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Year-End Sale is here! Get 80% off CI Markets subscription at $99 per year. Promo ends Dec. 31st.

This 2023 year-end special of The Week Ahead has a lineup of great guests, discussing topics to prepare you for the upcoming 2024.

1. Brent Johnson on 2024 Growth, Disinflation, Central Banks, and the Dollar:
We tackle the Fed’s stance; frankly, it’s a bit perplexing. With various opinions floating around, from 275bp cuts to just 2, the big question is, why the urgency if everything seems fine? Brent helps us get clarity on that.

We’re hovering around 5.5%, and markets are soaring, but what’s the rush? Brent sheds light on why 2024 might be “priced for perfection” and explores potential downside risks, from Fed miscalculations to unexpected Dollar strength.

2. Tracy Shuchart on Crude Quality:
Turning our attention to shale, Tracy dismisses the Texas export buzz but gets into a more interesting topic – crude quality. Tracy and Ralph discuss on Twitter the nuances of shale and the importance of understanding crude quality, especially with recent stories about Texas exports for tax reasons. What are the secrets of gassy wells and their impact on the market?

3. Albert Marko on Yemen-Red Sea Shipping Risks:
With rockets fired by Houthis, a coalition is formed to protect vessels, leading some shipping companies to bypass the Red Sea and opt for the longer route around Africa. Albert gives us the lowdown on how long this situation might persist, its reasons, and the potential impacts on shipping.

Join us for these insightful discussions and gain a clearer perspective on the year ahead.

Transcript

Tony Nash

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Tony Nash

Hi, everyone, welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Brent Johnson, Tracy Shuchart, and Albert Marko. As we head into the end of the year, we’ve got a few things we’re going to talk about today. In 2024, obviously, we’re looking at growth, disinflation, central banks, dollar. We’ll talk with Brent about that. With Tracy, we want to talk a little bit about fracking and crude quality and the surge of exports we’ve had out of the US and Texas lately. Then with Albert, we’ll talk to you politics, and we’re looking at the Yemen, Red Sea shipping risk and what’s really happening there and how long it will last. Guys, thank you very much. I know we’re headed into a holiday weekend, so I appreciate you taking the time.

Tony Nash

Brent, and again, thanks for joining us again. I want to start with the Fed because we had this meeting last week where everything’s doveish now. I honestly don’t know what to think about the Fed. Are we higher for longer or not? I saw one bank, it’s a European bank, so that helps you to understand, but saying that we’ll have 275 basis points of cuts in the first half of the year. It seems ridiculous, but I think nobody really knows if we’re going to have five cuts in ’24 or two cuts or no cuts or whatever. Bostec was out earlier this week saying that we’ll have two cuts, but we have other Fed presidents saying other things. I think we’re in this mode where I don’t even think the Fed guys are aligned on what they do. I guess what I’m confused by is why is there so much hope for cuts when we’re told that growth is fine? We’re told that inflation is fine. We’re told that retail sales are fine. PCE in Q3 was just adjusted to 2%, so PCE is fine. We’re at a 5.5% Fed rate and markets are flying. Why the urgency now?

Tony Nash

I put this tweet up on the screen. Some of the deep sale capital, I don’t know who that is, but they basically boiled this question down and I wanted to prep you for this. So why the urgency now, Brent?

Brent Johnson

Well, it’s a very good question, and to be honest, I’m really not sure myself. It was a very fast change of tone from Powell. On late November, early December, he was hired for longer and two weeks later, he says we’re considering cutting rates, basically, and didn’t push back when people challenged him on it. There’s clearly something going on. I’m not quite sure what it is. I have a couple of theories. I think the most prominent theory right now is that it’s political, right? They don’t want to have a recession going into a presidential election. And if we had a big recession right in front of it, that could be bad for Biden, and that could be as a political move or vice versa. There’s other people on the other side are saying if he goosees the economy going into the election, that’s political, too. But I think that could be part of it. I think the other part of it is that potentially they have access to information or they see some things coming that the rest of the market doesn’t. And if they are going to be cutting after so recently saying that’s hire for longer, they must see some bad things on the horizon that nobody else sees or the rest of us don’t see.

Brent Johnson

And one thing I would say is I think the market has reacted correctly directionally to the news, but I think the magnitude of the moves have gotten way ahead of themselves. So equities rallying on a doveish pivot from the Fed makes total sense. And this goes all the way back to the previous Fed meeting because they were somewhat dove-ish in that meeting as well. And markets have gone straight up for six weeks. Yesterday was the first significant down day in a really long time. And so to me, everything is priced to perfection right now, and we just live in a very imperfect world. So I agree with the direction. I disagree with the magnitude. And for me, it’s easy to decide what to do right now, and that’s to do nothing and to, if anything, hedge the downside. Because to me, everything’s priced in to the upside already. The other thing I would say is that some of the criticism of the Fed is warranted, but some of it is not. And the thing is, regardless of what the Fed does, they’re going to get criticized. There’s a whole industry that has been created and designed to criticize the Fed regardless of what they say.

Brent Johnson

Let’s say they do see some slowdown in the economy coming. At the end of the day, the Fed wants to slow the economy. That was the whole point of the rate hikes to begin with. That is the way they thought that they could tame inflation. But while they want to slow the economy, they don’t want to crash the economy. They don’t want to have a global financial crisis that they cannot control. And so if you take that into effect and you consider how far they went in such a short period of time from 0-5.5 %, and now let’s say that they see some success, they think the economy is going to start to slow, but they don’t want to crash the economy, then it does actually make sense to start before you get to the 2%. He even said that in his press conference, If we don’t start cutting before we get to 2%, then we risk going past 2% and getting into severe deflation, which they don’t want severe deflation. If you think about it like landing a plane, you don’t want to land the plane going full speed. You do want to come in on a smooth path.

Brent Johnson

And so maybe there’s some of that going on as well. And the final thing I’d say just on this is that the people at the Fed are not stupid. Now, they may be misguided, they may be out of touch, they may be arrogant, but they’re not stupid people. And so if they are now signaling that no more hikes and probably cuts, there’s probably a reason for that. And I think people should take that into account when they’re buying the all time highs and all these assets. Oh, yeah.

Tony Nash

Go ahead, Tracy.

Tracy Shuchart

I have a question, Brent. Do you see a scenario which we’re going into an election year? Obviously, there’s a lot of political things going on. Nobody wants the recession heading into this next election. But do you see a scenario in which we have Fed cutting, you have Yellen still issuing bonds, and obviously fiscal spending is not going to stop. So do you see a situation where this could reignite inflation?

Brent Johnson

Yeah, potentially. It all depends on why they are now moving to cuts, right? If they are moving to cuts because they are trying to combat this deflation that they see on the horizon, then it just depends. If the deflationary forces outweigh the cuts that they’re doing, then you could still get deflation. But if those deflationary forces don’t show up and they start easing again, it definitely risks the possibility of a further acceleration of inflation. I think that’s the last thing that Powell wants, which is why I feel like there must be some reason that he’s risking inflation reaccelerating. I wish I knew what it was. I don’t. But it’s a very good question. And that’s what’s got me thinking the most is because nobody thought he would go to five and a half % in 12 months, but he did it. And nobody thought that he could do it without crashing the markets, but he did it. I think the reason that he did that is he didn’t want to be another Arthur Burns. I think his legacy is extremely important. He’s already got all the money in the world. He doesn’t need any more money.

Brent Johnson

The only thing he has to protect at this point is his reputation. I think that’s a big thing for him. For him to risk inflation reaccelerating, I think he must see something that perhaps the rest of the market doesn’t see.

Tony Nash

Yeah. Before Albert jumps in here, I want to say a couple of things. First, I agree with you that although I mock the Fed on occasion, I actually think they’ve done a really good job of getting us into this zone of acceptability. It’s taken longer than a lot of people wanted to, but the magnitude of their actions was actually really fast. I think they could have hugely miscalculated, and I actually don’t think they did terribly. Because these are broad policy decisions they’re making. You don’t really know where it’s going to hit. They actually, I think, did a really good job, despite a lot of their personal defects or whatever. Like you said, they are smart, and they did a pretty good job of landing us where we are. I do think, though, I hear you say the election year, but it is pretty normal to hike in an election year. If we look historically, it’s not a completely abnormal thing. Of course, we didn’t see that in 2020 because we had COVID, right? But it’s not abnormal to hike or for the Fed to adjust monetary policy in an election year. Is that right?

Brent Johnson

I don’t think it’s abnormal. I don’t think… No, I think you’re correct. I don’t think it’s abnormal. I just think we live in abnormal times where everything is managed now. From the last, let’s just call it 1980 to 2020, we lived in a world that was globalizing and getting closer and working closer together. For the last four years, we’re now in a world that is fracturing and supply chains are not getting more efficient, they’re becoming less efficient. And we’ve got geopolitical issues that we didn’t have the whole time back then. I just feel like… And as a result and the fact that the debts have gotten so big everywhere. And this is what I don’t think a lot of people realize. There’s a lot of people out there who think that inflation is here to stay and 2020 was a game changer and the government’s response ensures that we’re always going to have inflation. Listen, I can’t say that that’s not true. Maybe we will have inflation going forward. But with the type of system that we have in a debt-based monetary system, you always risk deflationary shocks. Because if the economy is not moving and money is not circulating, you will get defaults.

Brent Johnson

And when defaults happen, there’s always the risk that it becomes contagious and it jumps from one place to the other.

Tony Nash

Yeah.

Tony Nash

I want to talk about deflationary shock in a second. Albert, what have you got?

Albert Marko

I mean, I agree with Brent. 80, 90% of what he says is pretty much correct, but going… I’m one of those guys that I like to look at who’s in charge and what have they done in the past. For me, Yellen has been doing the exact same playbook as she did in 2017, where she took the VIX to 9.7%. She had 12 weeks. I looked at the chart, there was 12 weeks of up markets at that time. It was crazy.

Albert Marko

Trump at that point with Minuchin, ousted her. They just got rid of her. They didn’t reappoint her for the position, so she was done at that point. But the biggest thing that we should learn this year is the Fed wants inflation. The reserve currency guys don’t do debt jubilee, so they’re using inflation to do whatever soft landing plans that they have in the mix to cut corners off your currency. They had multiple chances to cut inflation all of last year, in which they’ve emphatically passed each time. Now we can debate whether it’s economic problems on the horizon or political strategy by certain members of the Fed and the treasury, that’s something else. But for me, US stocks love 1% GDP growth, which by definition means 65% of the rest of America is already in a recession. I mean, nobody wants to discuss those things. But going into an election year, we’re definitely going to hear more about it. I just don’t see inflation easing up. I’ve talked to quite a few people that are connected up into the Fed, and they’re looking at inflation and starting to worry once again. Cutting rates is a very dangerous game with inflation still problem, in my opinion.

Tony Nash

Okay.

Brent Johnson

Can I just follow up really quickly? The other thing, again, I think the markets have reacted correctly directionally, but just the magnitude is way too big because you got to remember these dot plans. It’s just what each person thinks at that time. They can change their mind. It’s not a unanimous thing. They don’t all agree on the dots. Again, it is true that if you don’t want to crash into 2% and you want to glide into 2%, then you probably want to start cutting as you get closer to it. But if we don’t see continued movement towards 2% inflation, we’re not going to get all these cuts. In other words, all these cuts are not guaranteed. That’s where I think the market has just gotten way ahead of themselves. I think that while they haven’t necessarily misinterpreted the Fed, I think they have misinterpreted the Fed’s intention to not let inflation just totally run away again. Now, again, it doesn’t mean that that won’t happen. It doesn’t mean it won’t get away from them. But I don’t think that they have just all just pivoted and said, We’re cutting rates no matter what, inflation be damned and we’ll just deal with the consequences later.

Brent Johnson

I think they’re trying to get this off landing is what they’re trying to do.

Albert Marko

Without question, they’ve said that over and over and over again for two years. There’s no question they’re trying to do that. I think the magnitude of this mood, this is a question for you, Brent, is that you think a lot of it is to do with just the liquidity of the market in this time. Right now is the holidays, nobody’s really there, things can move quickly.

Brent Johnson

I think it’s that, but it’s also, again, directionally, I think it makes sense, but the dollar has sold off a lot. And as the dollar sells off, that provides liquidity to the whole world. And that’s why you’ve seen financial conditions ease so much. And part of it is also that everybody’s just front running the Fed. They’re not front running the ECP. They’re not front running the other central banks. And the idea that the Europe, which is already basically in a recession, is going to outhawk the Fed over the next year to me just doesn’t make a lot of sense. And so if we get a bunch of cuts, then what the dollar has done and what the equities has done makes sense. But again, these are all priced in, but they’re not guaranteed. And we could very well be in a situation where Europe is cutting aggressively in order to fight their recession, in which case the dollar probably rises versus the euro. Again, I think 2024 is going to be much more challenging than 2023. And in fact, I think could look a lot like 2022. I think we could have a lot of volatility in the first half of the year.

Brent Johnson

And then as we go in towards the second half of the year and the election, things perhaps calm down a little bit. But I think the first six months are going to be very volatile.

Tony Nash

Yeah. One of the things that whenever we talk about the Fed and what the rate intentions are is Powell and the Fed have said they want to normalize rates. We had ZERP and NERP and all this other stuff. Five and a half %, to be honest, historically, is not a high rate. If we’re normalizing rates, if we see cuts coming, what is that normal rate? Is it two and a half? We don’t really know the answer to this, but we don’t have, let’s say, the demographic issues that Japan has where they have to have NERC to make up for productivity. We don’t have the demographic issues that Europe has where they have to have low interest rates to make up for a lack of productivity. Similar argument could be said for Korea, China, at least in the next year or so. Five and a half %. I hear people act like these interest rates are extremely high, but really from a historical perspective, are they?

Brent Johnson

They’re not high from a historical perspective, but what’s different from previous times in history, where they were at this level, is the level of debt and the level of debt that was taken on at very low rates. What I mean by that is there’s a lot of debt that let’s just say, that was issued sometime in the last 10 years, 5-10 years. It was issued when rates were zero to one and a half %. Now that they’re getting reset with interest rates at five and a half %, perhaps their car payment is going, I’m just making something up. Or their mortgage goes up from a $500 payment to an $1,800 payment or whatever it is. The speed with which rates went up and the speed and the magnitude of the difference of where the debt was initially taken on and where it’s being rolled, I think, is much different than in previous points in history where interest rates are at these same levels.

Tony Nash

Right. Okay, that’s fair. Before we get. Into the next-

Brent Johnson

I’m going to jump up and turn these shades down because the sun is still coming right in my eyes.

Tony Nash

Okay.

Albert Marko

That’s something that I don’t see in Nebraska very often.

Tony Nash

That’s right.

Brent Johnson

That’s right.

Tony Nash

Brent, while you’re doing that, I want to ask a question about Japan. Okay. We’ve had all sorts of discussion about the Bank of Japan and them potentially tightening, taking on different tightening activities. But why would the BOJ tighten if we have a Fed that’s loosening? Because that effectively makes them uncompetitive in terms of exports. We’d see the Yen jump dramatically in value. From an export perspective, their competitors are Taiwan, Korea, and China. Those guys are not putting on tighter. They’re not tightening at all. So it doesn’t make sense to me that Japan would start tightening right now. Does that make sense to you? I hear the chatter every day, but I can’t quite put it together why they would start doing that.

Brent Johnson

Well, I think part of the reason that they were doing it was the currency fell 30 % in two years, which that’s an absolutely enormous move for a major currency. It’s not totally unheard of for an emerging market currency, but for the let’s call it the second or third biggest currency in the world, that’s a massive move. And then for the first time in literally decades, they were starting to get inflationary pressures in Japan. And so I think there was some pressure. The currency just kept falling, starting to get inflationary pressures. I think there was some political pressure internally to get off of zero and get somewhat… I mean, again, if you even go to half a %, that’s nowhere near normalization, but that’s a big move for Japan. I think that is part of it. But I agree with you, Tony, is that they can’t really strengthen their currency a lot. If they raise rates too much, their entire banking system comes under pressure because their banks, their pension funds, their endowments, all these different local insurance companies, they own trillions of dollars of zero and negative yielding GBs. They would face the same thing.

Brent Johnson

They would potentially face the same thing in Japan that the US banks faced last March. Rates go up, the bonds fall. If the banks then have to start liquidating those bonds, those JJBs that are now completely underwater, they could have… They can not out-hawk. They can out-hawk the Fed or some other on a short term relative basis, but they are not going to get to a point where their interest rates are higher than these other central banks because it would just decimate their economy.

Tony Nash

We’d have BTFP to the 10th power or something like that.

Brent Johnson

Right, exactly.

Tony Nash

Okay, so I want to take a look and all of you guys jump in here. But Brent, you say that 2024 is priced to perfection. What do you see as the biggest potential downside risks, and I’ll name a few, but let me just name a few things. Fed miscalculation, unexpectedly strong dollar, which you mentioned in a tweet, I don’t know, last week or something, US commercial real estate, US election related volatility. By that I mean fiscal overspending, political overreaction, that thing. Bank of Japan changing really anything. China real estate, CCP miscalculation, German de-industrialization, Middle East geopolitical risk, oil prices. There’s a lot out there.

Brent Johnson

That can- All that stuff. All of that stuff. And that’s the thing is I don’t know what it’s going to be. I just know that there’s all these potential things that you just rattled off. I mean, there’s a couple of dozen right there, and yet the markets are priced as if everything’s beautiful and there’s no potential problems on the horizon. Markets do, they climb a wall of worry. I’m not saying we’re going to have a collapse next year. I’m just saying that everything is priced as if all these cuts are for sure, as if Europe is not going to start cutting rates, as if there’s not going to be any problems in China or Japan, and as if geopolitics is all going to just take a rest and have no more blowups. And I just don’t think that’s the world we live in anymore. And I think it’s more likely than not that we’re going to have some an outbreak of volatility. Now, whether that takes place in the Middle East, which I think Albert is going to talk about, whether it takes place in Japan because they’re messing around their interest rates, whether it happens in the US due to commercial real estate, I’m not smart enough to know that.

Brent Johnson

What I do know is assets are all the way back to where they were two years ago. They’re back at their highs. Volatility is almost as low as it’s been, not quite as low as what Albert was talking about with the Ellen five or six years ago, but very low historically. History has taught me when everybody is doing the same thing, that’s about the time that they’re going to get hit upside the head. To me, it just makes sense to be prudent right now. Again, this is not advice, but just as an example. Right now, basically, every asset class is within 10% of where it was January first, 2022. And the VIX is very low. Now we’ve got interest rates at five and a half %. We’ve got geopolitical problems, all these things that you mentioned. You can buy a put on the S&P 500 that is 1% out of the money through June. Six months duration, 1% out of the money, and it will cost you 2% of your portfolio. Let’s pretend that I’m wrong. There’s no volatility in the first half of the year and markets rip another 15, 16%. Okay, so now you’re up 13 while everybody else is up 15 or 16.

Brent Johnson

That’s not horrible, right? You still made money. But if we do get some volatility and we don’t have this perfect market that everybody seems to think we’re going to get, and we have a repeat of the first half of 2022 and 2024, and equities are down 10%, 15%, 20%. Now you’re down one or two. I mean, to me, that’s a pretty good risk reward. With assets the way they are right now, I’m much more inclined to buy protection than to put on leverage.

Tony Nash

Great. Tracy, of those things that I mentioned, what are you… Or other things, what are you looking at as risks for ’24?

Tracy Shuchart

I think commercial real estate is definitely a risk. How that pans out in the market and does that cause a contagion in other areas? I think everybody sees that right now. That’s been an ongoing saga. But how that plays out will be very interesting. Will the treasury or the Fed have to get involved again? As they did in March with SPV Bank failing, are they going to let the commercial real estate market fail entirely? Or these banks that are backing the loans, I should say. I think that’s definitely something to watch out for, but I think that’s a freight train everybody’s already watching, to be honest. I do think that if the government or the Federal Reserve has to get involved on the banking side of the issue, they definitely will. But again, does that cause a contagion in other markets? We’ll have to see.

Tony Nash

I just saw a story. I mean, this is pretty common everyday. Some building in L. A, the value is like 50 % of the loan value. And so this is common, right?And so-

Brent Johnson

Well, Tony, I’ll give you a good real world. I’m back in San Francisco now for the holidays, and this is a hilarious story. The office that I used to work in when I lived here was in the old Federal Reserve Building in downtown San Francisco. Right. And it was privatized years ago. And in January of 2020, when I was still working there, the landlord of the building or the owner of the building sold literally January of 2020. Think about the timing on that, right? Perfect. And so he timed that perfectly. And now the owner, a couple of months ago, turned the keys back into the bank, just not making any money, can’t meet the mortgage, gave the keys back to the bank. I was going to go into the office, but I didn’t because the bank is now running the building and the heater blew up and they haven’t fixed the heater. So there’s no heat in the bulding.

Tony Nash

It’s always HVAC and stuff like that that these guys skimp on.

Brent Johnson

Yeah. That’s just one example. Now, does that mean that’s happening to every building? No, but I’m sure it’s not the only one either. My colleagues have already said that when their lease is up, I don’t know if it’s this year or next year, they’re not planning to renew it because they’re mainly working from home anyway or they’re working remotely, and the bank is not doing a great job of managing the building while they have it. Anyway, I just wanted to give that little anecdote.

Tony Nash

Yeah. No, this is what we’re seeing. A lot of this has happened because of work from home and people just aren’t filling these buildings to capacity or close to capacity like they had. Albert, what are you looking at for risks in ’24? You’ve been talking particularly about banks, US banks for a month or two. What are you worried about within US banks and what else are you worried about?

Albert Marko

A little bit of what Tracy was talking about the commercial real estate and the loans and whatnot. I think from what I hear, Bank of America is in pretty deep trouble. Whether they’re in Solomon or not is quite a question that probably we’re going to have to look at in 2024. Now, do I think they’ll fail? No, because Powell likes to bail everybody out. But any rumors or murmurs of Bank of America, insolvent would definitely cause the market to take notice.

Tony Nash

Right. Between big banks like B of A, between the regional banks, between commercial real estate, these are probably the things that you guys are looking at.

Albert Marko

Yeah. As layoffs kick in, loans start defaulting, debt starts going higher, credit card debt goes up. I mean, it’s just it’s snowballs at that point.

Tony Nash

Well, the other thing is we don’t have the perpetual noise every day of inflation is rising. Companies can’t go out and put a 5% price rise or 10% price rise or whatever like they were doing in ’21 and ’22 and even early ’23. I think I was looking at General Mills. There was something, so announcement from General Mills yesterday, and they were saying, Hey, we can’t change the price by volume anymore because consumers won’t take it.

Albert Marko

They had those tailwinds of inflation that helped earnings, but that’s certainly gone. Earnings in the first two quarters of 2024 are going to probably be really bad.

Tony Nash

Right. This brings me to a tweet that Brent that you sent out earlier. You said, One thing to remember is you don’t need a flood of new sellers or buyers for the stock prices to begin to fall or rise. You just need an absence of new buyers or sellers to show up. Whether that’s products for General Mills or whether that’s equities, if buyers don’t show up because of these risks or because we’re not getting this perpetual noise that we need to be afraid of inflation, we could see things change pretty quickly, right?

Brent Johnson

Yeah. Again, this is why when markets get to an extreme, whether an extreme high or an extreme low, that’s why they typically reverse, right? Markets don’t move in a straight line. I actually believe that we’re going to see equity, much higher equity prices in the years ahead, but I don’t think that we’re going straight higher from here because markets pendulum swing, and it’s when you get to clear to one side, that’s what provides the energy to then swing it back the other way. At the end of October, we do a weekly show with my friend John, and we were talking about how sentiment had gotten pretty low. It wasn’t totally low, but it was close. It wasn’t extreme, but it was getting pretty close to extreme negative. We said it wouldn’t surprise us if the market bounced a few weeks coming out of the Fed meeting because markets don’t go in a straight line. Now, since then, and so we got the two weeks, which I was expecting I was not expecting the subsequent three or four weeks that we have now got. But now markets are up until yesterday. Everything switched yesterday and we’ll see what happens over the next week.

Brent Johnson

But markets had gotten more extreme to the upside than they were to the downside as far as sentiment and relative strength and all these different ways to measure where you’re at on the positive or negative had gotten even more positive than they were negative back in October. And so the speed with which things move now, that’s something else that’s a little different. Over the last four years, the speed with which we swing from positives and negatives, I think, has increased dramatically from where we were 20 years ago. Yeah. Everything moves in unison. It used to be that you’d have a sell-off and maybe you’d stay down for two or three months, and then it might take six months to build all that back up. But now you get huge 10 % swings. It’s not that common to have 10 % months in equities. It happens at either. But typically, though, it typically happens in big bear markets because you’re rallying from oversold levels. I just feel like that the swings that we’ve had over the last four years, if you go back and look at the charts, they’re just like big Vs and Ws. There’s not a lot of use in there.

Brent Johnson

There’s not a lot of ends and use. I think that’s the world we live in because, again, we’ve gotten to the super debt cycle where the debts are so big that if the central banks and the monetary authorities and the governments don’t react quickly, you’re going to get some very, very bad things happen. I don’t know if that helps move the conversation at all, but I just think that that’s, again, where we’re different now than we were maybe 20 years ago.

Tony Nash

Yeah, absolutely.

Albert Marko

We’re seeing that in everything, even like oil. I’ve been watching oil a lot lately.

Brent Johnson

Yeah, perfect example. Perfect example.

Albert Marko

I’m like. How are we having 5% moves on day-to-day basis? This is crazy.

Tony Nash

Right. Albert, that is a perfect segue to move to Tracy. Tracy, let’s talk about crude quality and shale. I saw some stories earlier this week about how Texas is exporting a bunch of shale this month for tax reasons or whatever. You said it’s boring, which is fine, but it’s interesting to see those levels. I’m curious about shale and the quality of crude that we can get or that we’re getting from shale. On the screen, we’ve got an exchange between you and Ralph, who comes on the show pretty regularly on crude quality and gassy wells and this thing. Can you talk to us about that and why it’s happening and why it’s important?

Tracy Shuchart

Yeah, absolutely. When we’re talking about US shale right now, and we’re seeing all these rig declines, but we’re seeing US shale volumes increase because of better technology and whatnot. I won’t go into the minutiae of how they’re drilling these wells. But what happens is when you do that, yeah, you’re producing more, but what is happening is that what you are getting out of these wells is gas here and gas here. What I mean by that is that you’re producing more natural gas liquids, which is technically not oil. Those are things like natural gas, propane, and other things that you can use for chemicals, but you can’t use that as an oil substitute. Over time, what is happening, because we’re trying to stretch these wells out, these well productivity out, is that what we’re getting out of these wells just happens to be lighter and lighter and can’t be used for necessarily the same things that oil could be used for. In other words, you can’t use it to refine gasoline out of, but you can use it at a chemical company to refine chemicals out of. It’s a different makeup of what these wells are producing.

Tracy Shuchart

As they try to stretch this, we’re getting more and more of this type of product.

Tony Nash

Okay, so why does that matter? How much of what comes out of a well is used for gasoline versus other chemical products?

Tracy Shuchart

I mean, that’s a very loading question because it depends on, is it oil sands? Is it US Shell? Is it deep water? That’s totally going to matter because they’re totally different crew quality. But what that matters is that when we’re looking at these numbers, Shell is a 13 million barrels a day plus right now. Everybody’s like, Oh, Shell is back. They’re producing more than ever. But again, it’s not actual product that you can use for traditional oil-producing products and other. I mean, it’s great for the chemical industry because that means they can buy more and it’s cheap. It’s great for that industry.

Tony Nash

I just want to go back. You said if we see that, say, Texas is producing 13 million barrels a day, those barrels are not necessarily… It’s not necessarily oil.

Tracy Shuchart

Correct. They count NGLs, which are natural gas liquids, into the entire food production. This is what some people had a problem with EIA and how they were reporting it. They made a little bit of change that just came into effect this last month that basically they segue out the difference between what is actually an NGL and what is traditional oil, so to speak, within the weekly reports now. You can see that number even just over the last month has grown.

Tony Nash

Okay. What does that mean for these upstream companies in terms of profitability? If there’s more crude in those barrels, do they make more money?

Tracy Shuchart

Well, I think-

Tony Nash

Sorry to be so basic.

Tracy Shuchart

I just want to know. No, I think how you have to look at this is that… Really, I think it comes down to mergers and acquisitions right now, to be honest with you. If we look at this, we have a ton of big deals that went on this year. I think if you look at the Dallas Fed survey just released yesterday, 77% of all of those producers surveyed said, Yeah, we’re going to expect to see more M&A. You can see this. If you look at what’s the survey of how much do you want to produce, you see all these smaller companies are planning to produce as much as they can. All the majors don’t want to produce anything and are just looking for acquisitions. I think that’s really the dynamic we’re seeing right now is we’re having all these smaller to mid companies trying to produce the heck out of these wells, so they look productful so that they get bought out by the majors. I think that’s what’s happening in the industry as far as production is concerned. I think it all boils down to business right now.

Tony Nash

Okay. Why are they pushing to be acquired? Are they largely debt-funded as companies?

Tracy Shuchart

Not necessarily, but the deals that are going down right now are huge and way more than you’re making if you’re a small company that’s basically just producing NGLs at this point. If you make your wells look more productive, you get these billion-dollar deals going on. That’s very attractive to you.

Tony Nash

Okay.

Tony Nash

But there’s no bond- Go ahead.

Brent Johnson

The majors are buying them.

Tony Nash

Go ahead, Brent.

Brent Johnson

Sorry to interrupt. But the majors are buying them. They’re basically buying new revenue, right? Correct. Because they’re not growing themselves, so that’s why they’re okay.

Tracy Shuchart

Exactly.

Brent Johnson

Yeah.

Tony Nash

Great. Okay, that’s good. Thank you for that. I think it’s a lot more complicated than I’m used to seeing. I’m not an energy expert like you are. Sorry for the dumb questions, but I just need to make sure that this is happening.

Tracy Shuchart

No dumb questions.

Brent Johnson

Can I ask you a question? Can I ask you a question related to that? Is there a… I’m sure there is somewhere… Are you familiar with estimates of how long these shale companies can pump at this magnitude? Is it two years? Is it three years? Is it seven years?

Tracy Shuchart

I mean, those estimates used to be a lot shorter, but with new technology, they’re pushing that. It’s like energy, what is it? Gasoline efficiency. We’re just pushing out the miles. But you have to realize most of the tier one acreage is gone. We don’t have… We don’t have a new auction after yesterday until after 2025 because that’s gone. So as far as federal lands are concerned, and so basically, they’re pushing… It’s the pedal to the metal right now. It’s like, let’s get out everything when we can. How long that can last? I can’t tell you for sure, but I can say that it’s not forever.

Brent Johnson

In general, it’s lasted longer than a lot of people expect it. Is that right?

Tracy Shuchart

Absolutely.

Tracy Shuchart

Yeah, absolutely. That’s because of a lot of the new technologies that have come within the industry as well. You have to factor that technology in when you’re looking at these wells. Five years ago, we probably wouldn’t have been where we are today had it not been for… Probably would have already seen a decline in other words.

Tony Nash

Tracy, in the state of Texas, where I live, there really isn’t much federal land. It’s almost all private. There’s a small amount of federal land. When you talk about the federal auctions, how much does that impact a place like Texas where there’s a lot of fracking?

Tracy Shuchart

Well, it doesn’t necessarily. Most of your federal auctions are going to be in New Mexico, Wyoming.

Tony Nash

Colorado.

Tracy Shuchart

Colorado, Gulf of Mexico, offshore. That’s where most of your federal lands are coming from.

Tony Nash

Okay, very good. Okay, thanks for that. It was hugely informative. Thank you so much for that. Let’s move on to geopolitics. Albert. Okay, everyone’s a –

Albert Marko

Boring.

Tony Nash

Sorry.

Albert Marko

Boring, boring geopolitics.

Tony Nash

No, not at all.

Brent Johnson

Nothing going on there at all.

Tony Nash

There’s nothing going on here.

Tony Nash

Everyone’s a Red Sea expert this week, of course. Houthis fired rockets and vessels. You guys know the story. Now the US has a coalition that will protect ships in the area, supposedly. Several shipping companies, particularly Europeans, have opted to go around the Horn of Africa instead of transiting through the Red Sea to go through the Suez Canal. What’s going on here? I’ve heard some ideas that this coalition of European vessel owners is really trying to strong-arm DOD to do some things they don’t want to do, that thing. What’s really happening there and what are the impacts?

Albert Marko

Well, I mean, the Houthis, because of the Israeli-Gaza conflict, decided to enter the fray and show the world that they’re an actual force. I mean, realistically, they’re not. They couldn’t really hit Israel as much as they are yapping like dogs that they were going to destroy parts of Israel. So they started taking aim at ships that were destined for Israel. But they don’t really know which ships are going where. You’d have to be an expert with the-.

Tony Nash

Or just aim at Zim.

Albert Marko

Yeah, exactly. It’s just… It’s one of those things where the Iranians wanted to influence the area, and they used the Houthis as a proxy. I mean, it’s an age-old problem, going back 50, 60 years, where Yemen has been a launch pad for communist insurgencies within Saudi Arabia. So this is nothing new, right? The problem is these ships have insurance requirements, right? And once you enter a conflict zone, those insurance coverages evaporate. So for the ship owners, one, it’s not very safe to try to go through there and God forbid, a ship gets sunk and then you lose everything. And your insurance doesn’t cover it, you’re completely out of business at that point. Realistically, the cost of the Suez Canal passage versus the diesel that they’re using is pretty much even. It’s just a time factor at that point. There’s issues if you’re carrying oil to Rotterdam from the Middle East that the price can sway significantly in that time frame. Those issues are to be assessed by the ship owners. Now, I have a fear that the US might get a little bit brave and start attacking some of the Houthis positions with drones or missile strikes or so on and so forth, which would probably affect the price of oil going into the market.

Albert Marko

And the markets would probably sell off new US war. It was quote-unquote. But I don’t really give that more than a 50, 60% chance, but it’s still there. Certainly there.

Tony Nash

Their Air Force is like F-4s made in the ’60s or something, right?

Albert Marko

I mean, it’s a joke. I saw that tweet and I’m just like, They’re like, Bring it on, America. I mean, we can send some kids to PlayStations, hooked up to DJI drones to take those out. I mean, that’s a joke. Yeah.

Tony Nash

Right. So I remember this close friend going around for the past day or so where it’s George Bush from 2001 or whatever talking about the coalition. And then he says, Now watch my golf drive, or something like that, right?

Brent Johnson

Yeah.

Tony Nash

And it was like the perfect early 21st century American moment. And at that time, a lot of these countries jumped into the coalition, whether they felt forced to or supporting America or whatever. But the sense I’m getting is that the Europeans, although they have claimed to be part of the coalition, they’re not really doing that much.

Albert Marko

This is a perfect example of a unipolar world where the dominant superpower of the United States conducts maritime security globally. Nobody else can do that. And you can see that from the-

Brent Johnson

I’m glad you brought this up. I’m so glad you brought this up.

Tracy Shuchart

Seychelles jumped on this.

Tony Nash

Seychelles are the difference-maker in this coalition, right? They are going to-

Albert Marko

Yeah. This is why the US is a reserve currency. This is why we are a unipolar world still and for the foreseeable future. There is nobody else that can send ships and rockets and the helicopters and manpower globally to choke points that trade flows through. This is the United States’s world and we’re seeing it right now.

Tony Nash

Yeah, but the PLA has thousands of ships, 94 % of which are small fishing boats, right?

Albert Marko

Oh, yeah. tonnage matters at some point. Whenever you talk to a real military expert, tonnage matters. When you have 21 aircraft carriers versus 5,000 fishing boats, they’re not going to matter much.

Tony Nash

Right.

Brent Johnson

Well, I think this is important, I think, for people to think about because I obviously get in a lot of these debates regarding the US hegemony and still a unit of polar power and the US dollar. And I’ll often get the comment that aircraft carriers and Navy Forces are no longer important due to hypersonic missiles and all this nonsense. But here’s the thing. Number one, I don’t believe that that’s true, but let’s just pretend that it is. Let’s just give those people who say that the benefit of the doubt and let’s say that is true and some a large war scenario, they’re sitting ducks. Well, there’s a lot of stuff that goes on that’s not a large war scenario. And the fact is that the US Navy for several decades has kept the shipping lines open from things like the. Remember 10 years ago, Captain Phillips and the Ethiopian pirates? That has helped keep prices down for everyone, not just for the United States. Now, does it benefit the United States? It absolutely benefits the United States. They’re not altruistic in this, but it helps the rest of the world, too. And if the US was not the hegemon and was not doing this, prices would be higher everywhere.

Brent Johnson

Insurance rates would be higher everywhere. The lead time to get shipments from around the world would be much longer. And so I think that’s one-.

Tony Nash

And insurance would be higher, right?

Brent Johnson

The insurance would be dramatically higher. And so that has inflationary effects, right? And so this whole thing that Albert is talking about with the Red Sea, this has the potential to keep rates higher for longer with the Fed. This is how potentially Fed rate cuts might not happen as quickly as are forecasted, or even if the Fed cuts do come, may not have as significant impact on the markets because of what’s going on. In other words, they may have to be cutting in order to protect against deflation-based monetary forces as a result of market selling off because oil spiking and there’s more geopolitical conflict in the Red Sea and the greater Middle East. And so this is just another part of what I was saying earlier is that markets are priced to perfection based on monetary policy, but there’s a lot more going on than just monetary policy. And there’s so many different ways that this can go wrong. It doesn’t mean it will go wrong. It just means I think markets move on expectations and they are now fully expecting the markets are fully expecting several cuts. And if those several cuts don’t show up, markets are not going to be at the same levels they are right now.

Albert Marko

They’ve been wrong for two years on this pivot, pause, cut, so on and so forth. So I have no trust on these five, six Fed cut stories out there.

Tony Nash

275, basically.

Albert Marko

Okay, sure.

Tony Nash

Okay. Guys, I want to talk more broadly about geopolitical risk, okay? Because I don’t know that a lot of people understand. When the 2008 financial crisis hit, investment banks just gutted their geopolitical risk desks. Since then, I don’t know of really any major banks that have, maybe credible is too strong of a word, but credible geopolitical risk analysis. A lot of that’s been outsourced to relatively small firms. Am I wrong on this? I don’t feel like we really get a lot of credible geopolitical risk analysis from the banks, from the guys who should be able to price risk. Am I off there?

Albert Marko

They don’t. Goldman Sachs has a new geopolitical division. I really haven’t talked to them or seen what they’ve written, but just going on from previous interactions with the financial industry and geopolitical analysis, it’s been truly awful. It stems from them being so polar opposite, where finance guys absolutely do not believe that geopolitics makes a difference up until about six months ago. And now they’re flipping because they’ve gotten blown out in their portfolios and they have to blame something and it’s geopolitical. So now they’re all going towards the geopolitical analysis, but they’re not good. Still not good.

Brent Johnson

Well, not only that. You got to remember the investment banks that put out research and the big commercial banks, they’re basically sales pieces. It’s very hard for an analyst at a major firm to come out and say something very negative. It’s not impossible, but it’s not easy. And even when they do try to put out something negative, their higher ups will say, hey, can you smooth this out a little bit? Can you say this a little bit softer? Because at the end of the day, they want people invested. They want people buying things. They don’t want people to hunker down and do nothing, right? And so I tend to agree with your point, Tony. They don’t really have these groups to begin with. But even when they do, you’re not going to get the same unvarnished truth that you would at perhaps an independent geopolitical firm.

Tony Nash

And so we’ve got small geopolitical firms largely based in New York or DC or London. I used to be with one of them, and these are not people who have field experience, none. They’re basically, it’s secondary research. They’re largely reading, and I just want to make sure that our viewers understand this, they’re largely reading English language publications in these countries to come up with their assessments. They don’t really know what’s going on. It’s filtered through English language, whether it’s Reuters or some local newspaper or something like that. That’s really what geopolitical risk is today with the geopolitical risk firms that you know that can come out. We don’t need to name names, but the ones that come off your tip of your tongue.

Tracy Shuchart

Or even worse, the big think tanks.

Tony Nash

In the US. Sorry?

Tracy Shuchart

I said, Or even worse, the big think tanks in the US, and I’ll just say that and I won’t name names.

Tony Nash

Well, no. I mean, look, the big think tanks in the US, there are not a small number of their leadership who are boards of Chinese companies. They’re government funded as well.

Albert Marko

They’re just so bad, Tony. I just had a discussion this morning with a finance guy at a firm up in New York. And he’s furiously texted me because I think they were trying to make a bond position. They’re like, Oh, Lavrov’s plane landed in the United States. The Russian diplomat, the foreign minister. The war is over in Ukraine. I’m like, What the hell are you talking about, man? That’s most likely a taxi ride for the diplomats to go back for the holidays to Russia. That’s not some bond move. You’re completely mispricing everything and making assumptions where you don’t have expertise on doing, and they do that often, and that’s why they’re so bad.

Tony Nash

Right. Now, I want to bring us back to crude, Tracy. If we have geopolitical risk rising in the Middle East why are we seeing that in crude prices right now?

Tracy Shuchart

Well, first of all, this whole episode is a shipping move. I’ve reiterated that over and over and over again in Twitter because everybody said, Why isn’t oil moving? Because there’s no risk to oil. Unless you see the Houthis lobbying missiles at a Ramco again, there’s no risk to oil. Production is fine in the Middle East. Production is not interrupted. This is not an oil issue. Now, if you want to talk shipping and you want to talk, yes, now we have a shipping issue with not only containers, but also shipping with the tanker in oil and oil products market as well as they’re being diverted around Africa instead. In fact, we’re seeing tankers have been having to be diverted from Panama Canal for months now because of the things that are happening. It’s a shipping issue. You’re seeing shipping rates increase, and that you’re seeing a bounce in the container and the tanker markets. Right now.

Albert Marko

This goes back to what Brent was saying, though, with these outsized market moves, and this is what we’ve been seeing, any headline, geopolitical, economic, so on and so forth gets so blown out of proportion. And Tracy is right. This Hutho thing is not a risk to oil. This is ridiculous. They’re not going to start blowing up Iranian and Russian ships and Chinese ships. The Huthis rely on those people. So these outsized moves based on wacky headlines is here to stay, and it’s not definitely help.

Tony Nash

To my earlier point, people don’t know how to price this risk because geopolitical risk analysis is so bad. People don’t know how to price risks. You have all of this volatility around these items. Either they underprice and dismiss it, or they overprice it because people are sitting in suburban New Jersey or whatever. They have never been to the region, they have no idea what’s going on, and so they overreact. I know we need to wrap this up, but let’s just get into real nitty gritty on the Middle East for a minute, Albert, on this Yemen issue. The their allies are Iran, Qatar and really Oman, right? I mean, Qatar and Oman are Iranian allies. Is that fair to say?

Albert Marko

Yeah, the Russian. Well, yes, for the most part, but they’ve also had long-standing links with the Chinese and the Russians. I’ve even tweeted out that the Chinese have barges sitting offshore that sells arms to the Houthis, and nobody says anything about it.

Tony Nash

Right. Then the sitting on the other side of that is really the Saudi’s and the Emirates, right? Just in terms of Middle East dynamics, right?

Albert Marko

Yeah, and the israelis, yes.

Tony Nash

And the Israelis. Okay. But I doubt the Emirates and the Saudi’s would really say that Israel is their ally. They don’t really say that out loud, do they?

Albert Marko

No, it’s common knowledge. The Saudi’s and the Israelis have been defense partners for 30, 40 years. This is nothing new.

Tony Nash

Right. And so I think on one side of that, we have chaos, right? Iran and other stuff. And then we have order on one side, which is Saudi and UAE, very orderly societies, Israel, very orderly. So the one I can’t figure out, Albert, is Qatar, okay? Because very orderly place. There’s a massive US base in Qatar. So why are they allied with Iran?

Albert Marko

They’re not just allied with Iran, but they’re allied with Turkey on top of that. The little troika there sitting in the Middle East is because they see the Saudi as a threat to their monarchy. So they need to counterbalance that with the Iranians, the same way that the Indians counterbalance China with Russia. That’s just the basic layman’s terms of reason of why they’re aligned with the Iranians. They need a counterbalance.

Tony Nash

It’s just balancing out. It’s not that the countries are super empathetic to Iran. They’re just worried about Saudi. They’re enemy, my enemy, that thing.

Albert Marko

Yeah, exactly. That and the Iranians are also right across the street there. I mean, it’s not that far away. It’s just down through away. Their gas fields and the water are Yeah, exactly.

Tony Nash

Yeah. Okay, very good. Guys, this has been fantastic. Thank you so much for this. We’ve got a lot to think about going into 2024. Have great holidays and have a great week ahead and see you in the new year. Thank you very much.

Tracy Shuchart

Happy holidays.

Albert Marko

Merry Christmas, everybody. Happy holidays.

Brent Johnson

Happy holidays.

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This Dec. 18th episode of The Week Ahead is hosted as usual by Tony Nash, with first-time guest Anthony Crudele, joining Michael Belkin and Tracy Shuchart. In this episode, the panel discuss:

1. Year-End Market Temptations with Anthony: Anthony walks us through the intriguing observation that more traders encounter challenges during the year-end period than at any other time. We dissect the dynamics behind this trend, offering keen insights into market behavior during this crucial period.

2. Rotation Dynamics in the Market with Michael: Michael takes center stage, discussing the ongoing rotation within the market. Starting with the Dollar’s significant post-Fed meeting decline, Michael provides insights into the depth of this fall. We then explore the current sentiment toward the tech sector and potential factors that might redirect investor focus. For those with an eye on gold miners, Michael explores potential advantages amid the declining Dollar, spotlighting $CDE. He articulates the thesis behind this potential opportunity and discusses the factors that make it compelling.

3. COP28 and the Market’s Take on Fossil Fuels with Tracy: Tracy leads a discussion on COP28, shedding light on the market’s interpretation of the climate talks. Despite positive sentiments surrounding the event, Tracy provides an alternative perspective based on the wording of the final resolution. Discover how the markets are responding and the implications for investors.

This episode offers a focused exploration of these three key themes, featuring expert insights and candid discussions. Join us for a deep dive into the forces shaping the weeks ahead. Stay informed and stay ahead of the curve.

Transcript

Tony Nash

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Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash, and today we’re joined by Anthony Crudele, Michael Belkin, and Tracy Shuchart. We’re talking through a number of key themes today. The first is year-end market temptations. Anthony had some really interesting thoughts about things that happen this time of year in market. I want to really dive into that a little bit. Michael Belkin has been telling us for months about a market rotation. I want to talk about that and see is that still on? Then with Tracy, we’ll jump into COP28 and their love of fossil fuels as we found out this week.

Tony Nash

Guys, thanks so much for joining us. I really appreciate the time you take. Anthony, it’s great to have you on. Obviously, I’ve watched you for years. I want to talk about markets with you. But first, you had a great tweet this week where you said more traders blow up during this time of year than any other time. I think that’s super important to be aware of. Can you talk us through that?

Anthony Crudele

It’s the psychology shift. It’s the mindset changes. It’s the I have to do something mindset versus I want to do something. Patients, a lot of times, gets away from traitors during this time of the year. I’m talking specifically, when I talk about traders blowing up, my background, independent traders, I’m talking a lot about the traders out there trying to go out there and make it as an independent trader. Not talking about traitors in their books, just a different world for me. But I think because those traders have that type of pressure on themselves. I remember my first panic attack, anxiety attack was Christmas morning. I woke up and I didn’t have gifts. I was in my early 20s, independent trader, and I didn’t have any gifts for anybody. I just felt this immense amount of pressure come over me. I remember during that month, leading up to that time, I’m trying to make things happen. I think that’s just a consistent theme when you look at independent traders, investors, that they tend to try and do things that maybe they wouldn’t try and do because they try and turn a buck. Everyone feels the pressure.

Anthony Crudele

We have had a year where regardless of what the data may say, inflation is still pretty high out there, I think, for everybody in the mainstream. I think that it’s just important to understand that you don’t have to do anything. I think we put majority of the pressure on ourselves as traders. We’re competitors. We want to go out there. We want to do well. We want to perform well. When you also get into this time of the year and why I think a lot of traders blow up, I think not only because of the psychology, but it’s really a different market. I mean, look at this past week. We had biggest options exploration of the year. You’ve got triple witching. We had an FOMC meeting. We had CPI, PPI. We have all of these cross winds coming in at once. You have end of the year flows, seasonality. That really, a lot of times, is going to cause a lot of either one-directional moves and I think a lot of random volatility, I call it, where all of a sudden bigger players come into the marketplace because they have to do something and they have to do something on a different reason than what I talked about with independent traders having to do something.

Anthony Crudele

They have to move money around. You’ve got, like I said, all the expirations between the futures markets, options markets. That’s why I think that this time of the year is really unique psychologically, and also in terms of just in trading in general.

Tony Nash

Right. It’s interesting you use the word saying that traders are trying to make things happen. I think over the last couple of years, it’s been pretty easy for people to feel like they can make things happen. I’m not sure if that is… I almost feel like we’re at the end of that to some extent. That magic that we had in ’21 and ’22, this year has been a lot harder. As people end this year, I think what you mentioned about having money for gifts or whatever at the end of the year, that’s a real pressure that everyone feels. I think a lot of traders feel like they set their own destiny to some extent. Not really, but I think a little bit of that feeling is there. How do you see people trying to make things happen? What are some of the biggest mistakes people make?

Anthony Crudele

I think people just think too much. I think that’s really what it comes down to. I think the mistake that they make in terms of actually going out and trading is that they’re just thinking too much about all these different things I mentioned that are happening in the marketplace right now, and they don’t really take it down to a level of execution. You’ve got so many financial experts out there talking about what’s happening in the market, macro flows versus options flows. I just did a big podcast on this and just all these different cross winds, like I mentioned. I think that traders get overwhelmed by it. Then when they get to the screen, they have all these hidden underlying biases that get in the way of them just trading what’s in front of them. A lot of people will fight the tape because maybe a move is happening. Look how much we’ve rallied and the Dow and Russell. I know the Nasdaq and S&P have rallied as well, but look at those markets. You easily can see people stepping in trying to fade them if they didn’t catch a move or just trying to go in and trying to make a couple of ticks and get in front of a steam train and they give away a lot more money than they really anticipated to.

Anthony Crudele

I think the mistake is just overthinking the environments instead of just simplifying and saying, Okay, look, there’s a lot that I don’t understand what’s happening right now, and that’s okay, and come in and just be small and smart. I keep telling our traders and my free Discord, small and smart don’t ruin Christmas.

Tony Nash

Yeah. Tracy, you’re in the trenches on this stuff. Talk to us about how do you feel at this time of year? Do you feel additional pressure?

Tracy Shuchart

I think mainly because my main focus is energy, generally tends to be pretty predictable as far as seasonality is concerned. Usually, we see a low in oil markets, the second to third week in December, and then we see a rally to the end of the year because of tax purposes, because oil companies’ tax assessment date is on the 31st of December. They try to get rid of as many barrels as possible. It also correlates to when refinery maintenance season is over, so they’re able to ramp up refining. That works out. We see big draws generally from the EIA report, which generally leads to a bias to the upside. I think looking at the energy industry, it’s just a very seasonal market. If I were trading equities, I probably, especially in the futures markets, I think it gets more and more difficult. When you start having the notional value increase every year. I mean, we have what, $4.9 trillion of notional value, notional expiring today. It’s true. That number keeps growing. I think that gets more and more difficult to trade. I think that when you get into these passive flows that just keep growing, it gets more and more difficult because you just have computers and buying because that’s what they’re told to do.

Tracy Shuchart

That’s my take on that, mark, on that.

Tony Nash

Once like Michael.

Michael Belkin

Calculating stuff.

Tony Nash

Enabling these computers. Okay, that’s good. Thanks for that. I think obviously be careful, think twice. I like what you say about staying small and all that stuff, Anthony. It’s really good to think about it this time of year. Let’s talk a little about what happened with central banks this week. The Fed, obviously, everyone knows the news about the Fed. The BOJ is obviously a big consideration. The ECB, does whatever they do to enable the hollowing out of European economy. But we saw on Wednesday, Powell presented a very doveish look for it, very doveish. Equities, accept the Nasdaq, equities loved it, small caps loved it, commodities loved it. Is this and all three of you guys, Anthony, let’s start with you, but all three of you guys, is this the end of cuts? Are rates just flat for the next months or whatever? On screen, I have a survey I’ve done looking at when the first rate cut is expected. Half the respondents, more than half the respondents, believe it’ll happen in the second half of ’24 or later. That’s changed. Obviously, shifted a little bit earlier since the Wednesday meeting.

Tony Nash

Is this the end of rate cuts? Are we going to see dramatic doveishness with the Fed? Anthony, let’s start with you.

Anthony Crudele

You think it’s the end of rate hikes, right?

Tony Nash

Sorry, rate hikes. Oh, my gosh. Yes, rate hikes.

Anthony Crudele

I know because our minds are already on cuts, right? To be clear, I’m not a macro trader, but what I look at is an overall theme. This was a shift, bottom line. I mean, the dot plots taking for what they’re worth are showing three next year. I immediately went to CME’s Fedwatch tool and I looked to see what they were going to be pricing in through the Fed Fund futures, and they’re looking at six rate cuts heading into next year, I think starting obviously in Q1. Do I think this is the end of rate hikes? If we take the Fed for their word, I think that’s what we’re looking at. The market took that statement and things changed. Market environment changed. Now they rattled the cage. Yeah, I think that we’re at the end of rate hikes.

Tony Nash

Okay. Michael, what are your thoughts?

Michael Belkin

I remember when I was a kid going to Disneyland, there’s this ride called Mr. Toad’s Wild Ride, where you’re smashing into walls and stuff. To me, that’s like the Fed steering the economy. It’s out of control. It’s blowback. They’re always doing the wrong thing at the wrong time for too long. So if you go back a couple of steps, so we had COVID, they threw an insane amount of stimulus at the economy. Then they said inflation is not a problem, it’s transitory. Then they raised interest rates by 500 or something days of points. And now they say everything’s okay. And maybe asor all of a sudden. Yes, so there was a change, but my work says we’re headed into a recession. And interest rates are going to drop sharply, the economy. So all my economic stuff… I do forecasting, time series analysis, forecast, direction, position, intensity, looking for turning points and things. Industrial production, capacity utilization, retail sales, even though the numbers should look a little bit stronger lately, I think this is a major inflection point and that goes as well for corporate earnings. Basically, I think the Fed is going to be… They’re usually the caboos.

Michael Belkin

They decide to change too late after everything’s changed. I think this is incredibly bearish. If you go back to me, this is a moment like 2000, March 2000, or after that. But nothing is ever exactly like anything else. But this is a major inflection point in the economy, similar to late 2007, early 2008 or 2000, 2001. I think there’s going to be big surprises coming from the private sector. Let me put this in perspective. So the Fed started tightening March 2022. So that’s 21 months or something now. The average lag in monetary policy hitting the economy is like 18 months. It’s not brain surgery, but we get a major downturn. Steve Hank, he’s really great on this. He’s a monetary economist at Johns Hopkins. And I don’t follow him real closely, but I totally agree with everything he’s saying. So I don’t think this is a soft landing. I think we’re headed into something more like a crash landing. Not this afternoon or this week or before the end of the year, but generally things are turning down. Interest rates go down. Right now, the market is perceiving that as bullish. Short term traders, Oh, the Fed’s done hiking.

Michael Belkin

It’s time for me to buy stocks. That’s so ingrained. It’s like one factor model. But you’ve go back and look at 2000 to 2002, 2003 or 2007, 2009, Fed was cutting rates aggressively. The economy crashed in stocks, the S&P went down by 50 %. So I think the psychology in the market is completely wrong. And I’m collecting all these press clips. One of the things I do in the Belkin Report is press clips. It’s all disastrous. Like recession in Germany, recession in Japan, China, nothing’s working. We get these numbers that they always revised down. They look great in the US at first, then they revised them down a couple of months later. Anyways, I think the Fed is going to be cutting rates, but I think the psychology doesn’t yet reflect that that’s bearish. So there’s going to be this, I think, mental change coming for investors, maybe not before the end of the year, but I just have the opposite read on this that the market is getting at the moment.

Anthony Crudele

Can I ask Michael something real quick?

Tony Nash

Absolutely.

Anthony Crudele

I appreciate your thoughts on this. I do agree with you that at some point this is probably something that turns into a bearish situation. I think when you see what happens at the end of a bull market or a big rally, you see this type of news that accelerates it. I think that’s what we’re seeing here. It almost creates a scenario for a blow-off top. Obviously, with seasonality, end of the year going into the beginning of January where it creates this bullishness. I think that this news is just accelerating that flow, which almost is like a capitulation type top. Part of me thinks, Is this inverted yield curve actually starting to come into play where people are starting to see that… Everybody was talking about how this was going to cause a recession. My question to you is, is that playing a role? Do you think that played a role in what the Fed was looking at? Maybe we’ve overtightened, this yield curve inversion is still there and ultimately there is some fear behind this. That’s why you’re thinking that it could be eventually a bearish signal to the market?

Michael Belkin

Yeah, I was actually surprised to see Powell capitulate. I agree. So the market has been saying the yield curve and a lot of this economic data, you can’t read this stuff and not understand that the global economy is headed down. So back to your point about the market making a blow off top. So before each recession, of those major recessions I mentioned in the early 2000s and then 2008 area, the market had made a high right before that. It didn’t make any sense. So it went up and went up for no reason whether news was bad, then it reversed sharply. So I think that’s what we’re setting up for. I think it’s really… So if you’re buying the market here, you believe in buying high. It’s buy high, and I think they’re going to end up selling low. So my model is looking for turning points. I looked for things like buy low, the health maximum, buy low, sell high. So to me, this is a sell high moment. And that’s just for the indexes. But if you look, let me just talk for a second about what’s going on beneath the surface. Okay, so hang on.

Michael Belkin

So my top sectors, I do a lot of. Work on the sectors.

Tony Nash

Hold on, Michael. Can we get into that in just a minute?

Michael Belkin

Okay, in a second.

Tony Nash

I want to do that in the next segment, if you don’t mind.

Michael Belkin

Sure, no problem.

Tony Nash

I do want to continue this Fed discussion, just in terms of things like your process, flexibility and rigidity and your duration. How do those change when we’re in inflection points like this? Tracy, let’s start with you. How does your process change or does it change when you’re in situations like this? Does your duration change when we’re in time frames like this?

Tracy Shuchart

Absolutely. Well, first of all, I wouldn’t go back and say that Powell’s 180 and doveish dance scared me, to be honest, because that made me think, What is the Fed seeing that we’re not seeing in the data? Clearly, there is a deterioration of the data, but not enough to literally do a 180 and start being that dumbish. That frightened me right away. I also have to agree with Michael that I think we do see some blow-off top. To me, this looks like the end of 1999, heading into 2000, and then when we had that huge drop-off, like starting, say, November 1999, it looks like right now where we may see a little bit of pullback, we may see a little bit of volatility, then we see this blow-off top, and then this market has a real problem to say, starting end of Q1, beginning of Q2. That’s what this market feels like to me. I also think we’re going to have a huge problem because if we look at the inflation situation, I think we are in stagflation. I don’t care what anybody says because inflation is still very persistent. I think that this looks like a 1970s scenario.

Tracy Shuchart

What’s going to happen is Powell is going to be faced with a situation where he may have to cut rates, but that’s going to send inflation out the door again, in my opinion. I think that’s what I’m looking at in the market, let’s say, over the next two quarters.

Tony Nash

Okay, great. Does-

Tracy Shuchart

Great. Thanks.

Tony Nash

No, that’s good. I don’t know.

Tracy Shuchart

If that answers your question, but that’s really what I’m looking at.

Tony Nash

No, I think that definitely addresses. Certainly what Michael said, that we’re going from this… Well, first of all, the Fed isn’t telling us what they’re seeing, I think. There’s something that they’re seeing that really has shocked the leadership and they’re conveying that. That’s a weird 180. It’s a great point. That should worry us. As we see interest rate cuts, obviously, that reduces margins that company… The record margins we’ve had over the last couple of years, that reduces margins for companies as well. Earnings are probably going to be scary, especially for some of these retailers or casual dining or even tech as some of these, say, budgets are pulled in, that thing. It could be scary. But I guess just going back to my last question about your process, when you see what you saw on Wednesday with Powell changing his tone dramatically, how does that change your process? Does your duration get shorter? Does your process change? How do you, Tracy, adjust when you see things like this?

Tracy Shuchart

Well, my first thought was this market is going to love this, which it does. My first thought was I need to start buying some protection in February or March because I think that a blow-off top could come. The market’s taking this along the wrong way initially. Atman protection is very cheap right now. That was my first go-to is let’s look at some puts in February, March, and see what’s going on there.

Tony Nash

Great. You’re looking at a two-month horizon for something like this to happen.

Tracy Shuchart

I would say Q1, Q2. I think that’s going to be a pivotal point. I think that we’ll know by the end of Q2. Being that it’s so cheap right now, so I have protection against a long portfolio, I’m fine with that. If I take a loss on that then.

Tony Nash

That’s great. Anthony, how about you? How does your process and duration change, if at all, when something like this happens?

Anthony Crudele

Well, for me, I’m primarily a short-term swing trader, day trader. When it comes to that process, it’s really just understanding what is the current environment. Obviously, that has shifted underlying bid in bonds and treasuries, underlying bid in gold, a favor trading the Russell to the long side more than Nasdaq and S&P because of the impact of interest rates, I think, is going to let the Russell outperform those indexes going forward. You have that shift. I also manage my own longer term portfolio, a portion of it, not all of it, because I don’t want it all in my hands because I could sometimes get a little aggressive. But I think overall, I’ve already been in IWM, so I’ve been long, small caps just because I felt that this whole year was really a bull market. I didn’t know eventually that they would catch up. They’ve now caught up dramatically and I own a bunch of tech stocks. I think for my longer term duration stuff, I use this strength to start taking my risk down. I think if you’ve already been long, I think you start taking risk down. It’s funny, this whole year, nobody wanted to call it a bull market and go back to what Michael said.

Anthony Crudele

It’s like people are buying high and that’s what happens at the end of big rallies of bull markets. It’s funny, those that have not participated are now in a rush to participate. I always look at that from a long term investor, the stuff that I’ve been in, and like I said, I own a bunch of tech stocks, I own the small caps. I’m going to start peeling that stuff off into the next quarter and just reduce my risk. Because it’s my long term portfolio, I probably won’t be out of everything. But then we’ll wait and see and I’ll let price dictate that. I don’t know when this all of a sudden shifts, but it just feels like right now the momentum is so strong technically. We can argue whether or not fundamentally it makes sense to be buying stocks now because interest rates are coming down. That’s what the market thinks. As a trader, as an investor, I look at it and go, Maybe I ride this tail a little bit, but there will start to be signs when you start to see things start to soften up, and then I adjust from there.

Tracy Shuchart

Yeah. We had this article this morning that everybody’s been talking about, there’s a $6 trillion cash word that could fuel more stock gain as the Fed pivots. We’re talking basically they’re saying, buy the high. When you get into this, this reminds me of the mania. Eventually, that mania always reversed the mean, in my opinion.

Anthony Crudele

When has that ever worked? When everyone told you it’s now time to buy because all the paths are clear and we’re at all time highs, right? Yeah, it’s going to work for a period of time, most likely, but that period of time, as fast as we come up in price, as fast as we come.

Tracy Shuchart

Wise spends.

Tony Nash

It’s like twice as fast. Right. That’s why duration is important, right? Anyway, we’re in the middle of a Santa Claus rally, so it’s just let’s-

Tracy Shuchart

Yay!

Anthony Crudele

I would not be fading it now.

Tracy Shuchart

I definitely wouldn’t step in front of this market.

Tony Nash

Yeah. Let’s move to Michael. Michael, you’ve talked about rotation for quite some time, and you’ve talked about getting out of tech, getting into things like financials. With the Fed devishness, I’d like to look at a few different things. I’d like to really start looking at the dollar. We saw the dollar start to pull back pretty dramatically on Wednesday, and we’ve got a chartup showing your dollar direction. Can you talk to us about that? Where and why do you expect the dollar to move and over what duration do you expect the dollar to pull back?

Michael Belkin

Okay. So this backward segue into what you’re talking about a second ago, how did the Fed pivot change my feelings or my forecast? So not really too much. So the Belkin report have been saying short the dollar, be long bonds for months. Okay, so that’s been working. And believe me, I’ve been wrong on other stuff, so I’m not boasting here by any stretch of the imagination.

Tony Nash

It’s a bit of boast.

Michael Belkin

To me, it was like, Oh, hello, where have you been? If you look at the sentiment stuff, so people were buying the dollar against the Yen. They were shorting the Yen like crazy right before this whole thing happened. And then the Yen all of a sudden rallies like crazy. And same thing with bonds. So bonds are up enormously now from the bottom. So the bond market bottom on October 19th. It’s just a couple of months ago, November, December. Right now it’s almost a two-month anniversary, and it’s up enormously. And if I could just go over a couple of what’s happened this week. So let’s just forget about what the indexes are doing, but a lot of what I do is focused on sector rotation.

Michael Belkin

So the bank’s KBE ETF is up 8% this week. So the S&P is up a little over 2% at the moment. Gold stocks, GDX, up 5.1%. TLT, that’s the T-bond, is up 5%. So bonds are up twice as much as the S&P. To me, that’s really a key, super critical thing here. Another comparison I’d like to make is from 1987. I’ve been hired into Solomon in 1986. Solomon Brothers, I was in market analysis. I ended up in proprietary trading, being the quantitative strategist for a man unit running the house account on the equity side. I remember in the summer of ’87, seeing the market go up, up, up, up, up, up, up. Greenspan had come in and was raising interest rates and the market went up for no good reason except for algorithmic buying portfolio insurance in those days. Then it peaked in August, sold off in September, came back, rolled over again. And the critical issue there was bonds relative to stocks. So that’s one of the… What I do is I do relative value trade. So ratio things. So long TLT, short S&P 500. So in ETFs that’s TLT SPY. That has outperformed by two % this week.

Michael Belkin

And that might not sound to an individual investor, but if you’re a big pension fund or something… So what happened to tie this back into what happened in ’87, we had a huge pension fund, General Motors pension fund, dumped all its stocks going into the ’87 crash and shifted to bonds. A lot of other institutions were shifting their bonds. So the shift by asset allocators out of stocks, which look overvalued into bonds, which look undervalued, that’s happening in slow motion. But just to flesh this out a little bit further. So again, the Belkin model looks to buy low and sell high. And that’s not just in absolute terms, but relative terms. So one of the biggest advances this week is solar stocks. Tam is the ETF. And some of these stocks are up enormously. So these are down… This ties into what Nathan was saying about the Russell 2000. Smaller stocks, some of those have been really depressed and left behind by the market. Those are going up way more than tech. So the biggest declining sector this week is communication services. That’s fang. That’s bag seven. That’s Google and Meta. That’s underperformed the index by almost two % this week.

Tony Nash

Let’s talk about that for a minute. Sorry, just to pause there because you have a good chart on that showing basically that you think we’ve hit… We’re pushing down there. I want to put that chart on screen as you’re talking through it. Can you talk through Mag Seven a little bit and where that’s going?

Michael Belkin

Yeah. Sentiment and positioning is critically important. What I do is time series analysis, but I look very closely at sentiment. Some of my hedge fund clients, that’s the biggest thing, they want to know where people are positioned. They’re overly positioned. So they’ll run to the one side of the boat, the boat’s tipping over, and they run to the other side. Mag Seven is obviously the most over-owned thing out there. Everybody and his brother, they’re allowing these things. It looks bulletproof. All the stock analysts, Oh, they’re so great. The earnings are good. So you’ve got to own them. So that’s what everybody owns. And if you look at the top Goldman Sachs, the top longs of hedge funds versus their top shorts, are getting crucified this week. So their top longs are underperforming the market, all these Mag Seven stocks, and their shorts are going up. So there’s this huge squeeze going on beneath the surface. I also like to talk about gold. Is that okay?

Tony Nash

Yeah. You have this gold CDE versus 200 average. Can we talk through that as well?

Michael Belkin

Okay, yeah. So gold is the flip side of the dollar. Okay, dollar goes down, gold goes up. So Belkin Report has been saying, Sell the dollar, buy gold. And gold has been in the doldrums. Nobody wanted to touch it with a 10-foot pole. Went from the penthouse to the shithouse, pardon my French. So all of a sudden it’s starting to come back and it’s really depressed. So I do a retail gold stock report which covers every investable gold stock, not Moose Pasture, not Vancouver, but Hope in a dream stocks, but stocks that have revenues, production reserves. And my number one pick this week and number two in previous weeks was core mining, CDE. That stocks up 20 % this week. So that’s the number one stock recommendation in the Belkin report. And again, I’m not boasting because the market is going up and I’m fighting it. So the things that are going beneath the service of the market is not what you’d think. So bonds outperforming, GDX up five % versus S&P two %. TAN, solar stocks up 12 %. What’s that? Five times as much as the S&P. Bank stocks up 8 %. That’s three times as much as the S&P.

Michael Belkin

And then things that are underperforming… Oh, by the way, real estate. So here’s another… I didn’t really mention that, but real estate is up six %, this XLRE ETF. That’s the REIT ETF. It’s up almost three times as much as the S&P this week. So things that are really depressed I think people are rotating out of… And again, back to the idea of asset allocators rotating out of stocks into bonds, I think that’s just starting. And that can be really convulsive. As we witnessed in ’87, our trading floor at Solomon Brothers was convulsed. We didn’t know in going into the ’87 crash, it was the days of paper tickets, order tickets that wasn’t or anything. It wasn’t digital anything. And it was just frozen. Nobody knew that it was… Nobody knew that we were getting filled or what. The whole thing was in a state of suspended animation. I’m not saying we’re going into a… The market is going to go down 20 % in a day or something. But I disagree with the other panelists here saying looking for a top, further out end of first quarter or something. I think we’re in a reversal zone here and the tech stuff…

Michael Belkin

You got to remember these Mag Seven stocks are about 30 % of the S&P 500 and about 50 % of the Nasdaq 100. And if these things start going down, this other stuff could go up. But you get this great rotation. But if you’re an index player, forget about it. The indexes are going to be heavy if people rotate out of these big name, high cap tech stocks and they start going down and this other stuff starts going up. So this gets back to like 2,000 rotation. Back when the tech bubble peaked, there was a wonderful rotation into financials and utilities, real estate, consumer staples, defensive high yielding stocks. While tech went down, the Nasdaq went down almost 90 % or something over the next couple of years, and all this other stuff went up for a year or two. I think there’s a great opportunity in rotation, but not in the stuff… It’s the exact opposite of what people have been doing for the last few months, just reflexively buying Magseven stocks over and over and over every morning.

Tony Nash

They haven’t lost on it, so it’s not terrible. They haven’t lost on it yet. But Michael, let’s talk. You mentioned financial sector, so let’s talk a little bit about that. You have a chart on the financial sector to the S&P 500 ratio. Keep in mind, the charts that people are seeing, they came out on Monday, I think. The Fed meeting happened on Wednesday. What you’re putting out, pretty prescient given the things that the Fed said.

Michael Belkin

Right. So the financial XLF is up three and a half % that so far this week, it’s one % more than the S&P. That doesn’t sound like a lot. So what my model is time series analysis gives direction, position, intensity. I’m looking at a 12-period forward forecast. Right now we’re only in about the first, second inning of financials outperforming the S&P. And if you get the sentiment, people don’t want banks, the banks are failing, regional banks and so on. They got such big losses on their bonds. But now the bonds are rallying. So that’s mitigating the things. I’m not saying buy the world’s worst banks, but generally -.

Tony Nash

Helps that duration risk a little bit, right?

Michael Belkin

Yeah. But again, the the the bank ETF, up up 8 this this Hello? Am I the only one to even notice that? My clients are big asset asset for the most part. Some huge, almost trillion dollar companies, some of them. And these guys, they have to be fully invested or maybe they can raise a certain amount of cash. So I talk to them and they say, Well, if I’m going to sell something, what do I buy? If I have to buy, I always think they’re So what do I sell or what do I buy? That’s what the Belkin Report tries to do. I’ve been telling them get out of this Mag Seven stuff, rotate into things that are down in relative terms, which is the XLRE, real estate, banks, XLF, KBE, gold stocks, GDX, and also utilities and and staples. Nobody likes.

Tony Nash

Great. Okay. It sounds interesting. It sounds like we’re definitely moving away from where we’ve been since, say, 2021, which it’s about time, right? I think a little bit of this stuff is a little bit tired. Glad to see that. What do you guys think about this rotation at the Etrace here? Do you see the same? Maybe not exactly, but we seem to be at the cusp of a rotation. Is that fair to say?

Tracy Shuchart

Yeah, I think it’s very interesting. We’re seeing value bid over, say, tech, which I call the pep loves dog bid. Everybody, every time there’s a dip, somebody wants to buy tech. But I think it’s very interesting that we are seeing depressed value stocks to get a bid, coincided with the dubbish fed. What are money money What are these big guys really saying? How will I have them spooked? I don’t don’t know. The money. When you see these rallies in particularly the hard assets, obviously that’s my area of focus. But when you see them in industrial metals, precious metals, energy sector, things of that nature, that generally tells me that there is being a shift and that people with a lot more money than we we do forcing something that the Fed is doing or saying that they’re uncomfortable with at this stage. It also tells me a lot about inflation because what that says says to to is that with these six rate cuts factored into the market from the the CME, that tool, I know that the dot plot’s at three, I think. By the way, what this says to me is inflation is not done done by stretch of the imagination and people are buying into inflationary tending assets such as energy, metals, and whatnot.

Tracy Shuchart

Because I think what I fear is that you’ll have rate cuts and it’s too early, it’s too soon, and then we have inflation inflation back like the 1970s.

Tony Nash

Yep. Anthony, in terms of are you in terms of rotation? Are you.

Anthony Crudele

On board? Well, when I look at tech, like like I said, my longer term portfolio stuff, I own a few of the Magnificent Seven. I’m very heavily weighted right now on Russell, and I just think that the rotation has already begun. You’re seeing everybody rotating into small caps. I thought it was interesting that Michael talked about the solar. I might follow up a question with him on that because I’m curious about it. But I also look at it from a seasonality time of year. I look at where the markets are from a technical basis. Tracy talked about how much on the sidelines sidelines could come in, in, Tracy. You say six trillion, something like that?

Tracy Shuchart

Ridiculous. Yes.

Anthony Crudele

Yeah. I look at that and go momentum is on the side of the bulls right now. I think that rotation is beginning, but but just don’t see a fallout in these major tech stocks right now. I think that it’s going to take take time, I think that that’s why I’m looking at it more as we rally. I’ll be peeling off risk, not adding adding risk, I’m talking about my longer term stuff over the next quarter just because I think momentum carries through because of time of year and because of just like I said, that money that comes in now because we go back to where we started.

Anthony Crudele

This is a sentiment shift, right? Everybody’s fighting that this is a bear market. Not everybody, but a lot of people, a lot of the year. It’s now a bull market. It’s now in the headlines. You’ve now got a lot of retail money coming in. Just in my experience as we’re making highs, highs, all-time highs some of the indexes, it’s hard to see a rotation right now. I’m still in the camp that we will see some blow-off-top, capitulation-isk type move just because the flows are so one-dimensional right now. I I think that don’t see a reason to change my mind, but the tape will prove me right or wrong, nonetheless. I think it’s a time thing is more of the way I look at it.

Tony Nash

That’s why we have markets because we have differences of opinion. It’s great. I love that.

Anthony Crudele

Can I ask Michael a question real quick about the solar? I’m just curious about it because I think it’s interesting. Michael, from your research when it comes to why the solar stocks are doing well right right I mean, it’s not like oil is is and I know that we’re in an election year, so I’m not necessarily sure how much that plays into the solar as well. But is it really just because maybe interest rates are coming coming because a lot of these solar companies are borrowing from banks banks and that’s just a lower interest rate? Is that what’s triggering it? I’m just curious why that maybe that solar space is something that’s doing so well right now.

Michael Belkin

Possibly that’s one influence. I suspect it’s caught up in shorts. It might be a short squeeze because they’re not the greatest companies, right?

Anthony Crudele

That’s why. Yeah.

Michael Belkin

Yeah. I’m saying buy solar stocks, hold your nose. But these things are up enormously this week. They’re in the Belkin Report. Report. So SPWR, SEDGRUNNOVA, HASI, things like this. I used to be part of this short selling group that would get together every year. I’m still invited, but I haven’t been able to go in the last few years. But these are the companies that stock analysts probably hate. Even though Biden has been throwing enormous amounts of money, solar energy subsidies. So I think maybe that it’s just a a sell-high thing. Things that hedge funds hate that they’ve been selling and shorting that have been been By the way, this is a new position for me, goes back about two or three weeks. These were on my sell and shortlist. The Belkin report is not a broken clock. These were previously sell and underperform recommendations in the Belkin report until a month or so ago. Now they’re working as longs. I think it’s more just like a buy-low, sell-high rotation. It’s looking for things things that down. That’s a normal end of the year thing. So if you’re looking for a fundamental reason, might be hard to find, but it’s just order flow, sentiment, positioning, direction, position, intensity.

Michael Belkin

That’s what I do.

Anthony Crudele

Yeah. Sorry, Tony. It’s interesting to me because I’m thinking about this. If this is happening overall in the market, I’m just curious what Michael and Tracy think, isn’t that a bullish thing? That’s why it’s hard for me to be bearish up here at all, really, really, because it’s a rotation where I’m seeing the weak stuff getting bought bought up. My experience in bull markets, I’ve seen that be a very bullish signal, at least in the short to medium term. That’s part of why I’m looking at it it This could carry that momentum into what we consider a blow-off type top-ish scenario. I’m not projecting that’s what will happen, but I just think that the action I’m seeing is bullish.

Tony Nash

Anthony, you said a lot like Tony Greer right now, and I mean that’s a compliment.

Tracy Shuchart

A Well, it’s the everything big, right now.

Anthony Crudele

My guy.

Tracy Shuchart

Everything’s big right right now. If you look relatively speaking, we are seeing value start to outperform, at least this week, outperform traditional tech tech I think that is just a shift in investor sentiment or money manager manager or a big player sentiment.

Michael Belkin

Can I hop in there?

Tony Nash

Absolutely.

Michael Belkin

With the Magseven being 50 % of the Nasdaq, I think that’s negative for the market. To me, I said this before, but I’ll just repeat, I don’t know if you were around in 2000, but the rotation then was… The S&P held in 2000 after the tech bubble top, but it was all held up by these defensive stocks, the big portfolio manager’s role while tech was crashing. So the Nasdaq was going down while the held held the Nasdaq underperformed. I hate overlaying one chart over another chart, expecting things to happen. That doesn’t usually work out. But you get similarities. There’s things rhyme. I think we’re more in a situation like that where you do not want to be in the the Nasdaq also the the VIX. Talked a little bit about it, but the VIX is insane right now. It’s so ridiculously low. It’s depressed by are funds that sell options. There are a lot of ETFs now that sell options for income. That’s part of it. I don’t know who all the different participants participants are selling volatility. To me, the VIX is a screaming buy. Buy. So means puts are cheap, even calls it.

Michael Belkin

But if the SKU is not there, it’s not then the distant ones aren’t so cheap. But basically, when the VIX starts going up, the market starts going down and you get wildish swings. I would say say temporary I’m not telling you what to do, but just in general, the forecast is for the Nasdaq to underperform. So the stuff that everybody’s been buying, I could see the Nasdaq going down while these other things, the Russell, the things you’re talking talking about. Of these other things go up for a month or two, not hugely. It’s not like a massive bull market breakout, but more of a rotation. But definitely I’m not bullish on the Nasdaq. I think it’s really overdone, over-owned. I know these hedge funds are feeling pressure because these stocks are underperforming. If you’re you’re 30 of your portfolio is in these things and you’re getting negative alpha, people are tapping on your shoulder. Your boss is saying, Well, what are we doing? What are we doing with Meta?

Michael Belkin

What are we doing with with Google?

Michael Belkin

What are we doing Alphabet? What are we doing with Microsoft? I think it’s negative for the Nasdaq.

Tony Nash

Okay, since Anthony asked about solar, we just had the COP28 meetings earlier this week, and maybe that’s why everyone’s excited about solar. Who knows? But message we got out of… We had a lot of gushing analysis of COP28 in the UAE this past past week. Seems like every climate warrior was super happy about it. But based on the wording of the final resolution, Tracy, Tracy, it like you don’t necessarily think that there’s a lot of reason for those guys to celebrate. Can you tell us what you’ve observed? I’ve got a tweet of yours on the screen. Okay. I’m sorry. Observed and how markets seem to be reading into the news.

Tracy Shuchart

Well, I think… Okay, when we have to start, and I just clipped in that that tweet. Just a clip of that specific energy section of it. It’s 28, 29, and 30. I think what you have to read in this market is this whole time, so let’s put it this this way, missed two of the lines to come to a resolution. They went over time into a third before they came to a resolution. The big-

Tony Nash

Does that usually happen? Does it usually take that much for these-

Tracy Shuchart

Well, no, actually, last COP28, it did over coal, and they decided to leave coal out of it.

Tracy Shuchart

It’s happened, but but not like is rare that it’s twice. My argument is everybody was thrilled about this because they mentioned transitioning from fossil fuels. Now, here’s my argument about this whole thing, and that was, I think, think, 28 if you look on that chart, transitioning from fossil fuels. What everybody really wanted in that, what the environmentalists environmentalists wanted that was the words phasing out—so really the oil and gas industry won on that point, even though they all cheered. There are a lot of renditions of that statement, but but it came out something much more watered down than, let’s say, the the environmentalists really wanted. Then we have to look at coal, and that was 28 B. Now, that initial wording started at, we’re going to rapidly, rapidly phasing down. What ended up was, we’re going to accelerate our efforts towards a phase down. I mean, all this language has been very much watered down. What is also really interesting is that if you look at 29, 29 recognizes that transitional fuels can play a role in facilitating energy transition. That means natural gas. Now, natural gas was a big point of contention last year, and they didn’t want that involved at all.

Tracy Shuchart

To me, this says, Oh, my God. Well, maybe people are realizing we just can’t jump from fossil fuels to nothing to solar. Sorry, my last points I just have to make is 28E, which is a big win for the the nuclear because it’s been shunned from COP throughout its history, finally got a mention as a fuel. I think that’s exciting for the new era industry.

Tony Nash

Yeah, and they talk about the low…

Tony Nash

No, it’s a great breakdown. In In they talk about low carbon hydrogen production, which again, is a nod to natural gas. It’s interesting that Anthony mentioned with the solar… His solar question to Michael, he talked about interest rates potentially falling to help out these solar firms. Do you think—and we talked about this a couple of weeks ago on the show—if we do have this 180 pivot from the Fed, well, given where interest rates are, do you think that it was an acknowledgment from COP28 that it’s tougher to transition to these green power generation approaches with interest rates, even at the level they are now, much less whether they either arise or fall, depending on where we are in a year. Do you think this is a nod to how expensive it is to deploy those technologies?

Tracy Shuchart

I think it’s a nod to how expensive it is to deploy any technology or any source of energy at interest rates that’s high, which we have to know. This has been a major theme throughout this entire year, starting from the the invasion. India decided we’re still buying Russian oil, we get it cheap. China, we’re still… But everybody was energy security is our focus. We don’t really care what the United States says, what the West says. I think what was a notable shift in this COP28 is they gave with interest rates this high because all of these energy projects are very capital intensive. They require a ton of capital at borrowing rates that are skyrocketing. And so I-

Tony Nash

And those countries are running out of fiscal power.

Tracy Shuchart

Exactly. You have emerging markets right now defaulting on debt payments. We just saw this with Ethiopia. We’ve seen this in multiple countries in Africa. This is a very tough time, skyrocketing rates, especially for emerging markets that are looking for energy security. In my opinion, this is a long way around of of saying In my opinion, when we look at COP28 this year, I think it’s very interesting that I think that they say they got what they wanted, but I would say this was a big win for the oil and gas in the nuclear industry over any other technology, to be honest with you.

Tony Nash

Okay. I also want to ask you about coal. Obviously, China and India and other places continue to build coal plants because people need cheap energy. Are emerging markets. They need need low energy and all this stuff to power their electric cars. If we look at 28 B, and it talks about the phase down of unabated coal power. What is unabated coal power?

Tracy Shuchart

What they’re saying is that we don’t want you to keep adding coal plants and using this as your backup plan, which we know China has. China hasn’t stopped building coal coal even though they have built nuclear, they have built out hydro, they have built out all these other technology, solar, wind, etc, etc, they still haven’t scaled down any sort of coal production and or coal energy, electric source of electricity, in other words.

Tony Nash

They need the coal to power the EVs.

Tracy Shuchart

Yes. I know I caught that that the first time. Yes. I just wanted to. Absolutely, I know. Know. You the same thing with India. You have growing populations. They want exactly what they see the West has. They need cheap energy. They have growing growing This makes perfect sense for them, economically speaking. Of course, they’re not going to stop, and they don’t really care what the West says. To be honest.

Tony Nash

It’s really cynical of the West to force this stuff down the emergency markets throughout when the West used this cheap energy to build build our infrastructure infrastructure our our Why are we now forcing these other places to spend huge money on green energy when a coal plant or natural gas plant or whatever is-

Tracy Shuchart

They’re using it as a carrot for we’ll give you money for this project if we can shove this renewable project down your throat.

Tony Nash

Right. Exactly.

Tracy Shuchart

This is where we’re seeing a lot of conflict in Africa right now. I I digress. That’s a whole other subject for another day, but that’s what we just saw in Niger. There’s a lot of conflict going on against the West, a lot of military military happening against Western Western nations. Throwing their views down their throats, so to speak.

Tony Nash

I want to ask you one more very specific question. I don’t want to get Anthony and Michael to come in. In 20 and H, they talk about phasing out of inefficient fossil fuel subsidies that do not address energy poverty or just transitions as soon as possible. They’re interested in phasing out fossil fuel subsidies, but there’s no mention of subsidies for, say, green fuels and EVs and all this stuff. They’re happy to continue to subsidize those fuel sources, but you can’t subsidize fossil fuels.

Tracy Shuchart

Yes. To be honest, I think that language is also pretty watery. I wouldn’t be surprised surprised to that kicked down. You have to realize this is a bunch of, pardon my language, but a bunch of blowhards that come together to decide the fate of the world. Many of these goals cannot be reached, but they all walk away, pat themselves on the back, say, Oh, we did a good job.

Tony Nash

Oh, yeah.

Tracy Shuchart

You’re saving them money.

Tony Nash

They went to a great hotel in Dubai and had some great meals.

Tracy Shuchart

Exactly. At the end of the day, I wouldn’t take any of of these from any COP28 as law. This is how it’s going to be. I expect every year it’s going to rapidly change. Again, this year, the biggest rapid change that we saw was a nod to nuclear and a nod to natural gas, which is a huge 180 from literally the last decade.

Tony Nash

Okay. Last question for for then I’ll turn over to these guys. How much of the stance on this statement had to with the fact that it was in the the Do you think because it was in the Middle East, they were more amenable to being friendly to Natgas?

Tracy Shuchart

Don’t think so. There’s been 28 COPs. We’ve had 13 of them in oil producing nations.

Tracy Shuchart

Some of them more than once. Next year is going to be in Azerbaijan, in Baku. To say that oil and gas gas got a nod just because it was in an oil-producing I would say is I think that’s what they liked. I think that’s the narrative they like to push. But in all reality, 13 other major oil-producing nations had posted this meeting before.

Tony Nash

Before. Michael, I got a couple nods out of you as I was asking some questions. What are your thoughts on this?

Michael Belkin

Okay, well, let me preface what I I saying I live on a rural island outside of Seattle, and I’m a mountain biker. I almost every day, even in the winter, or mud, rain, snow, whatever, light snow. On my way to the forest, I have to drive up the road. Luckily, a lot of people have Teslas and Rivians and stuff like that around around here. There’s still a lot of diesel trucks. So I have to breathe this stuff when I’m riding. So I’m not like a hard nose energy person. But I have to say that there’s almost a religious cult, pseudoscience about climate. I’ll just have one thing to say about it. There’s a story today that came out. Now, scientists say breathing is bad for the environment.

Tracy Shuchart

I posted that today.

Michael Belkin

The gasses we exhale contribute to what? 0.1% of the UK’s greenhouse gas emissions.

Tracy Shuchart

They want you to stop breathing now. Seriously.

Michael Belkin

These pseudoscientists, mostly hard left, they sit in Ivory Towers, and they come up with these models. I’m I’m a I’m a statistical modeler. And I was at Berkeley. I came out of the UC Berkeley Business School and Staff Department, and I was in classes with some of these people that were premed, they were taking stat classes. And so they basically know the conclusion that they want, and they come up with this data, this absurd data to support these crazy things. So I’m glad to say that’s all I have to say about it. I’m glad to see that this was watered down. And believe me, I’m not in favor of having smoked coal floured, coal fired utility plants and all that stuff. We obviously have to do something about that. But the religious pseudoscience, coal science from the hard left on this, it’s really… It’s almost… Sadly, it resembles what happened in the the pandemic where a lot of these people were modeling all these things saying hundreds of millions of people were going to die or something. So we have to lock everything down. So it’s dangerous to the economy and to the markets markets to have that have no idea what they’re talking about, they’re on some Ivy Tower academic pulpit coming out of these BS studies.

Tony Nash

I mean, for those of you who aren’t quants and aren’t modelers, both Michael and I build models. If we wanted to show Apple at a $10 stock price or a $10,000 stock price, if we went into that exercise with that final conclusion in mind, we could build that model. Very easy. And so, we have things like like breathing is bad for the the environment, can build that model and you can say that. If that’s what your preconceived outcome is, very easy to build that model. I think most of the people who watch this this that. But just to bring it back to financial markets, we can build any model we want if we know the outcome, the intended outcome. Anthony, what’s your thoughts on COP28 and energy?

Anthony Crudele

It is not my world, Tony. It is just… It was great to hear what Michael and Tracy had to say, but I know so little about it, it wouldn’t even be worth me commenting. I know to stay in my lane.

Tony Nash

Good for you. Thank you. All right, Tracy, what’s the outlook on energy prices, specifically, oil coming out of COP28? Do you believe that once this is digested, we’re going to see some upward pressure on, say, gas prices, oil prices as a result of this longer term, I would say, say, of the hard commitment on green green.

Tracy Shuchart

Yeah, absolutely. I think that definitely will and it has been ever since the decision. We have seen oil prices prices about $2. We’ve seen oil prices rather depressed considering the geopolitical issues that are going on in the Middle East right now. I think that definitely has relieved some pressure. I also think that not only fundamentally, but I look at at this market, market was very oversold. You have positioning. People are not short, they’re just not long whatsoever. Any news that is good, then you start that hop on train and then that gets the ball rolling. I look at positioning as well. If you look at the CFTC, commitment of traders, there was no interest in this market whatsoever. We were at the lows, not as low as 2020, but generally low historically for this market. Positioning is right right now. I’m not saying we can’t go lower by any means, but we had good news coming out of COP28 for the oil industry. We had positioning where it was. We have no interest in this this market. Not very surprising. Plus, if you see that, oil tends to do really well in inflationary environments. There are actually six rate cuts coming, which I don’t think that there are, but the market is pricing that in.

Tracy Shuchart

That’s very positive for the oil industry because the oil looks at it as in, I think inflation is-

Tony Nash

Interesting. Okay, last thing. Michael, what are your models telling us about energy and oil and gas?

Michael Belkin

Okay, I’m slightly different than Tracy there. This was my number one long call. I think maybe earlier when you had me me earlier in the the I was long energy, long energy stocks. That’s completely changed. I’m short. So I have them as underperformers, energy producers, energy service in in particular, it like a lot of not so great companies. So So tactically direction intensity is what I do in the model. We’re like maybe in the third inning or so in relative and absolute decline for energy and oil, also physical. Now, the only thing that scares me, I was a little bit late on putting this on because obviously in the Middle East, we’ve got missiles in the Red Sea every day, two more today, and we don’t know what’s going to come out of the blue over there. So I’m vulnerable to something stemming from the Israeli-Palestinian conflict, messing up oil supplies. But one other thought on that. So when the economy goes down, energy prices go down. Unless it’s like 1970s and oil supply is completely shut off. I’m bullish on some commodities, mainly metals. Do you see palladium yesterday? It was 10 or 12 % out of nowhere.

Michael Belkin

So I like the metals. I like gold, silver, platinum, gold stocks, silver stocks, these things. There’s hardly any of them out there and nobody even knows what they are. But energy stocks, not so great at the moment. As tactical short, under-performed, not included in the number, like in other words, stocks that went down a lot that are now bouncing. They’re not in that category in my models forecast.

Tony Nash

Great. I love it when we have disagreement on this show, guys. This is perfect. So, Anthony, thank you so much for your time. Michael, Tracy, thank you so much for your time. We really appreciate it. Have a great weekend and have a great week ahead. Thanks a lot.

Access AI-powered markets forecasts for free with CI Markets Free. Sign up here: https://completeintel.com/markets

Welcome to “The Week Ahead” with your host Tony Nash.

1. Bullish economic resilience. Jonny Matthews talks over the resilience of the consumer in the US due to low mortgage rates, potential concerns about a secondary wave of inflation, the impact of rates on corporate debt, and the market’s expectations of rate cuts. Additionally, he highlights the challenges in achieving the Fed’s 2% inflation target and the complexities involved in making adjustments to the target.

2. Fed and inflation targeting. Albert Marko examines the Federal Reserve’s handling of inflation and interest rates, expressing concern about a potential second wave of inflation and skepticism about the market’s expectations of rate cuts. He also touches on the challenges of hitting the 2% inflation target and potential changes in the Fed’s inflation target.

3. Oil (OPEC) and Silver (ready for liftoff?). Tracy Shuchart explores the recent OPEC meeting, and an exploration of the silver market, including supply-demand imbalances, industrial uses of silver, and potential investment opportunities in the sector.

Transcript

Tony Nash

Hi. Everyone. Welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Johnny Matthews. You’d know him on Twitter as super_macro. Also, Albert Marko and Tracy Shuchart. Today, we’re talking about bullish economic resilience. Johnny has got some great charts for us to talk through. We’re also talking about the Fed and inflation targeting. There’s been a little bit happening over the past week on that and Albert will go deep with us there. Then we just had an OPEC meeting, so we’re going to cover OPEC in a little bit of detail. But we’re also going to cover Silver, both of those with Tracy, so we can understand what’s happening in both of those.

Tony Nash

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Tony Nash

Guys, thanks so much for joining. I really, really appreciate the time you guys take and the thought and work you put into this. It means a lot to everyone watching the show.

Tony Nash

Johnny, thanks for joining us for the first time.

Johnny Matthews

Thank you for inviting me.

Tony Nash

Yes, sir. You have sent across some great charts, and I’m looking forward to digging into them. The first is the 30-year fixed mortgage rate on current mortgage debt outstanding. I hear a lot of people talking about this, and the reasoning seems to be that the Fed rates don’t really matter that much for existing homeowners. The difficulties arise when people buy a new home, whether they’re moving or buying a first home. Can you walk us through this chart and help us what it means, not just for mortgage holders, but the health of the consumer in the US?

Johnny Matthews

Yes. The blue line is the current average rate on the outstanding stock of 30-year mortgages. That is just 3.6%. Although the current mortgage rate for someone that wants to buy a house is something close to seven and a half. It’s come off its highs. People are just not paying that. They’re staying put, they’re not moving house, and they’re paying on average 3.6 % rate. They’re unaffected by these steep increases in interest rates that we’ve had.

Johnny Matthews

In fact, I haven’t got the chart in the pack, but if you look at actual debt servicing obligations of the household sector as a percentage of income, it’s as low as it’s been since the early ’80s outside of the pandemic. I mean, households are really not exposed to these higher interest rates. As far as the consumer is concerned, the consumer is quite well immunized from what the Fed has done. I’m hopeful that that will provide a great deal of resilience for the consumer going forward.

Tony Nash

There seems to be a growing group of people who believe that. We’ve had some guests who started talking about this 9, 10 months ago about the bullish case that you’re talking about. I think, Albert, you’re not quite so convinced. I don’t want to put words in your mouth, but you’re worried about it as a second wave of inflation and additional tightening. Do you still have worries there?

Albert Marko

Yeah, I do. I absolutely do have a worry about the secondary wave of inflation coming just because the Fed is notorious for making mistakes. It’s like I don’t believe any of the CPI data that comes out. One wrong move and we’re back into the four, maybe even fives in the inflation target again. It’s problematic. Obviously, it’s not… I don’t might not happen. They might keep us in the threes for however long in 2024, but it certainly should be a worry.

Tony Nash

Yeah- Go ahead. Sorry, Johnny.

Johnny Matthews

I was going to say I don’t wholly disagree with Albert. Maybe it doesn’t go that high, but I just don’t think the Fed is going to get inflation down to the two % target with what they’ve done so far and with how well immunized the consumer is from these rate hikes. So we’re still…

Johnny Matthews

If you look at the total employment, I know the unemployment rate has gone up, but that’s because more people have entered the workforce. If anything, it’s not like we’re shedding jobs at the moment. You’ve had this tremendous pace of income growth certainly in the first half of the year, tremendous pace of job growth and an enormous pile of wealth that the consumers are sitting on and they are spending it.

Johnny Matthews

We’re seeing the Fed has conquered the easy part of inflation. Energy prices have been falling, used car prices, they’ve been in freefall for almost a year, so durable goods prices, that inflation is down to virtually zero. We’re seeing big, steep declines in headline inflation. But if you look at core and you look at services inflation, I think that’s where the Fed is going to have difficulty in getting it back down to two %. That’s going to provide quite a solid base for inflation going forward.

Johnny Matthews

My concern along the lines of what Albert was saying is that the Fed is going to think that they’ve scored a victory and start easing. Well, certainly that’s what the market thinks at the moment. And if they do start easing too quickly, inflation will get a second wind.

Albert Marko

Imagine them cutting rates early 2024, what the housing market would do. People that were sitting on the sidelines because the rates are too high or start piling back in the real estate.

Johnny Matthews

Well, I think we’ve seen mortgage rates… Sorry, Tony, I was because we’ve seen the mortgage rate drop almost 50 basis points from its peak already, and it’s probably going to come down even further with these declines in treasury yields.

Tony Nash

I know mortgage brokers are really suffering. We’re in Texas, so the real estate market is relatively robust here still, as it is in Florida, of course.

Tracy Shuchart

Just in general, if you look at the recent housing listings, we literally hit the lowest amount of listings on the market in two decades. Even more so then after the financial crisis, when everybody-.

Albert Marko

Yeah, but how much is that due to people just not wanting to leave their 2 or 3% mortgages for seven.

Tony Nash

Yeah, and that’s a supply issue, right? Absolutely. That’ll likely keep prices up because it’s a supply issue.

Tracy Shuchart

Well, you have a supply issue and then you also have a raising mortgage rate issue, in my opinion. Even though we came down to the basis points, you’re still looking at seven % compared to three % or two % whenever you locked your rate in, if you were lucky enough to.

Tony Nash

Yeah, my first house in 2003, I think, or 2002 was seven %. I felt like things were good. I feel old telling those stories, but 7%. I think we could live with it if we had it for a little bit longer. Although the magnitude feels dramatic, but I think it’s doable. We’ve done it in the past.

Tony Nash

Let’s move from consumer to corporate. Johnny, you said this great chart. It looks like businesses are in good shape as they pay off debt. You’re showing the blue line here is the net interest paid as a percentage of profits, and the red line is the Fed Fund’s target rate. With this, what’s the average maturity of corporate debt? How big of a risk is it to see debt roll over for companies to have to get higher risk? Is this generally long-term debt or is this a combination of long and short-term debt?

Johnny Matthews

Yeah, I think first of all, let me just explain that this is from the NEPA accounts. This is not just S&P companies. We’re talking about the whole economy, basically, all corporates.

Johnny Matthews

You can see in that period during the ’70s and early ’80s when the Fed hiked rates, companies were paying a much higher percentage of interest as a % of profits whenever the Fed pushed rates higher. But then once we had the financial crisis, I think what happened was we had rates that the yield curve was flat as a pancake, rates were on the floor, and companies turned out their debts.

Johnny Matthews

Now, we’re not seeing the distribution here. Obviously, the biggest company with access to capital markets were able to issue bonds and lock in really low rates for very long periods of time like Apple did. They issue 40-year bonds. For the larger companies that have done that, they’re in great shape and they’re the ones that generate most of the profit, which is why you’re seeing this effect here.

Johnny Matthews

We’re seeing net interest as a % of profits is the lowest it’s been in decades. And so the impact of the Fed’s rate hikes on the corporate sector is nowhere near as painful as they used to be. Now. I wasn’t able to get the distribution of maturities of debt. This data covers just all companies of all sizes, and so we don’t have that data available. Some of the investment banks have done a reasonable job of estimating the debt distribution of the S&P companies, but for the most part, the larger companies, this is just not a problem.

Johnny Matthews

Obviously, for the smaller companies and in the high yield sector, they’re really going to have a problem. But we spent a decade listening to people moaning about zombie companies being kept alive by ultra-low rates. Well, now is the time to clear them out. Let’s have a bit of that creative destruction that everybody was missing over the previous decade.

Tony Nash

But you’re right. I mean, interest rates caused this stuff. I think you’re right also that I suspect all the large companies refinanced and issued new debt at zero or whatever for long periods of time. Anybody who didn’t, the CFO should probably be gone. But it is the smaller companies that really don’t have that term luxury who are probably suffering with this?

Johnny Matthews

Yes, I would think so, which is perhaps a little unfair. It does give the biggest companies an advantage and they’re able to grab more market share. But that’s just the way evolution goes in the corporate sector.

Tony Nash

Yeah, the risk of being with the small company is coming back. That’s what your interest rates, there really hasn’t been a cost to risk for a long time because interest rates have been zero or negative, and we’re seeing the cost of risk come back pretty strong.

Tony Nash

Finally, let’s take a look at rate expectations. This will flow into Albert’s section really well. It seems like there’s an expectation to see rate cut in Q2 of ’24. Of course, that’d be great for some people, but what brings that on? What do you think is in these rate assumptions to bring on these rate cuts?

Albert Marko

Hope and dreams of getting their portfolios up. I mean, a lot of the people that are demanding, not demanding, but vocal about cuts or the guys heavy into the tech sector that love to see us go back to like one %, you know what I mean? Or even zero rates. I mean, Ludacris to talk about. I’ve actually heard some people say that 5% is going to be 1% within by September or whatnot. I think it’s just crazy at this moment. I can’t see the Fed making such an obvious mistake when most of the Fed speakers come out and say, We’re not even talking about it. We’re even thinking about cuts. Why is the market talking about this right now?

Albert Marko

The market has been wrong. That’s what Palo said today, Friday, right? He basically said that. Yeah. Even somebody else that came out there said the same thing. I don’t understand why this Pivot Talk comes up every two months or Pivot and pause right now. Okay, we have a somewhat of a pause. But I still think that we’re probably going to get another rate hike or two. Especially. If core and supercore inflation goes up, starts ticking up, they’re going to have to do it.

Tony Nash

Okay. Jonny-

Johnny Matthews

I think at the moment, these are market implied rates. At the moment, the market is just selectively latching onto every sign of weakness in all the data, like, for example, the manufacturing PMI that we had today from ISM. The new orders were at the second-highest level that it’s been in over a year. That’s a forward-looking indicator of where this ISM index is going. But the market just looked at the low level of the headline index and just pushed, I think, the two-year yields have made a new low for the week. At the moment, the market’s got the bit between its teeth as far as rate cuts are concerned.

Johnny Matthews

Just looking at this chart of rate cut probabilities, by May, the market is saying that there’s only a 15 % chance that rates will be unchanged. And the market is now pricing in over 100 basis points of rate cuts next year, which I think is ambitious. I just don’t think it’s going to happen. Like Albert says, my concern is that we’ve cracked the… We’ve done the easy part of getting inflation down, and this hard part is going to be much more challenging. We may well see a bounce in some of these factors that we’re heading south very, very fast.

Johnny Matthews

Base effects in energy, we’re looking at year-over-year price changes that are… That’s going to change directions soon. As we go into the early months of next year, we’re going to find that energy prices are probably higher than they were a year previously. These effects will start to have an upward impact on inflation, and you’ve still got that high base from services inflation, which hasn’t… I think it was 4% at the last inflation print. Hopes of over 100 basis points of rate cuts next year, I think the market is dreaming.

Tony Nash

Yeah. I mean, with the charts you have the consumer is strong, business is strong. I’m just not like… I’m a little bit puzzled why we’re seeing rates expected to be below five by June. That’s very-.

Tracy Shuchart

The Fed hasn’t changed their mantra. Powell has been very adamant, hired for longer, hasn’t changed, but the market keeps trying to second-guess them. This is not the first time. We had rate cuts actually priced in this year, earlier this year, which were priced out in the market. But if you listen to the Fed, they’re telling you hire for longer. And the markets are thinking they get really excited over any dip in economic data, so to speak.

Albert Marko

But it’s like a double edged sword. I mean, dip in economic data lowers demand. Labor market is going to be affected going forward into an election year. The Fed has been mindful and very vocal about a soft landing. Well, maybe we’ve already had a soft landing. And maybe we’re in the second half of the game here, going into the 2024. It’s like, do we have another soft landing, or do we have a little bit of a harder landing? It’s a debate that I’m starting to have with myself going forward six months down the line. I mean, the rate cut idea is just absolutely mind-boggling to me. I can’t see it until Supercore or Core starts going under two % CPI prints. I don’t want to even talk about cuts.

Tony Nash

Well, I guess the thing that I have started to see over the past month is people saying, Maybe this time is different. And when I start seeing that, that’s when I start to worry, when people start saying, Maybe this time is different. I don’t know, maybe it is, but it hasn’t been before.

Johnny Matthews

I think it is-

Albert Marko

Go. Ahead. Johnny.

Johnny Matthews

I was going to say it is very different from what people have experienced. We had the financial crisis that… And at the time, we all read this Reinhardt and Rogoff book, “Eight Centuries of Financial Folly.” In the book, they said, “Right, you’re going to have a decade of sluggish growth and low rates. You’re doomed to that.” They were right, and that’s what we had. People’s expectations now are that rates are going to go back to that super-low level.

Johnny Matthews

Then we had a pandemic where we shed 20 million workers in a space of a month and then tried to hire them all back as quick as we could. It just wasn’t possible. We had all these supply chain snares and excess labor demand. The interesting thing after the pandemic, from my perspective, is that in the same way as the US, there was a much greater demand for labor than the available supply. The vacancies were running at twice as many unemployed workers, a much higher ratio than you’d ever seen before. It was the same in something like 20 of the top OECD advanced economies. The same thing happened. We had it in the UK, where vacancies as a ratio to unemployed people were higher than they’d ever been.

Johnny Matthews

And it was the same. There was this global shortage of labor. It is different in a sense that we had a decade of doom, gloom, just unable to really get the economy motoring. Then we had the pandemic, and then everything was shaken up. And people have these biases that are influenced by their experience over the prior sluggish decade and think that rates are going back down there, but they’re not. This is a whole new world we’ve entered.

Tony Nash

I would recommend anybody… This was recommended to me by someone on Twitter. It’s a book called The Price of Time by Chancellor. If you have not read it, it’s an absolutely interesting read on interest rates. Every time we have a period of low interest rates, when interest rates rise again, there is this period of delusion where people think higher interest rates really is going to impact us like it did last time, and then something happens. Is that something going to happen? I don’t know, but it’s happened every other time. I’m not a doomer like I hope it doesn’t happen, but I’m always a little bit wary of that. Albert, go ahead.

Albert Marko

Yeah. I mean, if you go back throughout history, humans do the same thing over and over again, just repurpose and regurgitate policies and rhetoric from the previous, from the predecessors. I fully expect the Fed to do the same thing that was done in the ’60s and ’70s in terms of errors, just the way humans are. They’re looking for some rally, and I think that they’ll probably make a mistake leading up to it. Inflation is such a problem, Tony, that Barkin and a few other people are starting to come out saying, Well, maybe we should talk about moving the inflation target up a couple of notches or making it fluid.

Tony Nash

Let’s hold off on that. Let’s hold off on that for just a second, okay? Let’s close out. Tracy, do you want to… In terms of this time is different or something like that, what are your thoughts on that? Because we’re seeing crude at relatively, I would say, average to low prices. But it’s not whatpeople, I guess, what people would expect given the level of demand that we’re seeing. Do you expect those prices to kick up? We’ll talk about OPEC in a couple of segments, but just generally, just where we are economically, what’s your view on… Johnny mentioned that oil prices may kick up next year. Is that your general view?

Tracy Shuchart

Yeah. I have to just push back on what you just said just a little bit because I think, first of all, at $76, oil is still higher. You know what I’m saying? Than the historical north. So what we are seeing-

Tony Nash

I’m buying the narrative that we’re at cheap oil, sadly.

Tracy Shuchart

Yes, we have seen oil prices come down, but oil prices above $100 are not really sustainable. You would bring down virtual markets. It’s terrible for everybody. Still, sustained higher oil prices at $76—everybody thinks this is, “Oh, yeah, we saw 120 after the Ukraine invasion, and then we saw another kick-up to 95 after the conflict in Israel.” But literally, if you back out to your five-minute chart for a minute, we’re in this range where we’re at $72 to say, for WTI, a $72 to $85 range, a bit higher for Brent. That is still historically higher than we’ve seen.

Tracy Shuchart

Yes, we are seeing that really hit us right now in the US, but we are definitely seeing that hit in Europe, particularly in Germany right now, where you have a lot of companies leaving because energy prices are just higher there. I understand that has to do with a lot of the policies they have, but still, natural gas prices have come down, things of that nature. Energy prices, in general, are still rather elevated compared to what they have been in comparison to historical norms.

Tracy Shuchart

I think that absolutely the risk is higher energy prices next year. I think that’s a complete possibility. I think all eyes are on the US right now for a multitude of reasons.

Tony Nash

Great. Okay, let’s wrap that up and let’s move on to Fed speak.

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Tony Nash

Albert, there were a number of Fed speakers and the Beige book was released this week. I think it’s easy to dismiss the Beige book, but there are some pretty clear statements in it regarding slowdown in inflation and easing of job market.

Tony Nash

I’ve got on the screen a screenshot of the takeaways from the Beige book. It has phrases like, Demand for labor continued to ease. Phrases like, Reduction in headcount through layoffs or attrition were reported. Things like price increases, largely moderated. Those are the things at the top of the takeaway sections.

Tony Nash

But lower the takeaway sections, there are things like cost of various food products increased. Anybody who goes to the market understands that. Increased cost of debt as an impediment to business growth, which we mentioned with Johnny earlier on small companies. That seems to show some continued headwinds. What are your thoughts on that? I mean, it’s a mixed message.

Albert Marko

Well, yeah, depending on which Fed speaker is talking and which way they lean politically. I mean, some of them want to show that the market is resilient and the economy is resilient for political purposes. Others have better intentions of actually trying to get the economy on a stable footing at the moment.

Albert Marko

Labor layoffs are not coming fast enough for the Fed. I mean, I hate to be the guy saying such a thing because of the personal aspect of people losing their jobs and whatnot. But in terms of how the Fed’s policies working, the layoffs are just not coming fast enough. Honestly, it’s because no company wants to be that first one that lays off a significant number of employees because of the political ramifications that come with it in this atmosphere. We’ve talked about that.

Tony Nash

They’re trying to employ more people, so having higher interest rates makes it harder for those small companies. You’ll see more small companies and mid-sized companies close. I think that’s where a lot of your layoffs will be found.

Albert Marko

eah, but they can do a lot of stuff to help that to alleviate that. The SBA loans that a lot of these small companies took up to $2-5 million can easily be forgiven. If they really wanted to sit there and help small and medium-sized companies, they can do stuff like that instead of letting layoffs gain steam or closures and whatnot.

Albert Marko

Like I was saying previously, food prices are still on the verge of going higher. A lot of it’s due to the energy issues of natural gas and oil going forward. There’s a lot of derivatives in that, specifically fertilizers and stuff like that. Those become problematic. Again, we like to harp on inflation in this channel, but that’s just it’s sticky. Supercore is sticky. It’s problematic. Barkin is out there now saying CPI target should be or inflation target should be fluid or a little bit above 2%, which was absolutely dismissed. I was laughed at when I said that this is probably going to end up happening about a year ago.

Tony Nash

Let’s go to that. Okay, so Barkin was out this week saying, and I’ve got this on the screen, I am open to an inflation target range after we hit the 2% goal. He’s saying that now. In August, just a few months ago, he said a new inflation target would risk Fed credibility. What’s happening and what’s changed since August for him to change his view?

Albert Marko

It’s sticky. It’s hard. Like Johnny was saying earlier, they did the easy work. They got it down to 3. Whatever fake number they want to throw out there. But now to get this to an actual 2% target, they’re going to have to do a lot of hard things. I don’t think they can really do it. I mean, you know what? They could probably say, Oh, look at this healthcare data is minus 68 %, and shelter is minus 14. Oh, we hit two %. Now let’s change it. They could do something silly like that, but I don’t think the market and everybody else is just going to laugh at them. They’re going to lose credibility, like Barkin was saying a year ago.

Tony Nah

Johnny, what’s your thought on that?

Johnny Matthews

Yeah, I really don’t think they would dare change the target. But by the same token, I don’t think they’re going to hit it. I mean, if they do continue tightening or they hold rates at the current level for long enough and they start to see some deterioration, some further deterioration in the labor market and unemployment continues to creep higher and higher and higher, with inflation at three or slightly lower, that would be good enough for them to cut rates. They’re just not going to get it down to. The two % target.

Tony Nash

They’ll talk about lags or something and. Say-

Johnny Matthews

Yeah, exactly. They’ll put it in their forecast, in the Philips curve framework, with unemployment going higher, wage growth will continue to slow down, and that means services inflation will continue to decline. They can do pretty much whatever they like to come up with reasons for cutting rates, and that’s what they’ll do. If getting down to the two % target and sacrificing the economy and sacrificing a whole load of jobs and pushing unemployment up to six %, they’re just not going to do it. They’re going to stop at a little bit below 3%, that’ll be good enough for them. And I think actually, for most people, they would think, Okay, well, it’s not so bad if inflation was three %. So –

Tony Nash

Don’t help us if someone like Austin Goulds, if he ever becomes Fed share, because we’ll have inflation targeting at like six % or something. I mean, it’s people love to be critical of Powell. But the guy is being, I would say, relatively disciplined in keeping prices at a reasonable rate. I mean, he can’t help supply chain issues, but he’s really staying very focused on this 2% target. I think he should get some credit for that.\

Johnny Matthews

Oh, absolutely. I think he’s to the past few decades I’ve had to listen to speeches from the likes of Janet Yellen and Ben Bernanke, which was so boring. My ears were bleeding, honestly. It was just unbearable. At least Powell, when you ask him a question, he answers the question. He doesn’t just waffle on and on and try to skirt around it. He answers the question. He was asked recently where do you think the neutral rate is? And he basically said, I don’t know. I just don’t know. Who the hell does know?

Tony Nash

It’s theoretical anyway, right?

Johnny Matthews

Yeah, who the hell does know? I really welcome that in the Fed Chairman. He’s very clear and down to earth. I really do like that. But just getting back to the labor market and what the Fed will do, one thing that we haven’t discussed that is a bit of a concern to me is that when I look at the cyclical or non-cyclical components of job growth, what I call the non-cyclical government, education, and health care, that’s showing now reasonably strong growth, stronger growth than the cyclical components, which surged after the pandemic, and now they’re coming down and down and down.

Johnny Matthews

In the last payroll print, it was something like 150,000 payrolls, 50,000 were with government. I don’t know what the breakdown was between education and health care, but you can see what I mean. More of the jobs were in non-cyclical sectors, and that is really quite a concern to me. I think the Fed will start to focus more on the labor market if this trend continues. Getting back to your earlier point, Albert, and what we were discussing earlier, with inflation down where it is currently, if the labor market really does begin to crack, the Fed, they will start cutting.

Tony Nash

Yeah, they’ll say dual mandate, right? And they’ll start cutting and say, I don’t care where the inflation rate is. We need to start cutting for jobs.

Albert Marko

Yeah, which will be a mistake, like usual. It’ll be a mistake.

Tony Nash

That’s true. Can we just have a moratorium on government jobs for a while in the US?

Albert Marko

Yeah, they should do a skeleton crew of just basic one-tenth of what they have out there and cut their salaries too until they get things right.

Tracy Shuchart

I love it. I mean, where do I load on that?

Tony Nash

Just in terms of –

Tracy Shuchart

Can we. Put that on the ballot?

Tony Nash

Just in terms of inflation target, are there other central banks, say, in Europe or England or whatever, that are doing inflation targeting right now?

Johnny Matthews

Oh, yeah, all of them. This whole inflation targeting thing, this two % target was just plucked out of the air by some, I think it was a treasurer of the New Zealand Central Bank, just came up with two %. Yeah, that sounds like a. Good number.

Albert Marko

Sort of like COVID social distancing.

Johnny Matthews

And it stuck. One central bank after another adopted a two % inflation target. So we have it in the UK, they have it in Europe, they have it in Australia, New Zealand. It’s become a universal thing. But it was just a spurious number that they picked. There’s no real science behind it.

Tony Nash

It’s like I’m old enough to remember when 6% was the assumed natural rate of unemployment.

Albert Marko

You know, if they wanted to have-

Tony Nash

This was in the ’90s. 6% employment was normal.

Albert Marko

Yeah. I mean, if they want to have an actual discussion on what an inflation target should be, I welcome that. But the fact of the matter is they’ve stuck to this 2% threshold and if they deviate from it, it’ll have repercussions.

Tony Nash

Huge repercussions.

Johnny Matthews

Absolutely. I mean, we’ve already seen inflation expectations in the Michigan survey creeping higher. The longer term inflation expectations are the highest they’ve been in I don’t know how long. And it’s strange to have one year inflation expectations going higher when gas prices are heading south. So that is the big danger, isn’t it?

Albert Marko

How much. Of it, though? Sorry to interrupt you, but how much of that is due to wage growth that just keeps on creeping up? It doesn’t stop, really.

Johnny Matthews

I think the two things feed each other, don’t they? High inflation feeds higher wage demands, and then wage growth feeds into services inflation. That has always been the big fear of central banks that you have this wage price spiral, and that’s how it… That’s how it rolls along.

Tony Nash

Yeah, but that doesn’t exist, Johnny. We’ve been told for the last three. Years that the wage-

Johnny Matthews

Yeah, true.

Albert Marko

We talked about that, Tony, I think even like a year ago in the doom loop of wage inflation, energy inflation and interest rates and so on and so forth. And here we are. Here we are. Experiencing this.

Tony Nash

Yeah. Same discussions, not a lot’s changing aside from the interest rates. I think I like your rosy charts, Johnny. I’m not quite sure from that first segment. I’m just not quite sure how it all sticks in, say, the 3-6-month time frame. Again, I don’t want to be a downer. I’m just seeing some of those correlations, especially on that business chart, really break down over the last 12 months. There are a lot of things around unconventional Fed policy, discussions about new inflation targets, other things where expectations in the marketplace, people don’t know what to expect. They don’t know if their food is going to rise another 15% next year. They don’t know if cars are going to be cheap or expensive.

Tony Nash

I think we do have a lot of this slack in terms of what consumers have on the sidelines. But I think on some level, they’re keeping dry powder because they have no idea what’s going to happen. We’re hearing about this new virus in China that’s supposed to go out. Nobody knows what’s going to happen, and they don’t know the unpredictable factor. Going back to the government employment that you talked about, nobody knows what governments are going to impose on people if this thing really is a new thing. I think that uncertainty is probably hurting some government spending or some company spending, some personal spending and other things. I could be very wrong here. But I think a lot of those expectations have broken down because there’s a lot of uncertainty really around prices, especially. At the household level.

Albert Marko

Yeah. But, Tony, the thing is looking at Johnny’s rosy charts, well, he’s probably going to be 90% right.

Tony Nash

Of course. I think so too.

Albert Marko

Over the next. Six months, five months of it is going to be absolutely what is Johnny is talking about.

Tony Nash

I think you’re right. The part that worries me is the question mark.

Johnny Matthews

Well, I put those charts together. I did another talk recently. I said that I’ve been a recession denier for the almost two years now. When the Yield Curve first inverted and people were screaming about the oncoming recession, I just couldn’t see it with what was going on. But I’ve got to be honest, some of the data more recently do suggest that, well, clearly the economy’s lost momentum. I mean, it was never going to carry on growing up north of five % like it did in Q3.

Johnny Matthews

But consumption growth that we were seeing that we saw in October wasn’t bad, that was okay, and Q4 consumption growth could still be on track for two %. The wheels haven’t fallen off. I’m hopeful that now that headline inflation has come down a long way, primarily driven by lower energy prices and cheaper gas, people have more discretionary income and they’re going to spend it. They’re going to carry on spending it. And it’s these services that are really benefiting, sporting events, concerts, whether it’s Beyonce, Taylor Swift, people pay top dollar to get a ticket and they’re lucky if they can.

Tony Nash

That’s right.

Albert Marko

$1300 a ticket for the Michigan-Ohio State game. $1300. Those were Super Bowl-

Tony Nash

What score was that? Is that Rest Night or something?

Albert Marko

Well, the real football. Listen, I’m a big soccer. I’m a huge soccer fan, so. I got to throw that dig into the British guys.

Johnny Matthews

That’s all right. We used to it.

Tony Nash

Tracy, you were raising your hand about services. Was there something you wanted to add there?

Tracy Shuchart

No, I wasn’t. I’m sorry. That was an accident. I was. That was a. Total accident.

Tony Nash

Okay, great. Let’s just keep talking, though. Since we’re talking about things coming back next year and a little bit of uncertainty, there was an OPEC meeting this week. Can you talk us through what happened, why is it important, and what are the expectations for next year?

Tracy Shuchart

Yeah, absolutely. I think the major problem is we saw that big drop after the OPEC meeting, even though we had additional cuts. I think the market was expecting OPEC to have a solid plan and not to announce that additional voluntary cuts would be announced by each producer individually. But how it all shuffled out at the end of the day. We saw market kick up a little bit afterwards and again today. But the long and short of that, the whole situation was what we have is we have 1.5 million barrels and cuts and voluntary cuts carried over from this year between Saudi Arabia and Russia. Then we have an additional 684,000 barrels per day cuts between several nations.

Tony Nash

Okay. If they agreed that today, how long before that’s implemented?

Tracy Shuchart

That’s implemented starting Q1. It’ll start January first because the current… There’s two parts of this. The current agreement that was supposed to end December 31st, 2023, on the quotas, the depressed quotas that they came up with last summer are going to carry over again for another quarter. Then on top of that, we had additional voluntary quotas. Again, it’s the same numbers, except for heading into Q1 for the group as a total, we’ll have the long and short of it is we’ll have an extra 684,000 barrel per day cuts from today’s levels, from Q4 levels.

Tony Nash

Okay, so you said something interesting. You said voluntary. The 684,000, are these all-voluntary cuts?

Tracy Shuchart

These are all voluntary cuts. You have the nations that were voluntary were Algeria, UAE, Oman, Kuwait, Kazakhstan, and Iraq.

Tony Nash

Okay. How voluntary is voluntary? I mean-.

Tracy Shuchart

Well, voluntary.

Albert Marko

And how much of it is maintenance baked into the voluntary cuts?

Tony Nash

Great question.

Tracy Shuchart

Well, this is where you get… This is where it gets sketchy, but these are voluntary cuts. I do expect, I think, Iraq. Iraq sounds like to me they’re counting on Kurdish oil not coming back soon. That sounds like they’re voluntary cuts to me, to be honest with you.

Tracy Shuchart

I think the rest honestly would make those. I was not surprised UAE or Kuwait or Oman would curb less… I think, who is the largest UAE at 163K BPD? It’s nothing for them. The rest didn’t really surprise me. They’re very small cuts. Obviously, you come into springtime and there’s a meat season for all these players, and so partially that factors in, but generally not for January or February.

Tracy Shuchart

But in those cases too, part of that also could be they don’t have to produce as much because they don’t have summer demand anymore, domestically speaking. There’s a lot of ways you can look at this situation, but the market was really expecting a broader base cut between the group and it to be on the final communique and to say, We’re going to do this plus another million barrels per day. That’s what the market was expecting because of all the nonsense headlines that were leading up to that.

Tony Nash

Okay. The market took it pretty much in stride, didn’t see it as a big deal. Yes, it’s more supply offline, but….

Tracy Shuchart

Yeah, we saw a significant drop. We saw a volatile drop from $80 to $76 in WTI. We’re bouncing a little bit back after that after the market’s been seems okay with the fact that there still will be additional funds.

Tony Nash

Okay, great. Albert, what do you think on that?

Albert Marko

I mean, it’s just the open game of we’re going to do cuts, and then all of a sudden, ship-to-ship transfers without transbinders are moving everywhere in the Persian Gulf. It’s like, yeah, whatever. You know what I mean?

Tony Nash

Johnny, we’re skeptics here on the weekend, just so you know.

Johnny Matthews

Oh, well, yeah. I mean, it sounds nuts to me. A bunch of these guys get together and say, agree. Well, we’ve got to cut two and a bit million barrels a day of oil production. I volunteered to do a couple of hundred thousand a day and they will share it out, but it’s voluntary. Well, none of them are going to do it, are they? They’re going to say, Well, okay, they’re doing it. I’m not going to bother. I’ll just pump it out while the price is still where it is.

Tony Nash

Right. They said it was voluntary, right? So…

Johnny Matthews

Yeah, exactly. It was voluntary. It’s voluntary. It’s like anything else, voluntary. You don’t have to do that.

Albert Marko

And that data doesn’t until the end of 2024 again, so whatever.

Tracy Shuchart

I will. Say in OPEC’s defense, after the 2020 April debacle when oil prices went negative and in March when they had the blowout and everything crumbled between Saudi Arabia and Russia, we have seen a little bit more cohesive of a group and that has helped keep oil prices elevated. I think it’s also interesting to note that Brazil has just joined the plus part of OPEC. I think that’s generally politically motivated, but that’ll start in January first, 2024.

Tony Nash

Interesting. Okay. Maybe we’ll see some Middle Eastern sovereign wealth investments in Brazil as a part of that or something?

Tracy Shuchart

I would not be surprised.

Tony Nash

Interesting. Okay. All right, let’s move on to silver. I think, Tracy, there’s some really interesting things happening in the silver market. Silver has been pretty strong lately. Now, we saw a huge run-up in silver in 2011. Part of my reason for wanting to cover this is I’m wondering if we’re going to head there again soon.

Tony Nash

I guess the most fundamental question in a precious metal market like silver is supply-demand. Silver production has been expected to fall about 18 million ounces in 2022, with the largest cuts in places like Mexico, Brazil, sorry, Peru and Argentina. At the same time, we’re seeing a huge upswing in demand over the last two years. This is the second chart where the white line is total demand and the blue line is total supply.

Tony Nash

We’ve seen silver supply fall, but we’ve also seen the price not necessarily keep up with that. Can you help us understand what’s happening in silver markets? This third chart is showing a decline in silver prices as the balance is in deficit. What industries do you see driving demand and what would bring supply back online?

Tracy Shuchart

Yeah, I think when you’re talking about silver, most people think of it as in jewelry and/or physical investment such as gold. But you have to think about the industrial properties and the industrial uses for silver, and that’s really 45% of the market. Really 27% is investment, and you’re talking even lower percentages when you’re talking jewelry or anything like that.

Tracy Shuchart

When we’re talking about industrial properties, especially with transition, green energy, this big push that we’re having, we’re talking solar panels and EVs in particular, but you also have healthcare demand too, that is also growing. That demand has been there for a while, but if you want to look at where the demand is exponentially growing right now, we have to look at, say, things like solar panels, which have found that silver is much better for use in solar panels than anything else right now. It’s long and short without getting too technical about it.

Tracy Shuchart

Then if you look at vehicles, for example, all the soldering and everything, we all use a silver. Then when you start talking about EVs and hybrids and EVs, you’re talking about more electric components than ICE vehicles already currently have. There’s a lot of demand coming particularly from that industry.

Tony Nash

Okay. So do you expect strengths, like real strength, $30, $40 an ounce strength to return to silver markets as a result of this demand at some point?

Tracy Shuchart

At some point. I won’t say tomorrow. The silver market is very finicky. Most people, it’s very volatile. You had the Hunt Brothers, right? Yeah. The silver market. And so in a lot of it’s paper, too. You have to understand a lot of these things are paper. And so if I were looking to invest in the silver markets, I would look for something that was backed by actual silver, just say, rather than paper markets, but that’s just a side note. This is not investment advice.

Tracy Shuchart

I think that possibly we could return to those levels as soon as people realize what the deficit is really going to look like. It’s particularly, we’re not in a nerve world anymore. If you have all these mining projects, they take a lot of money to find. A lot of money to finance. With rising interest rates, these make a lot of these projects unaffordable or harder to get off the ground because they cost so much more money. I actually posted a chart today which basically says that my production is not expected to get to the highs that we were like any time soon. Again, in this current rate environment. That’s also something to factor in. I keep trying to stress that these projects take a lot of money and a lot of money to borrow from the banks, and it’s just not that affordable. It’s just not as affordable anymore. Plus, you have that permitting issues, you’ve got all sorts of problems that are already conducive to the mining industry trying to get a project off the ground. Interest rates certainly are not helping that.

Tony Nash

But Tracy, if we couldn’t get people to invest in things like silver mines and upstream oil and gas and all these things at zero interest rates, what’s going to be the thing to drive them to invest with higher interest rates?

Tracy Shuchart

Well, that’s exactly. If you were to invest in the market, you would be investing on the supply-demand imbalance, not necessarily. Or you would be looking at either current mining companies that are already producing and/or mining companies that have already borrowed, already permitted, and maybe haven’t started yet. You want companies that are halfway there, so to speak.

Tony Nash

Yeah. No, that’s really interesting. The miners are-

Johnny Matthews

I thought the question was-

Tony Nash

Sorry, go. Ahead, Johnny.

Johnny Matthews

Yeah, yeah. Because this third chart of yours that shows quite a deep deficit of production compared to demand. Yet the price hasn’t really responded up to now. The price is going higher, has gone higher in the last few weeks, alongside gold because the dollar has been sinking.

Johnny Matthews

Question one is, how do you explain the fact that it doesn’t seem to respond to demand or the supply deficit? The question two is just a general question because I was quite bullish of silver a few years ago when inflation just started to pick up. I bought a silver miner on the expectation that some of the factors that you were talking about before were there are very high costs to running a silver mine. When the price goes up, the profit in the mines goes up a long way. It’s a bit like owning almost like a cool option on silver, in theory, if you are in the mines, you should get that payoff. Except that maybe it’s just the mine that I owned, but seems to me like these silver mines underperform what you’d expect when the silver price goes up.

Johnny Matthews

So my second question really is, are you not just better off to buy an ETF or something?

Tracy Shuchart

Yeah, I would suggest that unless you really know your stuff on silver miners, they’re very difficult to trade. You also have to think for the last 11 years, we almost had not a lot of supply, but supply on the market. We’ve had the last 11 years, it’s been a terrible market to invest in. We’ve had more supply than demand. It hasn’t really gone anywhere. You’ve had no reason to really… If you were looking at you’re an investor and you want to invest in precious metals, so to speak, that hasn’t been really the big trade either. I mean, gold’s gone sideways, silver’s gone sideways. It really hasn’t been… Really hasn’t been a really attractive market, so to speak, for investors, unless you’re a very long-term investor.

Tracy Shuchart

But I think that’s changing because if you look at that chart and you look at the last three years of deficits, that’s more than the last 11 years of supply upside at all. And we’re only talking… Nobody’s getting rid of the screen push. Everybody’s still gung ho for this. The EV push is still there. And so in my opinion, I just don’t see supply catching up with demand anytime soon, and I don’t see any real new greenfield projects coming online right now.

Albert Marko

I hate silver.

Tracy Shuchart

Everybody hates silver. It’s been a terrible trade. I mean, it’s been a terrible trade. I think for the first time we’re seeing opportunity, particularly because we’re seeing this demand in transition materials. We’re also seeing higher demand in the healthcare industry, which that demand has always already been there. But again, it’s not a market for everybody. I mean, it’s not an easy market to start at home.

Tony Nash

Yeah, be careful.

Albertt Marko

That and net gas are widow makers for me. Yeah. Notorial.

Tony Nash

Yeah, this is fantastic. Thank you, guys. Thank you so much for all the thought you put into this. Thank you so much for sharing your insight. Really appreciate it. Have a great weekend and have a great weekend. Thank you.

Trcay Shuchart

Thank you.

Albert Marko

Thank you so much.

Johnny Matthews

Thank you.

AI

That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

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Welcome to “The Week Ahead” with your host Tony Nash.

1. The Upcoming USD Squeeze. Michael Ncoletos discusses the potential impact of a US dollar squeeze on the global economy, focusing on the factors contributing to the potential strengthening of the US dollar and its implications on emerging markets, particularly about their dollar-denominated debt. He also highlights the significance of interest rates and the cost of money in determining investment decisions.

2. Year-end market check. Bob Iaccino discusses the current state of the markets, emphasizing the impact of higher interest rates on the tech sector and the significance of the energy market in relation to inflation. He also mentions the potential impact of technology stocks on the economy and expresses concerns about the future performance of tech stocks in 2024, particularly in the second half of the year. Additionally, he discusses the potential for Argentina to dollarize its economy and the challenges and potential for success of a conservative government in Argentina, drawing parallels with other countries and global political trends.

3. China, US & geopolitics. Albert Marko discusses the recent election in Argentina and expresses skepticism about the potential for significant change under the newly elected leader, Milei. He mentions that Argentina is burdened with a significant amount of debt and that it would be challenging for Milei to make substantial changes without a strong support structure or clear policy direction. Marko also raises concerns about the influence of leftist forces in Latin America and suggests that Argentina may be set up to fail. He expresses doubts about the feasibility of Milei’s plan to dollarize Argentina given the country’s debt and limited dollar reserves. Overall, he indicates a reserved judgment on Milei’s potential impact and suggests that the composition of Milei’s cabinet would be crucial in determining the direction of Argentina’s policies in the next 12 months.

Transcript

Tony Nash

Hi everyone, and welcome to the Week Ahead. I’m Tony Nash. Today, we’re joined by Michael Ncoletos, Bob Iaccino, and Albert Marko. We’re going to talk through the upcoming US dollar squeeze, which Michael has just published a stellar piece on this. We’re going to talk with Bob about year-end markets and see what we’re heading into. Then we’re going to talk to Albert about some geopolitics, specifically about Argentina, but how does that apply more broadly? Looking forward to the discussion. Guys, thanks so much for joining us.

Tony Nash

Hi, everyone. We started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeantel.com/BlackFriday and subscribe to CI Markets for $99. Thank you.

Tony Nash

Michael, actually, you and I met a few years ago when I was giving a presentation on China, and I used one of your charts on the weakening advocacy of Chinese debt issuance. It was so great that you were there. I didn’t know you were in the room, and the humility you had around that was just astounding.

Tony Nash

I follow you really closely. And we’ve been talking about the dollar for a long time. Albert talks about the dollar a lot, and you published a paper a couple of weeks ago about the coming US dollar squeeze. This is really, and pardon me for oversimplifying it, but it’s really a story of interest rates and viable alternatives to the dollar. Obviously, there’s a lot more to it. You outlined a seven-step process. Would you mind walking us through that? I’ve put up a chart on the Fed funds rate to get us started. Would you mind walking us through each of those steps as an overview?

Michael Ncoletos

First of all, it’s great to be here. I also enjoy your work, so I share your thoughts about your work, and thank you for sharing with everyone and love the discussions we’re having. But sometimes you bump into someone by luck. I think we bump into each other by luck. That’s right. I think it was in the came of Ireland, right?

Tony Nash

That’s right. That’s right.

Michael Ncoletos

I’m Greek and you’re from Texas, right?

Tony Nash

Yes, that’s right. Worlds of way.

Michael Ncoletos

We met in the came of… That’s-

Tony Nash

Not a bad place to me.

Michael Ncoletos

How small the world is. A few weeks ago, I was thinking about the dollar, which I’m one of these people who think that the dollar is unlikely to weaken unless the US government or the US Fed decide to do so. And the thinking is we’ve been reading a lot about the US deficits, about the situation in the US and fiscal responsibility. And we’ve seen a lot of people talking about the new currency, the BRX currency that could replace the US dollar as the global reserve currency. So I try to lay out why I think the dollar is not going to go lower. And by lower, I mean it’s going to squeeze higher for a few reasons. After a 13-year expansion of the US balance sheet, which I think the balance sheet reached around $9 trillion, if I’m not mistaken, the Fed decided to stop that and to start raising rates and then to start QT. So in the first phase, the Fed just started raising rates. And by that when you raise interest rates, you effectively drain liquidity from the world in the US dollars because a lot of dollars, as simplified as that can be, are going to go to the currency which has the higher interest rate, assuming that there are no capital controls or nothing else.

Michael Ncoletos

So that was the first step. The second step was that the Fed stopped QE. And by stopping QE, stopped reinvesting the treasures that you had bought and the mortgage-backed securities, which again by stopping reinvesting means that these new issuance need to be bought by the market. So when the market needs to buy them and it’s not the US government, more dollars are used for that. You need dollars from the market which would be used for something else to buy these treasures and these mortgage-backed securities. Then the Fed moved a step further and started QT, which means it started reducing its balance sheet. But when you reduce the balance sheet again, which means you need more money from the market to start buying these treasures, more liquidity started to drain. Now to put all this together in an economy that is going through, let’s say, a Cold War, you want to put it this way with China, in a world where there is reshoring and in a world where there are a few wars going around. So there is a supply issue in terms of how inflation is created. You have less oils and oil prices go up.

Michael Ncoletos

You’ve had an inflation scare across global which has translated to real inflation. Now, in normal conditions, when you have a supply-driven inflation, the remedy is not to raise interest rates because monetary policy is effective when inflation comes from the demand side, not when it comes from the supplies. The Fed of San Francisco published a research paper a year ago, I think, showing that two-thirds of the inflation in the US was coming for supply reasons. So the question I ask myself is if what I’m saying is correct, and I’m pretty sure the people of the Federal Reserve are pretty aware of it, why are they raising rates and increasing the deficits when this is clearly not going to do much on the inflation side. Okay, we’ve had the pause, we’ve had an inflation coming down, but we need to see where it’s going to stabilize. So the question is, when you have fiscal deficits and fiscal deficits are around seven and eight % of GDP and you don’t have the central bank buying treasuries to fund that deficit, it means that these bonds, which according to a report I read, I think next year it’s eight trillion, eight trillion need to be financed from the US government.

Michael Ncoletos

So eight trillion dollars need to be found from the global market to fund that deficit. Now, most people are aware of the dollar and how it works, but most people are not aware of the Euro dollar market. You’ve raised it a few times, but most people don’t understand. The Euro dollar market are effectively all the dollars that are not included in the US M2. We can go into specifics what’s included and what’s not. It’s very technical, but I don’t think it doesn’t make sense to do this discussion on. So all the dollars that are not included in M2 are the euro dollars, which are outside the US, which it’s equivalent in size of the US dollar mark. So M2 is around 20 trillion. Imagine that there’s another 20 trillion or maybe more outside of dollars. So what’s the problem with that? When the dollar goes up, you effectively create an issue, especially on emerging markets. Why do you create a problem in this emerging market? Emerging markets because they do not have hard currencies, tend to issue debt in dollars. They tend to issue debt in dollars, the interest rates go up, their bonds go lower, so they have a funding need.

Michael Ncoletos

They either need to put dollars in to bridge the gap or they need to start selling bonds. It’s not as easy as one would think.

Tony Nash

Michael, let me… Let me just pause there and ask you a couple of questions. You said the US needs to raise $8 trillion in debt next year. Is it possible to have a failed auction?

Michael Ncoletos

I guess it could be, but why would there be a failed auction? The rate, the interest rate will go high.

Tony Nash

Right, that’s the answer. I hear a bunch of the dollar naysayers go, Well, the US is trying to put so much debt out there, they’re just going to have a failed U. S. Treasury auction. But what you’re saying is, no, they’ll just… The U. S. Will just offer a higher interest rate on that in order to sell that. Is that right?

Michael Ncoletos

Yeah. Let me put it this way. There is this chart floating around, especially on Twitter about the liquidity of the U. S. Treasury market. This is ridiculous, and I’m saying it’s ridiculous because the U. S. Treasury market has an average trading volume of like 15 trillion a month. The next one, the next one is the eurozone with six trillion, and then it’s Japan with three and China with two trillion per month. So if US dollar bond liquidity is going down, imagine what’s happening on the other markets. We’ve seen the Japanese bond market are not trading for a day. We’ve seen no… When we talk about liquidity, and I’m not saying that liquidity is going up, I’m saying it’s going down, but it’s a relative discussion. It’s not an absolute discussion.

Tony Nash

That’s key. And everyone understands.

Michael Ncoletos

What does that mean? You’re going to buy what? Japanese bonds.

Tony Nash

Currencies are relative. It’s all relative. And I think that’s something.

Michael Ncoletos

That currency are relative. And what’s more important, people need to understand that the dollar disposition is a derivative of the US capital market system. The US capital market system is so efficient, at least in terms of anything else that we see right now in the world. So when a government, whatever government buys trades in US dollars and accumulates US dollar FX reserves, they can buy at the split of a second US treasuries, and they can sell at the split of a second US treasure. There’s no such issue. Now imagine doing the same, accumulating one, for example, or rubles and FX reserves, and then one day needing to sell them, A, there’s no liquidity. B, if you manage to sell them, there are capital controls. You need to take them back. How will you take them back when there’s capital control? So the most… The next most efficient is the Eurozone. And the Eurozone is not one market, it’s Germany, France, Italy. So when we talk about the Eurozone, we’re not talking about the 20 countries. We’re talking about three or four countries within the 20 countries. So again, when we talk about the US dollar, it’s a relative discussion, but it’s also a relative discussion of the capital markets they are representing.

Tony Nash

Right. Okay, good. I just wanted to get that out of the way..

Tony Nash

The other point I wanted to raise was you said emerging markets need to raise their debt in US dollars. I don’t think that’s really well understood by a lot of people. So if you’re in like an Indonesia or Sri Lanka or whatever, if you need to sell debt to international investors because you’re not really going to raise that in domestic markets, are people overseas going to take the currency risk along with the sovereign risk?

Michael Ncoletos

Well, let’s put this. Turkey has interest rates at 30%. They should debt at 30% or are they going to issue debt in dollars, which would be at like 6, 7%, whatever the number is right now. They’re going to try that and they’re going to hope that the economy recovers. And as the economy recovers, their currency is going to become stronger. So the debt repayment is going to be cheaper. In theory, all very nice. But when the dollar goes up, it creates a squeeze on the world, on the growth, on the collateral, on everything, which makes things much worse for all these countries. Unless they have current account surpluses, which once they have, they can sustain that period for a longer term than the others. But again, they’re going to get squeezed as well. There is no hope. So all these countries that raise debt, dollar debt or foreign-denominated debt in the last 10 years because rates were at zero, now are facing issues because what we’ve seen the discussion that happens right now in US banks about the collateral that banks have and that the treasures that they hold have a mark to market loss, as we’ve seen, which effectively that doesn’t…

Michael Ncoletos

It’s not the case because the Fed made a…

Tony Nash

BTFP.

Tony Nash

BTFP, which they accept at face value the bonds. Now imagine what the US banks are facing, countries facing it without the BTFP to protect them at face value and with them needing to refinance that debt at the worst possible time. So if you’re asking me, the squeeze will not go in the liquidity of the US Treasury Bank. The problem would be in Turkey, China, Russia, Indonesia, Egypt, these countries and all the others are going to face Argentina. They’re going to face issues when raising debt because their capital market is not deep. When you buy these bonds, you marry them. If you don’t marry them, you’re going to be selling at a deep discount the day you decide to sell them. Okay, and you have more issues. So we tend to talk about the US. And I want to make a point. The US financial situation is not good. Definitely, and I’m not saying it’s good, but I’m saying the way the world is structured and the US being the global reserve currency, it’s less bad than whatever everyone else is facing.

Tony Nash

Yeah. I hadn’t thought about the sovereign debt issues before today, but now that you mentioned that, that’s Silicon Valley Bank all over the world at a central bank level, right? At a finance ministry level.

Michael Ncoletos

Let me put it simple. I’ll put it as simple as possible. When you can buy US treasury two year treasure, 4.9 %, 4.92 %. So five %, let’s say five %. You buy 5%, you buy US treasures, the safest asset in the world. You gain 5% a year and you sleep like a baby. So when you invest, you need to think, is there something that’s going to give me a higher return and it will be relative to me sleeping like a baby and gaining 5%? This is as simple as that. Because if I’m gaining 7% and I’m not sleeping at night, it’s not worth it. I need a higher return, and this higher return goes with the countries that are hard to find the finance.

Tony Nash

That’s right. Bob, what do you think about this?

Bob Iaccino

Well, I think the perfect end to that extremely impressive summary of what’s going on in the global markets is the sleep at night part that a lot of investors seem to ignore when we’ve gone through, let’s just call it multi-years bull markets and equity assets. Because they tend to… Investors tend to forget, and I’m speaking a little bit more to retail because I believe institutional investors know it, but sometimes they don’t. Let’s take the example of the hedge fund, for example. Hedge funds are supposed to perform when equities are performing, and they’re supposed to outperform when equities are collapsing. One of the things I like about this format versus the traditional financial media that unfortunately I’ve been a part of in theory since 1999 is that they tend to have this view that positive performance is the only performance that matters, and outperformance, they’ll put somebody on TV and they said, You’ve outperformed the S&P this past year. The S&P is up 12%, you’re up 15%. But when the S&P is down 24 %, and that particular person is down 18%, they’ll come on and say, Well, you’re down 18% this year. Well, you’re still outperforming to the opposite side.

Bob Iaccino

It’s one of the things I talk about a lot, and I’m digressing a little bit, but outperformance to the downside to me is much more important than outperformance to the upside. To Michael’s point, if you can make 5% and sleep at night, that to me is worth an extra 5%. That’s just the way that my internal math works. It’s not some technical formula that I can explain. You need to double my return to take away my sleep at this point in my career is basically what I’m saying.

Tony Nash

Yeah. Our traditional investors, are they looking for 30% returns a year? They’re not necessarily looking for 30% returns a year. That’s crypto level, right?

Bob Iaccino

When I was part of the investment committee of the fund to funds that I was a principal at, we went into these big investors. I’m not going to mention the fund because it’s dissolved at this point. But we had 10 years of returns where our worst year was down 46 basis points. Our best year was up 8%. That was what the fund was designed to do. But when we went into large, large allocators, they would say, God, I just love your returns, but you represent nothing but risk for me. Why? Well, because you don’t have a lot of money under management at this point, and we worry that allocating to you would affect your performance, which it would have, but whatever, didn’t happen. That stuck with me for a very long time where these large institutional asset allocators are very worried about sleeping at night because their management fee matters more so than beating their last year’s performance by a % or two. That’s something a lot of investors don’t understand. Again, I’m digressing a little bit, but it goes to the point of how much it matters that the safest asset in the world is between four and a half and 5% depending on what duration you put on it.

Bob Iaccino

That matters a lot, and that will continue to draw very large capital for a long period of time. That capital won’t necessarily leave those assets for a 25 basis points here or there or 50 basis points here or there.

Tony Nash

Interesting part-.

Michael Ncoletos

Can I add something, Tony?

Tony Nash

Absolutely.

Michael Ncoletos

I think we’re 100 % involved. You’re being paid to wait for the first time in your life after 20 years. You’re being paid to wait.

Bob Iaccino

That’s a great. Way to put it. That’s a great way to put it.

Michael Ncoletos

You’re being paid to wait. For the last 20 years, this hasn’t happened. So you’re being paid to wait. And when there is a correction, if there’s a correction or if there’s a recession, or there’s a depression or whatever, I won’t go into what could happen, you will have money on the side, being paid and being able to deploy it as you wish, having the most liquid asset in the world, which at that point would probably rally, which you’ll be making a couple of gains as well. And you’ll be doing the best thing you can do.

Bob Iaccino

If I can add to that, Tony, we have five trading days left in the month of November. Really four. Friday is a lost day, so to speak. We have four or five trading days left in the month. Let’s call it four and a half in the equity markets. You’re about to post your greatest November percentage-wise on record to the upside for equities. The volume is barely half of what it was in October. Now, it’s not going to make up the rest in four trading days. I guess it theoretically could, but it’s not. What does that tell you about the overall stance of the institutional investors? Honestly, in huge dollar amounts, they have not been involved. Because what Michael said, they’re being paid to wait. If you look at the overall makeup of this particular earning season that we’re basically finished with, it’s been good. But we have the weakest buyback numbers announced since 2016. We have the largest negative reaction on individual stocks that have missed earnings expectations since 2011, largest drop on misses. We have the largest cut to estimate since the second quarter of 2020. What does that tell you that these analysts and these investor relations parts of these large companies are thinking?

Bob Iaccino

They’re worried. They’re not mentioning recession as much. As a matter of fact, the lowest mention of the word recession, I believe since 2022, but they’re not positive overall, even though there’s beats on the outright figures.

Tony Nash

Because the risk appetite is mitigated by what Michael is talking about.

Bob Iaccino

By what Michael is talking about, exactly.

Tony Nash

It’s great. Let’s get back to this USD thing for a few more minutes, and then let’s move on to markets and talk real deep with Bob. Michael, you have chart showing the foreign exchange turnover by currency. Of course, it’s overwhelmingly USD. Of course, we’ve had some growth in CNY since, say, 2010. But on a relative basis, where is that CNY taking market share from? Is it taking from British pound or where is it taking that market share from? Is it from the dollar?

Michael Ncoletos

I think I say mostly from the euro.

Tony Nash

From the euro? Okay.

Michael Ncoletos

Yes. But again, China has done like 40 swap deals since 2016. They’ve been trying to make their currency more usable, let’s say, as simple as that. But again, everyone who trades in China and Yuan, they will do it at the equivalent of a Barker size trade. They will not do the extra mile to accumulate the FX to zero. So if I’m buying 10, selling 10, I’ll use that 10 to do it in one. But if I’m doing 30 and 40, but the 10 is only the bilateral trade going both ways, I don’t want to accumulate the Chinese.

Tony Nash

Right. Here’s one of the key things there that I don’t think a lot of people, a lot of these CNY cheerleaders understand is if people accumulate CNY, they’re trusting the People’s Bank of China, right?

Michael Ncoletos

A, and they trust them. They’re going to get their money back when they want it.

Tony Nash

Right. But when we look at the currencies on this chart, it’s the Fed, it’s the ECB, it’s the BOE, and the BOJ. Very highly covered, and I wouldn’t say transparent, but relatively revealing on some of the decisions they’re making. I don’t remember the last time I saw a PBOC press conference open where people could ask questions, real questions. Until we can have that level of questioning of a central banker, it’s really hard for a country or a company to accumulate that currency because they have no idea what the policy of that central bank is going to be. Is that fair?

Michael Ncoletos

Tony, before you get your… You have to take off the capital controls.

Tony Nash

Yup.

Michael Ncoletos

The right mind when I accumulate the currency which has capital control. We’re talking about the Bricks currency, okay? There’s a discussion. Two out of five countries have capital controls. Two out of the five have capital controls, and half of them don’t trust the other half within the Bricks. We’re talking that this is going to be the alternative to the US dollar? Okay.

Tony Nash

It’s great. Put them in the ring together.

Michael Ncoletos

Okay. If you want to believe in Santa Claus, you can believe in Santa. But as things stand now, this is no option. Sorry.

Bob Iaccino

Santa Claus, is that real?

Michael Ncoletos

Sorry.

Tony Nash

Yeah. We’re not going to reveal that on this show in case there’s kids watching. Let’s take this full circle to… I know there’s great chart on risk premium from EMs to the US, and I know we covered this a little bit, but seeing that risk premium really disappear, what is that? Effectively, that sucks all the money back to the US. Like you said earlier, what’s the point in investing in emerging markets if you have a guaranteed return, a US dollar denominated guaranteed return?

Michael Ncoletos

It comes back to what we talked about earlier. Again, I agree with you 100 %. If you’re getting 5 % for the safest asset, you need to at least get the double in order to get the risk. Okay, obviously it depends on the risk anyone can take. But let me put it this way. When you take risk, you need your upside to downside risk to be skewed on the upside. So if I’m willing to make 5 % to lose 5 %, there’s no point of having the discussion. If I’m losing to make 10 % to lose five %, that’s a two to one or a three to one, then it makes sense for me to make the investment. So a 10 % return is something I’m starting to consider in order for me not to put it at the five % and sleep at night. So to quantify what Bob said easier, I’m thinking in terms of how much you’re going to make in terms of what you can lose. So two to one, three to one, whatever that is. But it should be something bigger. So if it’s one to one, why bother get something riskier with the same return when I can buy something which there’s no risk or at least there’s never no risk, but there’s very small risk.

Tony Nash

Right. And the other thing that I try to reinforce with people that is so basic that some people look at me and think I’m stupid by saying this, but interest rates are the cost of money. And if money costs five % in the US, money should cost a lot more in riskier markets, right? That sounds really stupid, but that’s just the basics of it. So –

Michael Ncoletos

No, it’s simple. It’s very simple. Unless you’re safer than the US, which safer doesn’t mean only a fiscal situation, which is better. It means you have rule of law, you have an open capital markets, you have a democracy. There are a few things when you say safer. It’s not just numbers. So if you have an overall safer economy, then you should justify a better interest than the US. If you’re not safer than the US, then you need to justify a higher cost of money. As you said.

Tony Nash

Okay. Hi everyone. We’ve started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeintel.com/BlackFriday and subscribe to CI markets for $99. Thank you. We always hear about China being in the ascendant. Albert, as we saw that Chinese vessel with smoke coming off of it yesterday, is China a real competitor right now if they don’t have a Navy to enforce their policy?

Albert Marko

Nope. Simple question is absolutely not. They don’t have any maritime, naval force to enforce any of their trade activities globally. Everyone points out. I think I’ve seen some charts out there of, Oh, look how many ports that the Chinese own. Yeah, but those host nations can evict the Chinese at any point in time with absolutely no repercussions. So it’s like-

Tony Nash

So does DP World out of the UAE, and do they command a world trade? They don’t. They run them out.

Albert Marko

They don’t. Yeah, it’s exactly right. These comments of China being a competitor to the dollar or the US in the near term is just a lame argument. It’s silly. I don’t take any of it seriously.

Tony Nash

Great. Michael, do you have any view on the timing of this squeeze? Are we in the middle of it now? Is this something that’s coming in a few months? When do you expect the intensity of it to really hit?

Michael Ncoletos

Well, the Fed doesn’t need, first of all, to raise rates anymore. You can stay here and the problem will continue. As the deficits grow, more dollars are needed from the market. I guess next year is going to be a bit tricky, unless, of course, because, and I mentioned this in the paper, because we have US elections and because of US elections, you never know what the government will do. Maybe they do another QE. Or if it’s not a QE, it’s something with another name, not to call it QE, and they throw liquidity into the system, this thing might pose. But I think positioning in the dollar in the next couple of years, you’re going to see the dollar much higher.

Albert Marko

I agree with that. That falls right into my political outlook, where in order to combat inflation, they’re going to have to keep the dollar high. That’s just either raise rates or keep the dollar up to a level where it just suppresses inflation over the long run. That’s same view as me.

Tony Nash

Interesting. That’s great, guys. Okay, so let’s move on to the next topic on year-end markets. Bob, you already mentioned there’s only a few trading days left in November, and I know you cover a lot of markets every day. I’d really like to get a sense check on where we’re going into the end of the year. We have higher interest rates globally, like we just talked about. Inflation seems to be abating, at least for now, and we can debate the magnitude of that. We have some geopolitical factors, but they seem to be easing, especially US, China, these sorts of things, seem to be easing up a little bit. Of course, there’s the Iran, Hamas thing, but that’s relatively local. Spending seems to be slowing. Us retail sales and all this stuff are down. We’ve had some dire retail outlooks for the holiday period. At the same time, corporate profits peaked in Q3 2022. You mentioned earning surprises and stuff earlier, but they’re slowing. I’ve got a chart up showing corporate profits, and they’re down fairly at a significant level since 2022. What are you looking at as we go into the last month of the year?

Bob Iaccino

One of the things I’m looking at from an equity market perspective is what’s going to break first. The reason I say what’s going to break is because I think it is a matter of what and not if. I think the soft landing scenario, you would have to believe that the Fed was possible of creating a soft landing. They were capable of it, which I don’t in order to. You would have to allow the Fed a victory lap regardless of… I mean, I agree with what Michael said when you have supply-side-driven inflation, the Fed doesn’t really have a lot to do with it. But they have been successful when you look at the data in slowing the housing market, and that’s about it. You need to see others slowing in order to believe that inflation is actually going to get to their 2% target, or they need to accept something higher than the 2% target. Now, whether they know it or not, they left the door open for that a couple of years ago. When Jerome Powell said, Because we’ve been below 2%, I’m paraphrasing, of course, he said, When we’ve been below 2% for long, we may need a little bit of time above 2% in order to reach an adjusted average of 2% inflation.

Bob Iaccino

I still don’t know what an adjusted average is. We didn’t learn that in statistics class. We just learned average. He could actually, at some point down the road, say, You know what? We’re between 2.8 and 3.1% is okay for now, which to the point of the elections next year that Albert brought up, and I think that could be one of the things they say going into the elections. They could actually put pressure on the Fed to say, Well, we’re allowing it here for a little while, and we’ll reassess in 2025 to see if we need to do anything more. Also, wages are growing at a rate. When you look at the three-month average of real wages, you’re seeing a level that isn’t consistent with 2% inflation. It’s much more consistent with about 3.2 to 3.8, 3.2 on the core, and you’re pointing it on the headline. So the driving factor for me going into next year really is energy. I’m a little biased because crude oil is the thing I trade the most. But as you mentioned, I look at 29 markets every single day, and when those are boring, I go to individual equities.

Bob Iaccino

But energy markets to me are the number one thing because despite crude oil and crude oil is trading at about $74 on NIMEX right now, 78 on Brent, that’s still high historically. We actually talked to Tracy Shuchart, chigirl about that on a recording that will release this coming Wednesday. I’m sorry, this coming Wednesday, but she’s the one who brought it up and it struck me because we tend to think as $70 oil as being, Well, that’s okay, we’re back down below $3 a gallon. But that is still a relatively high price historically. Put that up against the higher interest rates. I got in trouble for on a Bloomberg TV interview about a year or so ago where I mentioned that there were somewhere in the range of 37-40% of C-suite people in the S&P 500. But the last time we had rates this high, they were in high school. Some of them weren’t born. The journalist that was interviewing me at the time got offended because she was in high school the last time rates were at this level.

Tony Nash

You could be bragging, right?

Bob Iaccino

I know. She should have been like, That’s me. That’s me. And she said to me, Well, they could read, Bob. And I could tell she got offended by that. And I said, I didn’t say that they couldn’t read. What I said was, and I’ll go to the old Mike Tyson quote that I bring up a lot, Everyone has a plan until they get punched in the face. And these people are about to get punched in the face with rates they’ve never had to deal with. You take Silicon Valley Bank as an example. They’re out there having DIE parties, and I’m not judging that, rather than hedging their to maturity interest rate risk, right?

Tony Nash

Right.

Bob Iaccino

Because they never had to do it before.

Tony Nash

Yeah, there was at zero interest rates, there’s really no… You have the nominal, say, punishment for risk, but nothing beyond that. Now, your punishment for risk is multiplied over the nominal cost.

Bob Iaccino

You brought up the cost of money, which is a very real thing for consumers as well as investors. We’re going to go into… The holiday season is a big deal to me, and energy prices are a big deal to me. How much more do consumers themselves even at their higher wages? Because while we’re looking at potentially 2.8 to 3.2% inflation next year, that’s on top of the inflation that we’ve already had. The news media tends to do consumers a disservice by saying inflation is falling. That does not mean prices are falling, and the three of you know this. That does not mean prices are going down. That means the $30,000 car that became a $38,000 car is now a $40,000 car. The increase is not as much, but prices are still increasing. You pile on higher energy prices, which is not a guarantee, it’s not a given. I think there’s a lot of trouble going into maybe Q2, Q3 of the markets next year.

Tony Nash

Yeah, I’m with you all. I feel like the consumer is really stressed, but I hear this stuff every day with people telling me the consumer isn’t stressed. But I see it in front of my face every day when I go out into –

Bob Iaccino

They say they’re stressed. Paul Krugman and put it… I work a lot about it. It was about a month ago, and I just recently found it and retweeted it because of the just complete ridiculousness of his stance, saying that consumers are complaining about their financial position, but it’s not as bad as they think. I’m like, What the hell are you talking about? Somebody says they can’t pay their bills, and Paul Krugman is out there saying, Yes, you can.

Tony Nash

Right.

Bob Iaccino

Are they talking about?

Tony Nash

He pay my bills if he wanted.

Albert Marko

Paul Krugman is nothing more more than democratic mouthpiece at this point. He doesn’t say anything relevant to anything economic at this point in time, in my opinion. Every time he speaks, he just says something more ludicrous that is just absolutely out of bounds.

Bob Iaccino

I can agree more, and I don’t care that he’s a democratic mouthpiece. Just say you are. Don’t throw yourself in the Nobel Prize-winged economist anymore, even though that’s technically a fact.

Tony Nash

I’ll say this in Krugman defense. I had his international finance textbook grad school, and he writes an amazing textbook. We’ve got to give them.

Albert Marko

That’s the problem is because the guy knows he’s a smart guy. There’s no question that a smart economist, financial guy. But for him saying these ridiculous things that, Yeah, you can pay your bills, even though everything’s 30% more than it was three years ago, is insane.

Tony Nash

Right, and cards are loaded up and all that stuff. I want to ask you about tech. We have a massive concentration of equity risk in tech right now. I’ve got a chart up on the screen showing the relative concentration in tech compared to other sectors. It’s interesting, you mentioned energy, and if anything, people are less concentrated in energy than they were a year ago. Tracy Shuchart actually posted this earlier this week. What are your thoughts on tech? We just saw this OpenAI nest over the last week. OpenAI is the peak of tech right now. The governance in OpenAI is terrifying. We all saw it play out and live. I would submit that the governance in OpenAI is more representative representative the governance in tech than not. We have this concentration of investment in tech, which is risky anyway. Then we have governance issues playing out, and people want to act like that’s not relatively normal in tech. Can you talk to us about your views on tech and what you see? Is OpenAI, do you you reflective of governance in other tech areas?

Bob Iaccino

Well, I have no insight in a company like OpenAI, but what I do like to look at is an equity sector backtest and describe what the four sections of equity market performance look like to me. One of them is recovery, which is faster growth, slower inflation. Another one is deflation, which is slower inflation, slower growth. Then you got reflation, which we went through a bunch of years of with faster growth, faster inflation. Then you have stagflation, which we all know what that is. It’s faster inflation, slower growth. In three of those scenarios, scenarios, is in the top five in terms of their historical returns. Worst-case scenario, they’re in fifth place if you have slower inflation and faster growth. But I think we have a better chance of stagflation or deflation over the medium medium term and performs poorly in deflation, but doesn’t actually perform that badly in periods of stagflation. Now, granted, we haven’t had that many. But the number one one performer faster growth, faster inflation, and faster growth, I’m sorry, faster inflation, slower growth is energy. That’s why, again, I look toward energy because in third place in both of those backtests is technology.

Bob Iaccino

If energy is rising and it’s having an effect on inflation to where we have inflation not quitting, I want to be in tech, even though that might point to higher yields. But when you look at a yield equity backtest, the only time when tech suffers is when the yields further out are struggling, specifically the 10-year yield. If the 10-year yield is rising, tech tends to underperform. If the short-term yields are rising, let’s say that the Fed is hiking and the market thinks that it’s going to work, tech outperforms again. It’s difficult for me to see stocks going up without seeing tech going up. But my base case is actually the stocks don’t perform that well in 2024, specifically in the second half of 2024, which would mean stock tech would lead to the downside. Does that make sense?

Tony Nash

That makes total sense. Do you think-

Michael Ncoletos

Can I add something to that?

Tony Nash

Yes, please.

Michael Ncoletos

Well, I agree agree 100 with both. Technology mostly the ones that do not have a bottom line are a duration asset. When the duration gets hit, they get hit as well. It’s as simple as that. When they have a a bottom then it’s a DCF, and depending on your discount cash flow or whatever, net present value or whatever you’re doing, then you can assess a value which may be doing better or do well. But again, I think you hit it right on the nail on the head. I view it the same way. I just wanted to add that.

Tony Nash

Albert, what are your views on tech?

Albert Marko

As long as the higher interest rates are remaining, I don’t know what tech is going to be how they’re going to be able to perform going into 2024. Obviously, the Fed likes to use the Mag Seven stocks to pump markets, but long term, they’re so riddled with debt and they’re holding it and their interest rates are just higher for longer. As long as the market is offside again on this pivot or rate cuts, I don’t see what tech is going to be able to do in 2024. We’re already at stratosphere levels on tech. I think think we have 35 times earnings or something like that. It’s absurd. I agree with Bob. I don’t see much of what tech could possibly do. Would I not want to… I mean, I’d sure as hell want to hold it if the market shifts, knowing full well what the Fed can do. But for me, I don’t see much play here going up.

Tony Nash

Sorry, NVIDIA is 116 times earnings. Right now.

Albert Marko

Oh, sorry, I was probably referencing 2021 levels.

Tony Nash

Just to break that down, as the market is saying that it will take 116 years of earnings to properly value the equity price price That’s what the market is saying right right now, I mean, you guys trade more than I do, so I just want to make sure I have that right.

Bob Iaccino

That was the very first definition that was given to me as well. Yeah, the very first one one I’ve ever I’ve always held that in the back of my head because even if you’re looking at 35 EPS during times of bull markets, the things that people are buying are between 28 and 40, and then they get as high as 116, obviously. But to what Albert said and to what Michael reiterated in the simplest of terms, again, thank you for that. When these companies raise money, they like to go to the public markets. And if the public markets aren’t doing well, they are not going to to like the yields do because the vast majority of them are not that cash positive. We’re not talking about the big seven here. We’re talking about the vast majority of the tech sector. Now, how much has to happen for the tech sector to drag the big seven down? Well, I think that’s more a matter of taking profits than anything. One of the biggest moves lower we see in these high flying names, and I’ll throw Apple in there, even though Apple is probably more of a value stock than a growth stock that it used to be, they will sell those because they don’t want to lose on the other positions.

Bob Iaccino

They’ll sell them to cover options positions for margin calls, things like that. That’s when those start to get hit. There was the big news story about Michael Burry of the big short short betting against the SOX, the Semiconductor Index. They talked about how he took $47.6 million position. We took it an option, so it’s not $47.6 million. Again, the legacy media doing a terrible job at everything. And by the way, sidebar, legacy media would want us to argue about this stuff rather than agree and have a consensus as to what things are looking like. That’s why I like these formats so much more, because if we do agree, we should be allowed to agree. And it’s part of the reason I got kicked off CNBC for having that fight. But anyway, when you’re talking about moving forward, what can happen to the tech sector, we all acknowledge and understand that tech is going to lead the future of all nations. Nations. So you’re buying a currency, the first definition I learned of buying a currency is you’re buying a share of stock in that country’s economy. Economy. So you’re advanced in tech, the currency tends to benefit from that, hence the US dollar remaining strong for a long, long time, among all the other things Michael mentioned.

Bob Iaccino

But when you’re looking at tech falling, tech will be the first thing that people buy dips of. It will also be the first thing that they cover when those buying of dips don’t don’t if yields are higher for longer because these companies will need to manage a lot of their cash flow based on higher yields they have not had to do for two decades. I think that backs up both what Albert and Michael are saying in terms of why yields actually matter. They don’t matter for inflation today. They matter for the condition of the economy 18 months from now, two years from now, and how we adjust to these inflations. Because, again, I don’t even know how many of us on this stream are old enough to remember those rates. I remember my dad dancing because he got 6% on a house. He was thrilled because his first house was at 14% or 12%. This is a very new phenomenon, even rates where they are now. I wonder if the Fed will blink. I don’t know if they will or not. I’m curious about it.

Tony Nash

I remember my parents with a double mortgage in the early 1980s. Yeah. We have a lot of treasury people and a lot of CFOs who I don’t think… I don’t know if they’re ready for the… Yes, they can read, but I don’t know if they’re ready for the lessons that they’re…

Bob Iaccino

My father literally danced. He had a friend who had an accordion and knew how to play it. He danced the Tarantella for about 15 minutes because he got 6%. I’m sorry, I’m a child of immigrants, and that’s what we live with.

Tony Nash

Fantastic. Okay, great. Thank you for that, guys. Guys. Hey, talk about Argentina for a little bit, but because, of course, we had that big election in Argentina, and we saw a radical radical and according to Bloomberg, a madman, Milei, elected in Argentina. He’s got great hair, of course. This Bloomberg snip that I’m showing on screen right now, evidently, Bloomberg believes he’ll only help rich people and that only rich people want Argentina to end their economic slump. Bob, you’ve made some comments about media, and this is the stuff that we see there.

Bob Iaccino

Turning off Bloomberg as you speak.

Tony Nash

Yeah. With the Milei win, of course, the MSCI Argentina Argentina rally up 22% since October 31st, which is great. Great. Albert, what can Milei actually change? If you were in charge of Argentina, well, first of all, what could he change? Then if you were there, what would you change?

Albert Marko

I don’t know what he can change, to be honest with you. Argentina is riddled in debt. I have a suspicion that a lot of the debt is not reported in some special vehicles vehicles whatnot, and they’ll probably find out when they unload that just as as the interest-

Tony Nash

Yeah.

Albert Marko

-in office. Office. He doesn’t really have… Listen, I like him. He’s quite a character. He says some crazy stuff, some stuff that makes a lot of-

Tony Nash

I can see you liking that.

Albert Marko

Yeah, and I do. And I like the guy personally. But he doesn’t have a support structure. I don’t know who is going to be in his cabinet at the moment. His rhetoric for elections is far different than actual policy when you’re in charge of things. I don’t know-

Tony Nash

I’ve heard it’s hard.

Albert Marko

It is hard. And I don’t know what he can actually do. And I’m afraid that if he starts just firing people left and right and all these different institutions, that has to be all rolled up into something else. I mean, you just can’t just eliminate an entire ministry of so and so without some repercussions. I don’t know what he can actually do. I don’t really have a positive outlook for Argentina, regardless of him or anybody anybody else. In charge for the next 12 months. But like I said on Twitter, I like to reserve judgment until I see who his cabinet positions are. Until you see that, it’s really hard to make an assessment on the guy and what he’s going to be able to do for Argentina. He’s talked about dollarizing Argentina. Which in principle I agree with. It would absolutely stop hyperinflation in Argentina. But the reality is with what dollars is he going to do this with? Their debt is enormous and they don’t even have enough dollars to dollarize. It may be a five-year plan, perhaps, but but it’s not going to happen. I’m sure Michael can sit there and tell you more about the dollar and how they could possibly dollarize, dollarize, I don’t see a viable way that his election rhetoric can match up with policies going forward in the next 12 months.

Tony Nash

Bringing up Michael is a good point. Michael, you live in Greece?

Michael Ncoletos

Sorry, did I understand? In order for Argentina to dollarize, it will need another, like braided Balls type of trick. The US government has to be on board and they need to fund the Argentinean economy and make quite a few deals on this, make a few agreements, which I think is not that unlikely given that we’re also going into a geopolitical conflict, if you want to put it this way. So if you look at the Cold War between US and Russia, you had spheres of influence. I guess we’re going to go through that again. And it feels to me that Argentina is closer to home in terms of the US. The US will want to bring Argentina into their sphere of influence and help the new government in that sense. That’s my feeling. But this has nothing to do with economics, has to do more with a geostrategic view.

Tony Nash

Okay.

Albert Marko

Yeah, the problem-

Michael Ncoletos

I know with other things.

Albert Marko

Yeah, the problem with that is is has been notorious of installing leftists throughout Latin America. Look what happened with Brazil and then Colombia. Also. I have a suspicion that Argentina is set up to fail. They don’t want a conservative in there to actually succeed in economic policies.

Tony Nash

Can we just ask… Michael, you live in Greece a decade ago or so. They were facing very difficult economic times. When you look at Milei, just your top-level assessment, do you think he can be successful?

Michael Ncoletos

Well, Greece had a blessing and a curse. The blessing and the curse was the the in the sense that because we had a hard currency, things did not collapse. That was the blessing. The curse is that because we had a hard currency, it took us 10 years to adjust. So it depends how you want to see it and depends how, as Albert says, what the cabinet will be and what the policies will be. It comes down to pure policies and economics economics how they’re going to deal with this. If they want to be serious, they’re going to get the heat for 24 months and then they’ll be okay. If they don’t want to be serious, this can last for another 20 years and we can be having this discussion every five years.

Albert Marko

I’m going to have to agree with option B on that one. I just think that it’s going to take a long time for Argentina to pull out of this. Even with the policies, if he enacts some policies that are good, that’ll probably be credited towards the next leader of Argentina and not the not Milei.

Tony Nash

Let me just wrap this up. I know Bob needs to go, and I know we need to give our viewers a little bit of time to digest this stuff. Whenever there’s a win like this, and I’ve heard this in the the over the past couple of of days. Person on the right wants to believe that it’s a signifier of a bigger movement. Like, Milei’s win means that geopolitics is moving to the right, all this other stuff. Do you think think real or do you think it’s just a one-off?

Albert Marko

I think that there’s certainly a building momentum for conservative governments out there. But the fact of the matter is a lot of the leftist players control the markets and the media, and it’s hard to actually displace that in the near term. I think it’s going to be at least another… It’s either going to be another decade before conservative government stay gold or they’re going to need some some black swan or economic economic to the point where people are just fed up and don’t want to hear it anymore.

Tony Nash

Which is what happened in Argentina, but the question is-

Albert Marko

Yeah, we’re talking about a global thing. Yeah, that’s exactly right. We need a global thing. I think a good indicator would be what happens in in Holland. The next election coming up right now.

Tony Nash

Okay, just real quickly tell us what’s happening there.

Albert Marko

Well, the leftist government has absolutely butchered the economy there, and I think the people are pretty much fed up. But the problem problem is if the Conservatives get in there, do they have enough to actually have a majority in Parliament to lead lead coalition? I don’t even think that’s possible over there at the moment.

Tony Nash

Okay.

Albert Marko

We’ll see.

Tony Nash

Interesting. I think there’s a lot to come come Argentina, as you say. If he doesn’t have the people around him who can help him lead, it’s going to be extremely difficult for him to have much of an impact. I am so grateful for your time and your thoughts. I really appreciate this. Thanks. Have a great holiday weekend and have a great week ahead. Thank you.

AI

That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

🔥BLACK FRIDAY SALE!🔥 80% OFF CI Markets! Get it for only $99/yr: https://bit.ly/3uscpEI 👈 🔥 Promo ends Nov. 28th ⏳

Welcome to “The Week Ahead” with your host Tony Nash.

1. The Stock Market – Gone. Tony Greer provides insights into the current state of the stock market and where it might go before year-end. He also explores the relative levels of the SPX and the VIX, and shares valuable perspectives on where equity markets might head.

2. Record Oil Demand & Growing Gas Supply. Tracy Shuchart discusses the dichotomy of global oil demand reaching record highs while crude oil prices continue to fall. She discusses the implications of Saudi Arabia’s commitment to supply cuts and the EIA’s projections on LNG export capacity. Why are LNG export facilities concentrated on the Gulf, and what does it mean for global markets?

3. China, US & Geopolitics. Albert Marko reflects on recent diplomatic victories between the US and China, particularly the reassurance from China regarding Taiwan. He shares the dynamics of US-China relations, the risks involved, and China’s change in diplomatic tone. Whare are the potential geopolitical risks on the horizon and the internal and external challenges facing China?

Transcript

Tony Nash

Hi, everyone. We’ve started our Black Friday sale at Complete Intelligence, and you can subscribe to CI Markets for $99 for the whole year. That’s 80% off our normal price of $500. Starts today, and it goes until November 28th only. Go to completeantel.com/blackfriday and subscribe to CI Markets for $99. Thank you.

Tony Nash

Hi, everyone welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Tony Greer, Tracy Shuchart, and Albert Marko. This week, a lot of interesting statements. When I contacted Tony Greer about the show, I said, What do you want to talk about? He said, Four words. He said, The stock market gone. That’s what we’re going to talk about today, the stock market gone. We’re also going to talk about record oil demand. We’re talking about growing gas supply. We’re finally going to end with Albert talking about China, the US, and geopolitics coming out of that meeting in San Francisco. Guys, thank you very much for joining us on this Friday. Tony, like I said at the top, when I contacted you, you said the stock market gone. I really want to understand what that means. That was very concise. Can you walk us into what does that mean? What should we be watching right now? Why are you saying that? I’ve got on the screen just a snapshot of the VIX and SPX just so that we can understand what’s going on in those markets as well.

Tony Greer

I think this week, Ton was… Sorry, I just have an alarm going off for no reason. This week was watershed week for me for observing the stock market. I feel like we have a date that will live in infamy on Tuesday, November 14th. We got CPI data. It was benign. The data wasn’t off by much, but the market clearly, by virtue of its response, responded that inflation is no longer going to be an issue. Right? Bonds rally, stocks rally, both are dramatically oversold. Both have huge, usually negative sentiment. And so they up and take off, right? So what I feel is that the stock market has just gone uncaged because that move broke it out above all major moving averages that day in a major magnitude S&P rally. We had a major magnitude bond rally, huge magnitude bond rallies that day across the curve. New lows in rates. New low closes in rates today. So all of that follow through to me means that the high in Fed funds is in. It means that we are now going to be in a very tight range of Fed funds. And I feel like the market just weathered a very terrible storm.

Tony Greer

And so now the risk has changed where the risk to the stock market was the bond market. If we had hairy inflation data, the bond market was going to collapse and scare the crap out of the stock market, stocks were going to go with it. Now that has all been removed. All been removed, all been removed. Then crude oil went down $15 and further removed the idea that there’s going to be any brand of inflation scare coming across the airwaves. With that all said, technically the breakout is intact. I don’t want to take on too long. Go ahead, Ton.

Tony Nash

No, that’s great. What people have been saying for the past year or so is higher for longer. The er part of higher is you’re saying is gone. It’s going to remain high for a long period of time, but it’s probably not going to go higher. Is that fair?

Tony Greer

Are you talking rates or inflation?

Tony Nash

Rates and inflation.

Tony Greer

Yeah, similarly. Similarly, headline inflation is gone. It’s not going to be back. We’re not going to see any pops in CPI that’s going to scare the market anymore.

Tony Nash

Over ever or, I mean, not ever, but like over the next two years?

Tony Greer

Yeah. Well, give it six months to a year, right? Oil price has been buried, gasoline prices are getting buried. The gas price is going to go down in election year come hell or high water. I just think that that removes an unbelievably huge risk that the stock market was pricing in, right? It priced it in right into the Treasury refunding. It priced it in right into the Middle Eastern conflict. We came out of that. And so with.

Tony Nash

All of that- That all sounds good to me. That all sounds really good to me. Tracy, you know the rules here. Jump in. Don’t raise your hand.

Tracy Shuchart

I’m trying to.

Tony Greer

Sorry, Tracy. Sorry I keep cutting you off. I know.

Tracy Shuchart

What I wanted to ask is, what do you make of that health insurance print? It was negative 34 % and CPI. I mean, we know they changed the metric, but that’s really what brought down the CPI, right? Because it’s actually included in core.

Tony Greer

Absolutely.

Tracy Shuchart

What happens if we have a revision or is the market going to care and the market’s not going to care? It’s already-.

Tony Greer

I was going to say, Trace, I’ve matured in my thinking to the belief that the market trades off the data that it’s given and takes it totally on its face. Nobody’s reading into… Yeah, the health insurance was something that the micromanagers of the market follow. The rest of the world, CPI point one, doesn’t care, stocks, bonds, gone. That was the statement. That’s what they said. That’s what I’m going with.

Tony Nash

Can I comment on that, Tracy? Sorry, go ahead, Albert.

Albert Marko

No, it’s right. It’s perception is reality in this market. They don’t care about revisions. They can go back six months from now and say, Oh, yeah, inflation was actually 5%. Nobody’s going to care at that point. It’s done. It’s over and done. These algorithms and trades, they run on the same day. I mean, if you see some decent number, that’s it. It’s gone for the next five business days. It’s just what it is at the moment.

Tony Nash

I’ve actually trademarked to wait for the revision if you guys haven’t paid attention on Twitter. I do pay attention to revisions, but I think I’m the only one. It’s obvious that Tony doesn’t care. But what it also tells me with that healthcare change, Tracy, is that the guys who publish the economic data want those numbers to come down and they will change whatever mechanics they need to make them hit the zone that they want so that guys who just look at the top number, they see what they want to see. That’s part of the statistics game, I think. I think, Tony is right. Take it for what the top-level print is. Digging down is awesome for nerds, but it takes too long for traders. Is that right, Tony?

Tony Greer

A little bit like that, right? It’s like if we’re not going to trade off of the data that comes out officially, then what are we going to trade off of? I feel like the market already done and dusted, decided that a long time ago.

Albert Marko

The only problem I see is whenever they make these ridiculous changes to weighing inflation or employment or whatever data point you want to talk about, just for me, it compounds the looming problem that’s coming with this market. Because they can have clear sailing as long as the geopolitical issues are in check, as long as the data that they can manipulate is in a certain range and so on and so forth. But if something goes wrong and it gets out of their control, that’s when we’re going to have a problem. Do I see that in the next six months? Probably not. I would have to say trade on the data. What else are you going to do?

Tony Nash

Yeah, my health insurance didn’t go down 37%.

Albert Marko

That was a criminal change. They’re using corporate profits as a metric of CPI. It’s just insane for me. But whatever, we can go on that for hours. But it is what it is.

Tony Nash

So slowing inflation is a good thing, but we saw there’s this little company called Walmart. And on their earnings call, their CEO said, We could be facing deflation in a few months. And we also had another CEO come out in their last earnings call saying that we’ve already seen deflation. I’m starting to get the sense that deflation is going to be one of those terms that we’re going to hear a lot in earnings calls for the rest of this quarter and probably next quarter as a justification for shrinking profitability. What do you see with that, Tony? Are you expecting not just inflation to stop or trail off? Are you outright deflation? If that happens, how does that impact markets?

Tony Greer

I try to stay away from economic predictions because I’m not a biologist. But if I had to trade off of what I feel like the bond curve and the yields market are telling us, I feel like the curve had a very violent double bottom down at -100, and everybody was convinced the recession was coming. Then the curve went and rifle all the way back almost to zero, two cents. Now we’re somewhere in the middle at -40 basis points, which means that we’re still going to be navigating some waterfalls in the stock market. They’re just going to be a lot more shallow than anybody can imagine. That’s great. Yeah. And just related back to the inflation deflation thing, I would imagine that the narrative becomes a little bit deflationary, which I think is just going to be more fuel for the bond market to get off the lows and get rates back even another 25 basis points lower. I think that’s going to be even better for Mag 7 and any lowering rates in the end of the curve. I mean, it’s going to be good for home builders. It’s going to be home construction is going to rally.

Tony Greer

Semiconductors are going to rally. Like all of this stuff is just going to start going. Breakouts are really tradable right now and they’re going to continue.

Tony Nash

Interesting. Albert, what do you see?

Albert Marko

What are we at? 4,500, 4,500 and change, whatever it is today?

Tony Greer

Yeah, 4,500 a quarter.

Albert Marko

Where do we go from here? I mean, what are we talking about? 4,800, 5,000 on the S&P? I could see that at the end of the year towards the election. I for sure can see that. But for the next three months, we go to what? 4,500, 4,600? 4,800? Then what? We’re at all time highs for everything across the board at that point.

Tony Greer

Breakout City.

Tony Nash

Yeah.

Tony Greer

Performance chasing, career risk, things. Like that.

Albert Marko

Yeah, listen, I don’t discount it. It makes me vomit inside a little bit, but I don’t discount it.

Tony Greer

Play the game, man.

Tracy Shuchart

You have to think is all these CTA chasers, their model’s just flipped. They’re going long because their models flipped, and they don’t really care what’s happening in the underlying market.

Albert Marko

Yeah. For me, it’s like I look at this in a political script way, and if they want to get the market booming by the election time, I think they’re going to have to fake a crisis in February, whether it be banking or something, just to be able to relaunch it back up again. I just don’t think that they can stay in this 4,6, 4,7 area, 4,600, 4,700 area, and keep it there for nine months.

Tony Nash

But a couple of months ago, we were talking about S&P at 3,600 or something like that. And obviously, we’re not there, right?

Albert Marko

No. They got to lose control first. And they’re in no way of losing control of anything. There’s no China, there’s no Europe. So what’s going to happen?

Tony Nash

We went through the regional banking crisis. We went through inflation. We’ve gone through housing, worries about housing. And now everybody says 60 % of people in their homes or whatever, and it’s not a big deal. And we’ve gone through a lot of these concerns. And Powell, I think, is looking pretty smart right now. I mean, everybody wants to snipe at the guy, but he’s actually looking pretty smart right now in terms of managing things and managing the markets pretty deathly. Am I wrong on that?

Tony Greer

Trying to close the fucking door.

Tony Nash

Right, exactly.

Tony Greer

That was the best line. I’m sorry. That was the best line ever.

Tony Nash

Oh, yeah, exactly. He showed us he’s a real human being. Which is great.

Tony Greer

Yeah. I mean, it was cool as a cucumber for a change. A leader was like, You’re kidding me? Close the fucking door, man.

Tony Nash

Right. As a trainer, Tony, when you see the way Powell has acted and continues to act, is he providing a consistent, confident approach that you’re looking for as you look at markets?

Tony Greer

I feel like he’s a little bit volatile. I feel like sometimes he exudes pretty good confidence and I can listen to him. Other times I’m like, I feel like this guy is a deer in the headlights and has no idea what to say. He gives me mixed feelings.

Tony Nash

Okay. Do you think we’ll look back on him and go, Wow, he was handled things as well as Greenspan, although he didn’t do it as smoothly as Greenspan did, but he handled some tough things and got things back on track.

Tony Greer

I was going to say it would be hard to say that Powell made too many enemies during his tenure. He’s trying to help. He’s helped us out of the SVBI. He stewarded that fairly well, I thought, and doing a way better job containing inflation than I ever would have thought possible. But it’s just further proof that if you control the money supply and the narrative, you really control everything.

Albert Marko

That’s right.

Tony Nash

And puking fiscal doesn’t hurt either. Right. Having a DC that wants to spend a ton of money doesn’t really hurt.

Tony Greer

100%. That’s going to be part of the reason why the stock market is going to go up and keep going.

Tony Nash

Yeah.

Tony Greer

In my opinion. You know what I mean? God forbid the economy gets back on its feet and they still don’t have an inflation impulse to battle. That’s a really bullish cocktail for stocks.

Albert Marko

It’s tough because they still have wage inflation hitting corporations at the moment and they’re starting to leak out jobs here and there. So I don’t know. Man, it’s just hard for me to swallow that this economy is going to get back on track when inflation is still 20% above 2019 levels, and jobs are starting to leak away from the publics. Man, it’s just so hard for me to swallow, Tony. It’s hard.

Tony Greer

No, I hear you. Jobs going down is part of the volatility. We get a weak economic data, we get a weak print and bonds go off on another leg higher. To me, that could be totally part of the trade.

Tony Nash

Yeah, but here’s what I’ve seen. In the recession in ’91, which nobody talks about it anymore, we had huge job cuts. Boom. Everyone fell off in about a month. In 2000, same thing in tech and finance, boom, everything cut off. 2008, across the economy, everything cut off within two, three months. Here we saw Meta, Amazon, Microsoft lay a bunch of people off a year ago. Then over the past couple of months, we’ve seen banks lay a bunch of people off, especially in their mortgage units and their lending units, that thing. What I’m starting to see is clusters of layoffs, not one single economy-wide action. I’m not saying this time is different, but I’m saying a few different things happen by sector over an extended period of time. We could still have that event where a bunch of jobs disappear within a month. But we are seeing big clumps of jobs. We saw this a year ago in tech with a bunch of jobs just disappearing over a week or two.

Tracy Shuchart

The only thing that I’m concerned about is that we raised rates so quickly, like faster than almost any time in history. I feel like maybe markets haven’t completely digested this yet. That’s the still what if question in mind.

Tony Nash

What does that look like? Markets digesting it. What does that look like to you?

Tracy Shuchart

That means that I don’t think it’s really hit the economy yet. We haven’t really seen labor come off. We haven’t… We haven’t really seen those effects, except for maybe, I guess you could call the commercial real estate market, but one could argue that that was already in trouble from COVID and that was just a carry-over and just got worse with rate increases. I just think that I’m just still a little apprehensive or a little skeptical that maybe markets haven’t completely digested this rate increase and that we could be blindsided, well, quote-unquote, blindsided in some respect if things really start to fall apart. I’m just saying it’s just in the back of my mind. I’m not saying it would happen.

Albert Marko

The market keeps chasing this Fed pivot and Fed cuts. Now they’re pricing cuts in May, I think that’s what they’re looking at right now, four cuts for all of 2024. That’s not happening if super core inflation doesn’t trend down. That’s simply not happening. I don’t think the market thinks that’s going to… For sure, the market is not looking at that. They’re not contemplating any more rate hikes. I still think we’re going to get one or two in 2024.

Tony Nash

Q1.

Albert Marko

What’s that? Yeah, I think Q1, Q2, we’re going to get a rate hike, one or two of them.

Tony Nash

I just want to tell you, from my college football perspective, since we’re right in the middle of the season, Tony Greer is our quarterback who just snaps back and forgets the last play, just keeps on plugging. Tracy is our offensive coordinator who has a little wider view, a little bit afraid of the defense coming after. Albert’s the GM who’s just taking everything into view and looking for the long term. It’s great.

Albert Marko

Yeah, well, quarterbacks wins championships.

Tony Nash

That’s right. Yeah, they do.

Tony Greer

I just want to play the game right and make sure that I’m on board if there is a seasonality-driven rally that to me seems like set up a picture perfect scenario for that to take place and in magnitudes that people are not going to want to believe and it’s going to be all that much harder to jump in and get position for. And that’s why I think it’s a lasting thing.

Tony Nash

Hey, Tony, just for reference, when you look at a position, how long do you usually take a position for? Is it a day or a month or weeks?

Tony Greer

I start off with a two day to two week time frame, almost with pretty much everything, Tony. That’s how I address it. And if I live through a two week time frame, then I’m usually just go on cruise control, which is putting in a trailing stop scenario and then let the market take me out. And in those conditions, I’ve been in position for like two years. You just have the trailing stop right up behind you if you get it really right. Okay, great. It doesn’t happen a lot, but it happens sometimes.

Tony Nash

Fantastic. That’s really good context to understand because you’re looking at things right now for a relatively near-term trade turnaround, right? I think Albert’s looking at things longer-term, thinking elections and politics and that thing. That’s really interesting. Not that Albert doesn’t go in and out in a day at times, but I think that’s really interesting.

Albert Marko

Multiple times in the day.

Tony Nash

Exactly.

Tony Greer

Speaking of the election, who knows? But Trump was good for the market, right? And if the market starts pricing him in, that’s a bullish scenario that I didn’t even calculate what that will do to the markets because I don’t know if that’s going to be the case, so I don’t think about it yet. But man, I think that would be a bullish scenario. The guy was good for the economy, good for the stock market, right?

Albert Marko

Well, you would have a double positive. You’d have the Dems trying to push up the market because they want to look good for the election. And then you’d have some people in the market pricing in Trump because they think he’s going to be good for the election.

Tony Greer

I wouldn’t be short stocks if Donald Trump got elected President.

Albert Marko

Oh, God, no. Hell, no.

Tony Nash

Interesting.

Tony Greer

Like, period. Not for a day.

Tracy Shuchart

It would be like all in everything.

Tony Greer

Yeah, right? I’m saying that day that I was talking. About-

Tracy Shuchart

I would triple my energy positions. Right away.

Tony Greer

Yeah. Oh, yeah, forget it. Yeah, totally. But on that day, the reason that day was so insane to me is because there were 17 sectors that I follow that had a two-sigma or more, most of them breaking out through moving average resistance. On any given day like today, there’s one stock with a two-sigma move on the board today. On any given day there’s probably an average of 2.3 two-sigma move, stock movers. That day, 17 sectors all rallied in two-sigma fashion. That is the everything rally. That is like if you’re short, you’re dead.

Tony Nash

Yep. Wow. Interesting. Let’s definitely keep an eye on that as things move. I’m not sure, Albert, it’s too early to take polls at face value, right?

Albert Marko

No, I mean, it’s way too early, and you have all sorts of variables like Democratic and Republican operatives trying to show some narrative in the way they ask questions in the polls, and then you have just voters flat out lying. You have people that are pro-Biden that they want to see Trump get in, so they give Trump extra votes in the polls and vice versa. It’s a mess. Polling is a mess right now.

Tony Nash

Right.

Tracy Shuchart

Well, it’s not. They used to call you on the phone, or they call people on the phone. I mean, who has a phone anymore? Boomers? I mean, like a landline, right?

Albert Marko

Yeah.

Tony Greer

Seriously.

Tony Nash

And cable. Who has a phone and cable?

Tony Nash

Okay, guys. Let’s move on to energy, Tracy. This week you tweeted about global oil demand at season record highs. Since we have crude prices falling, I want to understand what that’s about. We also have Saudi Arabia saying they will continue supply cuts. Why is that? Why is crude falling when we have record demand?

Tracy Shuchart

Well, I think first that data was JODI data, so it lagged too much. That was September data, just to make it clear. But really, if you look at the OPEC monthly report, which just came out last week, they’re still showing demand, very supportive, and that’s only, say, a month lag. But really what we have seen is a lot of length come out of this contract since October to the latest COT report. We’ve seen about 40% of the length come out of that contract. Obviously, it’s going to be more after this week, but we haven’t really seen short positions initiated. For whatever reason, people are jumping out of this contract. Now, my hair, brain theory is that we saw this come out as soon as markets started to rally and we saw the great jump pile in into tech again. That only exacerbated after we had that CPI print. Then after the CPI print, we saw oil go down even more. We saw everybody jumping into that tech trait. I think that’s partially the reason, that narrative where you’re changing from the value to growth scenario. Does that make sense? Because growth stocks, as soon as you hear the Fed wants to pause, that pause narrative that we started hearing right before the last meeting at the very beginning of November, we started hearing a lot of this pause from all of the Fed heads, right?

Tracy Shuchart

That’s when we really saw a jump into growth again because that’s what those markets like to hear, because you don’t want higher interest rates and file into growth. In my opinion, that was part of the… That is part of the exodus and the liquidation and crude stocks. But really, it’s not that anybody’s getting short. It’s not that the fundamentals of this market has changed. The market still remains very tight. In fact, our US distill stocks, which are like diesel, heating oil, jet fuel, et cetera, are ending the fall season at their lowest seasonal level since 1982, and we haven’t hit winter yet. We definitely have a problem with the shortage in diesel, and it’s not just in the US. We’re seeing this in Germany as well, which is unbelievable considering their manufacturing has taken a complete dive. Manufacturing definitely takes more distillate. We’re seeing this distillate problem. I think that’s only going to grow as we hit into the winter seasons. Again, what I’m saying is the market is fundamentally still tight. I know that was a lot.

Tony Nash

It’s still tight, but prices are down because investors have rotated out of energy into tech. Is that, if I understood what you’re saying.

Tracy Shuchart

I believe is slow. I believe so. I think it’s because everybody loves to jump on that growth narrative, the Mag 7. It’s a huge pylon. I’ve been posted a chart on Twitter this week. Basically, 99% of hedge funds are invested after 12% at the beginning of this year. Since then, that rotation into growth pulls a lot out of value stocks. Nobody’s value investing, and it’s not just the energy. We can look at this across all the value sectors.

Tony Nash

I mean, a rug pole in tech would really kill a lot of people, right?

Tracy Shuchart

Yes.

Tony Nash

What’s that?

Albert Marko

And then some.

Tony Nash

Yeah. I’m shocked to see that number of hedge funds that highly invested in tech right now. But I guess it makes sense. If you’re talking about the rotation. We had another guest on about a month or so ago talking about the rotation out of tech, and we started to see a rotation out of tech, but it almost sounds like those guys have gone back in.

Tracy Shuchart

Everybody’s piled in, especially after that CPI print. I mean, it’s a rocket ship.

Tony Nash

Yeah.

Tony Greer

I’m calling something else that you have to consider in crude oil is Cushing inventories just saw a couple of pretty big builds and put them back into the range they were in over the summer rather than right off of their lows.

Tracy Shuchart

Still at historical lows, though.

Tony Greer

Yeah. No, I know, Tracy. I’m just trying to circle the fact that WTI this week was the source of the weakness, right? Wti is a five % gas is off one or two, and I think diesel is almost unchanged. I’m saying it was like a purely WTI slide. It was a pure supply-side issue. I mean, front month spread went from 25 cents back to 25 cents contango, and the front price front month dropped $15. That was the whole thing right there, if you ask me.

Albert Marko

Yeah, this ridiculous drop in this price. I mean, this is like Bitcoin’s time moves from the oil market. It’s just super suspicious, especially with an OPEC meeting coming up where I think they’re probably going to announce deeper and longer cuts.

Tracy Shuchart

For sure.

Albert Marko

Yeah. We’ll see what happens. I’m a long oiler. Right now, I’m a long oiler.

Tony Nash

You’re long. Okay. Interesting. Okay, guys. Then, Tracy, let’s talk about gas for a minute. We saw this street from EIA talking about LNG export activity from North America. Is this a realistic projection? That’s the first question, but also why are all of the US LNG facilities on the Gulf, which I would assume means they’re serving Europe. Why don’t we have any LNG Asia-facing? Because it looks like Canada is the only one that’s really serving Asia.

Tracy Shuchart

Well, because California. They are trying to phase out oil and gas, and so they don’t want any more pipelines. They don’t want any more. They want nothing to do with it. Same goes all down the Westcoast, right? If you’re talking water.

Tony Nash

Okay, so we’re not servicing three and a half billion people in LNG.

Tracy Shuchart

Right. Because of-

Tony Nash

We have the second most abundant LNG in the world or something? Or gas, sorry, in the world. We’re not serving three and a half billion people in Asia because-.

Tracy Shuchart

California doesn’t want oil pipelines and they want no oil and gas. Yes, correct. Basically, that is it. They’re trying to phase it out. There’s nothing you can do about it. Environmental groups. There’s too many problems trying to get more capacity through California. It’s just not going to happen. End of story, unfortunately. We do have LNG going to Europe. We do. But right now, the other problem for that is the Panama Canal.

Tony Nash

Tell us about that. What’s the Panama Canal problem?

Tracy Shuchart

Right now, there’s drought, and what they’re doing is there’s not as many ships can go through and not as many heavy ships can go through, so you have to split things. We saw the same thing in Germany last summer with the Ryan River. We’re seeing in the Panama Canal right now, people are paying on… I think the last figure was somebody paid $4.5 million just to jump the line to get their cars to go through.

Tony Nash

Wow.

Tracy Shuchart

In the Panama Canal right now. What that is doing is it’s causing prompt Asia prices to rise over European prices right now. That’s out into summer of 2024.

Tony Nash

Okay, wow. When I look at this map, the rest of the export facilities, there look to be two on the East Coast. Everything else is in the Gulf. Then we have two from Canada. It looks like there’s one from… No, there’s not one in Mexico. Well, there are a couple in Mexico, it looks like.

Tracy Shuchart

Yeah, but they’re not.

Tony Nash

Is there a lot of LNG export from Canada to Asia?

Tracy Shuchart

No, not yet.

Tony Nash

It’s mostly Qatar type of trade.

Tracy Shuchart

Yes. They’re building out their export, but it’s a case with Canada that’s a little bit too little too late because the liberal party or the party in charge there was like, We want nothing to do. We don’t see a base case for LNG until US exports started to-

Tony Nash

Who would want cheap energy? I mean, it’s terrible.

Albert Marko

That’s absurd.

Tony Nash

That’s absurd.

Tracy Shuchart

They do have capacity, and it’s good for them that they’re building out and they have more capacity coming online, so they don’t have to be as dependent on the US, and that’s for oil as well as gas. But ultimately, everything is focused and everything’s been focused really on the Gulf because we can still get it to Asia and we can get it to Europe from there. All the big companies, LNG, CHK, Oxy, they’re all building out big facilities. In fact, by 2022, we became the largest LNG export facility, and we still have a little bit more in the Gulf. We have the largest LNG export capacity in the world right now. We still have a couple more projects coming online out to 2027. The bulk is majorly done with, but it’s a huge area right now.

Tony Nash

Texas is the energy capital of the world and becoming the tech capital of the world. You guys can keep finance on the East Coast, but we’ll take energy and tech.

Albert Marko

Maybe if the Canadians priced things in hockey sticks and maple syrup, they’d see the light, but apparently, they don’t understand that whatever.

Tony Nash

Okay, great. Hey, let’s move on to this big China meeting that we had in San Francisco this week where US and China met, Biden and Xi Jinping met. It was a… Well…

Tracy Shuchart

Brain wreck?

Tony Nash

Sorry.

Tracy Shuchart

Brain wreck.

Tony Nash

It was a train wreck, but I think it’s been portrayed as this amazing shaking of hands and meeting of minds and all this other stuff. But I’m not sure anything material was really decided there. But one thing that was at least lightly committed, and this is where Albert takes his victory lap, is that China has no plans to invade Taiwan. Let’s dig into that first. Albert, on the screen, I have an interview we did with you on February eighth of 2021, where you said, Not going to happen. Taiwan invasion, not going to happen. It’s not going to happen. Since then, you’ve been saying it’s not going to happen. There are all these fear mongers out there, so many of them saying, Oh, China is going to invade Taiwan. It’s that season. It’s October, it’s April. The straits calm, they’re going to invade Taiwan. Now all these boats are lining up. But it hasn’t happened. I just wish that the Taiwan fear mongers would shut up for a little while and realize the dynamics of the China-Taiwan relationship and the US-Taiwan relationship, and I wish they’d listened to you. Take your victory lap, go.

Albert Marko

Well, first of all, you had it right with their forging slip, but they don’t have planes. They don’t have planes or plans to attack Taiwan anytime in their future. They don’t have the military to be able to… They can bomb the hell out of Taiwan if they wanted to, but they have financial repercussions, both by closing ports down. They also have investments in Taiwan and the semiconductor industry. The CCP elite, they have shadow money in those factories over there. So to make this assumption that China is going to just scroll in there and just burn everything down and take it over and install a new government and so on and so forth. It’s a tired argument, really. I’ve been going at this for, I don’t know, I think it’s like 2013. I love my NATSEC guys. The Pentagon guys are great and all, but they do have to justify budgets and their existence. But until there’s some shift in that area where the Chinese are extremely confident that they can win quickly in Taiwan, I don’t see any plausible way that it materializes. And even Xi comes over here now for this meeting. And initially it started off as him coming here as throwing an olive branch to let’s work together economically and so on and so forth.

Albert Marko

But then Biden says ridiculous things. The meeting was rushed and I don’t think really had some real agenda besides just shaking hands and taking pictures and pushing them out to the US and global media. Other than that, I don’t want to see what the purpose is of this meeting at all.

Tony Nash

California will have a glass of wine.

Albert Marko

It was like… Well, Yeah. Okay, well, sure.

Tony Nash

I’ve done work for and with the Taiwan government and the Chinese government. When you talk to people in Taiwan, there really is not a worry about China invading. I know that sounds anti everything you hear in America, panic social media, but the Taiwanese are not sitting on the edge of their seat waiting for the Chinese to invade because they have dealt with it for so long, and the chronic, continual, fear mongering out of certain voices in the US is just tiresome.

Albert Marko

Yeah, it is what it is. I mean, you have these World War III type guys coming out there. Even Friedmann at one point said the US is going to attack North Korea in two weeks. Things don’t materialize this quickly. I mean, for China to have serious intentions of invading Taiwan, there needs to be a lot of prerequisites in place economically, politically, militarily that just don’t exist right now. They just don’t.

Tony Nash

Right. If they materialize that quickly, if they do materialize that quickly, it’s usually a mistake. Somebody’s made a mistake somewhere and something’s happened.

Albert Marko

Oh, absolutely. Something’s happened or it’s either desperation or a mistake’s been made.

Tony Nash

Yeah. China does not want a war with the US. Regardless of the rhetoric that mid-level people say, China is not one war with the US. The US does not want a war with China. Regardless of what people say, the US does not want a war with China. And the leadership on both sides knows that.

Albert Marko

Yeah, of course not. We’re in this weird symbiotic relationship. China does their thing and they’re the world. The United States does everything else everywhere else in the world at the moment. There’s no reason to change that status quo. Simply there isn’t any.

Tony Nash

Okay, let’s talk a little more broadly about the US-China relationship. What do you see as the key risks? And, Tracy, Tony, jump in here too. What do you guys see as the key risks between the US and China right now?

Albert Marko

Oh, man. That’s tough. Besides the whole espionage and corporate espionage and that thing, I don’t really see too much risk out there because I don’t really think that China can do anything that would upset the status quo of the relationship at the moment.

Tony Nash

Okay, let me throw something out. What about supply chains out of China? China was very inept in handling supply chains through COVID. I get it, global emergency, all that stuff. But the ineptness out of China was shocking. When we had 6, 9, 12-month backlogs for things, this was just shocking. Do you think supply chains out of China are still a risk?

Albert Marko

Not really. I don’t think so. I think they’ve learned their lesson and they’re going to learn even more important lesson where Europe is no real economy at the moment. And the emerging markets where they can dump their cheap Chinese stuff is drying up. The only place they’re going to have to look to is the United States and the Middle East. Those are the only two areas.

Tony Nash

Okay. So supply chain is off the table as a risk right now from China.

Tony Greer

In hindsight, I feel like that was madly, madly hyped up in order to blame inflation on it and to pair that up to be able to say, Oh, look at the supply chain issue. Well, that’s why prices are higher. Don’t say anything about doubling the Fed balance sheet or anything like that or spiking money supply. I mean, look at this. The biggest canal over here is jammed up, and that’s why prices are through the roof on everything. In hindsight, it seems like that was really, really part of the deal.

Tony Nash

Okay.

Tracy Shuchart

And realistically speaking, I’m just going to say if we’re looking at, say, these transition metals, battery metals, China still has not only are they the largest producer of a lot of these, but they’re the largest processor of a lot of these. They mine this stuff in Africa, they process it in China, then they send it out. Right now, we’re two decades behind. We’re talking about wanting to bring mining to Europe and to the US, but our permitting process is 10 years. Europe’s not that far behind. We’re really 10, 20 years behind China at this point. We’re going to have to realistically rely on them because we just can’t bring the supply online domestically, either in Europe or in the United States to be able to-

Albert Marko

No, we have EPA and environmental restrictions that prevent us even making basic things like active pharmaceutical ingredients. It’s a dirty business. That’s why the Indians and the Chinese do it. That’s why we outsource it over there. That’s not going to change.

Tony Nash

Yeah, that’s the APIs are… I think APIs are a huge risk for pharma and for the American health care system. That is a massive risk that people talk about it every so often, but then we forget. I think API is a massive risk for us. What about real estate in China and the real estate markets? Could that impact the global economy or do you think that’s pretty isolated in China?

Albert Marko

I think it’s isolated and it’s priced in at this point. I mean, we’ve already had Evergrande and other companies go belly up, essentially. What’s it done? It hasn’t really done anything at the moment.

Tony Nash

Okay. Then what do you think about China’s relationships in Southeast Asia? For example, the US and Indonesia just came to an agreement this past week about trading nickel and some metals. The US and Vietnam came to a very tight security agreement last month. Do you think the US getting more directly involved in some of, say, the Southeast Asian countries is troublesome and worrying for China and could be destabilizing for the status quo?

Albert Marko

Not really. I view China’s actions twofold in the Indian Ocean, and South China sees one is security, obviously, but other one is illegal fishing. They love their illegal fish. They have to. They have to pump out all that fish and feed their population grow. That’s a necessity.

Tony Nash

Right. Okay. Although I don’t think a whole lot necessarily happens substantially in the event itself. But I think what it’s allowed people to do is take a deep breath and just go, Okay, let’s just carry on here and try to figure out how we can have a normal relationship. If nothing else was achieved, do you think that was achieved and people will look at China a little less hyperventatively or whatever or like a little less-

Albert Marko

Oh, yeah. There’s no question that the US and both Beijing and Washington need some economic partnership or trade deal or something in the next 12-24 months. There’s no question about that. And that’s what I think they’re probably leading up to.

Tony Nash

Okay. Do you think that that could be part of the reason markets have calmed a little bit this week as well? Meaning, hey, this China thing is going to be okay. There’s not going to be a war. We take a little inhale, exhale. Do you think market that could add to a little bit of… Well, take a little bit of risk away from market activity?

Albert Marko

I don’t think so. I don’t think that’s really… I don’t think you can correlate to at the moment only because a lot of… If China starts rallying that actually takes money out of the US and goes into Asia. I don’t really think that’s much. I don’t think it’s a factor, to be honest with you. I think everything is the US market rallying is what Tony was talking about earlier.

Tony Nash

Yeah. That’s part of my question, is the rally partly because the risks and fear of China is off the table at the moment?

Albert Marko

I don’t think anybody was seriously considering China war as a risk for the markets, especially the –

Tony Greer

The gold market and the treasury market would definitely not pricing in imminent conflict with China. I think that’s fair to say.

Tony Nash

Then on the energy side, Tracy, China pretty stalked up with energy. It’s not like there’s no war over energy or worry about energy or anything with China.

Tracy Shuchart

No, they’re demand is still high. We even saw their teapot refineries just asked for extra export quotas for the end of the year. They’re doing well. Their demand, despite the property implosion, which leads me to believe it’s a controlled demolition, but that’s a whole other tongue.

Tony Nash

Of course, it is.

Tracy Shuchart

A whole other story. But we’re still seeing demand very high from them. Again, we have the teapots to ask for additional quotas. They’re using it, they’re selling it. Obviously, we have a diesel problem. That’s one of the reasons why they ask for export quotas because they can’t… The demand was higher than what they could export.

Tony Nash

Great. Very good, guys. That’s great. It’s the end of a great week. I think things have ended really well. Tony, I’m really glad to hear your optimism. I think that offsets a little bit of Albert’s wariness from time to time, so it’s great to have you on.

Albert Marko

It’s one of those things where I can be wary and we could dip a little bit, and then Tony’s thesis comes into play, and you absolutely have to jump on it. My my negative sentiment is something of an opportunity for Tony’s-

Tony Nash

Oh, yeah. This is why we all love markets, Albert. It’s a battle of ideas. It’s a battle of data. I’m not saying you guys are necessarily polar opposites all the time. I just think one day Tony wins, another day you win, another day Tracy wins. I think that’s great, right? Because it’s that battle of ideas.

Tracy Shuchart

Yeah. Well, that’s why we have a discussion, right?

Tony Nash

That’s right.

Tracy Shuchart

There’s a lot of… And so, yeah, you can pick each other’s brains.

Tony Nash

So guys, thank you so much.

Tony Nash

Thank you. Have a great weekend. Have a great week ahead. Thank you.

Tony Greer

Thanks, Ton.

Albert Marko

Thanks.

AI

That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

Get 40% OFF your CI Markets subscription: https://completeintel.com/save200/.

Welcome to “The Week Ahead” with your host Tony Nash. In this episode, we discussed three crucial topics:

1. Rates, market pricing & earnings quality: Bob Elliott discussed various topics including the Federal Reserve’s approach to controlling inflation, the impact of interest rates on the housing market, the challenges of small modular reactor (SMR) projects in the nuclear energy sector, and the outlook for crude oil prices.

He highlighted the potential for a soft landing in the economy going into an election year, the complexities of the housing market, the difficulties faced by SMR projects, and the favorable risk-return profile for investing in oil.

2. Dollar, commodities and elections: Albert Marko discussed various economic and financial topics, including the potential impact of fiscal and monetary policies, interest rates, inflation, and the outlook for the dollar and commodities. He also touched on the challenges and prospects of small modular reactors in the energy sector, as well as the implications of energy prices, particularly in relation to crude oil. Additionally, he shared insights on the housing market and the potential impact of political dynamics on the economy.

3. SMR: Death of nuclear power?: Albert and Bob discussed the potential death of new nuclear power in the US, citing increased costs and R&D as contributing factors. They also mentioned the challenges related to transporting small modular reactors and the regulatory restrictions associated with them. Additionally, they highlighted the difficulties in developing new green energy technologies and emphasized the need for incremental progress and realistic expectations.

Finally, the conversation shifted to the outlook for crude prices, with Bob Elliott and Albert Marko expressing a favorable view of oil as a growth asset, considering its current pricing and potential for a diversifying bet against economic weakness.

Join us for a clear and concise analysis of these important topics in plain language you can understand. Stay informed for the week ahead! Don’t forget to like, subscribe, and share for more valuable insights.

Transcript

Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash and today we’re joined by Bob Elliott, Tracy Shuchart and Albert Marco. We’ve got a few key things to cover today. First is rates, market pricing and earnings quality. We’ll go in deep with Bob on that. We’ll talk about small nuclear reactors with Tracy and the potentially death of new nuclear power in the US. And then with Albert, we’ll get into elections a bit and dollar and commodities prices through the election cycle.

AI

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Tony Nash

So, Bob, thanks again. Really appreciate you joining us again. It’s always really educational. You’re one of my favorite Twitter followers, or Twitter follower.

Bob Elliott

Thank you. I appreciate.

Tony Nash

Always, always super detailed. I always learn something. So yesterday, Thursday, just poor Powell dropped a bunch of F bombs and killed the melt up. You put out a great tweet about two year rates. Two year is just up a bit, over 5% I believe, right now. And you tweeted this. So it’s come up a little bit. The yields come up a little bit. So can you walk us through the trajectories? Kind of, why are rates here? Where do you expect rates to go and what impact does that have on markets overall?

Bob Elliott

Well, I think the basic question that was actually at the center of Powell’s contentful commentary yesterday, rather than foul mouthed rants, was around the fact that inflation is still not durably at the Fed’s target. And it’s not just that it’s not there, it’s that the Fed, at least right now, doesn’t see a clear and convincing path to it, so they can start to ease off the tight monetary policy that they have in place. And so I think one of the things, what we’ve seen obviously, over the course of the last six months is a recognition that we’re going to need higher rates first in order to slow the economy, in order to kick off that moderating cycle, to slow wage growth, which should eventually slow nominal spending and then slow inflation. But that rise in interest rates essentially hasn’t been yet enough to get there in a convincing manner. And I think one of the issues was that the Fed basically said, as of a couple of meetings ago, they were really pointing to the fact that the short rate, or recognizing the short rate really wasn’t the thing that was going to get the job done.

Bob Elliott

They really needed that long end to move up. And they got some of that. Until, of course, Janet Yellen wrestled away the tightening that they needed through the shift in the QRA composition, bringing bond yields down.

Tony Nash

Yeah, we don’t have a team, right? I mean, they wrestle each other all the time.

Bob Elliott

Of course, what I would emphasize is, from a roles perspective, if you actually go back and read about fiscal monetary policy in the. This is not unusual, I would say, particularly in heightened inflationary environments, or in environments where there’s a desire to engage in fiscal expansion and populism, as well as global conflict, to fund global conflict. And so it’s not like this is a shocking move on the Treasury’s part. But I do think it’s an important move because the treasury has been a technocratic institution basically for the last 30 years, and now what we’re seeing is indications that it’s going to be a policy making institution rather than a technocratic implementation institution. That’s a big shift, and you’d be surprised at how much flexibility Janet Yellen has actually to shift the composition of duration before running into any meaningful sort of outliers in terms of the overall debt composition in the US.

Tony Nash

Right. And I think we’re all old enough to remember when Janet Yellen was the Fed chair and she was banging on the table saying, hey, we’ve done all this monetary policy stuff, but there’s no fiscal right. So now that she’s know, leading the treasury, she’s doing all this fiscal, but it’s offsetting the monetary policy stuff. So they’re just not on the same page at all.

Bob Elliott

Absolutely. I think one of the things that was super interesting about the market action coming out of QRA was that there’s basically a bid on all bonds, right? But what that ended up doing is it created a bid on twos and tens, and that didn’t make any sense, because if these two levers are going to work in opposition to each other, which I think I’d say probably over the next year, we’re going to see opposition between them. What that should indicate is that the Fed needs to be tighter than expected before the QRA, and given that the treasury is going to be essentially easier than expected before the QRA, but instead, the exact opposite happened in the market action, which was Powell got priced in to ease more in 24 as a function of the QRA. And that’s the thing that I think makes no sense, to be honest with you. If we’re in this new world, Powell is going to have to do more in response to the easier long end policy. And so those 75 to 100 basis point cuts that are priced into 24 certainly look vulnerable in that context.

Albert Marko

Yes.

Tony Nash

Albert, come on in on that.

Albert Marko

All right. No, I agree with Bob. We’re certainly in uncharted territory right now. Late 60s style maneuvers by the Fed and the Treasury. There’s no question about that. I think the bigger debate in the near term, six months, really, is whether a soft landing is possible or not. Now, I know Bob’s going to be on the opposite end of me on this one, I get it. But all fundamental guys are. Bob’s a top notch guy and fundamentals and whatnot. But for me, going into an election year and knowing how much power the Fed and the treasury have of working the long bonds and everything, I do think that they’re going to get a soft landing just for this election cycle, after the election tans off at that point. But I think that’s where I really want to discuss is soft landing versus hard landing, if it’s possible in 2024.

Tony Nash

What does that look like to you, Albert? A soft landing. Can you paint that picture for us a little bit?

Albert Marko

Fake breakdown, the 3800, 3900, and then rally for the election? That would be my soft landing. I mean, obviously, inflation is a persistent problem, and this is a manifestation of the treasury and the Fed with conflicting policies that I just don’t see alleviating. So that’s a wild card in there.

Tony Nash

Okay, Bob, what do you think on that?

Bob Elliott

I think it’s one of those things where, let’s say from a longer term perspective, I think the core question about sort of soft landing and the durability of a soft landing is, can the Fed bring inflation to its mandate without a meaningful weakening of economic activity? And I think there’s pretty compelling evidence over history that the answer to that is no. The way we will get inflation back to that target is through a meaningful rise in the unemployment rate. So there will be a landing, and it will be hard because that’s what’s necessary to achieve the Fed’s goals. Now, let me pause on that point and say, but that doesn’t mean tomorrow there’s going to be a soft landing. And if anything, tomorrow there’s going to be a hard landing. Like a year ago I felt like a man in the wilderness saying that we weren’t going to have an immediate recession. Right. And the reason why that is, is two, I think, important points. One, macroeconomic cycles, if left to their own devices, not in a crisis mode, but in left to their own devices, frankly, are like slow moving. It’s like molasses, like go back to the 60s cycles go back to the late 80, 90 cycle.

Bob Elliott

Even the 2000 cycle took three years to play out. Three or four years to play out. So I think we have a very slow moving economic environment. And you see that, like with payrolls, which are slowing at the pace of molasses. Right. Nothing too exciting. And the issue is that the ability that particularly the treasury has, but also the Fed, has to run inappropriately easy. Monetary policy is absolutely there. They absolutely have the capacity to be able to do that. Right. Even if Janet Yellen actually reduced the amount of coupon issuance over the course of the next year, reduced, we would still only see a bill share in terms of the total treasury debt stock that’s still under 30%. So that’s okay. That’s not prudent. It’s not a good idea. It’s not good to keep stoking these inflationary pressures, but it’s certainly possible, particularly if they’re politically motivated. And so when I’m looking at this overall picture, what I’m saying is I’d rather not bet necessarily so directly on hard landing versus soft landing. I’d much rather bet on where are there opportunities in the market that are underpriced in that context. Right. So for instance, assets like gold and oil don’t look to be particularly priced, that we’re going to have continued inflationary pressures or continued if I’m going to buy a growth asset.

Bob Elliott

Oil is the cheap December 24 oil is like the cheapest growth asset that’s out there in the world today. And similarly, if we’re going to have this stimulation, these policymakers extending this cycle, then those December 24 sofers, they’re looking like those rates are probably going to have to rise relative to what’s priced in.

Albert Marko

Yeah, I certainly agree on the rates rising. I think that Powell will probably have another two or three hikes going into 2024. In my opinion, the only issue, two or three. Yeah. If they can’t get inflation down going into an election cycle, what are they going to mean? What are they possibly going to know? The issue I have is that both Powell and Yellen has White House and the Senate on their side going in for fiscal stimulus, farm bill that’s going to be coming up, God knows what other juicy little stimulus projects that they’re going to pump in into 2024 and just artificially keep the markets up. For me, knowing how DC works intimately, I can certainly see them keeping this pig up at least through the election cycle.

Bob Elliott

And I think that’s one of the questions. In that context, where’s the best way to express that view if you think that that’s, or essentially, where is that possibility underpriced? And that’s where I think it’s a bit underpriced. I mean, I think it’s definitely underpriced in the short rate market. I think it’s moderately underpriced in the long rate market, though, Janet Yellen will probably be responsive if rates were to rise 50 basis points again, she’ll just be a little like even easier in the next announcement. It’s underpriced in commodities, I think. And then if you go over and look at stocks, that’s the place where it looks a little overpriced, where we have earnings growth expectations from analysts bottom up to be almost 12% next year. That’s not like a great, that’s going to be tough even if things work out perfectly. Right.

Tony Nash

Let’s get into that in just a minute. The earnings stuff.

AI

Heads up for a short break.

Tony Nash

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AI

Thank you. And now back to the show.

Tony Nash

I want to ask you about some of your earnings tweets. But before we get into that, we had a viewer question, Bob, and they said, what importance should investors place on long term bond auctions? Can an auction actually fail? As in having a bid to call ratio of less than one.

Bob Elliott

Auctions? The US treasury market is like the deepest, most liquid market in the world. And so can auctions fail? I mean, maybe technically the auctions could fail. I don’t think. That’s not really the big deal thing. I think when you scan across, this is the challenge in the bond market, particularly the US government bond market, which is, will someone buy the bonds? Yes, someone will buy the bonds. That’s going to happen. The question is, at what price will they buy the bonds, and what are the elasticities of all the different players in the market? Now, I went out when bond yields were moving swiftly to five. I was looking at the composition of the bond buyers and I said, look, actually, we’re seeing a lot of yield sensitive buyers coming in and starting to man.

Bob Elliott

I mean, there’s a reason why it’s kind of like peaked literally at five, right? It almost looked like there were a bunch of orders in place at five at a 5% yield. They’re just like, buy, buy at 5% yield. Now, look, maybe it has to go higher than that in order to clear all the duration supply. Or maybe Janet Yellen is going to just increase the bill issuance until we get a turn in economic activity, until there’s enough supply demand for duration, because the economy is deteriorating in order to fill the duration supply gap. And so I think a lot of folks are looking at the bond market like when it was at 2% and not thinking about it at 5%. The bond market at 5% is totally different than the bond market at 2%. Totally different supply demand composition, and particularly a reactive treasury. What would I say? Anyone who’s drawing a line to yields to 13, which, to be clear, I was asked, like, a serious person on CNBC asked me whether bond yields are going to go to 13, and I was like, no, that’s not going to happen. You got to be kidding me.

Bob Elliott

I almost laughed about it. That claim, are we in the ballpark of what’s going to clear the market at these levels, this amount of duration, supply. Look, we’re in the ballpark. Maybe it’s got to go up 30 basis points or 50 basis points, but it’s not 500 basis points.

Tony Nash

Right. And Bob, that’s a good call, not laughing at the CNBC people before, because I’ve done that and they don’t ask me on anymore, so good.

Albert Marko

I personally have PTSD dealing with the bond market. The long bond market for me is just like, it’s the size of Apple’s market share, the 10, 20, 30, and tips all combined. So I have a suspicious feeling whenever the market’s about to break down that bonds pump two points and all of a sudden we’re back on the rally terms again. So I personally don’t like to play the long bond.

Bob Elliott

I think most of the easy money has just been made in the long bond.

Albert Marko

Yeah.

Bob Elliott

When yields were in the mid three s and the economy is growing at six to 8%, you looked at it and said it doesn’t make any sense. Right. Okay, so now we’re in the ballpark of five. Like, should it be five and a quarter? Should it be 475? It’s not the business I’m in in terms. There’s a lot more interesting opportunities that are out there. And remember, as a trader, you don’t have to trade every market, right. You don’t have to even have a view in any market. You just say long end bonds like in the ballpark and move on.

Albert Marko

Yes, exactly.

Tony Nash

Yap, Bob, you had started getting a little bit into earnings, and earlier this week you wrote a tweet about Q three earnings within the context of 8% nominal GDP. So kind of dumb question. You talked about 6% earnings growth within the context of 8% nominal GDP. Can you help us understand why that matters?

Bob Elliott

Well, I think the basic question for the equity market is thinking about what’s priced in. And I know at some point sometimes I start talking about what’s priced in and people are like, that’s so boring. Why are we talking about what’s priced in? But when you’re trading the market, you got to trade it against what’s priced in. That’s all there is to it. Analysts are expecting twelve. We’ve had pretty mediocre earnings growth, like at the S&P 500 level. Quarterly earnings has been from a macro guys perspective. You look at the numbers, it’s kind of been flat for two years, basically, right. It means up a little bit this quarter. It kind of wiggled up and down, but basically flat. I’m sitting there thinking, well, my God, GDP growth, nominal GDP growth has been about as good as it will ever be in the rest of our lifetimes in the United States. And earnings are totally flat. And it’s like, okay, well, what happens when things get worse? How are they going to meet that earnings growth expectation that sits in the market in the event that even in the good times, these companies are struggling to generate this type of nominal earnings that would get aligned with the types of expectations that are priced into the market?

Bob Elliott

So that’s the gap. That’s the gap that I see. And also, to be clear, from that time we’ve had interest rates rise a few hundred basis points. We’ve had on the short end, on the long end, we’ve had the global economy, Europe and the UK slowing down. It’s not like there’s a boom out there. And the impact on US companies is likely ahead rather than behind related to those issues as well.

Tony Nash

Right. So we’ve talked about this before about the margin expansion that companies had over the last two years. That opportunity, that window is closing. It just seems to me that there are a lot of headwinds in terms of earnings growth going forward. Is that kind of what you’re seeing? This nominal GDP you say is as good as it’s going to get? Does it just seem like that window is closing for those companies and we’re in for some difficult quarters ahead?

Bob Elliott

Again, from a macro perspective, when you look at it, how do companies make money? Either the top line sales have to grow really well or they have to have margin expansion. And the way that you have margin expansion typically is through borrowing, household in particular, borrowing and spending. Or really what’s happening is their incomes aren’t keeping up with the top line sales growth. And when you look at that picture today on a forward looking basis, it certainly looks like you’ve got a circumstance where nominal GDP growth will be lower in the future than it has been over the last two years because we’ve tightened, because global economy is slowing, et cetera. And then you look at the margin picture and it’s like, well, I mean, the labor markets are pretty tight, wage growth is a lagging indicator. The big reason why those companies were able to get such good margin improvement during essentially like coming right out of the COVID crisis is because it just takes a while to negotiate the wages up. But now we’re in a circumstance where some people say, well, real wage growth is a good thing and I think it’s a good thing for the individual spender, but it’s actually a terrible thing for a company like companies don’t want real wage growth.

Bob Elliott

Companies want negative real wage growth. They want their prices of their goods to rise a lot faster than what they’re paying their workers because that’s when their margins expand. So real wage growth from a company perspective, which is driven by the tight labor markets and the flow through of the previous inflation to wages eventually coming through, that’s a bad outlook. So I don’t know. From a macro perspective, it’s not looking good.

Tony Nash

Yes.

Albert Marko

No, certainly not. Without question that inflation has masked a few of the earnings and boosted quite a few companies earnings as the relative volume has gone down. But it’s going to come back to bite them in the ass sooner or later.

Tony Nash

Yep, probably sooner. Okay. Hey, Albert, let’s jump to a little bit of discussion about the dollar, commodities and elections. So there were some elections in the US this week and a Republican presidential debate, which really nobody seemed to care about. Then Joe Manchin out of West Virginia announced that he won’t run for re-election for the Senate in 2024. And you tweeted about this on Thursday. So why is that important? And what could that mean for things like congressional support for, say, Ukraine, for fiscal, for appointments in the next administration, that sort of thing?

Albert Marko

Well, assuming that Biden still wins in 2024 and Manchin because he’s not going to run. Jim Justice, a lot of question is going to win that seat for the Republicans and the Senate majority is so thin at the moment that this could pretty much spell that the GOP takes over the majority in both the House and the Senate with a possible Biden second term. It’s not going to be good for any kind of fiscal spending. It’s not going to be good for very many bills out there because there’ll just be roadblocks left and right all over the place. Even today, the margin for the majority is so slim that they have problems passing things that are normally easy to pass, like the farm bill. That’s a bipartisan thing that usually every five years gets rubber stamped and shipped off. But even that is looking months down the road before that happens, which going back to commodities is great if you want to buy corn early 2024 because I love corn going into Senate races and presidential elections.

AI

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Tony Nash

Right. Okay. So with Republicans in charge, it’s unlikely that we’d see like an inflation Reduction act part two or something like that, which could help. Sorry, go ahead.

Albert Marko

No, you’re right. We’re not going to see that unless we have some sort of market or economic breakdown where the GOP is getting scapegoated daily in the media, where they’re going to be forced to pass something into an election year.

Tony Nash

Right. So that could, I would think, conceptually help to avoid kind of a re, or re-reacceleration of inflation in 2025 maybe. Right. I mean, I don’t necessarily believe the fairy tale that Republicans are fiscally responsible, but I think it would potentially help to avoid kind of a secondary or tertiary kind of reignition of know. And Powell has said that he wants to focus on controlling inflation. So can you help us really think through what that means in terms of obviously the fiscal environment but also the dollar?

Albert Marko

Well, I think that the dollar is one of the key tools they’re using right now versus inflation. I do see it going up in 2024. I mean, there’s weaknesses just all over the world. Bob mentioned slow down in Asia, slow down in Europe. The problem is that the dollar.

Tony Nash

Japan can’t get itself –

Albert Marko

Japan, yeah, Korea, you name it. But the problem I see with the dollar surging over 110, 113, 115 is you start breaking things globally to the point where it transcends back to the United States market. And I don’t think they want to see that. I think it was at 115 like a year ago, and Europe almost broke Europe down below parity. So it’s certainly a problem for the dollar being up that high with the Republicans being roadblocks or in a majority. Everyone wants to say that they’re conservative, fiscal conscious people, but realistically, they have jobs, they have to be reelected and their constituents want to get paid. So I expect more stimulus packages going into the next two years.

Tony Nash

Okay. And we’ve got the dollar today. We’ve got the dollar at about 106, up from earlier in the week, last couple of weeks. So it does seem like they are setting some expectations for a stronger dollar already based on.

Albert Marko

I mean, it’s crazy.

Albert Marko

We’re at 106, 107, 104, 105 for extended period of time, and it’s done anything to our economy. It’s actually quite interesting to see, like Bob was saying 1960, 819, 69. We’re sitting here with all sorts of problems globally and the dollar is strong as ever.

Tony Nash

Right. So what would you expect? I mean, we’ve got oil that’s pretty weak. We’ve got commodities that are pretty weak. What other impacts would you expect it to have?

Albert Marko

Oh, man. Housing. Housing would be a big issue going into 2024. I mean, the White House and a lot of Democrats want to see housing come down and make it more affordable. I don’t see how you do that. DC wants it, but boomers and other investors certainly don’t want to see that break. So I don’t know how that’s going to pan out. I’m actually quite perplexed about the housing market.

Tony Nash

Yeah, it’s pretty sticky. Right. Bob, what are you seeing in housing?

Bob Elliott

I think the most important thing on housing to recognize is that the composition of the housing market at a peak or a boom is just like totally different than a freeze. And we’re at a freeze and we’re at like a traditional standoff. Both sides are staring at each other, that being the buyers who want lower prices and the sellers who don’t want to sell. And they’re just kind of staring at each other. And usually what you need in order, you usually need a catalyst in the housing market to start to create that price change. And in 607 we had a catalyst which was, there were a lot of floaters and iOs that basically reset and totally hammered people. Right. And so that was the catalyst back then in this case. And if you go back in previous cycles before that, the catalyst is unemployment. And so the basic question is like, what’s the catalyst today? Well, as long as incomes are okay and unemployment isn’t deteriorating, we can just stand and look at each other and basically have no transactions and have elevated levels of prices until you get to the point where in particular I think, employment starts to deteriorate.

Bob Elliott

And then what we’re going to see is it’s going to be a bloodbath, a fast moving bloodbath where the folks who are trying to dump their house onto the market are going to have absolutely no luck. So if you have a house to sell, today’s the day to do it, because tomorrow may be a lot more challenging.

Tony Nash

Yeah. And I hear people say it’s kind of Airbnb is going to people selling Airbnb residences, all this sort of stuff that may or may not happen. I think what you’re saying is, well, maybe not what you’re saying, but one way of interpreting that is if we start to see mass layoffs and people have to sell their houses to get cash, then we could really see prices drop pretty quickly.

Bob Elliott

Right. And the Airbnb thing, there are a million Airbnb listings in the US. And like. Okay, so what are you talking. Know, most of the people who list their house on Airbnb live in their house or it’s their vacation house or whatever. The number of people who are buying like twelve apartments in Miami on South beach in order to lay it out for an Airbnb is pretty tiny in the scope of 100 million units that are out there in the market. Airbnb will not be the catalyst. Unemployment, that could be a catalyst.

Tony Nash

Right. Yeah.

Albert Marko

And you don’t even see slowdown in hiring and construction, which would tell you that maybe the housing market is getting soft. I mean, there’s no layoffs in the construction sector.

Bob Elliott

Yeah, that’s right. Part of that is the multifamily. There’s also these secular dynamics, which is basically the household formation has been considerably elevated, making us millions of units short relative to household formation over the course of the last 15 years coming out of the financial crisis. And so in some ways, a few Airbnb owners puking out their Airbnbs would actually be good because there’s some young couples who would love to live in those apartments at a slightly lower price than they can right now.

Albert Marko

Yeah, well, there might be a microcasm that’s actually watched because New York just banned Airbnb. So I’d like to see what the rental market does there in the next six months, see if there’s some kind of lowering of it.

Tony Nash

That’s great. So Albert’s already said that he likes corn going into an election era. We’ve already talked a little bit about energy prices. Bob, you’ve already said commodities are probably a little bit undervalued right now. So let’s talk a little bit about energy. Tracy talked earlier this week. Tracy, one of our guests talked a little bit earlier this week about nuclear power. And last week we talked about wind and solar power projects being pulled because of higher interest rates and higher costs. So we had what’s called an SMR project pulled and I had to look that up. It’s a small modular reactor. These are small nuclear reactors that are apparently much easier to deploy and maintain and this sort of stuff. So I’m not an expert here, but Albert really knows this stuff. And so there’s a company called New Scale that shut down the first SMR project in the US because of costs I think the cost rose something like 50, 60%. And again, this sounds similar to the wind story and the solar story that we talked about last week. So, Albert, why are we seeing these costs elevated in nuclear? And also, is the option to pull these?

Tony Nash

Is it partly because of interest rates, but partly because we’re seeing other energy prices, like crude and Nat gas, continue to drift lower?

Albert Marko

Well, I’m sure it’s a combination of it. I mean, I’ve known about these SMRs for like 20 years. These aren’t new, by the way. Mitsubishi had prototypes out there years and years ago. The problem that they have is R and D, debt, cost, interest rates, wage inflation. Even being able to hire qualified people to put these projects into motion is very difficult. I mean, the biggest problem with those SMRs is like, okay, you build them, but how do you transport them? I mean, transporting a small nuclear device is not like putting in the back of a semi and hauling it across to Abilene, Texas. It doesn’t work like that. There’s big problems and there’s actual federal restrictions on with the EPA and whatnot. How do you put that thing 100ft down and how do you regulate it? And who’s going to come out and monitor? There’s so many headwinds for SMRs that I don’t think that’s even a consideration for the next 50 years, in my opinion.

Tony Nash

Okay. You can’t just put it in the back of a cyber truck and get the kind of green revolution perfection.

Albert Marko

Please don’t give Elon any more fuel to go on Twitter and do any more tweets about cyber trucks being nuclear powered. Definitely don’t.

Tony Nash

Okay. Last week we talked about wind and solar. This week we talked about nuclear. It almost feels like with the rise of interest rates, we’re going to have to kind of double down on these old hydrocarbon generation feedstocks. Is that where we are? Is that the end game? We’ve seen all this to green over the last 15 years. And is all that just resulting us going back to coal and oil and nat gas?

Albert Marko

Well, of course, they’re the most cost efficient and most stable power supply that we have, aside from nuclear. I mean, nuclear is on a different level. But look at Europe. Europe’s an perfect example. They’ve tried wind, solar and whatnot. Germany’s industrial sector was decimated for a few years because the wind and solar was giving fluctuations in the energy grid and destroying equipment. So, I mean, these little calculations are not really thought of whenever people start spinning this stuff up. But it’s not as easy as turning on a switch as saying, oh look, wind and power is on, it’s carbon neutral or whatever catchphrase you want to put out there.

Tony Nash

Yeah, I don’t want people to think we’re anti green. I mean, we’ve talked.

Albert Marko

No, I’m not.

Tony Nash

It sounds almost like we’re antagonistic to green. That’s not the case at all. We’re just taking a very realistic view on, okay, this requires capital investment at the start, right? And without the subsidies, without low interest rates, without other things, we get situations like I think just today or yesterday it was announced that the German government has to bail out Siemens with their wind business. So there’s another green energy company that’s being bailed out by a government. And between the subsidies in China and the subsidies in Europe, and obviously with the IRA, the subsidies here in the US, it’s really hard for those businesses to get moving.

Albert Marko

You know, listen, I’m not anti green or anti environment by any stretch of the imagination, but people have to understand that things happen in increments. They don’t just leap forward into some brand new technology or brand new computing thing or whatever technology you want to throw out there. It doesn’t work like that. It takes R&D, it takes time, it takes money, it takes testing and so on and so forth. It’s a progression. And that’s what we should look for instead of jackpots.

Tony Nash

Okay, let’s move this back into, say, crude prices. We’ve seen crude prices fall pretty dramatically over the past few months. What’s the outlook through the winter? Do we expect crude to stay pretty weak during the winter? And gas, are we going to see a winter like we saw in Europe last year where things spike? I mean, we’re already in November and things already spiked by last November. But are we going to see that stuff rally back through the winter? Or do you think we’re kind of where we will be through the winter?

Bob Elliott

I think probably. If you think just generally what growth assets are priced cheaply versus more expensively, I think it’s pretty clear that oil is priced cheaply in the scheme of things. Is it possible that we could have weaker growth ahead? It’s certainly possible. Weaker global growth, but oil is basically pricing in a pretty bad outcome. And I think, of course, one of the things to recognize is that there is a price sensitive seller in this market who will just start withdrawing supply if we get anywhere close to, frankly much more than a drawdown that we’re seeing in the December 24 Brent Curve. It’s not going to take a ton more before the Middle Eastern folks are going to start bringing oil off the market in order to support prices. And so I think in that risk return profile standpoint.

Bob Elliott

Right.

Bob Elliott

You’ve got a pretty good profile. If I had to hold a growth asset over the course of the next six months, oil looks like a better growth asset given the range of plausible outcomes than does holding something like stocks.

Albert Marko

Yeah. From what I was told is $69 is problematic for US production. So that’s somewhere where I would probably go all in on at the moment. I’m long oil as it is at the moment anyways, but that’s what I’ve heard is 69,

Tony Nash

73 today. So like Bob said, there’s not a lot of downside.

Bob Elliott

Yeah. And look, it’s a classic example of a macro trade where, look, you trade these things down because there’s certainty that’s going to go one direction or the other.

Bob Elliott

Right.

Bob Elliott

You’re looking for skewed outcomes. You’re looking for good risk return profiles. You’re looking for a good range, particularly if you think, let’s say you’re a little more concerned about the economy.

Bob Elliott

Right.

Bob Elliott

You want a diversifying bet against economic weakness. That’s what you’re trying to do. Right. And I think the long oil trade right now, I’m particularly struck below in the something like that out in December 24 looks compelling to me.

Tony Nash

Interesting. Very good. So that’s good. Let’s keep it low while we can. Right, guys? Good. I really appreciate this. We’ve covered a lot of ground. Thank you very much for your time. Thanks for your thoughts and have a great weekend and a great week ahead. Thanks, guys.

Bob Elliott

Awesome. Thanks.

Albert Marko

Thanks.

AI

That’s it for this week’s episode of the Week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.