficult to have an interest rate cutting environment when you have inflation rising because it’s an election year.
Tony Nash
And consumers love, and voters love to complain justifiably about prices and prices keep rising. What did we see after the Fed meeting? We saw commodity prices soar. A lot of commodity prices soared after the Fed meeting, and that’s going to hit consumers within two. You know, this very unnecessarily dovish talk out of Powell has resulted in inflation definitely being locked in for at least two months.
Peter Lewis
Tony, I’m wondering what you think about this. Is the Fed taking a risk here? Because they basically seem to be saying the economy can run faster without generating significant overheating pressures and they’re willing to cut even while they’re still away from their target.
Tony Nash
Well, this is very similar to like a 2020 2021 argument when things were actually doing okay in the middle of COVID at least in the US, and people kept saying, hey, let it run hot. Let it run hot. Right. And it seems like we’re replaying that again, where, although people may not be using those words, the subtext is let it run hot. And I think the problem is, as Andrew was talking about GDP, the quality of that GDP is not great. It’s overwhelmingly government spending in terms of the growth areas. Okay, so we’re not having private sector growth as a contribution of GDP in the US. We’re having government spending as a growth area in GDP. And so what we’re seeing is heavy fiscal and we’re seeing dovish monetary. And so that’s great, but it just means that we’re going to see more inflation. Inflation is going to come back. Well, it already has, but it’s going to continue to accelerate. If this is the world that policymakers are comfortable with and if this is the world that policymakers are comfortable with, it makes us voters very unhappy because their pay rises are not keeping up with inflation.
Tony Nash
Now, what’s interesting, public sector pay rises are something like twice the size of private sector pay rises. So public sector wages are keeping up with inflation, but private sector wages aren’t and so this is the problem with an election year. American voters are really tired of it and inflation comes up in almost every discussion I have.
Peter Lewis
And I wonder what American voters also think about what he said about labor supply. He sort of mentioned the strength of the data on labor supply, but then he pointed to the strong pace of immigration as helping on that front. That’s rather a hot political topic to.
Tony Nash
It’s a lightning rod, and it’s not a very positive discussion in most parts of the US, even in very heavily democratic parts of the US, which favor inflation in state Massachusetts, New York, it is just a sour topic for people and it’s a very sensitive topic. So when the Fed chair gets up and says immigration is helping the labor market, it makes Americans very uncomfortable and it makes them not really like him.
Peter Lewis
Tony, what do you make of the market reaction to this? Jerome Powell didn’t talk down the rally at all, did he? In his press conference in either stocks or risk assets. He didn’t even acknowledge that this is easing financial conditions and maybe making their job a bit harder.
Tony Nash
He did not. And I think he turned it from a tech rally to an everything rally. If you look across markets at the close in the US today, and as you mentioned at the top of the program with Hong Kong was coming on strong this morning, international markets coming on strong this morning. I think with this, I think overly dovish Fed meeting, he turned the rally from a tech rally to an everything rally.
Peter Lewis
Do you think this is going to continue?
Tony Nash
It’s possible. I think we have to see how things go into the end of the week. If things stay strong into the end of the week, then look out. But I think if we start to see things stall out Thursday and Friday in the US, then we could see things settle back to the levels we had seen a few days ago.
Peter Lewis
Tony, if you look at the reaction of the yen to this, clearly the currency traders don’t think that this is the start of a sustained period of rate increases in Japan. And there’s still going to be that wide yield differential between US rates and Japanese rates.
Tony Nash
Yeah, it wasn’t a big statement. ET seems to be very conservative. He doesn’t want to be seen as shaking things up at the BOJ. He almost acts like a caretaker. And so I think currency traders expected something a little bit more. They want a little bit more in the end, want a little bit more. In terms of markets being slightly tighter, he’s not a big bold move maker and this just wasn’t it. So to see the end continue to weaken on this was just really interesting for me to watch this.
Peter Lewis
Okay. Okay, Tony, what are your thoughts? You’re obviously looking at this from overseas. As Andrew says, it’s no surprise it passed, and it passed with unanimous vote in ledge coat. But now that it has passed, and foreign investors are going to have a chance to scrutinize it and see the impact of it, is there anything to worry them?
Tony Nash
Oh, sure there is. I think the law allows trials without a jury. It allows trials behind closed doors. It allows handpicked judges. So anybody forming a company, anybody who’s a board member, anybody who’s an officer in a company, in a jurisdiction like Hong Kong, you have to worry. Why don’t you have a lot of international companies centered in Beijing because of laws like this, right? So Hong Kong, which 1020 years ago, 30 years ago, was the place to have a company because it was the most business friendly city in the world. Today it’s not that way. And if you’re an officer or director in a company, it’s got to be a little know, give you second. You know, one of the attractors for Hong Kong for a few decades has been media. There is great media in Hong Kong, but it’s no longer a media center, it’s no longer an arts center. And the sad part about that is a lot of that stuff is moving, or has moved to Singapore, which is a pretty strong state in terms of control of messages. So people are so worried about the impact of this new law on Hong Kong that they’re moving to Singapore and seeing it as a freer place than Hong Kong, completely 180 degrees from the way things were ten years ago?
Peter Lewis
John Lee and the government will say, what this Article 23 legislation does is it brings stability to Hong Kong. So will foreign investors look at that and say, yes, Hong Kong is more stable as a result of that, and that’s a positive.
Tony Nash
No, it brings opacity and it brings authoritarianism, in truth. And authoritarianism generally is stable until it. And so, you know, Singapore is an authoritarian place and it’s stable. It’s marginally freer than Hong Kong now, I guess. But no, authoritarianism doesn’t bring stability necessarily, or the stability it does bring is short lived. And again, Hong Kong was very vibrant, very creative, very interesting business hub. And I don’t think it’s totally gone, but I think the risks to officers, investors, board members and so on are much, much higher than they were before.
Peter Lewis
Tony, you are a financial analyst. If you were based in Hong Kong, would you be worried about this state secrets legislation or this state street secrets article that includes economic information, technological information on Hong Kong?
Tony Nash
Yeah, absolutely. So I used to be with a company called IHS, and it’s since been bought by S and P. But twelve or 15 years ago, there was an IHS analyst who lived in China who had some information on crude output or something like that, crude storage. And this person, from what I understand, got it from an industry association or something because they used it in a business environment. The chinese authorities prosecuted him and put him in jail for a long, long time. And at the time, I was working with the economist, but we were shocked at what was happening, because you used to be able to do research, find information, and if you could find information, you could use it to your advantage. And part of using things to your advantage is to trade on it. Right. And so if Hong Kong is to remain a vibrant financial center and a vibrant trading hub, you have to be able to dig for information. But if the Chinese authorities are going to prosecute people for finding information, then Hong Kong as a competitive center is no more. It just isn’t.
Peter Lewis
I mean, that’s what some people are worried about is that Hong Kong is becoming more like mainland China in terms of things like data privacy, state secrets, and what constitutes state secrets?
Tony Nash
Well, there are huge data centers in Hong Kong, right? I mean, there have been for 30 years. And so those data centers, I don’t know, a lot of foreign companies that people have their servers outside of China for a reason, and they have their data stored outside of China for a reason. These new laws allow the government to look into whatever they. So, you know, that stuff that has remained in Hong Kong, I’m sure at some point will move elsewhere if it’s remotely confidential.
Peter Lewis
Okay, well, thank you very much for your thoughts this morning. Great to hear you. That’s Tony Nash over in Texas, USA, who is the founder of Complete Intelligence.
This podcast is originally published by BBC Business Matters in this link with title “Hong Kong’s lawmakers pass tough security bill”: https://www.bbc.co.uk/programmes/w172yzs33f96cxs.
BBC’s Description:
The new law broadens the definition of state secrets in a way that could scare away investors. Will the city be able to maintain its place as a top financial hub?
The British band Chumbawamba is trying to prevent its biggest hit from being used by a politician in New Zealand. The lead singer tells us why.
And Star Wars creator George Lucas steps into the boardroom power battle at Disney to support the firm’s CEO, Bob Iger. Will the Force be with him?
Transcript
BBC
The new law also broadens the definition of state secrets to include information about the economic, technological and scientific development of Hong Kong or mainland China. And this has caused concerns among investors. Tony Nash is the CEO of AI forecasting platform complete intelligence. He also ran the Economist’s research business and their Asia headquarters in Hong Kong.
Tony Nash
Do I think first, we’ve seen legal agreements move to other jurisdictions, so that’s an easy thing to do. They can write it with UK law or something like that. We’ve also seen financial services staff and multinational staff move to other locations, like Singapore. I lived in Singapore for 15 years, and it’s a great place, but Hong Kong always had a very special buz. It had a level of hard work, creativity, intelligence. That Singapore, although it’s a really great pace, it didn’t have that special buz that Hong Kong had. So this stuff has people moving, it has business moving, and sadly, that specialness of Hong Kong is going with it.
BBC
Do you think there might be some businesses that might stick around in Hong Kong, or do you think that the rules are just too much for them?
Tony Nash
Sure, Hong Kong’s not dead. Companies still need people to do work in Hong Kong, but I think the decision makers and the people who are, say, the regional heads or the sea levels or the board members, those people will want to be in other places because of the potential liability that they have. Traders can trade on all kinds of information, and so if something is deemed a state secret and a trader uses some information that they’ve heard, there could be criminal prosecution for that. And so this was never a part of Hong Kong. Of course, things like insider trading are illegal, but I’ve been in the research business for a long time, and there’s a company called IHS that probably ten to twelve years ago had one of their researchers in China put in jail for getting some information that was relatively easy to get. It wasn’t hidden, but it was later deemed a state secret, and that person was put in was.
BBC
Sorry to interrupt you, Tony, but that uncertainty is just going to make it very difficult to do any business out there.
Tony Nash
That’s right, it is. And especially if decisions are made after the fact. Right. So this person had this information, it was deemed a state secret after this person had it, and that person went to jail for a long time. So these are the difficulties that executives and business leaders and researchers and media people face as and if they stay in Hong Kong.
This podcast is originally and first published by BFM 89.9 in this link: https://www.bfm.my/podcast/morning-run/market-watch/oil-gold-bitcoin-markets-up-asset-classes-investment
BFM Description:
We appear to be living in strange times as almost all asset classes are up in tandem. We ask Tony Nash, CEO of Complete Intelligence to explain this conundrum and how to invest in these confusing times.
Transcript
BFM
So joining us on the line to tell us what’s going to be moving markets in the weeks ahead, we speak to Tony Nash, CEO of complete intelligence. Good morning, Tony. Now, let me ask you about what your views are in terms of the US CPI numbers, because it came in slightly higher than expected. I believe the figure was 3.2% for Febre, thanks to a pickup in housing and energy prices. Is inflation actually stickier than we think?
BFM
And what does this then mean for the Fed fund rate?
Tony
Yeah, it is stickier than we think. And if you annualize that, so that 3.2% was month on month. So if you annualize that, that inflation is back at 5.4%. So keep in mind that the Fed’s target is 2% inflation on an annualized basis. So we’re more than double that in America. So what does that mean? Well, there is a hope among, well, the current administration really wants a rate cut this year, and there are a lot of people in markets who are hoping for a rate cut. But as we see persistent inflation at the grocery store, with things like flights, with energy costs, with housing and other things, that cut is less and less likely.
BFM
And Tony, let’s look specifically at some of the sectors. I think the first one that really has caught my eye are the banks. Right now, they’ve paid out large dividends over the past year and also a lot of share buybacks. But with the net interest margins set to go down as a result of these expected rate cuts, will they be able to keep those payouts?
Tony
Yeah. So if we don’t see cut in rates, let’s say we don’t see cut in rates. We don’t expect we’ll see a rate cut before maybe Q three of this year, maybe even further than that if we continue to see persistent inflation. I’m not particularly worried about net interest margin for banks. I think initially rate cuts will not be as large as we saw them hike at the start. So I think we’d see tepid rate cuts at the start unless we saw a pretty dramatic downturn in the US. Now, in terms of buybacks with both banks and other segments, it’s really interesting to look at the amount of corporate debt announced in January and February. It’s a record, at least for the last ten years. And something like 20% to 30% of corporate debt issued is done for share buybacks. So we’re going to have to see what is announced for share buybacks probably in April May time period. But we expect there to be a lot of share buybacks this year, especially for those companies that issued debt in Janfeb.
BFM
So if we can look maybe, perhaps at some of the potential headwinds ahead, we are going to see US federal elections in November. It’s most likely going to be a Biden versus Trump rematch. How do you think investors are going to hedge potential political risks, particularly in equities?
Tony
Well, I think for Biden, I think they’re going to have to be careful of inflation because we’ve seen a lot of federal government spending under Biden. And of course, it was under Trump during COVID and Trump was a spender. But we’ve seen it accelerate under Biden, and we don’t see it slowing down necessarily. So in a second Biden administration, we’d expect the US debt to accelerate, especially if Janet Yellen is still the treasury secretary. She’s very good at issuing T bills to spend, and she’s very politically well connected, so she can get the authority to issue that from Congress. Under Trump, yeah, we would expect spending to slow a bit. And the way to hedge that play under a Trump administration is to look at, say, defense sectors. Under a Trump administration, defense likely wouldn’t do as well under Biden. We’ve seen wars in the Middle east and Ukraine, and we would expect things to at least stay where they are under Biden. Under Trump, there weren’t any wars. So we would expect that the defense sector wouldn’t really do very well under a Trump administration.
BFM
But, Tony, who is better for markets? Biden or.
Tony
Think? I think it cuts both ways. I’m a Republican, so I’m pulling for my party. It doesn’t matter who’s running. I think under Trump, we did see healthy markets without a lot of stimulus. And then, of course, the pandemic hit. And what we’ve seen since the pandemic is wave after wave of stimulus in the US that has really hit markets in a good way. Right? So under Trump, I don’t think we would see the level of stimulus that we would see under Biden. But Trump has also been vocal, saying that he would fire Jerome Powell, who he hired, who he put in place under his regime. So Trump is saying that he would want to cut interest rates. So it’s tricky both ways. And of course, presidents don’t like higher interest rates because they think that it slows down the economy in a very simplistic way. So I think it’s really a coin toss who’s better for markets? It really depends on the amount of fiscal and monetary firepower. I think the Democrats would bring fiscal firepower. I think the Republicans would bring monetary firepower.
BFM
And if we take a look at maybe another aspect, which is crude oil, we do see that oil prices have been rising on the back of diminishing US crude stockpiles. Why are oil inventories being depleted? And will the replenishing of those stocks push oil prices even further?
Tony
Yeah, oil prices are being depleted partly on production caps and partly on maintenance and other things. But crude markets, especially in the Middle east, very tight right now. They’re very tight. So as the US continues to replenish oil stocks in the SPR and other things, that will definitely push crude prices higher. They’ll try to buy opportunistically when prices are low. But as they refill the SPR and as other kind of storage in the US is refilled, that will definitely push prices higher, because the supply globally is so tight right now for both crude and for refined, you know, it’s really hard to see a downward spiral for crude in the next, say, month or two.
BFM
Tony, I have a question, because I’m stuck. If you look at cryptocurrencies, especially bitcoin, it’s like record high. $73,000, but gold, also record high. What does it tell you about markets, or at least sentiment, when equities are also at all time high? Aren’t those the two asset classes I mentioned earlier, defensive ones and commodities?
Tony
This is the problem with inflationary markets. It tells you that there’s a lot of money supply out there. It tells you that there’s more demand than there is supply. And I know people who invest in crypto, I know people who are aggressive crypto. I don’t see the inherent value of crypto, so I wouldn’t recommend anybody either way on that. But I think we do see, especially in the US, we see demand rising because it has to. Because we have inflationary markets. Demand is measured in dollars, it’s not measured in activity. So people will say, oh, the US economy is booming. Well, it’s booming because inflation is high. Right. And so because inflation is high, people have to consume more goods now. And that’s why we see so much demand on things, both because of the nominal value and because prices are going up. So it’s really hard to see anything fall until it does. Right. And those of us who’ve been around markets for 20 plus years, the music does kind of turn off and there are a lot of books I could recommend to you. But once interest rates rise, there is a lag before markets respond.
Tony
So things like cryptocurrency, that’s rallying because they’re in funds, they’re into index funds or, sorry, into ETFs and stuff. But other things, it’s because people are buying because the prices, they believe the prices will continue to rise. We haven’t seen any evidence that prices will fall outside of places like Europe and China, where they’re facing both economic headwinds and demographic headwinds. So that’s why we see things. Japan, China, Europe are slow because they have demographic issues. Of course, that’s a very slow issue, but they’re also seeing demand issues domestically in those markets.
BFM
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 ahead. We have a little bit of time on the clock, so we are going to turn our attention to some of the international corporate headlines that we’re watching this morning. We’ve got news coming out of Adidas. Adidas faced its first loss in over 30 years following the termination of its collaboration with Kanye west, which included the highly profitable Yeezy sneaker line. Despite the loss, though, Adidas shares performed well. They outperformed competitors like Nike and Puma. But the company’s decision to maintain its earnings forecast for 2024 at an operating profit of about €500 million did disappoint investors who were anticipating a more optimistic outlook.
BFM
I think the buyers of the stock are fans of the Adidas samba, which.
BFM
Is like the next cult is the big issue, right?
BFM
Yeah, it is the big couch shoe. So maybe people are thinking, who cares about these yeezys easys. We’re moving on. But if you look at the stock, actually yesterday it hit its all time high, traded at 200 and €1.55. Now, what does the street think of this? Are they optimistic? Because there were some write offs earlier on even before these results. And it’s somewhat evenly mixed because it’s 15 buys, 14 holes, just seven sells. Consensus target price for this german listed company, €187.91. Like I say, yesterday was an all time high. So it looks like markets. Who’s buying, I wonder? Maybe samba users.
BFM
Yeah, the fashionistas. I suppose you do see that. I think if we look at sales performance, north american sales are expected to decline due to market saturation. But really other markets are predicted to grow significantly. Yeah. Footwear sales grew by 8%, probably those sambas, while apparel sales fell by 13%. Okay, turning our attention to another stock and company, but this one in pretty big trouble. We see country garden. They’ve missed a coupon payment on a yuan bond for the first time, the latest difficulty faced by the chinese developer that is facing a lawsuit seeking its liquidation in Hong Kong. In response to this, the company said its main onshore unit hasn’t fully prepared a 96 million yuan coupon due on Tuesday for a 4.8% yuan bond maturing in 2026, and further emphasized that there is a 30 trading day grace period for this payment. So they’re trying to buy themselves some time.
BFM
I don’t know how much more time they can buy because they already defaulted on the offshore bonds. And then added to their pressure is the liquidation order by the Hong Kong courts where I think some people still argue, can it be enforced in China? So even the share price is really like all time low, down 25% on a year to date basis. The question is, I don’t think anybody’s going to buy this stock. It’s a question, can it survive? But amazingly, there’s still six buys on this name. Nine holes, six cells. This is listed in Hong Kong. It’s only fifty eight cents. Hong Kong Tiger price $0.63. Wow.
BFM
Some very brave six analysts there to still have a buy call. All right, 719 in the morning. We are going to head into some messages, but we’ll come back to cover the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
This podcast was originally and first published by Business Matters.
BBC Description
Polls are beginning to close across the 15 primary states in the U.S as Super Tuesday comes to an end. Our presenter Roger Hearing will be bringing us up to date on what the polls are saying.
We’ll be hearing from voters who have made up their minds and those who are still considering.
And we find out if the fact that the US economy is beginning to show signs of strength, will affect the outcome in November.
Roger will be joined throughout the programme by two guests: Tony Nash, Chief Economist, Complete Intelligence who’s in Houston and Laura Schwartz, former Advisor to Bill Clinton and democratic strategist, who’s in Chicago.
Transcript
BBC
Hello, and welcome to Business Matters. I’m Roger Herring. Coming up on the program today, millions of voters in the US choose their party’s candidate for the November presidential election on what’s called Super Tuesday. But how are they feeling about the prospect of Biden versus Trump round two?
BBC
Well, we’re going to be hearing from those who have made up their minds and those who are still considering and ask if the fact that the US economy is beginning to show signs of strength will affect the outcome in November. And I’ll be joined throughout the program by two guests, Tony Nash, chief economist, Complete Intelligence, who’s joining us on the line from Houston. Tony, I should say hello to you.
Tony
Hello, Roger.
BBC
Good to have you there with us. And, Tony, I mean, for the Republicans, it is pretty much a coronation, wouldn’t you say?
Tony
Overall, yeah, there’s nobody left. I mean, you may have the four republican voters in Vermont vote for Nikki Haley, but aside from that, I really don’t think she’s going to win much today.
BBC
All right. Fair point. Well, we shall see. She hasn’t said her campaign is over yet. We’ll talk about that. But let’s just bring ourselves up, just be, to what has been happening, because it has been the biggest day so far in the US election year. Millions of people voting in what’s known as Super Tuesday. And the idea is you decide who should be the Republican and who should be the Democrat candidate for November’s presidential election. Now, polling has been taking place in more than a dozen states. The results are only expected to reinforce, as we said, the near certainty that Joe Biden and Donald Trump will face each other again in November. Well, speaking to reporters a little bit earlier, President Biden was pretty defiant about his polling. All right. Well, thanks very much for the moment, Michel. We’ll come back to you in a little while, a little bit later in the program to get an update and see what’s happening and perhaps get some sense of other issues that may be working their way through this election year. But now let me come to my guests, Tony and Laura. So, Tony, first of all, let me come to you.
BBC
Do you get the sense then that this process, this primary process, isn’t really what we’ve had in the past, what we’ve expected, where there’s been at least an element of doubt as to the outcome? And so for that reason, is it more of a drama? Have any issues come up in the process that have been useful?
Tony
Well, one thing about your earlier conversation, there are states where you vote in a partisan primary, but you don’t necessarily have to be a member of that party. So we have, like in Virginia, according to Exopolan, I was just looking at half of the people who voted for Nikki Haley were Democrats. And so this is how the different parties game some of these. And I would say this is a pretty big issue, especially in this primary.
BBC
Sorry, just run that one past me. You’re saying that the Democrats, people who are registered Democrats, can vote for the Republican candidates in some states.
Tony
So I live in Texas. In Texas, you do not have to be a registered Republican to vote in the republican primary. And so this is something that’s been happening for, I don’t know, the past three, four election cycles where party members will go in and vote in the other party’s primary to kind of try to push things one way or another. So since there is really nobody running against Joe Biden because he’s the incumbent, it really is kind of open and fair game for Democrats to try to change the republican primaries. So I voted here in Texas. I’m a Republican. And there were all of the previous names on the ballot. It wasn’t just Donald Trump. There were, I think, seven or eight Republicans to choose from. So just so your listeners understand, Republicans don’t just walk in the door, and Donald Trump is the only name on the ballot. There are many names. If those names are submitted to the state and qualify in time for the primary.
BBC
Interesting. We’ll see about that. Tony, let me bring you in on this, because that point that Laura was making about the court case, and we do know that one criminal trial will happen at least before the election. How much do you think that actually will matter in terms of voters, particularly GOP voters?
Tony
Obviously, it won’t matter. I mean, honestly, I live in the suburbs. I know both men and women. I’m a relatively social person, and I don’t know a single person who that matters for. And so we see this as responses, but I haven’t heard of a single person. Donald Trump being a dog is. I mean, that’s old news, so nobody really cares. I think that the biggest issue that people are facing right now is immigration, and that’s what everybody’s talking about. And that will weigh on Biden more than anything else. More than his corruption, his son’s corruption, his brother’s corruption. Immigration will weigh on Biden. And that campaign more than anything else, because there was some news, I think, out today saying the administration flew 300,000 illegal immigrants into the US. They flew them in to avoid the optics of them crossing the border. And so american citizens are paying for that. They’re paying for these people to be illegally transported and to reside illegally in the US. So we see what’s happening in New York City. We see what’s happening outside of Boston. We see what’s happening in Chicago. These very traditionally democratic cities are having to contend with the things that people like me in Texas on the border.
BBC
Because, I should say, of the movement of people coming over the border, often by republican governors in the south up to these cities.
Tony
Yes and no. Yes. I mean, our governor in Texas has done a lot of that to start that, to bus people up to DC and New York and Boston and Chicago and other places. But the Biden administration itself has flown in 300,000 illegal immigrants into the US. This was just a story out today. So they’re paying airfare, they’re taking Americans off of planes, they’re flying on flights, and then they’re getting vouchers and debit cards once they arrive here. And that’s a massive, massive issue for.
BBC
So you think that will actually dictate where a lot of people go in November will be that issue more than anything else?
Tony
Yes. Especially as we see more layoffs from companies. The displacement that that cohort has for, say, inner city and lower wage workers is huge. And so, again, these are traditionally Democrat voters. And so that immigration issue, it just won’t stop and everybody is talking about it.
BBC
Well, we shall see. That’s a very interesting line that you put there and one I have heard as well before. Anyway, we’re going to move on to the next part of the program. We’re going to be looking at some of what the economy might do to that vote in November. We’re going to say, Tony, let me pick that theme up with you, because do you feel, as someone working in the US economy, do you feel that things are getting better? I mean, you can see, I guess, from the stock market is certainly seeming to reflect that.
Tony
Yeah. So there are a couple of different things. First is inflation. It’s undoubtedly, on average, things are, I think, 24% more expensive today than they were in 2019. So inflation is without a doubt another massive issue this year. The stock market is really about four concentrated stocks, okay? It’s about Microsoft, it’s about Nvidia, it’s about Amazon and it’s about Apple. So when we see the general indices move up and down every day. Money is so concentrated in Nvidia, Microsoft and so on, that’s not necessarily impacting the stock market as a whole. So these are people betting on artificial intelligence. If you look at general stock market performance on the year, it’s down, I think, high single or low double digits so far this year. The general stock market, if you take out those four stocks, and we do see a lot of layoffs, other things. So it’s hard to argue that we’re in a terrible economy. I’m not saying that’s the case at all. But when we look at inflation and when we look know if people are standing still, they’re losing money. Right. Why is that happening? Well, it initially happened because of Fed policy.
Tony
Loose fed policy. Right. And so today it’s happening because Janet Yellen is using the treasury general account as her own personal kind of campaign funds. She’s spending the treasury general account like wildfire. And that is helping to sustain the prices in the US and keeping things up. So Congress has very limited power to stop her from doing that. But Yellen spending from the TGA is one of the biggest issues that nobody talks about, and it’s really keeping inflation up in the US.
BBC
Okay, well, listening to all that, Tony Nash. Tony, I guess that didn’t really surprise you, the kind of things we were hearing there.
Tony
No, it completely validated things that I’ve been telling you for the last 45 minutes. I mean, people on the ground are feeling it. If you’re sitting in New York or Boston or DC, and if you, Roger, are interviewing a talking head sitting in one of those places, they’re not going to tell you this stuff. But you just interviewed two people on the ground and they’re telling you exactly the stresses that they’re feeling.
BBC
Okay, well, let’s. Nash in Houston. It is interesting to hear where these things are going and interesting that John Zogby certainly seemed to think that the legal troubles of Trump may be actually quite instrumental. And I know you disagree with that. You’re not convinced, are you?
Tony
I’m not. I really think inflation and immigration and the people I talk to, and they’re across, I have 20 somethings who work for me and I have a 60 year old who works for me and I talk to, of course, people who don’t work for me. But I get a cross section across every day and I’m not hearing Trump’s legal concerns as an issue. But I’m sure in places like New York or San Francisco or DC, it’s a major issue where media is. But I think, Roger, the major, I think issue this November will be who will show up to vote. And if people are ambivalent about Biden and they don’t show up, then Trump’s going to win. If people are ambivalent about Trump and they don’t show up, then Biden’s going to win. I think that’s a bigger fact than anything because we got a couple of 80 year olds running. It’s really hard to get enthused. You can’t have like an Obama wave.
BBC
Well, I think we seem to have.
Tony
2008 or even a Trump wave.
BBC
We’re just losing the line a little bit to you there, Teddy.
Tony
And with all this other stuff and.
BBC
The partisanship, people, I think we’re just losing the line to you slightly there. But yeah, just a final thought. Does it matter very briefly in a word, or could, we heard you there a little bit there, Tony, thanks very much there. The line getting in the way of that at the end. But I hope we got a decent picture there of Super Tuesday and what it means, just to let you know that at the top of the hour, polls will close in Colorado, Minnesota and Texas. And we’ll bring you up to speed, of course, with projections from that. But that’s it from this special edition of Business matters on super cheesy bye.
Categories
It’s Malaysia’s Time Finally
This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/us-market-valuations-india-undervalued-market-malaysia-strategy.
The BFM hosts provides a comprehensive overview of global markets and corporate earnings, covering major stock indices’ performance and specific company reports like HP Inc. and Salesforce. Analyst Tony Nash discusses market valuations, highlighting potential overvaluation of US stocks and undervalued markets like Poland and Israel. Discussions on tech giants Nvidia and Apple illuminate trends in the technology and automotive sectors. It also explores Apple’s decision to abandon electric vehicle ambitions, insights on emerging markets like India, and shifts in global supply chains. The segment concludes with an analysis of Salesforce’s earnings report, focusing on revenue growth concerns and the company’s strategic emphasis on AI technology for future profitability amid market changes.
Transcript:
BFM
BFM 89.9. Good morning. It’s seven o’ six a.m. On Thursday the 29 February. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Keith Kam. We are going to start the morning with the recap of how global markets closed overnight.
BFM
Wall street ended lower as investors were looking ahead to a key inflation report that’s due out later this week. The Dow Jones fell 0.1%, the S&P 500 was down 0.2% and the Nasdaq was down 0.6%. Earlier in the day, Asia was pretty much in the red as well. The Nikkei was down 0.1%, Hong Kong’s Hang Seng was down 1.5%. Shanghai’s composite index was down 1.9%, Singapore’s STI was down 0.6% and the FBMKLCI back home it ended lower, 0.9% lower at 1546 points.
BFM
All right, all in the red, surprisingly. But let’s take a look, maybe at some of the headlines coming out of corporate America. We have quite a number of companies reporting earnings with HP Inc. First on our docket, they reported first quarter results that missed estimates and this is really due to the ongoing slump in pc sales. Revenue declined 4% to 13.2 billion U.S. Dollars in the first quarter ended January 31, dismissed estimates of $13.6 billion. Profit, excluding some items, was share in line with Wall Street estimates.
BFM
If you look at different segments after two years of declining revenue in the consumer pc unit, analysts were hoping for a sales increase in the quarter. But instead consumer sales fell 1% to $2.76 billion, while pc revenue dropped by 5% to just above $6 billion. Its printer division revenue was pretty much in line with estimates at $4.38 billion. And that’s down by 5%.
BFM
Okay, so what’s the outlook? The company expects pc sales to increase in 2024. Basically, the new computers are now tied to Microsoft Windows eleven software, and there’s some modest impact from AI ready pcs. But if you look at the pc market right, it’s really going through a major downturn. Some people say it’s the unparalleled in the industry’s recorded history. Holiday shipments last year were the lowest since 2006. So it might be we’ve reached the bottom and then hence it’s going to be up from now. But very quickly, does a street like this name, what do they think? The answer is not really because there’s just eight buys, eight holes, three sells. Consensus price for the stock, $33.27. It was down eleven cents to twenty eight dollars and seventy two cents.
BFM
All right, we are going to take a look at more earnings, but let’s first take some discussion on what’s moving markets. We do have on the line with us Tony Nash, the CEO for Complete Intelligence. Tony, good morning. Thanks very much for joining us. The S&P 500 forward PE ratio has risen above 20 times for the first time in two years. Based on this, do you think us stocks are overvalued, as some analysts believe?
Tony Nash
Yeah, I think it’s possible, but we have to look at some of those stocks that are hitting those high levels. So if you look at Nvidia, which is a stock that everyone loves to talk about, Nvidia is contributing 23% of all of the S&P 500 earnings right now, all the earnings growth. So this is one that people love to point to and say, hey, it’s overvalued. But actually you have to pull back and look at the whole market and go, this one stock is actually propping up. We’ve all seen that meme where there’s this house falling over and there’s a log holding the house and fall on its own. Right? That’s Nvidia right now and maybe a handful of other stocks. So when we look at something like Warner Brothers, which is an old media stock, it’s got a massive PE right now. And that’s not technology, it’s just a firm specific valuation. So is it overvalued? Probably, possibly. But I think that’s a function of both earnings growth expectations and interest rate expectations. So there are a number of people here in the states who still believe the Fed is going to cut rates, and they’re factoring that into their equity valuations when those expectations keep getting pushed back and back and back.
Tony Nash
So at some point those rate expectations will catch up with the valuations and the pes. I think it’s also necessary to look at global forward pes. Okay, so the US is definitely in a weird place at, say, 21 times earnings, but if you look at, say, Denmark and India, they’re hitting 25. Those are two markets that are very highly valued. So when we look at the US, because of the strong dollar, we have a lot of capital being attracted to the US right now because of the strong dollar and because of the higher for longer narrative out of the Fed, those markets, they’re attracting some capital, but especially a market like Denmark. I’d be really concerned of the overall pes in a place like Denmark. And then finally, if we look at Malaysia, Malaysia has 15 times PE right now, so it’s not nearly as stretched as the US is right now.
BFM
Okay, so you highlighted us. Thank you very much, Tony, because we are usually nervous, but what other markets would you pay attention to which you think are, well, cheaply valued, undervalued.
Tony Nash
Cheaply valued, undervalued. Well, let me look at this list. Well, you’ve got things like, say, Poland. Israel is undervalued. Poland is undervalued. South Africa might be, Brazil might be. I mean, there are different types of risk in these markets, right? And we look at know people have really fled China as an investment market right now, really because of economic and policy risk in China. So if you look strictly at PE, China looks very undervalued, but you have to look at the other risks around that market to understand what’s loaded into that PE based valuation.
BFM
Tony, can I pick up on something you said about Nvidia just now? Its spectacular run is being compared to what we’re seeing with Cisco during the.com bubble. Is this a valid comparison and where do you think they are similar and different?
Tony Nash
Yes, I love that comparison. Because when you mention that comparison to anybody, anybody who watches markets, nobody is just kind of met about it. Right?
Tony Nash
Everyone either hates it or they love it. So I’m old enough to remember the Cisco run up. And so personally, I have some selection bias and I see a lot of parallels, but in reality, it’s both yes and no. So they’re both selling infrastructure to kind of the current thing. Right? So for Cisco, it was the first generation of the Internet. For Nvidia, it’s AI. Nvidia is spinning off much more cash as a percentage of overall market earnings than Cisco did back in the day. So it seems to be on much more solid footing than Cisco was. We also have Nvidia selling into the likes of Google and Microsoft. These are Facebook and so on. These are very large companies with very solid cash streams, whereas Cisco was selling to a lot of people and a lot of startups that really had money pulled when that Internet bubble. So I think there is some merit to that comparison. I think it’s an interesting one, and it’s one that I gravitate to because I live through that first bubble. But I think you can see both sides of it and definitely justify both sides.
BFM
Tony, can we take a look at recent news coming out of Apple? They dropped their decade long aspiration to enter the EV space. Is this a sign that the EV market is already reaching a peak in terms of competitor space as well as returns on investment?
Tony Nash
Yeah, I think for EVs, we’ve had a pretty long hype cycle for probably the past ten years, and Apple’s been talking about developing EVs for that long. And when we have a lot of the Chinese EV makers who are really making headway and they do amazing products, and in the US, you have Tesla that has huge market share, and we’ve got European brands and legacy brands and us legacy brands and Japanese legacy brands, all with EVs. I think from Apple’s perspective, it’s looking at that market and going, are we really going to bring something to the market that’s not there? And they do wearables, they do mobiles, they do software, they do other stuff. And I think from the board perspective and from the operating management perspective, they’re looking at it. There’s a huge capital expenditure risk of building automotive plants. There’s a huge supply chain on the selling end that needs to be built up. And then there’s a massive amount of marketing to get into that crowded space. So for them, I think it just makes a lot of sense to pull the plug. And I’ve been waiting for this for a long time, actually.
BFM
Okay, Tony, we’ve talked about China. We talked about Malaysia, some markets which are very unknown to us, like Poland and Denmark. But what about India? What are your thoughts on this market?
Tony Nash
Yeah, so we saw some announcements over the past couple of weeks of people moving manufacturing to India.
Tony Nash
And so I think India can definitely draw investment away from China in terms of manufacturing and supply chain investment. But I think that, say, China plus x strategy, whether it’s one, two, three, or multiple countries, that’s not something that people, major companies can execute right away. It’s something that takes time. And the problem that India has is Malaysia, Thailand, Vietnam are very, very good at what they do in terms of manufacturing. And so those are the competitors for India. So India has, say, very low labor wages, but the infrastructure and the services surrounding manufacturing aren’t as well built out as they are in, say, Malaysia, Thailand, Vietnam. So I do believe that India will provide benefit for very labor intensive, very scale oriented manufacturing. But again, for those guys, it’s really hard to just turn the tap on in India. They have to make a major investment, run it in parallel, and then maybe turn the tap on full. So I know India has been building this for a long time. Made in India started, what, twelve years ago or something. Right? So they’ve been pushing it for a long, long time, but there’s a whole ecosystem that has to be built out and I know they’ve made headway there, but it’s just not as built out as say Malaysia, Thailand, Vietnam.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. We have a little bit of time. Perhaps we can take a look at another earnings report that came out overnight. And that is Salesforce. Salesforce shares fell by 4% after it provided an outlook for sales that fell short of estimates, although results for fourth quarter surpassed estimates suggesting that new AI features for its software have yet to boost growth.
BFM
For its 2025 fiscal year, Salesforce expects adjusted earnings to be between nine dollars. Sixty eight to nine dollars. Seventy six per share revenue is expected to increase by about 9%, up to $38 billion. And analysts had expected $38.6 billion in revenue previously.
BFM
Okay, so what they’ve done is they’ve cut costs just like any other tech company and that has helped profitability in the past year. But now investors are saying where’s the profit really going to come from? Where’s the growth coming from? Especially since a lot of companies are tightening their respective spending on software. So they are, of course just like anyone else, investing heavily into AI. But that monetization path isn’t so smooth, isn’t so fast, right? So in the meantime, I think people were disappointed with their numbers. They however, have launched a copilot feature that uses generative AI to answers questions and to create new content. Now, does the street like this name? Do you remember this? Was a real darling during the pandemic? Still a darling actually if you ask me. 42 buys, 13 holes, just one sell consensus tile price $304.13 last and price $299.77 up. Love the ticker on Bloomberg. CRM says it all right.
BFM
Indeed. 07:19 a.m. We’re going to head into some messages and when we come back we’ll continue looking at the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9.
Categories
AI: More Hype Than Substance?
This podcast is originally and first published by BFM 89.9 The Business Station for their program called Morning Run. Find the original source at https://www.bfm.my/podcast/morning-run/market-watch/ai-hype-substance-sustainability-tech-stocks-monetary-policy
Investor excitement over AI has been driving up valuations of tech stocks, but to what extent is this optimism substantiated? Tony Nash of Complete Intelligence weighs in on the sustainability of the tech rally, as well as the outlook for Fed monetary policy, among others.
Key takeaways from this episode:
- Fed likely to delay rate cut to July unless significant economic changes occur.
- Market expectations of 3 to 5 rate cuts for the year but unlikely to be as aggressive as initial rises.
- Tech companies like Microsoft and Nvidia driving market rally, but concerns over valuations exist.
- Nvidia’s high valuation raises questions about benefit versus risk.
- US oil production impacts OPEC and Russia’s influence on oil prices.
- Japanese Yen weak against USD, potential for intervention due to undesirable levels.
- Cisco reports revenue decline, plans to cut workforce by 5%.
In this podcast from BFM 89.9, Tony Nash shares insights, indicating that the Fed views the hot CPI number as a sign of strong policy and hints at a potential rate cut in July 2024.
The conversation shifts to the stock market rally and the performance of tech giants like Microsoft and Nvidia. Tony highlights the concentration of the rally in specific stocks, raising concerns about valuations and market dynamics. He questions the sustainability of Nvidia’s growth and the risk associated with its current valuation levels.
The discussion then changes to the oil and gas sector, focusing on the US’s significant oil production and its impact on global supply dynamics. Tony explains how the US’s supply has influenced geopolitical risk premiums and natural gas prices, reshaping the market landscape. The conversation also touches on the Japanese Yen’s depreciation against the US Dollar and potential interventions by Japan.
Transcript
BFM
All right, for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. So, hotter than expected, US CPI numbers have dampened market expectations of a rate cut. How do you think the Fed will view those figures? And where do you think they’ll place the timing for the first rate cut of 2024?
Tony
Yeah, I think the Fed sees the hot CPI number as their policy just not having enough time to work. So jobs are relatively strong, inflation is reinserting itself. So it’s definitely higher for longer. There had been an expectation of, say, a March rate cut, but that’s definitely gone now. Markets have wanted an earlier cut, which is why we saw so much activity in stocks. So we’re seeing some stuttering in valuations, a lot of the choppiness in valuations at the moment as investors try to figure out where is fair value. So the next rate cut is likely July. So it’s pushed back pretty dramatically from what we expected, unless we see something change. If we see recession come in or job cuts or deflation or something like that. But what we’ve seen over the past couple of years is the Fed has proven that it’s determined and that it’s patient. So they’re not in a rush to cut.
BFM
What does this then mean for the quantum of cuts? Tony, I think market is expecting a range between three, probably now three to five cuts for this year. What are your expectations?
Tony
Yeah, I definitely don’t see cuts coming at the rate at which they started. Meaning, remember, those first two rate rises were 75 basis points. We’re definitely not going to see 75 basis point rate cuts unless we see some dramatic problems in, say, housing or equities or something like that. If it’s really just dialing down because inflation has slowed, then there’ll be minimal rate cuts and they’ll be spaced out over time because we’re really just getting back to kind of a normal rate environment. So we’ve been in a zero interest rate environment for so long that people are not accustomed to actually having a real cost of money, which is what interest rates are. And so we’re probably in a zone between, say, 4% to 5% where they may actually want to keep interest rates in that zone to have a normal cost of money and cost of risk.
BFM
Tony, with this in mind, and the stock market rally that we’ve been seeing in the past couple of weeks or so, along with how well tech companies like Microsoft and Nvidia have been doing, what do you foresee going into the coming weeks as far as the market is concerned?
Tony
Yeah. Companies like Microsoft and Nvidia are really in their own realm. You know, the mag stocks, they’re pulling the entire market. So when we see a rally, it’s not a market-wide rally, it’s largely concentrated in those stocks. Last week, for example, we saw Facebook rise by 21% in one day. That’s unbelievable. And for a company that size to see a 21% rise in their value, it’s really strange. So investors will have to see a dramatic change in news, or they’ll have to see investment funds dump shares before they give up their current positions. One telling factor, maybe Jeff Bezos’s sale of a large tranche of Amazon stock this week. He could be signaling that he thinks the market is at a top, so he’s cashed in for now. So if that’s what he’s communicating to markets, we’ll have to see if investors really receive that and what they do with those tech shares.
BFM
Okay, can I talk about Nvidia? Because that’s another stock that’s just gone gangbusters, right? It’s up almost 50% on a year to date basis. I’m looking at Bloomberg forward P’s of 60 times. It overtook Alphabet and Amazon. In terms of market cap, are we putting too much money and too much faith into AI?
Tony
I don’t think we’re putting too much faith in AI. I think we need to examine the earnings of those AI companies harder to understand the quality of those earnings. If Nvidia is rallying and other semiconductor companies are not rallying, we have to ask why and look really deeply into their value chain and understand what their sales process looks like. I’m not sure that a lot of these investors have really looked that deeply into what Nvidia actually does, what risks they actually have, what their value chain is like, how they get revenues and so on. It’s just that it’s seen as the picks and shovels for AI, which is great, but we all saw what. Well, maybe we didn’t. I saw what happened with Cisco Systems in the.com bubble in 2000, right. And some people were around for that. The underlying theory there was, well, Cisco has the picks and shovels for the Internet, and that’s great until it’s not, and then it loses a lot of value. So I think Nvidia is in a place where people are so bowled up on it. And my problem, I’m not making any investment recommendations here, but how much benefit is there versus the risk of the valuation?
Tony
I don’t know. That’s something that I try to run every day. I run an artificial intelligence software company and I don’t understand the upside left in Nvideo. You know, but maybe there is. I don’t compete with them at all. So this isn’t a jab at Nvidia. I’m just saying I don’t understand these valuations and I don’t understand where that additional alpha comes from with a company like Nvidia. But maybe I’m just missing it.
BFM
Can we turn our attention to perhaps the oil and gas sector, where we see the US is producing around 13 million barrels of crude per day, which is more than any country on the globe, including Saudi Arabia. How do you think this is affecting the influence of OPEC and Russia in determining supply factors such as price? And where do you see oil price trending over the next quarters or so?
Tony
Yeah, I think with oil prices. I think part of the reason we haven’t seen a geopolitical risk premium with the conflict in the Middle East is because of the supply that the US has put on the market. If the US didn’t have, let’s say we were in 2007 or something, and we had the conflict in the Middle East that we have, we would definitely see a larger geopolitical risk in the crude price. I also think that natural gas is a factor as well. So if we look at Europe, for example, the US provides, I think, more than 40% of the natural gas for Europe, which just two or three years ago it wasn’t anywhere close to that because they were taking Russian nat gas. But nat gas prices are declining and continue to decline because the US has put so much nat gas and so much lng on the market. So those prices are somewhat paired in European and Asian markets. And again, part of it is the geopolitical risk premium isn’t there because of supply the US has put on the market. The other part is the US has flooded the market with Nat gas in Europe. The US provides 21% of LNG to China and so on. So this supply has really helped to keep those prices down.
BFM
Tony, can we just look at the Japanese Yen? It hit high knots against the US Dollar. Well, the weakest against the US Dollar not seen since the 1990s. Nearly ¥151 to the dollar overnight. What’s your outlook on this, especially since the finance minister himself did give a warning that what he’s seeing is undesirable. Does it signal some kind of intervention, maybe?
Tony
Yeah, I mean, they’ve signaled that they’re not happy with this a couple of times over the past, say, quarter or so, but they change policy at the edges. They typically don’t make dramatic policy changes. So what I’d see is maybe a small intervention, but I think they’ll likely just talk about it. And I don’t think they’re necessarily going to fight the US data, CPI or other US data. We have to keep in mind Japan is really sandwiched between a booming US and a really faltering Chinese economy. And so they can’t get too tight on monetary policy because China is such a big trade partner for them and there are so many Japanese companies with manufacturing sites and even headquarters in China. And so they have to be really careful to play between the two.
BFM
The GDP data is coming out later this morning. Any idea what we can expect?
Tony
Yeah, it’ll probably be moderately strong. I don’t think it’s going to be crazy strong. If we look at it in Yen terms, it might look very strong. But if we look at it, say, in Dollar terms, I think it will be maybe moderately strong.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup.
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[00:00:22.650] – Tony Nash
Hi, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Michael Belkin, Tracy Schuchart and Ralph Schulheimer. A couple things we’re going to cover today. Our key themes. Michael is going to talk about giddy euphoria in us markets. Those are his words. I love those words. So giddy euphoria in us markets. Tracy, we’re going to talk through the geopolitical influence of us LNG. How much influence does us have can they exert through LNG? That sort of thing. And then with Ralph, we’re going to talk about Germany. First we’re going to talk about evs in Germany, and then we’re going to talk about some industrial policies and other things that Germany’s had that’s really resulted in them kind of hollowing out some parts of their economy. So, Michael, welcome back. Ralph, welcome back, Tracy, thanks again for coming on. Before we get started, I want to let you know about a new free tier we have within CI markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things for you. First, economics. We share all of our global economics forecasts for the top 50 economies.
[00:01:30.230] – Tony Nash
We also share our major currency forecasts as well as Nikay 100 stocks. So you can get a look at. What do our stock forecast look like? There is no credit card required. You can just sign up on our website and get started right away. So check it out. CA Markets free. Look at the link below and get started ASAP. Thank you. Michael, you put this note together, I think, last week where you really dig into a lot of the US employment data, and obviously you dig into markets and sectors and individual stocks and all sorts of things. You use the words giddy euphoria in us markets, which I think is great, at least for a section of us markets. And I want to dig into that. But first, I think we really need to look at jobs, which is what you start your piece with, and you look at BLS jobs. And in this cut that we have on screen, you talk about phantom jobs from the BLS, which is interesting. Can you talk us through a little bit of that? We’ve had Mike Green talk about that a little bit, but I’d like to hear it from your perspective as well.
[00:02:41.430] – Michael Belkin
Okay, great. So the jobs report, payroll jobs report last week said plus 353,000. And everywhere you see job market, hot blockbuster jobs report, blah, blah, blah, ever. CNBC, it’s unanimous. Like nobody looked at the numbers. Okay. That’s seasonally adjusted. Not seasonally adjusted was -5.6 million. And that’s not an aberration and it’s not a conspiracy theory. But what happens is the way employment works is a lot of people are hired in the last three months of the year for temporary jobs and retail and things like that, and then they’re laid off at the beginning of the year. That happens every year. So January is always down big in the millions. Right. And it was down more this time than last year.
[00:03:30.130] – Tony Nash
I just want to understand because that’s a big number, 5 million jobs. Okay. And I think a lot of people in markets put a lot of weight on these numbers that come out, these headline preliminary numbers that come out because they move markets for a few hours or whatever. Right?
[00:03:48.200] – Tony Nash
But when you say they seasonally adjusted 5 million jobs kind of into the market, how do you seasonally adjust that? And how does somebody look at that number and go, oh, yeah, that’s normal. Numbers grew. Jobs grew.
[00:04:02.430] – Michael Belkin
All right. So they add basically 6 million. So to get from 5.6 to plus three -5.6 to plus 3.353,000, it’s almost 6 million. They pad it again. It’s not a one off like they do that every year. They want everybody to think it’s a smooth cycle. It doesn’t go up and down. But that’s not the way the real world works. Now, going back, if you look at this historically, it usually takes about three or four months for the level of, in the jobs report, payroll jobs report, to get back to the December level. That’s in a non recession year. In a recession year, that’s like 20 01, 20 07, 20 08 or 2020. They don’t get back. So jobs decline and they head down into the economy, goes into a recession. That’s my forecast. So what I do is I have a time series analysis model which is actually similar to what they seasonally adjust the numbers with. It’s based on box Jenkins and Fourier analysis, which I studied at UC Berkeley and then I was at Solomon Brothers prop trading developed this model. Anyways, so my forecast says jobs are going down. And you just contrast that with what everybody’s, it’s unanimous, jobs are great.
[00:05:18.340] – Michael Belkin
And then even smart people go through, well, all these jobs were created in this kind of sector and this kind of sector, those are all imaginary, like they don’t exist.
[00:05:27.570] – Tony Nash
Well, are they adjusted jobs or are they real jobs? I have a chart from you showing your negative forecast for jobs. We hear about job cuts at meta and it seems to be concentrated in tech. We’ve also heard about a bunch of job cuts at ups and some other places. So these job cuts that we’ve heard about in tech and tech continues to kind of do well in markets. But will we see those go into the broader market, into other sectors?
[00:05:55.570] – Michael Belkin
Yeah. So meta is a case in point. Okay, so they cut 20% of their workforce over the last year or so, and their earnings were up 69% or something, right? So I can just see all these people drooling. Oh, boy, this is how to increase my margins. All these other tech companies, it’s a poster child for what to do. But I mean, think about it. When companies are cutting jobs en masse.Right, which is happening
[00:06:22.810] – Tony Nash
20% is on mass, right? I mean, it’s not like they’re doing a 3% marginal cut or whatever.
[00:06:28.270] – Michael Belkin
But.It’S all these other companies, they’re copycat. So, Snapchat, it’s become the thing to do, right? You lay off people so you can keep your margins up and keep your profits up. That makes the pie smaller. That’s what makes a recession. And it doesn’t happen instantly, but that’s going to be the theme this year, I think. Lots of layoffs in the face of slowing top line revenues. What are you going to do? I think it just drives the economy down again, it’s not instant Quaker oaths or something where it happens overnight, but the force is declining by basically it’s a recessionary, contractionary thing that happens to the economy.
[00:07:15.450] – Tony Nash
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[00:07:55.320] – Michael Belkin
We have to mention just stepping outside of AI about earnings and layoffs and stuff. So outside of tech, all these cyclical stocks are going down. So if you look at the Belkin report, I’ve been short air freight containers, packaging, all these paper products, metals and mining. So the cyclical stocks are weakening. They’re underperforming. There’s only been one thing holding the market up, a handful of big tech stocks, and even those are going like it went so going up anymore.
[00:08:24.650] – Tony Nash
Let’s get into that in just a minute. Michael, I want to make sure we talk through soft landing first.
[00:08:30.340] – Tony Nash
Because I think part of really interesting part of your discussion is on soft landing. And so can you talk us through in what context you say soft landings narratives often precede recessions. So I’ve got a chart up that you sent me about mentions of soft landings. So can you talk us through that? And then let’s also move into the Fed funds rate hike and how that plays into the soft landing narrative.
[00:08:58.340] – Michael Belkin
Okay, so if you look at the chart, we’ve got the biggest proliferation of soft landing quotes in media of all time. And the previous ones that were not quite as big as this came right before a recession. So basically, I think the psychology of the market is really messed up. Everyone, the sentiment is unanimous. It’s going to be a soft landing. I think it’s just an insane number, percentage, super high percentage of portfolio managers.
[00:09:28.720] – Tony Nash
I see it every day. I see people who are normally skeptics have changed to say, okay, it’s going to be a soft, I don’t know, the shoe is not going to drop. It’s going to be a soft landing. I’ve just seen over the last six months all of these people who are like, looking for the downside, except you, who are looking for the downside just kind of surrendering to the soft landing narrative.
[00:09:51.940] – Michael Belkin
Absolutely. So I think what we’re talking about is deviant psychology. So what people think. Okay, so you have to say the market’s always right, right? Well, was it right at the top of the tech bubble? Was it right at the bottom when people were bearish in 2002? Was it right when everybody was bowled up in 2007? Was it wrong at the bottom when everybody was bearish? My point is, you get these extremes of sentiment that you need to fade, and what happens is the psychology changes, and that is what drives the change in markets. A change in psychology where people suddenly, all of a sudden there’s some kind of a shock or something, and all of a sudden people say, oh, wait a minute. And so you see this change in sentiment, and that’s what drives investment flows, flows into different sectors and in and out of the market. So that’s why I think we’re set up a major change in psychology. Not overnight, but it’s coming.
[00:10:57.110] – Tony Nash
Right. And so a lot of what’s driving that psychology, it seems to me, is interest rates and so, you know, there has been an expectation, as we saw leading up to the last fed meeting, march rate cut and so on and so forth. And that’s been kind of destroyed for so, you know, we’ve seen it. We have a chart on screen from you showing, know, steepest rate curve or rate rises, all this stuff. So will that eventually erode the psychology we have in the market now?
[00:11:31.070] – Michael Belkin
Absolutely. So just to put things in perspective, take a look at this chart. So 525 basis points from March 2022 to now. I mean, it’s been on hold for a while. That’s the biggest Fed rate hike campaign on record. So when they started this interest rate targeting thing, that was greenspan. Before that, it was reserve targeting with Volcker. So going back to the. What’s that? It’s like 40 something years. And so I was delighted to be invited to this Vale symposium last week. I was there with a lot of heavy hitters, investment strategists, portfolio managers. And one of the things that emerged, David Rosenberg was there, and he pointed out that it takes, the average lag between the beginning of Fed rate hikes and a recession is 24 months. Well, guess how many months it’s been now since the Fed started raising rates. 23. So here we are in February. So March is going to be two year anniversary. That’s the average. So basically, people have just kind of swept that under the rug and said, oh, it doesn’t matter. It’s just the fed
[00:12:38.470] – Tony Nash
feels good.
[00:12:41.090] – Michael Belkin
But it hits with a lag. And we are setting up for basically the blowback, the delayed response from a serious, serious monetary tightening campaign that is going to slow things down. You see it in the cyclical stocks, not so much tech yet, but that’s what we’re setting up for. The oldest saying, marty Zweig said, don’t fight the Fed. Right. So people think that was back in 2022 when the Fed was raising rates. But the lag effect is about to hit. And if there’s one thing, another along with soft landing, the psychology in the market is unanimous. The Fed’s going to cut interest rates. That’s bullish. For know, everybody says, right. Well, that’s not what in, when it’s a recession, when it’s not a recession, if it is a soft landing, yes, you’re right. Stocks take off. If it’s a recession, the opposite happens. So stocks go down with Fed rate cuts because why earnings decline?
[00:13:46.710] – Tony Nash
Let’s get there eventually.
[00:13:48.390] – Michael Belkin
Yeah, we’re not there yet. I’m actually short bonds now, the model. So I think it’s going to take a few months for this to play out. So basically, I think where I was super bullish on bonds, if you remember back like in October and stuff, when everybody was bearish, my model, I’d been flat on bonds for a month or so. I just entered a short position on bonds. So I think the idea of a fed rate cut campaign was built into forward rates and everybody got too bowled up. So I think we’re going to have. Could bonds go down five or ten points from here? Yeah. So I think for a tactical move, two to three month move, I think bonds could sell off. Even though I’m bearish on the economy, I’m sticking with the model forecast on that.
[00:14:30.790] – Tony Nash
Interesting. So let me bring Tracy in. Tracy, we see a pretty tight fed or relatively tight fed, right. And we’ve talked many times about crude prices and things like geopolitical risk and all that stuff, right. And the impact on, say, evs, and we’ll talk to Ralph about that and green energy and, and it seems like there is kind of no cost to geopolitical risk when we’re in a zerp or nerp environment. But now that we’re in a five and a half percent interest rate environment, it almost feels with all this stuff happening in the Middle east and other stuff, that nobody knows how to factor that into things like commodity prices, crude prices, other things. Am I way off there or have people kind of not realized the cost of risk?
[00:15:37.290] – Tracy Shuchart
I think absolutely. That’s what you’re seeing right now across the commodity sector, and especially when we’re talking about metals and things that are really affected by the US dollar. Right. We’ve seen a rally in the US dollar, so that’s kind of very difficult for. That’s a very big headwind. Let’s say four metals per existence, for example. But if we look at crude oil, crude oil is actually more correlated to ten year yields than it is to the US dollar. It’s almost over 81% correlated. And so recently we have seen kind of a jump in the ten year. Right. Meaning yields have come down. So that’s also put pressure technically just on the sector. But as far as geopolitical risk is concerned, I think that I could go into the minutiae of that, where we can talk about there’s not a lot of oil tankers that actually pass through the Red Sea, even though they’re not going there, know there’s a lot of products that ship from Saudi Arabia, Qatar, everything kind of east of the Red Sea that uses the Persian Gulf which is a lot of product when you’re talking know gas and oil.
[00:16:56.990] – Tracy Shuchart
And so that is part of the reason. But I think know still the markets. I think bonds are applying pressure on the energy markets. And I also think that because there’s not a lot of transit through the Red Sea of oil and products and gas, that that’s also having people kind of dismiss what’s going on. That said, I think the risk is much broader now that we have not only the Israel Gaza issue, we also now have Syria’s back in, Jordan’s back know there’s a lot there and I think the market is highly discounting.
[00:17:51.670] – Tony Nash
Okay, so Michael, if we go back to markets in the US, particularly tech continues to be strong despite these rate rises. You’ve been telling us for quite a while that it’s time for a pullback. And in your report you’ve got semiconductors, software, hardware, social media, et cetera, kind of falling in your one to three month horizon. So help us understand when we see the likes of meta rise 20% in a single day last week and we see snap down pretty dramatically after earnings. Granted it’s down to November 23 levels, so it’s not down to historic multi year levels, but it’s still down 35% in a few days. So can you talk to us about where you expect the sector fund flows to move? I mean it’s overwhelmingly in this chart you sent me, overwhelmingly continues moving into tech. So where do you expect that to move?
[00:18:49.770] – Michael Belkin
Okay, first of, there’s within tech. The AI plays have been attracting all the attention, right? And there’s very few of those. So it’s Nvidia. Right. So those kind of stocks keep going up. I follow a broad bunch of stocks within the semiconductor software space and a lot of those are acting like dog meat. Okay, so the shorts are actually working, not massively, but things are underperforming. Things like cloud software. So those are sort of like tiger global favorite longs. Those are some of my top shorts right now, semiconductors. Outside of the AI space, demand for automotive, semiconductors and consumer electronics, all that stuff is disaster. It’s not good. So those are still shorts and those are working. It’s not, you look at the tech market, you think everything’s going up. It’s not. Portfolio managers know this. They’re getting squeezed into this small handful of smaller stocks. And the mag seven is down to like mag three or something, right? Amazon and meta and a couple of others. Okay. But anyways, the biggest outflows over the last year has been energy and the biggest inflows have been tech. So my model is saying time for a change.
[00:20:07.440] – Michael Belkin
Okay, so the flows are going to reverse. So what’s know. So Sir John Templeton said the time to buy is at the point of maximum pessimism. The time to sell is at the point of maximum optimism. And that’s really held up over time. For know you have to get it. Have my biggest buy signal in the model forecast, three month view at least for going forward. Buy energy, physical energy and also the energy stocks. So etfs, xop, oih, things like that, really depressed. They’re in the doghouse, right? And things that are up a know all the tech etfs. My favorite short is like clou. It’s not very liquid, it’s a cloud software thing. So basically you want to be long energy and short tech. Three month view. That’s what I’m telling my clients.
[00:21:00.290] – Tony Nash
That sound about right to you, Tracy?
[00:21:01.850] – Tracy Shuchart
I love it. I think its Fantastic. No, actually, we actually talked about that a little bit. So, with Mullen. I absolutely agree with Michael.
[00:21:17.020] – Tony Nash
Perfect. Ralph, what are you seeing in terms of just the general impact on markets and fund flows? What do things look like in Europe? Are people still super bullish tech? Are they coming off of some of that? Are they looking more at some more conservative sectors? What does that look like from your perspective?
[00:21:36.120] – Ralph Schoellhammer
Well, I think one of the things, and I know that Tracy is going to talk about this in greater detail, and I think it was just mentioned previously as well, what is underwriting would from a european perspective, still impressive resilience of the US economy is natural gas. I sometimes feel that we might not the four of us here in this group, but very often in public reporting, the impact of the shale revolution strikes. And still, as some would underestimate mean. If you look at the numbers, the role of natural gas that it plays in the US economy is astounding. If you take at electricity production and also heating in the chemical industry, in manufacturing, construction, not everything is rosy. Right. I think Albert is not with us. I think he would immediately shoot me down for any kind of optimistic or positive outlook. But I think that really is a huge issue. And this is something that we are currently lacking in Europe. I mean, there was recently a very interesting report in the Wall Street Journal that I find sums it up perfectly, which is the old saying that the United States innovates, the Chinese imitate and the Europeans regulate is probably more true than ever.
[00:22:43.300] – Ralph Schoellhammer
This is going to be a problem because I agree with what was said by Mike before, right. That maybe the AI thing is a bit of a hype. I don’t know enough about it to really make a qualified statement. But I think one thing we’re all going to agree on is whatever algorithms in the future are going to do is in order to have a good algorithm, they’re going to need a lot of electricity. Because in order for the algorithm to, I don’t know, distinguish between a cat and a dog, you have to show.Them a billion pictures of a cat and a billion pictures of a dog. And that means that the computer who does it has to be running. And while it’s running, it needs to be cooled, it needs to be supplied with electricity. So it all goes back. I don’t want to voice my inner Luke Groman, but in many ways, it all goes back to energy. In many ways. And this is still. I know I sound like a broken record, but this is still a huge problem in Europe. There are signs of sanity. I think once Germany was the role model. I think now they’re more the outcasts. So there is a shift in a new direction. I’m worried because the EU is like a weird construct. I mean, we have european parliamentary elections in June. So now, quote, unquote, they pretend to be much saner than they usually are. So we’ll see after the election, if they not all of a sudden say so all these little bit kind of winking and nodding at maybe we are okay with more nuclear energy and maybe we should find ways to allow more energy production in European Union, that once these elections are over, that they go back to saying no, well, the primary goal, of course, is the usual green goals, the green new deals, the climate agenda and all these kind of things. Interesting.
[00:24:14.900] – Tony Nash
First thing, I don’t believe the european parliament will be sane ever. Second, interest rates are going to dictate that they can’t really focus on green energy. It’s going to be really hard, and we’ve talked about that with you before and Tracy, and going back to the rate rise that Michael talked makes it puts a real cost to trade offs. Right. And it’s going to be really hard to subsidize that stuff at the cost of money that we have now, I think. And that cost, Michael, as you say, is forcing sector adjustments. And so let’s finally look at your earnings expectations. So your s and P 500 earnings index forecast is pretty negative. So can you talk us through what is your outlook on earnings, on quarterly earnings in the S and P compared to, say, where consensus is?
[00:25:05.890] – Michael Belkin
All right, so I’m a real lone voice in the wilderness here.
[00:25:10.050] – Tony Nash
Not the first time.
[00:25:11.510] – Michael Belkin
Wall street consensus is plus 11%. Last time I looked in 2024 earnings. So right now, we’re about halfway two thirds of the way through Q four, 2023 earnings reporting. So we haven’t even started into 2024 yet. Okay. So we’re tracking for about 52 64, according to standard employers operating earnings so far at two thirds mark, which is down, by the way, 7% from the peak. So s and P 500 quarterly earnings peaked Q four, 2021, two years ago. Does anybody know that?
[00:25:50.140] – Tony Nash
Yeah, I just want to back up 10 seconds, and I want you to say that again. S and P earnings, how do they compare to two years ago?
[00:25:58.080] – Michael Belkin
Down 7% quarterly. So the peak of operating earnings, according to index provider standard employers, was $56.73. Q four, 2021. And that, of course, coincided with the boom of COVID stimulus and all the extra money. So basically, corporations made a lot of money out of inflation. They raised prices, increased demand, and since then, we’ve kind of been dribling down, not collapsing yet. Okay, so basically, Wall street is looking for plus 11% to something like $224. I’m looking for 120. Down 40%.
[00:26:39.600] – Tony Nash
40%?
[00:26:40.800] – Michael Belkin
Yeah. Which is not ridiculous. It’s come from model forecast. That’s the typical decline in a recession. So there’s nothing conspiracy theory or licking my finger.
[00:26:53.890] – Tony Nash
I love that you say 40% isn’t ridiculous. I think that’s great, because I think it helps remind us where we are. Right in markets. And we had Alex Gurjevich on last week, and he talked about deflation and how that could impact some markets. So what that tells me is, are you expecting some deflationary impacts to hit companies ability to make profits and that then has an impact on markets?
[00:27:26.110] – Michael Belkin
Yes. But it’s complicated, okay?
[00:27:29.010] – Tony Nash
Oh, I know it’s complicated.
[00:27:30.570] – Michael Belkin
Definitely complicated. So the inflation decline that we’ve seen, by the way, I was super bearish on inflation when it was 9%. Model said it’s going down to 3%, which is basically what it’s done. That decline is over in the model forecast. So I don’t think we’re going to get any near term relief on things like the CPI next few months.
[00:27:49.910] – Tony Nash
You don’t expect a kind of deflation or nothing dramatic?
[00:27:54.080] – Michael Belkin
Well, I think the first thing, like, let’s just take it one step at a time here. Row of dominoes. I think, again, the forward rates overreflected. This idea of Fed easing that needs to get pulled out, I think bonds could sell off and actually short sofa and things like that for a trade two to three months later on in the year. Back to the point of your question. Yes. So demand falls, sales fall. The dynamic of a recession is retail sales fall, sales of the product fall, the company starts canceling orders, then the company that makes the stuff for that company cutting back, laying off people, blah, blah, blah, it goes on and on. And that’s deflationary. I think that won’t begin to surface for another maybe six months later in the year. That will become an issue. Right now, I think it’s more the inflation scare is back for a trade, and that kind of pulls the rug out of this idea that the Fed’s going to ease. By the way, one of the last comment on this, one of the best things to emerge from the Vale symposium that I was at was that Lakshman from the ECri Institute was there and he pointed out, I believe he said, that getting back to the idea of a soft landing, when the times that the Fed delayed cutting rates when the economy was weakening, that is what led to the recession.
[00:29:19.720] – Michael Belkin
So when the Fed is sort of preemptive and cuts rates, then you can have a soft landing. Not necessarily, but historically that’s been the pattern. But when they hold rates up, that almost ensures that we’re going into a recession, which is what’s think, you know, all this ironically, all these phony great economic stories from the administration, how great it is, vote for us. We’re doing such a great job on the economy, it actually ties the Fed’s hands and it prevents the Fed from cutting interest rates. So it’s actually going to have blowback. Instead of making people want to vote for the administration, it’s going to say, oh, wow, the economy is going down and it’s going to be too late to save it. So I think it’s going to be counterproductive. So phony strong economic story is actually counterproductive and it’s going to send the economy into a recession for sure.
[00:30:13.200] – Tony Nash
Wow, that sounds pretty tough. Thank you for that. I mean, it’s awesome. I love getting your view on things, Michael, because you’re right a lot. You have very solid analysis around what you say. You’ve run it through models. It’s tested over decades. And so I love getting your perspective. And it’s different from the, don’t worry, everything’s okay. It’s all going to be soft landing, different this time, all that stuff. Love getting that. So that’s great. Thank you so much for that. I guess one last question, kind of. Your model is generally, I think a one to three month horizon is like your sweet spot. So what is the biggest thing that you expect to happen in the next three months?
[00:30:57.170] – Michael Belkin
Okay. Energy goes up again. So that’s my favorite trade, long energy. If you want to be long something, don’t be long. Anything other than that. My longs are chicken longs, consumer staples sector, healthcare sector. But energy is really the number one long idea I have right now.
[00:31:13.880] – Tony Nash
Very good. Thank you, Michael. Thank you for that, Tracy. You must love that. So let’s switch over to you. I want to talk about U. S. LNG exports and its role in geopolitics. So you talked about the Biden administration’s LNG export pause earlier this week. And you talked about it last week too, when it was announced and all that stuff. So there was a hearing in the house this week, and you talked about this a little bit in one of your posts. So I guess what I’m really interested here is, is there a geopolitical importance or a geopolitical lever with US LNG exports? The US didn’t export much LNG until 2014, but by 2023, the US accounted for a third of european LNG imports and just over 20% of China’s LNG imports. So not a long time, but the US has become a pretty significant portion of the LNG imports of major economies. So what does that mean to geopolitics in the US’s, say, energy diplomacy?
[00:32:29.250] – Tracy Shuchart
Well, first. So US has become the world’s largest producer of oil and gas and the largest exporter. Right. Qatar will pass us because of their expansion program. But let’s just look at this right now. And so this is us energy leadership. And in fact, when Biden first suggested this, or first said that he was going to pause export licenses, we had twelve trade associations across the US, including the largest one, API, who basically said, this hampers us energy leadership, it endangers american jobs, and it also undermines efforts to reduce greenhouse emissions because obviously natural gas is a much better choice than, say, crude oil or coal, for example, to burn. It’s much cleaner. That said, now, when we look at this pause, it will not affect anything up until 2026. And so this is reversible, say, if there was a new administration to come into play, because everything that’s already been accepted till now, the build out to 2026 will still move forward. However, after 2026 are some of the biggest projects, and that’s where the problem lies. But I just want to say this. It’s not like an immediate threat, but it is on the radar as far as geopolitics is concerned, obviously.
[00:34:15.730] – Tracy Shuchart
First, let’s look at Europe. I mean, we basically said, stop importing russian gas. We will take care of you. And with this new revelation, Europe’s like, wait, what? You just said that you would be our main supporter and we look like we’re abandoning our allies. It doesn’t look good. In fact, Germany last week came out and basically said, how can we rely on the US if they say that we just changed up our whole energy source? We’ve built out infrastructure, we’re building out new infrastructure for our LNG hubs and capacity to import more, particularly with Germany, because they stopped nuclear. And so now there’s a bigger build out for gas capacity. Right. So that’s kind of shaken up the EU a little bit and led them to kind of question, well. How can we rely on you? So this looks terrible with our allies. It also obviously reduces our footprints in the global energy sphere. I mean, you’re not going to see the Middle east, particularly Qatar, the number one gas producer in the Middle east, stopping. They’re building out the world’s largest capacity out to 2028. I think in general, again, I have to quote API or the trade associations as saying this hampers us energy leadership and our place in the energy scope. I mean, natural gas is not going away. We’ve seen a million contracts over the last two years out to 2040, 2050. These are long term gas contracts. It’s not going away. And whether it comes to fruition or not, again, this won’t really affect projects until 2026. Should we have a new administration or should the bipartisan group that is now having hearings against this? And I want to stress it’s bipartisan. It’s not just the Republicans. We have time to overturn this, in other words, but the message it sends to the global community is bad.
[00:36:43.620] – Tony Nash
The message is out there. Ralph, as a European, how does that make you feel? I need your.
[00:36:54.690] – Ralph Schoellhammer
It’s a good question. Well, I mean, it makes a lot of sense. I mean, I’m worried as a european, not just because, as Tracy correctly pointed out, I mean, this is not going to have an impact as soon as some headlines seem to indicate. But I’m also worried because it is a terrible signal also, of course, to domestic us industries, particularly in this sector, because they want to make a profit. I mean, this is something I know we tend to forget. But most companies exist because they want to make a profit. So if you don’t allow them to export, that’s going to be a short lived sugar rush for the US economy because prices, we see it with the Henry hub at the moment, right? Prices are plunging in many ways. So gas is going to be pretty cheap for the US. But at some point, you stop investing. Why would you stop investing in more drilling, in more exploration if you can’t sell it abroad? So I think it’s also, as Tracy pointed out, this is a terrible signal. You cannot be the energy leader if you put like a cork into the bottle, so to speak.
[00:37:46.870] – Ralph Schoellhammer
Now, from a european perspective, I said this on your podcast many times, Tony. I’m still convinced of this. We’ll see what Tucker Carlsen’s interview with Vladimir Putin will reveal in the next couple of hours. But the Europeans will sooner or later return to at least partially. It’s never going to be as much as it was before, but they will return partially to russian gas as well because pipeline gas cannot be intercepted by the hooties. It’s not depending on a us administration that all of a sudden believes that they have to do something against fossil gas. I think that is still an attempt by the environmental lobby that they want to replace the term natural gas with fossil gas or methane, I think is also something that’s getting more popular because supposedly it sounds scarier. So these battles are still going on. So the energy sector that I find always the most important one in many areas. Tracy has recently posted about coal power plants in India. This is a very unique phenomenon. In the west. We have an ideological, it’s getting weaker, but there’s still an ideological crusade against the energy sector. And I can understand that this is unnerving for many who are active in that particular area of the economy.
[00:38:52.660] – Tony Nash
Yeah, that’s great.
[00:38:54.970] – Tracy Shuchart
I just wanted to add one thing really quickly, and why I say this decision will likely be overturned sooner than later is that I really think this is a boy for votes. I mean, the Biden administration literally said they want to win back younger environmentalists, and they literally, literally had 20 something social media influencers on exiting TikTok in a meeting with the energy board in the government. I mean, this is who they’re taking advice from.
[00:39:31.590] – Tony Nash
Honestly, we’re a two party system in the US. Who else are those guys going to go to?
[00:39:34.710] – Tracy Shuchart
They’re not going to go to, all I’m saying. And so I think it’s a ploy to get votes. I think that ultimately this will be overturned after the election. If the Democrats win, I think this will be given to pressure from, again, bipartisan pressure groups within the legislative branch. And this will be overturned. And I think it’s just a ploy for votes. However, that’s a big risk. You’re taking a ploy for votes versus your message to the global community. Not sure that was the best decision to make.
[00:40:11.490] – Tony Nash
We sure have done over the last two administrations a lot to erode institutional credibility in the US. Right. And from a geopolitical perspective, in terms of wanting to count on the US, we really destroyed a lot of over the last, say, 1520 years as a geopolitical partner. Right. As the US. So this does nothing to help the US geopolitically. Tracy, I want to ask you about China, because if we’re providing a fifth of nacas to China or lng to China, from my perspective, it seems like, I don’t think us necessarily holds China hostage with that. And I don’t think that would be any intention. But it does make sourcing energy from the US a factor within the China geopolitical. And so, you know, I think about Japan in World War II. I’m not making any serious analogy about Japan and China, but part of the reason Japan was so upset with the US is because the US cut off oil. And so I don’t think that the US would do that again and say, we’re not going to sell you lng, but it does become a factor in that. And I think from China’s perspective, there is always a healthy level of paranoia around that type of stuff.
[00:41:24.320] – Tony Nash
Right. So does the US have the opportunity to grow that much? Or do you think China will say, we love your lng, we’ll take 21% of our lng from you, but we’re not going to do a lot more because there’s too much risk in that.
[00:41:38.640] – Tracy Shuchart
I think they would absolutely say that. And I think they’re absolutely looking to Russia right now. Right. They’re going to expand the Siberia pipeline. You have siberian two pipeline. And that’s a double edged sword because does Russia become too dependent on China as a buyer? That’s a whole nother issue. We can get into another, you know. Absolutely. I think it’ll force China to look elsewhere. And they will. I mean, you can go to Qatar. Qatar is offering huge discounts right now. Right. We just saw them make a huge deal with India today, I think I posted. And so I think China would most likely say, yeah, we’re good with what we got, we’re cool, we can look elsewhere.
[00:42:29.480] – Tony Nash
Right. Okay. So there’s a little bit of a geopolitical lever there, but not a lot because the Chinese are going to stay on their guard. Okay, that’s interesting. I appreciate that. I think we have to look at markets and geopolitics together at times. Right. And so this is really helpful for me to think about this stuff. So, Ralph, let’s move on to Europe, which, I’m sorry, but it’s really easy to bash Europe, right? And so, no offense, it’s not you. I’ll bash on our american political leaders any day of the week, so it’s not your fault. But you talked earlier this week about Germany’s electric vehicle dreams fading away. Can you really help us dig into that a little bit? What were those dreams and what’s making them fade away?
[00:43:23.910] – Ralph Schoellhammer
I would just say one thing, Tony. Your president recently said that he talked to Francois Mitteron, who died in 96. So you’re bashing.
[00:43:34.930] – Tracy Shuchart
That’s not the only one, right? That’s the only instance lately.
[00:43:41.250] – Ralph Schoellhammer
Well, I think what we can observe, the Germans, in all fairness, I always get this criticism that people say, well, Germany is not Europe and Europe is not german. And that’s, of course, true. It is also true that german companies, for various reasons, particularly their car manufacturers, have somewhat slept through the EV revolution. I think that is also fair to say that they kind of could not really translate the advantage they had with the combustion engine into the electric vehicles. But there’s, of course, something else going on, and I think that connects nicely with the geopolitical issue, which is that I think many companies kind of had a business model with evs. And that’s true not just in Germany. That’s also true in Austria. That’s also true in Switzerland. That’s also true in France, where the idea was that they say, okay, the government is pouring so much money into subsidies of all various kinds that they officially talked about their EV strategies because they wanted to milk that cow as long as possible. And I think that is now slowly coming to an end. Germany has a huge budget hold due to a recent ruling by their supreme court.
[00:44:46.710] – Ralph Schoellhammer
We see the same in France. We see discussions in Austria, because now governments, a couple of years back, until recently, they subsidized evs. But now they start to realize, if everybody’s moving to an ev, we’re going to lose all these gasoline taxes. I mean, this was also part of the step in Germany because there is a sense that agriculture will not quickly move to battery driven tractors. So they tried to make new diesel taxes for the agricultural sector. But as all of you know, the farmers have not been taking it very well, to put it mildly. And in many ways, just kind of to add on a little bit to this street construction. Highway construction, of course, was for a very long time directly financed out of these diesel gasoline fuel taxes. But now we have this new situation where evs are significantly heavier. So the bearing tear on streets is actually going to be more than it was with the internal combustion engine cars. So you would potentially need more of these taxes to maintain and sustain and keep these roads in shape. Same with parking spaces in Austria and Germany, for example, in the inner city, you can park for free with evs.
[00:45:51.110] – Ralph Schoellhammer
Now, as more and more people have evs, this is a revenue source for cities. But even more than that, parking structures are not built for these significantly heavier cars. And that goes twice in Europe. In the United States, people are also driving heavy suvs and pickup trucks and heavy cars that are heavy, even though they’re not evs. But, you know, Americans always mock Europeans for this. But we had the kind of niche boutique small cars, and if they all get replaced with significantly heavier evs, this is going to have, down the road, unintended consequences. So I think this is where the shift is happening. And the other thing is, people bought it, particularly people with higher incomes, because subsidies were really great. You had subsidies on fueling them, you had subsidies on parking. You had certain insurance advantages. So there was a whole package of subs. It wasn’t just that they give you something that as well, that you got a direct financial incentive so that they give you €10,000. If you sold your gasoline, gasoline car and got an EV, there were all other kinds of incentives as well. And they are now slowly to break away.
[00:46:52.760] – Ralph Schoellhammer
And of course, now people are reconsidering whether or not they shall buy such a car. Now, one option would have been to say, well, then we’re going to buy all these new chinese cars because they overproduced. But the EU is already working on special tariffs on chinese electric vehicles. So that option, it will still be there, but it will get more difficult. So as things look at the moment, I think the mean this is always, and I know we talked about this on the show many times, sometimes it’s maddening if you listen to analysts. So I’m always glad that Tracy and Micah here to bring a sense of realism into this. People look at a development that’s like this, and then they take a ruler, put it on there and say, okay, if this was the development over the last two years, it’s going to be like this over the next 20 years. And then they draw this line and say, by 2040, everybody’s going to drive.
[00:47:37.170] – Tony Nash
An EV extrapolate today and forever.
[00:47:40.270] – Ralph Schoellhammer
Exactly. And this is not how it works. And I think this is not increasingly what we see. Plus, of course, another element that we have touched upon on quite significantly is dcvs need electricity, and Germany has currently less electricity production. I think it’s the lowest level since 2002. Listen, if you turn off all your nuclear power plants and promise, and then the promise doesn’t live up to the expectations that renewables will replace it, you have a problem in this area. So we see this already, that electricity prices are going up. And another element that is barely talked about is insurance for evs is getting crazy, right. Once the government support falls away, this is also an additional cost factor. So they are simply getting more and more expensive. And unfortunately, without being too facetious here, the evs are kind of falling down to the same category as wind and solar, right? There were these huge promises made, what they can deliver, and now it turns out that they can’t. Now, don’t get me wrong, in city areas, I’m a huge fan of evs. I can imagine that if you’re an apartment owner in a high traffic area of a town and all of a sudden everybody drives evs, that’s going to drive up the value of a property because there is no fumes, there is no noise.
[00:48:53.310] – Ralph Schoellhammer
So this is going to be great. But overall, a country that’s either spread out or like in Austria or Germany, where rural populations still commute significant distances to go to work, this is going to be a problem. And as I said before, this was one of the promises, like so many in that area that have been made in the past that are not being kept. And I think you also see a kind of, that’s more in Poland, but also in Germany as the last point, an emotional mean. People identify with cars, people identify with the car industry in Germany. And the ice bashing over the last couple of years, I think, now has a reaction that says, I’m going to buy a diesel car or a gasoline car simply because that’s german, right? In a sense. So I think at the moment it looks like that’s where the journey is going. Of course, always under the assumption that there is no major massive technological breakthrough that can be easily introduced to the market. I mean, this is what I always say in the energy area, if the Wanda battery that we hear about every two months is actually become a reality at any point in time, well, then all bets are off.
[00:50:00.510] – Ralph Schoellhammer
Then things will be different. But for now, we have been hearing the, that battery promise from time to time, I google it. I think it goes now back 20 years. The solid state battery and the salt battery, all these kind of things. And it’s like fusion. They exist theoretically, but so far, I think they’re not ripe for the market. Okay.
[00:50:19.900] – Tony Nash
So there’s real trade offs to be made and subsidies. People are tired of subsidies, it sounds like. And I guess generally in Germany, the business environment there has not. It’s deteriorated. Right. So you tweeted earlier this week that the AfD party said that the german government hates Germany. I think that’s the word they use. Or hate their own country or something like that. Can you talk us through that? First of all, who are the AfD for those of us who aren’t in Europe? And second of, like, what does this mean? Is that a mainstream german thought? Do most Germans believe that the government is not friendly to Germans?
[00:51:05.490] – Ralph Schoellhammer
I mean, the AfD that you just mentioned, right, the so called alternative for Germany. The alternative for Germany was a party that emerged during the euro crisis in 2008, 2009. And the name derives from a sentence that Angela Merkel said when she said, there is no alternative. Right. Whether it was from migration to the euro, there is no alternative. And then the party kind of came up originally as a kind of economic, libertarian, yet eurocritical party that has now morphed into what in the media would be called a far right party. I think if you take a closer look at their positions or their average positions, in many ways, I would argue they resemble common sense, which I believe is one of the reasons why they are very popular or growingly popular with the electorate. And the other thing, this was their leader, one of their two leaders, Alice Weidel, said that in the german Bundesstag, the german parliament, the current german government hates its own people. And I have to admit, if you look at the numbers, I mean, it is really, really very difficult to disagree with her. What the german government has done.
[00:52:04.410] – Ralph Schoellhammer
This is why I think it’s an interesting topic over the last couple of years, the so called ample coalition of the Social Democrats, the liberals and the Greens. It is the destruction of Germany as an industrial superpower. There’s really no other way to put this. I said, I don’t want to be hyperbolic here or be all, but I don’t know any other way to describe it. We talk about a country, and this is an issue we talked about a lot in the past that had paid off, built out world class nuclear power plants, and they turned them off for purely ideological reasons. There was no other reason. The reason is when people say, well, you exaggerate about Germany, I don’t know what to tell you. And you see the same now recently they approved, now, I think ten gigawatts of gas powered electricity power plants, again with this weird thing, in ten years they have to be run on hydrogen. It’s never going to happen. They’re either going to run on american lng or on russian pipeline gas. They’re never going to run on hydrogen. But again, they need to be built first. And the Germans are not as good in building stuff as they have been in the past.
[00:53:05.280] – Ralph Schoellhammer
And they have an electricity deficit for the first time since 2002. They are now a net electricity importer and no longer a net electricity exporter. And just to put it on a broader sphere of Europe, Europe doesn’t have that many net electricity exporters. It’s the Czech Republic, it’s Germany, and there’s another one and France, if the nuclear power plants are not in a state of renovation, in a comatose state. But the situation is very dire. I’m not saying the end is nigh because one of the beauties of democracy is that people can vote those in, power out and vote somebody else in. And I think this is increasingly what more and more people plan to do in Europe now. Will these parties then have silver bullets? I don’t think so. But we just recently one of the major and very old german washing machine refrigerator producers, Mile, has now moved production to Poland because that’s the other story nobody talks about. We have a manufacturing miracle in Europe as well, and that is Poland. So if a country pursues the right policies, economic growth is still possible, even know sometimes insane Europe. But what of course is worries.
[00:54:17.190] – Ralph Schoellhammer
Germany is still the major economy. The old saying is if Germany catches a cold, if Germany sneezes, the continent catches a cold. That is not entirely wrong. And as I said before, I have historically never seen a government pursuing policies at all costs and obviously against the will of the voters. It’s fascinating to observe, it’s very german, but it’s also very worrisome because of course, if the so called moderates are perceived as working against the interests of the people, then the people will vote for those who are not described as being moderate. But if they feel that they are more in line with their interests, they’re going to give them their vote.
[00:54:55.460] – Tony Nash
So is for people doing business in Germany or with Germany. Is there political risk in Germany now or is it just kind of like an inconvenient or uncomfortable discussion to have.
[00:55:10.470] – Ralph Schoellhammer
Well, I would argue, contrary to what you read also in german newspapers, I think the only political risk is if the current government would, at the election sign 2025, if the current government would get an additional period or maybe two additional periods. I think from a purely economic perspective, a rightward shift, maybe even including an AfD conservative coalition government, would be the best that could happen. If you look at the economic program of the AfD, that is a common sense, useful economic program. Again, yes, they have. Particularly in the German east. Let’s say they speak in a way that I would not speak. They use a language that I would not use. But I think the same was true in 2016 with Donald Trump and his presidential election. So this idea that if you have a right winger or a right wing party come to power, fascism is the next thing around the corner. This is not how this works. The german institutions are very stable. The german military, the german police is not going to participate in a right wing coup. Again, the same as in the United States. Donald Trump can say what he wants.
[00:56:11.400] – Ralph Schoellhammer
He doesn’t have the military, doesn’t have the national guard. He cannot erect a fascist dictatorship in the US. I know it’s a good headline. It’s great clickbait, but it’s not going to happen. But just as is Trump in the US, if you then pursue sensible economic policies, at least in some areas, you can create a boom, or a boom like economy. So, as somebody says, what’s the biggest risk for the german economy? I would still argue it’s the green party and the Social Democrats, because when it comes to the economy, they are insane. I mean, there is no other term to describe it.
[00:56:43.410] – Tony Nash
Well, it sounds to me like good old fashioned parliamentary consensus. Right? You’re going to be pulling this way, people pulling that way, and they’ll meet somewhere in the middle. And that’s just the way Europe works generally. I think so. Good. Okay. Well, guys, this has been fantastic. I think, Ralph, I don’t really think that much about Germany, but I need to think more about it. And I think what you talked about with the Mila factory moving to Poland, I had heard about industrialization, deindustrialization, mostly moving toward China. But to hear that things are moving to Poland now as well, I know that’s not new, particularly, but there just seems to be this real exodus from Germany, which is kind of sad to hear.
[00:57:28.740] – Ralph Schoellhammer
But this last point, the United States, the comparisons between the US and Europe, sometimes we are more similar than we think we have both in Europe and the US. I think we have a problem of political leadership, but there is still a huge amount of structural advantages. Now, the US have massive structural advantages simply because of the energy. But in Europe you still have a skilled labor force. The problem we have all from Portugal, partially, again, maybe not to Poland, but at least in France. In Austria and Germany, we have created a welfare system that incentivizes or disincentivizes labor in many ways, right? If part time work pays per hour, if you calculate it more than full time work, then people say, why should I work a full time job? If you have people who are 65 and say, I don’t want to retire, I want to continue to work, but the government kind of then sticks their hands so deeply into your pocket that you say, okay, fine, if my option is to make more money, not working or retiring, then earning money and continue to work, I’m not going to continue to work.
[00:58:31.620] – Ralph Schoellhammer
But these would be highly trade, highly skilled, highly experienced workers that actually the companies would like to hold. But under the current tax structure, it’s not so easy for them to do that. As I say, I don’t know how this in the US, but if you make 2000 after tax as an employer in Austria, Germany, you cost your employer over 5000, right? So this is with all the Social Security payments and so on and so on and so on. It’s similar in other countries as well. But this is the problem. We have created a structure that disincentivizes skilled labor just as a kind of. As a boomois, a sherry on top. And how is the discussion to say, well, maybe we should introduce the four day work week because then we will be competitive. So there is a lot of insanity going on. I blame law schools, because I think the only people who sit in parliaments these days went to law school and none of them ever went actually to found a business or to work in trade or to work a construction site, because they have this weird idea. I mean, it’s amusing, right?
[00:59:31.130] – Ralph Schoellhammer
They say, well, if you only have four work days, you’ll be so motivated that you easily make up for the one day you lost. Really?
[00:59:37.820] – Tony Nash
Doesn’t work that way? Sorry?
[00:59:39.960] – Ralph Schoellhammer
Have you ever worked on a construction site? You show me that you work more. That might be true. Yeah, that might be true. What is the famous us sitcom two and a half man, where Charlie Sheen was like doing these jingles for advertising. That might be true, right? That you can make more jingles in four days than in five days, but for construction, for police, for healthcare, please show me how a nurse that is working for four days can have the same effect than a nurse working five days.
[01:00:10.400] – Tony Nash
This doesn’t work that way.
[01:00:11.720] – Ralph Schoellhammer
It’s political insanity. But I think the people below the iceberg and below the waterline are still fairly sane, and I hope that they don’t lose the courage of their own convictions during the next elections.
[01:00:24.060] – Tony Nash
I love how you say they’re fairly sane. I think we can say that here in the US, most people are fairly sane. So with that, Michael, thank you so much for joining us. Tracy, Ralph, really appreciate your time. Thank you so much. Have a great weekend and have a great week ahead.
[01:00:38.640] – Tony Nash
Thank you.
[01:00:39.640] – Ralph Schoellhammer
Thank you.