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QuickHit: “LUV in the Time of COVID”

Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?

 

Don’t miss out some of our relevant QuickHit episodes:

Proactive companies use data to COVID-proof their supply chains

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?

 

SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.

 

On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.

 

One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.

TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?

SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.

TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?

 

SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.

 

The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.

 

TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?

 

SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.

 

On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.

 

It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.

 

The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.

 

Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.

 

TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.

 

SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.

 

It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.

 

I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.

Categories
Visual (Videos)

Deflation (and falling demand) is Still The Main Problem Globally Now?

This video is originally uploaded on Youtube at https://youtu.be/0D0IxTnufoo.

 

Jason Burack of Wall St for Main St interviewed returning guest, founder and CEO of Complete Intelligence, Tony Nash.

 

Tony’s company helps many companies solve their global supply chain problems and he has also lived and worked in Asia for 15 years in the past and advised the Chinese government on their economy and trade in the past. Tony’s company also uses AI predictive analytics software to predict stock market and commodity price movements.

 

During this 40+ minute interview, Jason asks Tony about China’s economy, the global chain, the threat of much worse stagflation and volatility in markets like stocks. Tony thinks that the main problem is still deflation and a lack of demand now regardless of the amount of currency, stimulus and bailouts governments do.

 

Show Notes

 

JB: Hi everyone. This is Jason Burack of Wall St for Main St. Welcome back to another Wall Street from Main Street podcast interview today’s special guest is a returning guest he is founder and CEO of Complete Intelligence, Tony Nash thank you for joining me.


TN: Thanks Jason.

 

JB: now Tony, I know you’ve lived in Asia for 15 years you’ve done a lot of work with the Chinese government consulting them on their economy. You’ve worked with a lot of companies all over Asia — Singapore, China, Hong Kong — helping them with their supply chains. So let’s talk about the Chinese economy and if you think it’s recovered post coronavirus.

 

You put out a survey about a month or so ago talking about unemployment rates in China with factory order…

 

TN: 50 million because at the time I think China had said that there were five million unemployed as a result of coronavirus and I put out survey saying “is it 0-5 million, 5-25 or something and then over 50.” And the vast majority of people responded over 50 million people. Not vast majority, but majority of people responded over 50 million.

 

I’ve since seen data that estimates unemployment in China alone as a result of coronavirus at 120 million or more. I think it’s safe to say nobody actually knows the real number. But it’s probably big. And it’s probably tens of millions rather than single millions. I think it’s a safe bet to say it’s probably north of 50 million. A number of economists watching China are still assuming that the government number holds.

 

 

JB: I’ve been reading articles quoting some factory owners and some factory owners in China. I don’t know if this is all the factory owners. But at least a few of them that have been quoting articles have been saying that their orders are down 70 percent. So exports are down a lot so there are not purchase orders for a lot of different companies right now is that what you’re also hearing?

 

TN: Sure there was just a piece out today saying that a survey in China has exports for May down 7 to 8 percent year-on-year. Imports are down almost 10 percent year-on-year. That survey data Is possibly under under waiting what the fall is. I don’t doubt that exports are down double digits and there has been some lag. As you remember from the kind of early mid Corona period, there were these supply chain issues of just getting stuff out. So initially, there was this wave of pent up export requirements just to get stuff out of China. But now things are starting to settle in because you have those demand in May, especially with the US and Europe closed, you have real demand depression. I think the main numbers may be overstated a bit and I think the exports may be down even more. Of course, it’s highly unlikely we’ll see that in the official data but it’s terrible.

 

I think things may be recovering a bit. I don’t think that China is in for a V-shaped recovery like we’ve seen, but I do think that they’ll come back maybe not to as much as they had thought they would but I don’t think it’s going to be a long-term depression.

 

My concern with China is in industrial production declines and the employment declines that come as a result of that and then the wage pressure that comes as a result of that.

 

JB: what is the percentage of GDP for exports right now because there’s a lot of people that are I would call them China trolls that tell me that it’s a lot lower amount but the numbers I’ve seen for exports as a percentage of GDP are still very high for the Chinese economy.

 

TN: It’s not as high as I once as I once knew. It’s definitely, I believe as a percent of GDP it’s it’s smaller than it was like five years ago. You do have that growing services economy component you do have growing domestic demand so but I don’t think it’s it’s definitely not as high as it was. Sorry I don’t have the number to hand but it’s really not what it once was>

 

JB: It seems that China has like astagflation problem right now in food prices and rent they’ve had to import an enormous amount of pork last year. All of 2018, they were having the African swine flu problem so the report shortages in China food prices were rising long before the coronavirus, and there’s a lot of videos online of shop owners protesting either rent not being reduced or rent prices going up by their building owner. So would you say that that’s why the Chinese government and the People’s Bank of China has been very hesitant about how much stimulus and QE to inject into their economy right now because they are worried that if they put too much in it will accelerate like a stagflation problem in their rural economy?

 

TN: I think that’s a concern. I think there’s also just concerns about the fiscal resources if the Chinese government has. Of course, they can print as many fun tickets as they want as long as it’s in CNY. But I think that is a concern.

I’m quite frankly more concerned about about deflationary pressures in China and just just on the face of it naked deflationary pressures through obviously the rest of Q2 and into Q3 and then how they potentially get out of it. I think China really hasn’t had an issue or had a problem with contriving inflation when needed. But if we do have the industrial production issues and the wage issues that I’ve been concerned about, I do think that deflation is more the overall and more serious concern there.

 

JB: That’s interesting because you’ve been predicting that the Chinese yuan against their exchange rate against the dollar it gets devalue down 7.2, right?

 

TN: That’s right.

 

JB: How would that jive then with deflation if they’re trying to devalue their currency?

 

TN: I think you’ve got both of those trends moving in the same direction. Unfortunately with energy prices down into the 30s, of course you have into the 40s. Yesterday or today, you have Brent move into the 40s. Sorry WTI. With the resources depressed, again, this is on a year-on-year basis.

 

But I think there’s serious downward pressure and will be continuing a series downward pressure on resources and commodities so the secondary impacts will also show a bit of producer price deflation. And then you have just the function of overproduction in China and having to sell those inventories. You don’t necessarily have the take off from the US. Partly I mean, this is a two or so year-old trade war, but because of our discussion, but because of the trade war, and then you have the issues in Europe with demand as a result of COVID, so I think you’re looking at more supply in China of manufactured goods.

 

They’re looking at commodity prices that I don’t believe we’ll come back dramatically. It’s it’s an ongoing issue. At the same time, you have the what I believe ongoing concerns for industrial production as a result of this and then there are the jobs and wages issues. If you have wages declining, then people just can’t pay for those goods so that’s disinflationary. Again I’m worrying about this where I think a lot of other people aren’t worrying about this. But it is something that I’m actually quite concerned about in China.

 

JB: It looks like the government can create even more distortions with what they try to do with intervention and central planning with the currency. We’re recording this interview right now in June 5th, the currency is that the Chinese Yuan is at 7.081 to the Dollar.

 

I’ve been reading articles that a lot of Chinese manufacturers are producing but there’s not really demand. So they’re stockpiling a lot of stuff. I’ve been reading a lot of articles lately too about a lot of oil companies in China importing more oil. I think they built another or the atleast announced another Strategic Petroleum Reserve. How many is that what five or six now? They are buying more oil. I don’t know if they’re using the oil because my friend tracks Chinese auto traffic data and he says it’s nowhere near the pre-coronavirus 2019 levels and there’s almost no traffic whatsoever on the weekends in the major cities. Only at rush hour is there actually like anywhere close to normal traffic levels and the other data throughout the day and night and on the weekends is nowhere is way way off.

 

TN: It’s not surprising at all. What it reminds me of is the kind of quotas for stockpiling for Soviet production and the kind of deflationary impact that had in many ways on certain goods in the former Soviet Union. In China, over production and stockpiling, I mean we’ve known about this and things like steel for years. But as it comes to finished goods, that’s hugely problematic given the volume that I suspect overproduction is happening and given the disappearance of demand in overseas markets and obviously domestic markets. Areas like automotive auto parts electronic goods these sorts of things that just people are not going to be renewing. Of course that’s not an absolute statement. It’s an incremental statement, but these things really hurt the manufacturing complex in China. We’ve all taken a pause generally from consumption in Q2 globally. In China it’s been a bit more stark.

 

JB: I think the factory orders are not coming in like you said in the stockpiling is just increasing the amount of credit that I think the Chinese government is injecting I’ve seen from China beige but they put an article out on their Twitter it was like 400 billion in a month pace. But I think a lot of that’s just going to keeping the factories running right now so they don’t go bankrupt.

 

TN: Yeah and that’s not surprising. I mean they don’t want people to be unemployed because they don’t want to see civil unrest. We’ll see more and more social controls in China so that there isn’t civil unrest because people are just bored out of their minds.

 

JB: Speaking of social unrest you know all the rules changes and stuff going on with Hong Kong. We’ll talk about U.S. and China trade relations in a couple minutes, but do you think that China one of the main reasons they’re going into Hong Kong is economically? Do you think that the Chinese government is eyeing that $400 billion that the Hong Kong Monetary Authority has to protect their dollar pay?

 

TN: Of course they are. I think the US was really smart to take away Hong Kong status very, very quickly because the incentive was that Hong Kong would continue to be this buffer zone and that China would continue to be able to benefit from that buffer zone and it’s fine if it’s a buffer zone and it really is a free market because in its heyday, and this is not that long ago like months ago, Hong Kong was the freest market in the world. But as you have the mainland authorities take over things like the judiciary, then Hong Kong no longer become the freest market in the world. So I think that was the reason or there are a lot of reasons but that was one of the reasons for them to grow assertive. China is looking for reasons to distract from the economy, which i think is extremely dangerous, but I think Hong Kong is one way for them to distract from their domestic economic issues.

 

JB: I completely agree. I think there was multiple reasons for what they did with Hong Kong and then what Trump does they gonna blame it on Trump.

 

TN: Right of course and that’s fine and that’s easy. Anything to distract, whether it’s incursions in India or whether its South China Sea or its Hong Kong or whatever it is. The Chinese ambassador to the UK making stupid statements about the Tiananmen, well kind of circumventing that. They’re doing anything they can to distract from their own domestic economy.

 

JB: I think yesterday was the anniversary of Tiananmen.

TN: that’s right

 

JB: For our listeners are not familiar, I think one of the tricks that what not the a lot of Chinese companies were getting around to not pay the tariffs last year was they were exporting their goods from mainland China to Hong Kong and then they were taking advantage of that. So they were re-exporting out of Hong Kong to avoid the tariffs that the US had put on. I think that was quite common practice, right?

 

TN: Sure yeah. Any sort of third country trans-shipment, but Hong Kong was as viable as any other, and because it had this relationship with the US, it was a very easy solution. But I think that’s becoming more and more difficult. Regardless of the goods, I think it’s becoming more and more difficult. Even things like exporting components or knocked down goods for assembly and their locations even that stuff is becoming more and more difficult.

 

JB: So now I want to transition to the US and China trade relations. We still occasionally get a tweet out from Trump or one of his representatives in the Trump administration or White House about how the US-China trade deal is progressing. But really, there’s been very little positive actions on China’s end about the trade deal. I think they made one purchase of soybeans. The trade announcement was in October 2019. So we have October, November, December, January, February, March, April and May. Finally, the Chinese government buys some soybeans in May. It was a fairly decently large order. But look at all the months that they didn’t really buy anything, it didn’t comply with phase one. So do you think the phase one trade agreement is dead?

 

TN: I don’t think it’s necessarily dead, but I think China is very good at negotiating agreements and very bad at going through on them. This is why the Americans were very focused on the enforcement mechanism within the phase one agreement. So I think the real question is, will the US follow through with enforcement? If the US doesn’t follow through with enforcement, then it’s just a piece of paper. It doesn’t really matter that much. But if the enforcement mechanisms come through, then I think it’s possible. Again, I’m skeptical. I was pleasantly shocked and surprised when the agreement was made in Q4. At the time, I was like most people skeptical about the ability to have that enforced because what are you gonna do? You can’t force people to buy stuff from you. That’s the real problem. Now with Hong Kong coming into the picture and with the US has action on Hong Kong coming into the picture, I think it’s going to be harder and harder for those for those the agreement terms to be exercised.

 

JB: My contracts in China, when the phase 1 deal was announced, they were really happy for the Chinese government. They were celebrating because no more tariff hikes. That was the main goal for the Chinese government for phase 1 announcement the trade deal was to make sure there was no more tariff hikes.

 

TN: Right. Evidently some of the state-owned buyers have started to look at soybeans and other products more recently. I’m just not sure that that’s real. I mean, this is some stuff that we’ve been hearing some transactions in the market. But stopping the tariff hikes is the first thing but actually getting them to buy is the more interesting part on the US side of course.

 

JB: But did Beijing just almost now for the last month or so there’s been press release announcements back and forth, back and forth between the US and China like Trump is now blocking the retirement savings I think of a lot of military and government employees from being invested in China, China then threatened to remove Chinese companies listing from US exchanges. Those are just a couple examples but back and forth back and forth back and forth. This is going. It doesn’t seem like this is Trump’s crazy way of negotiating from the art of the deal but this just doesn’t seem like it’s productive towards a trade agreement.

 

TN: I think it’s more of a recognition that these things haven’t been happening anyway. We may very well see more purchasing later in the year but I think this stuff is that there has to be well, there is tension between the US and China. China has become more aggressive in South China Sea in Hong Kong and other places, India. I think part of this is maybe not necessarily a direct hit on what may seem to be a problem it may be related to actions that China has been taking toward relationships that the US is becoming closer to. I don’t necessarily see trade as a single issue. I see trade as a multi-layered issue.

 

JB: Interesting. How important do you think what’s happening with Huawei and how the Huawei CFO, her extradition process in Canada is continuing, how important do you think that is?

 

TN: It’s very, because Huawei is kind of a crown jewel in China and I think as the UK starts looking to other technology as Huawei technology becomes an issue for Germany and they start looking at other sources, I think that removes China’s centrality to the deployment of these types of networks. Of course, that’s obvious. But the services, the information and other things that you can sell off of owning that network equipment is huge. So it’s not just a one-time sale. It is a long relationship. Now that doesn’t just have impacts on Huawei. It has impacts on places like China export-import bank or CDB. It’s not just the equipment, it’s the financing of the equipment. These centrally planned economies or heavily centrally influenced economies, it’s a game of musical chairs. Once you stop the music, it has knock-on effects for many, many other players. I think the Huawei issue with Canada and the US  is that on its own is an embarrassing issue. But stopping the purchase of Huawei equipment in Europe and the US and other places has long-term commercial effects with Huawei, but also the whole value chain including places like Export Import Bank and other places that are supporting those purchases or supporting the financing of those activities, whether it’s Exim Bank or another bank doesn’t matter, but it’s the overseas financial services impacts in China is also stopped or slowing dramatically.

 

JB: Do you think then if the Huawei CFO, if the charges aren’t dropped, if this doesn’t stop with what’s going on with Huawei, that that’s a deal-breaker for the US and China trade relations? Are they going to be able to figure out a workaround?

 

TN: There are a number of layers here. First of all, it shows that the law is not the law in China, that you can be of a certain class and rank and the law doesn’t really apply to you, if in fact she broke the law, right? If she broke the law and China is still upset then, it’s a very clear indicator to Chinese citizens that the law doesn’t apply to people of Ming stature. That’s a problem for China. While they fight for her return, I think a very bad development for them would be that she has found guilty yet China still wants her let free and they let her go. That’s a real perception problem in China for Chinese citizens. But do I think it will impact the US-China trade war? I think every issue is connected when you’re talking to China. So now from the US side, the way Trump thinks is he bundles issues, and so the way American administration’s typically think is they think in an unbundled way. So the State Department typically cannot walk and chew gum at the same time. We’ve seen that for decades State Department will be happy about finishing one agreement when another agreement that should be linked isn’t and they can never get it done or something like that. What Trump and what his administration actually does very well from my perspective is they bundle things extremely well and so I don’t think the Trump administration itself sees that trade agreement as discrete and different from the main issue or from Taiwan or South China Sea or Hong Kong or any of these issues. I thing the administration sees everything is bundled which is not dissimilar from the way the Chinese diplomats and central government see things. They see everything is bundled.

 

JB: I see Huawei is one of the most important things for China because they have such long-term plans for it like you said like it’s their main cornerstone company, it’s their main technology company and then once Huawei has control over the 5g networks and all the other infrastructure there for communications, then the other Chinese companies the financing companies and all the others start to follow suit after that.

 

TN: Yeah. I think that’s fair.

 

JB: Let’s talk then about the global supply chain. It seems in January and February, the global supply chain started to break. Do you think that it’s being fixed now?

 

TN: Do I think it’s fixed? I don’t. Our US supply chains fixed. I don’t think they’re fixed. Is the Chinese supply chain infrastructure moving again? Yes. I think what’s happening is a number of important US importers and US manufacturers and even global manufacturers are trying to find places to reduce their risk and exposure to China. And not because they want to abandon China. I don’t believe that’s the case at all. I think we see people who are say super nationalist or whatever who want to act like these guys are interested in leaving China completely. I don’t believe that’s the case at all. I think global manufacturers are looking for incremental manufacturing capacity to reduce their risk if there is a second wave of Corona, if there is political unrest in China, if there is some sort of retribution or something. I think they want incremental manufacturing for that. And for that, they’ll look to places like Mexico, parts of the US parts, or Europe or somewhere else, other place in Latin America. I don’t necessarily see a wholesale substitutional effect for supply chains out of China at least for the first two to three years. I think over time, there may be more substitutionality. But right now, I think it’s more of an incremental discussion.

 

JB: Do you think India is gonna benefit from this because we’ve seen headlines where India is talking about subsidizing, trying to get more Apple supply chain out of China? I think they’ve gotten one company to move from China to India but they’re going after a lot more than that. They see this as an opportunity and the sentiment online, Tony, I don’t know if I’ve ever seen this before where lots of people here in the West in the US and Europe are talking about boycotting Chinese products. Now that’s easier said than done because a lot of stuff that’s partially made in China is finished assembling here in the US and then it’s stamped made in the US but it’s all the components that go into it are not fully made in the US.

 

TN: Do I might think India will benefit from this? I love India. I really wish India would benefit from this. But I think there’s so much corruption in India. I think it’s very, very difficult. I think it’d be a very difficult thing for any manufacturer to make a significant commitment to India. While I would love for India to benefit from this, and while I would love for manufacturers to move to India, I think the reality is from a bureaucratic, from a corruption, from a just sheer logistically difficult position, again, you know I spent a lot of time in India in the same way I spent a lot of time in China. I just don’t see that happening. I wish it would, but I just don’t see it happening.

 

JB: That’s sad.

 

TN: Yup.

 

JB: it’s sad, they have an opportunity to do it too.

 

TN: They do, but I think the institutional issues are so great that it’s gonna take them years and years to root that out. Look, having services functions moved to India? No problem at all. This is why the BPO sector started booming in India 20 years ago. But actually having physical Manufacturing, and physical logistics, I think it’s probably still a very difficult proposition.

 

JB: In some of your answers, you said that the large corporations don’t want to leave China said they don’t really care if some of their intellectual property or research and development or forced technology transfer or a forced Chinese silent partner they were okay with that?

 

TN: No, I’m not saying they don’t want to leave China. But they already have a large amount of investment there and so moving wholesale from China over the next two to three years presents a big risk for them. So I think, what they’ll do is initially move incremental production away from China. Let’s say it’s a new model or a new product line or a regionalised product line. Let’s say they do something just for North America or something, I think they’ll move that stuff first because those are new supply chains that they would be building out. New manufacturers or expanded with existing manufacturers and then they look at either new physical transport or expanded physical transport. All these things are things that they have to be careful of not just the risk in China, but the risk within the new supply chains that they’re developing in other places.

 

So I don’t think any major US manufacturer will rush out of China unless they’re absolutely forced to. I think they’ll develop parallel supply chains and incremental supply chains first. Test them out for a couple years and then gradually, some of that may be rapid some of that may be slow, but gradually move stuff out.

Before the financial crisis in 2008-09, many manufacturers, particularly Japanese manufacturers, but many manufacturers were looking at something that they called their “China plus one” or “China plus 2“ or “China plus 3 strategy”, where they were looking at manufacturing goods in China but having other locations as backups. Now when the financial crisis came about, all these manufacturing firms wanted to just get rid of risk and they saw these other supply chains as risk so they doubled down on China and they continue to build out in China for all the new equipment and hiring and everything else in China as well. So they saw it as de-risking or at least not growing risk, but actually by concentrating their activities it actually became riskier. Now with a place like Japan, we saw with the 2012 riots and protests and other things that the Chinese did against Japan, this was over the Senkaku Islands, we saw a lot of Japanese manufacturers move their manufacturing out of China. Initially it was slow, and then it became much faster. I think people looking to exit China will look at that as a template. It wasn’t that long ago. It was 2012, 13, 14 when this stuff started and then it moved. So I think they look at that as a template rather than China try to invent something wholesale.

 

JB: I think it could take years for more factories to leave China. Could take a significant amounts of the supply chain to move. There’s billions of dollars of investment. Some of these factories now are not cheap to build. It’s a lot of technology involved, a lot of investment. And given the global economy right now, and how the consumer has not come back, some of these investments may be delayed.

 

TN: Yeah, I don’t think I’ll take as long as a decade. But I do think it’ll take years. But having said that, I don’t think many of these manufacturers will completely want to remove their operations from China either. It’s a big market and the Chinese spend money just like anyone else. So they’ll have their China operations for China and maybe they’ll build for other parts of Asia or they’ll build especially parts or something like that. But I don’t think many of them will have global manufacturing based in China. I think we’re going to see re-regionalization of supply chains and we may have talked about this before, but the move away from say the NAFTA and Euro area around 2000, it was a zero sum where most of the stuff went to China over the next 10 years, 15 years, particularly in the first five years. But then it kind of bled over the next five to eight years and then it became completely concentrated in China and then with the centrality of China, kind of the regionalization complete now we’re starting to see the re-regionalization even if it is a higher manufacturing price because the risk associated with closing again with an event like COVID is so high that people just need to have supply chains closure at home.

 

JB: Yeah. You told me to call it localization and not de-globalization like Peters Ayhan has been calling it regionalization.

 

TN: Regionalization, yeah. I think the globalization is a bit of a, it’s charged first of all but I also think it’s not really accurate. I think we’re still globalized. We still have globalization. But I think we’re Re-regionalizing. Things were pretty regionalized in the 90s and then they de-regionalized, they globalized with China as the epicenter but I think we’re going through a phase of re-regionalization and I think we’ll dip into globalization as needed, we’ll dip into regionalization as needed because people can run pretty sophisticated supply chains now and so whereas 20 years ago it was harder to do that.

 

JB: Yeah, I totally agree. I’ve been reading articles and also my last interview with you where you talked about it, our listeners can go back I think in December 2019, where you’re talking about your company Complete Intelligence and the supply chain management software, the improvements it’s had just in the last couple decades. So in the past, when there wasn’t good supply chain management software, it might take a purchasing manager or manager, even a senior manager at the company, might take them days or weeks with phone calls and tracing to trace orders and exact amounts of the supply chain. Now they can do it on their on their iPad.

 

TN: Sure, yeah. Just the track and trace stuff, the location of stuff, that’s old technology and it’s very easy. I think what’s harder for people is to understand the true cost and cost scenarios for manufacturing a good. What is the cost at the element level or the component level of that phone that you’re building or that electronic equipment or that food item or whatever. What we’re able to do and I think things are moving is much more precision around taking those costs, breaking them out, understanding where they’re going over the next one to say 24 months so that you can really plan where the best location is, what the right price is, all this stuff. The geopolitics and the trade policy around trade, I don’t think that stuff will ever leave us. The precision with which you can plan around cost and price and other things, I think those things are allowing manufacturers to adjust really, really quickly and really have a bottom line impact within say 90 days something like that.

 

JB: I think a lot of these governments are talking about trade so much because they all are seeing that they want to bring back manufacturing for jobs.

 

TN: That’s right. Whether it’s Europe or the US or South East Asia. You look at a place like Malaysia. A lot of Malaysian manufacturing was transitioned to China between say 2000 and 2012, 2015. And now global manufacturing companies or for the past couple years they’ve been looking at places like Malaysia and Thailand again because it’s simply not China and so it’s not just localizing manufacturing in North America it’s looking at other regions and arbitrage in the regulations and the tariffs instead of arbitrage say the electricity price, which is one of the reasons people after Mexico, or regulatory in taxes, which is part of the reason people of the US. So, this isn’t just say a Western or European US issue. It’s regionalization in the truest sense.

 

JB: So these governments and central banks, it’s not just the US and the Federal Reserve. The European Central Bank, the Bank of Japan, the People’s Bank of China is doing some but nowhere near the amounts because I think they are really worried about the stagflation component, but they are flooding in general the global economy and asset markets with currency. Some people are getting what twelve hundred dollar checks. There’s SBA loans. Is this going to put a lot higher costs in the global supply chain? Are you seeing higher cost yet?

 

TN: I don’t necessarily foresee that, but I do think we’ll see incremental costs. So what you’re talking about is so much money is out there that chasing those goods will become more expensive. I think you’ll see that maybe in futures markets or in financial trading markets. But I think in terms of demand-led consumption, actually people buying tangible things, I think we’re in an environment where prices are hard for us to rise. Granted you see oil trading like I said earlier WTI broke I think $40 today, which is great. It’s healthy. But when that actually transitions into physical demand and how that transitions into other areas, I’m not really sure. Meaning, that $40 or how much price pressure is that going to have on downstream goods? Because $40 is much less than it has traded even though we had negative 37 and 20 and 28 and 32 for a long time, those prices are still pretty far depressed from where they have been historically. So I don’t see that. Typically when we have this type of stimulus that cash makes its way into things like real estate and equities and that sort of stuff. Will there be inflation there? Probably. But will we see it in supply chains? Probably not as much as one would think initially.

 

JB: So you don’t see a stagflation scenario where people in the US are going to be given more $1,200 or more checks per month and then because the global supply chain is not functioning at pre coronavirus levels, that there’s going to be less goods and services to purchase, so there’s going to be more currency creating less goods and services which would be stagflation airing that in my opinion?

 

TN: Certainly that’s possible. Not necessarily my central view. I think once you see these, the benefits and this $600 a week extra for unemployment, I think once you see that end at the end of June, I think we’ll see people really try to get back to work as quickly as possible. I think we will see some wage deflation among kind of white-collar workers especially in places and things like oil and gas. I’m based in Houston, Texas so I think you’ll see that stuff as those jobs become more competitive. But I don’t necessarily see a fully stagflation airy environment in the US.

 

JB: I think one of the main points though is the distortions that all these government interventions and the central bank intervention is creating because look at the stock market now that the stock market the Dow is over 27-thousand and I we haven’t seen any examples really of a recovery in the US economy yet.

 

TN: Again, markets are trying to find their levels and what I’ve been explaining to our clients is we will likely see quite a lot of volatility between now and say August, where we’ll see markets rise and we’ll see markets fall.

 

In hindsight, if we look let’s say on a monthly average basis, they may look like pretty boring markets. But in reality, we’ll see things rise and fall quite a bit until those markets, whether it’s say a copper price or whether it’s sp500 ETF. They’ll bounce around quite a lot. So again nobody really knows this is this is the problem it’s price discovery. When we talked with say procurement people, our supply chain people, even revenue planning people within companies, they’re all kind of making their best guesses. But they don’t really know and I think whether it’s somebody allocating a portfolio or whether somebody buying for a product, the planning, the precision of planning, the tools that people you are using really are not that precise and they really don’t incorporate a number of scenarios. We do have a lot of planning teams and let’s say portfolio strategy teams who are really kind of guessing and that’s why we see and we believe we will see the volatility in markets because it’s easy to look at the Dow or the S&P and say, “wow that’s too high” and then next week it swings 5% lower and then the week after it swings up 3% and so we see these things go up and down until we find that price where market participants agree that it should be in general region. I think we’re gonna be having that debate in markets for the next two to three months.

 

JB: I expect a lot more volatility even though the VIX is down below 25 that was below its support levels at 28. It was in a new trading range a higher trading range now it’s below that. But the Fed has talked about Powell and the Fed have talked about wanting to reduce volatility. Temporarily, they have reduced stock market volatility. But I’m looking for data out of the real world economy especially in the US economy where there’s improvement and I haven’t really seen improvement yet, now they are gonna we’re hopefully gonna restart the economy, but who knows if we’re gonna get a second wave of the coronavirus soon.

 

TN: Well if you look at driving right now, it’s at like 80 percent of pre corona. And this is part of what’s giving strength to crude oil markets. People are getting back on the roads. Not really getting back into planes that much yet. But they are getting back on the roads and I’m optimistic about that. When we start to see some of these basic signs of life at say 80% level, I think that’s positive. I do understand why markets were up today given the unemployment data and things like the road data that sort of stuff. Are they at the right level? I don’t know that anybody really knows but I think there is growing optimism that things may be coming back. The rate at which they’ll come back? Again, I think markets are going to debate that for at least a couple more months and then we’ll see real tangible, sustainable activities say late July August and people get an idea of where things will land for the rest of the year.

 

JB: Do you think the US economy is gonna have to make some really radical changes as in a lot of the bricks and mortar retailers, a lot of a lot of these casuals sit down in restaurants, they’re going to go away and the transition to e-commerce and online sales is gonna, it was already happening before the coronavirus, but now it’s gonna be a rapid acceleration than in the coming years?

TN: I think in general, I would say no. But I do think that a lot of your marginal businesses in strip malls or your marginal franchises or whatever that we’re just barely making it, I think it’s like this is a good time to cut those losses. I think things like real estate obviously you’ll see some changes there. But you know I think most people just want to go back to normal whatever that is. If we look at say pre 9/11,  everyone said the world was going to change. It ended up being kind of a TSA check and so I think yes it’s easy. It’s been pretty easy over the past couple months to kind of extrapolate today into the future and today is forever. Normal is not normal anymore. But I think most people just want to get back to normal. Of course there’s going to be changes, but we’ve seen from some from some of the say protest activity over the past week, people will get out and they’ll go in public for whatever their right reasons are. Do I think the dining experience is going to change dramatically? I don’t. Do I think the shopping experience is going to change dramatically? I think it’ll change a little bit, but I don’t think it’s going to be some new normal of every single thing being done online and everything being delivered to house. Of course, people want that especially that’ll take off or continue likely in urban areas in a big way. But I think at the end of the day most people just want to get out of the house right now. They’ve been there for so long that they’re just trying to trying to get out and do something else aside from eat another meal in their house.

 

JB: The food delivery companies, they’re way overcharging on fees. I’m paying for a couple of my deliveries I think I ordered like a pizza and a couple other things and it was fifty bucks. It’s way more than than the normal cost.

 

TN: It’s very inflexible demand, very inelastic so if they can charge it, they will and I don’t blame them. I wish I was in that position.

 

JB: They still can’t make money if you look at their earnings report. Jim Chanos like put out a he posted an interesting article on his Twitter about like there’s an the Pizza arbitrage. Did you see that article?

 

TN: no

 

JB: Yeah. So him and his buddy who’s a restauranteur, they figured out that GrubHub was under-pricing pizzas so they bought ten pizzas at the GrubHub subsidized price and then they were able to basically make $100 per order risk-free, 80 to 100 dollars cash for is free. There’s an article that I could send you. It’s pretty funny.

 

TN: They could sell it to other people.

 

JB: They could resell it, but it was basically, they were there was an arbitrage trade because of like doordash and GrubHub were intentionally under-pricing the menu items and so people would order from them and their call centers so they could sell to Wall Street that there was growth that there was revenue growth for deliveries so the stock would still go up.

TN: Wow fantastic, what a game, huh?

 

JB: well I’m not the CEO of a publicly traded company like that but yeah it’s a bad and said there’s a lot of added incentives right now in society.

 

TN: Yeah.

 

JB: Well, Tony, I really enjoyed our discussion today. We live in very interesting time. One last question here about the dollar. So you think the dollar shortage is real and that the dollar is gonna start rolling soon?

 

TN: “Soon” is relative. So do I think the dollar shortage is real? Yes. Do I think the dollar is going to rally soon? I think it’s inevitable, but I think it really all depends on several things. But I do believe that emerging markets will continue to try to devalue their currencies because their exports especially China, I think that the dollar is in demand because there is so much debt globally, and they have to have dollars to pay down their their US dollar denominated debt. I do believe that Brent Johnson, his view his milkshake theory, I think is very solid and I think there’s a level of patience behind that theory and I don’t see the fundamentals changing that much. I think it’s a pretty elegant in the way he’s put that together.

 

JB: It’s a sound theory, but I think the US government the US Treasury President Trump who’s tweeted a lot about the dollar in the last two years, there’s a lot of ways that Congress and Trump and the Treasury can spend, can hand out checks, can do a plaza court agreement, if things get bad enough, they can do what FDR did in 1934. And if the dollar does get to those levels that Brent Johnson is predicting at 120 and the dollar index I mean that would collapse everything.

 

TN: Maybe. I don’t know that it would collapse everything. But I think it would certainly put strains on emerging markets. I don’t know that it would collapse everything, but I think it would certainly harm and I think emerging markets would have to live within limits that they haven’t had to for probably 30 years. So, and this is the basis of the end of the Asian century is they borrowed against the next 30 years to pay for the last 15, right. It’s just not sustainable since they don’t have a global currency and I think if you get a dollar north of say 105 close to 110, I think Asia just starts having serious serious problems.

 

JB: Yeah, I agree. And emerging markets have an interesting business model since China joined the WTO. So they set up to export to China either luxury goods or commodities and then they started borrowing in dollars especially around what after 2009, when the dollar index in what 2011 to some of the all-time lows there with Ben Bernanke just doing the QE programs. They basically started shorting the dollar at the worst possible time when the dollar was already relatively low and they were doing a lot of exports to China but then borrowing in dollar so it was a dangerous game that the emerging markets had set up.

 

TN: Very dangerous. I think being in those markets, betting against the dollar is a really hard proposition especially right now because the relative strength of the US, the US is in pretty good position compared to a number of these markets. It’s in a good position compared to say Europe. I’m not just talking like this month, I mean we’re all hurting this month. I think over the medium and long term from demographics to resources to other things, the US is in a is in a pretty good position it’s not in an excellent position I don’t think anybody globally is but I think it’s in a pretty good position.

 

JB: I want to thank you so much for your time today, Tony. If my listeners want to follow you more on Twitter or take a look at your company Complete Intelligence and the work you do, how did they do so?

 

TN: Sure, our company website is at completeintel.com on Twitter the company URL is or the company tag is @complete_intel. My personal twitter is @TonyNashNerd.

 

JB: Putting out a lot of good surveys and a lot of good stories, too, about the global trade in China as well.

 

TN: Thanks Jason. Thanks so much for your time.

Categories
Podcasts

How long can the bull run?

Now that the bull run has started, Tony Nash CEO and Founder of Complete Intelligence joins BFM 89.9 in another global markets discussion. What’s behind this rally and will it be sustained? They also discuss OPEC, the Brent price and its future, Europe’s fiscal stimulus, the ECB, and the resumption of trade war between the U.S. and China.

 

Listen to the podcast on BFM: The Business Station.

 

BFM Description:

On the back of an emerging bull run in Asia and the U.S., we reach out to Tony Nash, CEO of Complete Intelligence, for his thoughts on whether or not this momentum can be maintained, oil prices, as well as the ECB’s bond purchase programme.

 

Produced by: Michael Gong

 

Presented by: Wong Shou Ning, Lyn Mak

 

 

Show Notes

 

 

BFM: U.S. stocks extended their rally into the eighth straight day as investors clung to optimism for quick recovery from the pandemic. So the Dow Jones closed up 2.1 percent. The S&P 500 closed up 1.8 percent, and NASDAQ was up 0.8 percent. In fact, NASDAQ in the intraday trading did touch an all-time high. It’s as if COVID-19 never happened.

 

Meanwhile, Asia also had a very good run. Nikkei 225 closed at 1.3 percent. Shanghai was barely up, though. It was flat at 0.1 percent. Hang Seng was up 1.4 percent. Singapore was the big surprise here. We talked about it yesterday. The banking stocks were up and this caused the Straits Times Index to go up by 3.4 percent. Meanwhile, on the FBMKLCI, our market was up 2.1 percent. Also on the back of banking stocks, public bank RHP saw almost a pulping double-digit gains.

 

Pandemic? What pandemic? Never happened.

 

So this morning, for more insight into global markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Thanks very much for joining us this morning, Tony.

 

Now, equities have recently exhibited strong bullish momentum in both Asia and the U.S.. What’s behind this rally? And is it sustainable?

 

TN: I think a lot of it is the monetary policy expectations and the stimulus expectations washing through. It’s a lot of hope around activity in the summer, say, for crude prices, driving and consumption. There’s an expectation that there’s been some pent up consumption because of COVID. Some of this is coming back. It’s key to know that the U.S. markets are still 10 percent below where they were pre-COVID, 10 percent or more. So it’s not completely as if things never happened, but it has come back relatively quickly. The S&P, for example, was at around 2300. So we’ve climbed about 700 points in the S&P 500 since the nadir of COVID.

 

BFM: I always ask our commentators this, and I’m going to ask you also. Why the disconnect between what is happening on Main Street versus what’s happening on Wall Street.

 

TN: There’s an expectation that most publicly traded companies are going to pack as much bad news into Q2 as possible. And so they’re just throwing the kitchen sink into Q2. So that should mean pretty clear sailing for the rest of the year, assuming that it is 2020 and all. So anything can happen. But assuming that there isn’t another major catastrophe, things should be pretty clear for the rest of the year if every- and anything that could go wrong goes into Q2 data.

 

BFM: Brent has also erased some of its recent gains and is back below the $40 a barrel mark with the OPEC meeting now in doubt. What do you think oil prices will be heading?

 

TN: Our view is that things have been pretty range traded. We don’t see things going up to, say, $50 anytime soon. It’s possible. But we’ve expected things to stay pretty range traded until probably August or so.

 

We’re going to see daily rises and we’re going to see falls. But prices have come back a little bit on some drawdowns we’ve seen in storage and expectations around driving. Although, It’s not a perfect substitution for flying. And those volumes will still be down until we start to see people get back on planes. And until we start to see commuters back on their daily drives, we really don’t expect to see things come back above, say, $50 for Brent.

 

BFM: Shifting to Europe. The ECB is expected to expand its bond repurchase program this Thursday. So they’ve got a currency 750 billion euros outlay. Is that enough or do you think they need to increase it?

 

TN: It’s not enough. But I don’t know that Europe really has the financial wherewithal to do much more. They are not a fiscal union. And so they’re really having to contort their mandate to make sure that they can do this. This is really pushing Europe and the ECB and the concept of a quasi-fiscal union under the E.U. is putting real pressure on that.

 

So the limits of the monetary, not fiscal union are really pressed. And when you look at things like the insolvencies we saw in Greece and Italy and other places in southern Europe over the last 10 years, places like Germany are just tired of fiscal stimulus of other countries in the EU.

 

BFM: And if you look at the equity markets in Europe, that’s been also the lag out. Do you think there’s any opportunities there or is it a similar situation whereby the corporates there are going to not perform up to par?

 

TN: No, we don’t think they’ll perform up to par. Until we see countries beyond Germany really lift some of these lockdowns in a big way, it’s going to be really slow going. It’s strange how we’ve seen these protests really go against the lockdown. We may actually see some of these countries rip the Band-Aid off, because if you have tens of thousands or hundreds of thousands of protesters out there, it may be a situation where you can just say, “Well, lockdown’s over,” and you may start to see consumption patterns come back to normal. That would be a good thing for markets. That would be a good thing for companies. But European companies, especially European banks, remain troubled. And I think this crisis has really forced those banks to look in the mirror. And if markets are functioning well, then we’ll start to see some consequences, particularly for European banks.

 

BFM: Thank you very much for speaking with us this morning, Tony. And that was Tony Nash, CEO of Complete Intelligence.

 

He made some comments there about Brent crude, which he doesn’t really expect to come above the fifty dollars per barrel mark until perhaps we see planes start flying again. But the Trump administration has just made an announcement to that effect, saying that they are suspending passenger flights to the U.S. by Chinese airlines effective June 16th.

 

So the U.S. government said in a statement that it was responding to the failure of the Chinese government to allow U.S. carriers to fly to and from China. Now, this hasn’t, of course, been good for the tensions that have already been flaring between the two countries over the handling of COVID-19, as well as the treatment of Hong Kong.

 

China recently paused some agriculture imports after Trump threatened to limit the policy exemptions that allow America to treat Hong Kong differently than the mainland.

 

And that was done. The global economy was cheering and it looks like they’ve started fighting again. I think I’m just curious, what else is there to fight over? Because there’s been soybeans, beef, pork imports, corn, and now airlines.

 

U.S. airlines did see a bit of a share surge amidst the broader market rally and signs that travel demand is starting to rebound. Boeing was up 13 percent at one point after a report from IATA indicated that recovery was underway for global airlines.

 

So looks like we’re going to be watching that space as well, quite closely.

Categories
QuickHit Visual (Videos)

QuickHit: Proactive companies use data to COVID-proof their supply chains

Supply chain expert and SAP SCM/IBP Architect Odell Smith of My Supply Chain Group joins this week’s QuickHit to talk about how proactive companies will survive, how data helps them decide quickly on supply chain solutions, and what we can do to be better prepared next time. After a quick 5-year stint in engineering, Odell has been doing supply chain technologies for over 30 years. His company does mostly SAP products and advisory services and implementing technologies for the supply chain.

 

Don’t forget to subscribe to our Youtube channel and hit the bell icon to be notified when a new QuickHit goes live. If you missed some of our episodes, here are some of the lastest ones you’ll enjoy watching:

 

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

How ready is the military to face COVID-19 and its challenges?

Oil companies will either shut-in or cut back, layoffs not done yet

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: How are your clients looking at their supply chains? How do they use their data to better understand and plan their supply chains even with all the craziness and volatility? Can you give us an example?

 

OS: Our clients have had a variety of different issues. There are companies that even inside the same company, they’ve had one business unit with a huge spike in demand and another business unit will just drop off. One of our clients is one of the largest beer producers in the world. Their keg business that supports restaurants just evaporated all of a sudden. But their bottled beer just went through the roof.

 

So these companies are trying to see these demand patterns as they come in, but also be able to quickly respond to those. Everybody’s used to the monthly demand patterns. But being able to see such a rapid volatile change in these demand patterns and being able to see that with data in the systems, then being able to simulate how you’re going to respond and make intelligent decisions based on that data, has been a real game-changer. If this had happened 20 years ago, it would have been a much more difficult scenario to recover from.

 

TN: What kind of data are people using to make these decisions? Because we really don’t know what’s coming from the outside. All the governments say macroeconomic data. This hasn’t come in obviously. So how are people taking data in to understand how to adjust their manufacturing patterns?

 

OS: The operation’s focus is about trying to estimate what that demand pattern is going to look like and then be able to adjust from that, if you have a constant supply. But if you have an irregular supply, it’s also a problem.

 

Another huge issue here is we’ve off-shored so much stuff in the last 15 to 20 years. An example is one of our customers that is a large paper supplier. They bring in pulp from other suppliers. Everybody’s familiar with the toilet paper issues that we’ve had. These guys had all kinds of issues come up. They bring in product and then they manufacture that product. As they do that, their supply chains were disrupted by not being able to get their suppliers’ product through the ports. Their port activity was blocked. They knew that was going to be the case, and so they had to redirect some of that stuff that was coming in to run their manufacturing.

 

They also worked proactively with the ports. They knew that the port was going to be closed and they had to redirect that. We put in some cost optimization for them to be able to evaluate simulations to estimate where it looked like the best place to bring this raw material. And then of course, their manufacturing process itself had to change, because there’s a lot more demand now for toilet paper than there was for paper towels.

 

Nobody expected that demand shift. Everybody was unprepared for that. But being able to use data to make smart, intelligent, short-term decisions about how to correct for that new demand was something that they were able to put in place fairly quickly. For scenario planning, we were using SAP IBP to be able to make those right decisions.

 

TN: I started my career in a freight forwarder, customs broker, and all the physical logistics around it. And it was always interesting to me early in my career to see when people had cost-sensitive, time-sensitive, quality-based decisions, and you’re balancing all three. The types of decisions they made sounded like they didn’t really have any history to go by. They were just looking at expectations, and you’re just playing it day-by-day or week-by-week.

 

OS: If you have the tools and you have the data, then you can do that. Now, a lot of this data was manufactured data themselves because it was based on estimates. What are my options here? I’ve got three other ports to use, and there’s different costs of transportation going through those ports, plus there’s a risk. Will I be able to get the stuff processed through and time to be able to make it? And if I don’t, then what’s the downstream impact to me in my subsequent manufacturing process?

 

TN: All to get a roll of toilet paper to your corner store. What would you say manufacturing companies need to be thinking about? How can people be better prepared the next time this happens?

 

OS: One thing that came out of this is that this data is changing so rapidly. [Companies that can] access that data can see what worked, and what didn’t work from the last situation. There are going to be some things when you’re making these snap decisions, and you’re just trying to keep your business afloat. There are going to be some things that you learn in hindsight that were not the best thing to do. As long as you plan for that, and you know that that’s going to be the case, and you review that after the fact, and are prepared for that risk, know where that risk is, then it always helps you be able to respond better next time. If you don’t learn from those things, shame on you.

 

TN: Do most major manufacturing firms today have a good base of data and well-organized data to make some of those decisions? Or is it still kind of iffy?

 

OS: It depends. There are some that have really good data. But it has to be a decision by the company. The company has to decide to put the resources in place and to have that vision, that strategy of knowing that that data is important and that the data needs to be reviewed, audited, and cleansed.

 

Some companies are very proactive. Some companies are completely reactive. And when you get in a situation like this with this craziness, these [reactive] companies won’t make it. Proactive companies will make it. So it’s really a business mindset and putting a value on that data that makes it helpful.

 

TN: These major manufacturers that you work with, I think there’s a perception out there that a manufacturing firm has one ERP system. Do you work with any firms that have kind of one ERP system or are they dealing with half a dozen or more typically?

 

OS: There are companies that have been able to maintain that single ERP situation. But more than not, you wind up with mergers and acquisitions. And these M&A activity is just brutal on IT organizations because very seldom do you acquire somebody who has the very same ERP system and they are on the same version that you’re on. And then, there’s a product rationalization and a customer rationalization that has to take place. Those are all very difficult things to get past.

 

TN: Pointing out, so just people understand. It’s not as if you’re just taking data out, putting it in a big machine and then putting it out the other end to help make a decision. You’re taking data in from a lot of different sources. And you’re making sure that it’s somewhat normalized or understandable in the output. And then those managers within those companies are also seeing data in a number of different formats to make those decisions. So this isn’t linear. This looks more like a bunch of weeds over here and a bunch of mangled tree roots over there and you’re trying to make it as linear as possible. The complexity of these decisions, the complexity of these data, say logistics activities, are just fascinating.

 

So last question here Odell. You’ve seen these companies through the first phase or two phases of this. Do you see these companies back on a path to normalization now? Are there manufacturing and supply chain processes normalizing now?

 

OS: There are some that are beginning to get back on the horse and there are some that are just still severely impacted. Some of our customers are in the pharma industry. They’re just going nuts and they’re going to continue to go nuts for a while. It’s really a mixed bag of things. A lot of our customers manufacture products that are related to home. Everybody has been doing a lot more of that lately. Demands for those have still been really strong even though supply may have been impacted by some of the situations.

 

One of our clients is a company that has multiple legacy systems. One of the great things about these new cloud solutions is the ability to do that normalization, to be able to take data from multiple different ERPs, disparate ERPs, and bring it in for a total view for the executive team to make these quick decisions. A lot of our customers are doing really well, and so it’s great to see them coming out of this. It’s been a slow couple of months for people just to wrap their arms around the thing, and try to just fight fires. And then now we’re coming out of some of that and into recovery mode that looks good and strong.

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Podcasts

Top UK adviser refuses to quit for lockdown breaches

Our CEO and founder Tony Nash joins the Business Matters for an hour of discussion on Dominic Cumming, recent headlines in the USA, people in restaurants, government stimulus, opportunities in the pandemic, how careers and schools have changed, and what sorts of things are they buying online?

 

A related QuickHit episode, which you can watch here: We’re not going to normalize.

 

BBC’s description:

We talk to the BBC’s Politics Correspondent, Rob Watson about what Dominic Cummings’ future may hold. With our special guests Sushma Ramachandran, of the Tribune in Delhi, and Tony Nash, of Complete Intelligence in Houston, Texas, we talk about how India and parts of the United States are easing their lockdowns. We also look at how many people are looking to change careers, whether forced to or not.

 

Listen to the Business Matters podcast on BBC.

 

Show Notes

 

BBC: What do you feel about Dominic Cummings, especially in Texas or the USA?

 

TN: I don’t think anybody is surprised by this, that politicians have one rule for themselves and another one for everyone else.  Britain is not exceptional. What it shows is that we actually have a vibrant media that will report on this. That is the positive thing coming out of this. Every country has a politician that breaks the rules, but not every media in every country is brave enough to report it.

 

BBC: What are the headlines in the USA? What’s grabbing people’s attention?

 

TN: It’s an ongoing news cycle of trying to shame the states that open up. It’s really tiring, quite frankly.

 

BBC: When you say “shaming,” who do you refer to? I thought they all went up?

 

TN: They are planning to. But the early states when there’s an outbreak, there’s a very huffy approach to pointing to places like Texas, where I live, and saying that we’ve done it wrong, and saying that places with extended quarantine have done it right. Although, the incident rates in places like Texas are lower than in other places like New York or California. What’s really hitting in the media here is really trying to shame states, which are pretty much the southern states that are opening up first. There’s a stereotype that southerners are just stupid. And so it plays into this coastal narrative that southerners don’t know what they’re doing. Although the incidence in these states is lower than the coastal states.

 

BBC: What about the businesses that are opening up again? The restaurants, and staffing? Are there people around?

 

TN: It was a long holiday here, and I just took a short trip. The hotel I went to in, the restaurants I went to, said that they are understaffed. And although you see a number of 25-30 million people unemployed in the U.S., what these business owners have been telling me is that they cannot get the staff to come back because there’s a temporary unemployment kicker. So the longer people stay out of work, the more they get. They get an additional kicker from the U.S. And these are temporary. These will go away over time. In most cases, these are voluntary unemployment because they are making more money on unemployment than they would be going back in there job before.

 

BBC: Sounds like that it’s a problem that will be sorted out?

 

TN: It will over time. But there will be a lag. I think when people are accustomed to making more not working, they will question themselves as to whether or not they want to go back to their job, which is not a bad thing questioning their vocation. These are all good questions to ask.

 

BBC: Do you think the government will try to help green industries and take a leap role in new economies. Like new ones, as a result of this pandemic?

 

TN: I think we have. We have subsidies for green industries since, I think, 1997. It’s possible that there new ones as a result of this pandemic. I have a very different view around the revitalization of economies. The fact is governments stopped economies around the world. This is not a market failure. So I don’t care if you are a capitalist or a socialist system. Governments closed businesses. So if governments closed businesses, businesses have the responsibility and the accountability to restart those businesses. Because if they don’t, we’ll see civil unrest and political risks in ways that all these governments have not considered before they closed their economies down. I don’t think that this is a capitalist-socialist issue. It’s a fact that the government intervened to halt the economies around the world.

 

BBC: In what direction will they regenerate the economies or bring economies back to their level before?

 

TN: People are not really happy with the level of stimulus that they are receiving, because, at the end of the day, people are pointing at the government for stopping this. And if you isolate people for too long, they get really restless. We are facing real political issues and social unrest issues, unless governments, regardless of the economic structure in the economy, we will face real problems.

 

BBC: For entrepreneurs, is this a good time to start a business?

 

TN: I think it’s a good time for people to change direction, because any future potential employers, if you say, “I changed direction in the wake of COVID,” no ones going to question your motivation. They are going to understand that this was the time that everyone reassessed. For businesses that I’ve built, I built a business unit for The Economist. And one of them saw our most rapid growth during the last recession in 2009, very rapid growth. I think there are a lot of opportunities if you play it right. But it’s also a good time to start over.

 

BBC: Where would you put your money on? If you want to change career?

 

TN: I would put it on me. I run a business. I think we’ll see a lot of food startups. I hear a lot of people talk about food startups. Within 18 months, a lot of those will be out. But they will learn new skills. People are also going very local, which is a good thing.

 

I think people have been able to slow down. They realize that they wanted to focus on small things. I’m not sure how long this will last but this is good for a lot of people.

 

BBC: What will be the role of universities now? Will people think it’s a waste of time? Will the role of schools change?

 

TN: I think the role of universities has traditionally been to teach you how to think, not necessarily how to do. If universities are then focused on how-to-think activities, that’s a much better role for them. I don’t think vocational training is the best use of money for universities. They are moving toward helping people how to think, not how to do.

 

I run a company. I don’t need somebody with PhD. I just need somebody with very basic skills that they can learn through online courses and some practical evidence of what they do. In a lot of these things that are very vocationally-based, you don’t need a degree. You just need to know how to do it.

 

BBC: What have you been buying on a lockdown? We’re not going to shop as much as we used to?

 

TN: For some reason, we purchased two new skateboards. Like everyone else, we are no different on gardening. All of these have been fantastic to go very local and spend time with neighbors.

 

Will we go back to the stores? I don’t think we’ll do as much shopping, but I think we need the social interaction of shopping. There’s just something about the social interaction of shopping, which is necessary to our human condition. I go to Walmart here, and there’s just an element that’s necessary.

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QuickHit: Manufacturers are bouncing back, but…

In this QuickHit episode, we are talking with Chad Moutray of the National Association of Manufacturers (NAM). Chad is the Chief Economist for NAM, and he talks with manufacturers across the U.S. every day, to understand their issues and informs them of the the overall economic landscape. NAM has about 14,000 members that includes state manufacturing associations. Tony Nash discussed with Moutray the state of manufacturing especially in this time of the pandemic. What are they doing, thinking, and what are their plans? 

 

You can revisit our previous QuickHit episodes here:

 

We’re not going to normalize
How do we use up all the corn now?
How ready is the military to face COVID-19 and its challenges?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Can you walk us through some of the manufacturing firms that you’ve been interacting with and how do they’ve come to understand the environment? What have they been thinking about? What have their priorities been? Because I think it’s been confusing for everybody. But from a manufacturing perspective, what have you been seeing?

 

CM: I’ll go through a couple of things here. Number one, just that dearth of data that we had early on, everyone was asking me, “What is the current capacity utilization for manufacturing right now in the State of Pennsylvania?” I don’t know. How would I know, right?

 

There was a lack of information early on, and the abruptness and the severity of this downturn just caught a lot of people [off guard]. The numbers are so heartbreaking and jaw-dropping. We’re starting to get a sense now of what those numbers really are, and the drastic-ness of these figures in terms of being the worst ever, or the worst since the Great Recession. But there was a lack of information early on that really just caught people by surprise.

 

Companies don’t know what to do. This is not just a business conversation. It’s also a life and death conversation. Do you keep operating? Do you not keep operating? Are you operating in a state where you’re forced to close? Are you deemed essential? A lot of those things early on really dominated manufacturers’ time in terms of whether to operate, what happens if someone gets sick in your facility? What do you do? Do you close everything down? There was a scramble early on just to figure out operationally “What am I doing?”.

 

It moved from there to the conversation about PPE, Personal Protective Equipment, masks or ventilators or whatever else.

 

One thing that really has dominated that manufacturing conversation over the last month has been the National Association of Manufacturers work with the administration [to understand] whether it’s FEMA or DOD or the Vice President’s Office to say, “Okay. What do we need in order for everything to come back to normal? How many masks do we need? How many ventilators do we need?” And then helping to identify manufacturers that can produce that. That really has dominated a lot of time for the NAM over the last month or so–getting a handle on what are those needs.

 

That has gravitated into the new normal. Everyone is [asking] what does manufacturing look like three months from now, six months from now, a year from now? How do you get back to a sense of normal, whether there’s a vaccine or not a vaccine?

 

Answering those questions will dominate much of my time from a research perspective. We asked on a survey “Are you re-engineering in your process to have social distancing in mind,” or “Are you going to let people work from home?” That’s not always possible on the shop floor. But in some cases it may be, right? So those types of questions are first and foremost.

 

We’re talking to a series of tire manufacturers. They have a huge retail operation and retail is just going to change dramatically. They not only look at the manufacturing side, but how retail is going to change, and then how they can react. It shows you just how dynamic this particular moment in time is in terms of dramatically changing the sector.

 

TN: I know you’re still in the process of doing your research but what’s your feeling now? Do you get the sense that people want to get back to kind of a normal-ish environment quickly? I know “there” is relative. But do you think there’s a desire to get back and get relatively normal business activity back say in Q2 or Q3? Do you get the sense that it’s going to be longer? What’s the drag? How long will this drag effect impact companies and impact manufacturers?

 

CM: I do think that we’ve passed the worst of it. I do think that in that late March, early April, that’s when things just really hit bottom. You’ve started to see a sense, especially from some of the more recent data, that things, while they’re still bad, are not as bad as they were several weeks ago. I do get a sense that you’re starting to see that bounce back in the marketplace, which is good.

 

In general, there is what we’ll call “quarantine fatigue” not just for consumers but for businesses as well. There is a sense that activity is going to start resuming.

 

The difference here is that yes people are going to come back to it but there’s still going to be some hesitance there. We don’t have a vaccine. So coming back to work is not the same as it was before. That’s true at the NAM, that’s true in every workplace in the country. People’s willingness to go out to restaurants and bars and go to Disney World has all changed a little bit.

 

I do think that we are bouncing back already. But in this new environment, there is still a little bit of hesitance about getting out in crowds and the workplace change. Yes, I can go back to the office maybe, but am I going to? Am I going to continue working from home? How much separation is there for me between me and my co-worker on the shop floor? We’ve already started to see that rebound. But it’s in a different place than it was two months ago.

 

TN: A lot of questions. Let me shift gears a little bit and ask you about trade. With COVID-19 and initially when this was hitting China hard, we saw a lot of supply chains stall out and slow down. We’ve been talking about the regionalization of supply chains for a few years at Complete Intelligence. Is that something that you’re seeing, and I know you’re not necessarily advocating a position. So I don’t expect you to be doing that. But are you seeing that happen or is that concept not seeing a lot of traction on yet?

 

CM: We were starting to see people re-evaluating their supply chains as a result of the Trade War. Last year, we were seeing a lot of that. It doesn’t mean all of it’s coming back to the U.S., but it certainly means production might be moving out of China and other places. This exacerbates that even more. There’s been this realization that we can’t depend on one country and one source to get all of our stuff anymore given the extremeness of this disaster economically.

 

People are going to be re-evaluating the supply chain. From the NAM point of view, we want as much of that to come back to the U.S. as possible so we’ll be advocating policies on on-shoring. Look for that coming from us. But the reality is, companies are going to locate where they locate. There’s a lot of reasons why companies locate wherever they do, and it’s where the customers are, that’s where their other suppliers are, that’s where the intelligence is. And some of it’s going to go to Mexico, or to the rest of Southeast Asia. There is definitely this understanding that we’ve got to re-evaluate that supply chain process in terms of who we’re buying from, making sure there’s duplication, and I think that’s a conversation that every firm is having right now.

 

TN: Very good. Chad, thank you so much for your time. I’d love to have you back in a few months to revisit some of these questions. As the unknowns dissipate, it’ll be very interesting to to look back and see what people did right, what mistakes people can avoid next time this happens.

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QuickHit: We’re not going to normalize

In this episode, our expert guest Grant Wilson of Exante Data said that “we’re not going to normalize” and that countries need to make the very difficult decision to risk re-infection or re-outbreak in order to reopen the economy.

 

Grant Wilson is the Head of Asia Pacific for Exante Data, a macro advisory and data analytics company based in New York, with a broad global client roster. Exante Data was one of the first to identify and analyze the impact of Coronavirus with detailed data.

 

You can also check out our previous QuickHit episodes: How do we use up all the corn now? and How ready is the military to face COVID-19 and its challenges?

 

Show Notes

 

GW: So we saw COVID very early – mid to late January. In fact, I positioned it as a key risk factor for our clients. And as the situation evolved we just stayed with it.

 

We moved the firm increasingly towards all data through this period because we’re trying to assess how the virus is affecting the economy: [what are the] different scenarios to restart in different countries, different sectors, which is really the most germane question at the moment.

 

TN: Where do you think we are? I think the initial shock is past. Do you think we’re on a path to normalization or are we still in a hesitation phase before we get on to that normalization path or something different?

 

GW: I think it’s something different. I don’t think we’re going to normalize. I do think there are going to be industries, which have fundamentally changed coming out of this. People want to put a time frame on it, and I think you just got a run with it.

 

But to give you some examples, I’m extremely pessimistic about commercial real estate globally. The way people work has changed fundamentally, and it’s not going to change back. Whether the virus comes off a little bit more or whether we do get a second wave. The fundamental changes that are happening in terms of office environment, the digitization of communication. Those things are not going to turn around. So if you’re a large landlord or a sponsor of CMBX, derivative structure, you’ve got some real problems, and it does not matter where the virus is.

 

Similarly like public infrastructure. People are clearly using less trains, less buses, obviously less planes. Interesting that there could be a shift back to private car usage. We are trying to think through the secular things coming out of this.

 

And then for the virus itself, one of the most peculiar things is that there’s only probably a couple of countries globally that can truly achieve elimination, like to totally get rid of the virus within a proximate, self-contained environment. New Zealand’s a very good example of that. In Australia, the case counts are extremely low. So the rest of the world will not eliminate this thing. They’re gonna have to pick and make these really, really difficult decisions about how much of a virus risk and re-outbreak that they want to tolerate as against the imperatives of restarting the economy.

 

TN: A lot of the talk was about flattening the curve, which was about reducing the kind of overwhelming capacity going into hospitals so they could actually treat people. That flattening the curve discussion has changed to something different. And it seems to almost be approaching a zero-tolerance discussion where we have these lockdowns and people can’t go into work and make a living.

 

In the States, we recently saw Elon Musk threatened to move his company out of California to Texas potentially so that he could get his company to work. And the State of California or the county relented and let them come into work. Are we in a period where there’s selective lockdowns? Does flattening the curve mean anything anymore? What are you seeing in terms of the economy, industries?

 

GW: The thing is that a lot of companies, retail, hospitality, mass events, you know football games, basketball, things like that, they don’t really work in this model where you have social distancing. And so, you either really just have to go for full eradication. But it’s not possible in many of these places. You’re going to have to tolerate some reinfection risk and get on with it.

 

I’m very far away from the U.S., but we’re tracking it very closely state-by-state that there is sort of a polarization developing where Republican states are more inclined to try to restart the economy and sort of run this risk. Democratic states are still more tolerant of lockdown. And it seems increasingly politicized, and that’s not a great surprise given you’ve got a big event at the end of the year.

 

I’ve contrasted to Europe. When you listen to Angela Merkel, not Britain because Britain was very late and very confused in terms of their strategy. She’s a scientist by training and she explained very, very clearly that the first part of the strategy was to make sure that they didn’t blow through their ICU constraint. And now that they’ve achieved that, indeed they have flattened a curve. They’re not gunning for elimination. They know they can’t get there. And so they’re just trying to manage what’s known as the r0 so it doesn’t pop back up above one and you have a real explosive re-acceleration. But they’re having to live with it.

 

What still hasn’t necessarily gotten through to people, is that business models that worked previously don’t work anymore. It’s very hard to see how a lot of small and medium-term enterprises are going to make it out of this. And I think that’s the Chapter 3 or Chapter 4 version of it. But that’s the concern. There’ll be some winners and there’ll be some adaptation of the economy. But the legacy and the tail on this is just immense. It’s immense.

 

TN: So tell me this. Is there anything good that’s going to come out of this?

 

GW: There’s probably going to be a very significant re-think about climate change. This is going to be one of the first years where carbon emissions globally are going to fall. Effectively, it’s because we shut things down. It was the way that people actually wanted to get there. That’s probably one interesting data point. If you look at that area very closely, we’ve never been able to run a real-time experiment like this. So it will be very interesting to see how the effects sort of percolate through.

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Podcasts

Message to Fed: More sugar please!

Tony joins BFM for another discussion on the US markets, this time, sending a message to Fed on what needs to be done. What he thinks will Powell do next and why is the Fed buying a lot of ETFs. Plus, a side topic on oil as Saudi called for a larger production cut.

 

Produced by: Michael Gong

 

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

This podcast is originally published by BFM 89.9: The Business Station.

 

 

Podcast Notes

 

BFM: The Fed chair, Jerome Powell, painted a rather negative view of the economy unless fiscal and monetary policymakers rise to the challenge. But what’s left in the toolbox, though?

 

TN: There’s quite a lot left, actually. We’ve seen a few trillion dollars spent. What we need to make sure is that that money actually gets out to businesses. So offering lower rates, nobody is really in a mood to borrow unless it’s forgivable. With the mandatory closing of a lot of small and mid-sized businesses, it’s really putting their revenue models in peril. Actually helping those businesses with cash to substitute for revenue, since this was a government shutdown, is really all they can do. But I think the next path is looking to medium-term spending programs like infrastructure. A number of these things that can go from direct cash payments to earned cash so that we can have a more viable economy again.

 

BFM: Could you elaborate more on some of the fiscal measures that you’re talking about?

 

TN: For small and mid-sized businesses, we’ve had things like the PPP, the Paycheck Protection Program. What that does is it gives about two and a half months’ worth of expenses to companies so that they can retain their staff and pay for their rent during the downtime. But what’s happened is not a lot of companies have been approved. Of those who’ve been approved, not all have gotten their money, a number of them are still waiting.

 

For small companies, they run on cash flow. They don’t have three to six months of cash sitting in the bank normally. So while they wait, they’re going bankrupt. They’re having to fire people. At the same time, we’re starting to see more and more large companies announce layoffs over the past two weeks. And so we’ve seen the devastation of a lot of small and mid-sized companies in the US. We’re starting to see that bleed into large corporate layoffs.

 

Those large companies want to see the expenses associated with those layoffs put into Q2. As we go through Q2, we’re expected to see more and more corporate layoffs, so that all those companies can pack them into their earnings reports for Q2.

 

BFM: The correction of the last couple of days, the American share market has been a bit of a test, up 30% since the March lows. A lot of billionaire investors like Stan Druckenmiller and Appaloosa management’s David Tepper say that stocks have been the most overvalued for a number of decades. What does that do for your thinking by way of your portfolio? Are you taking some money off the table? Are you getting more cautious? What are you going to do?

 

TN: The only thing we can really guarantee right now is volatility. And what is happening is they’re trying to find a new pricing level. Until we’ve found that new pricing level, really anything can happen.

 

What we’re entering right now is a phase where people are realizing that states may stay closed longer than many expected. I actually think you’re going to get a lot of push back from citizens in the U.S. Los Angeles just announced they are going to stay closed for three more months. You’re going to see a lot of unrest there. People are really pushing back because their hopes and dreams of decades of these small and mid-sized businesses are just being devastated as local officials make these decisions. I feel in the next few weeks, we’re going to see more and more people pushing back on those orders because they need to get back to work. They’ve got to run their companies. They’ve got to make some money.

 

BFM: That’s right. But this is an ongoing chasm between what’s happening on Wall Street, which is essentially a rally and Main Street, which is dying. People are divided over whether the policy response will be to get into the Fed buying equity market instruments on top of the junk ETFs and all the backstopping of the bond market. What’s your stance and what Jerome Powell is going to do next?

 

TN: They can do that. It’s certainly within their remit to lend money. The ETFs are kind of an indirect way to lend money. It’s radical, but it’s not beyond their capability. Where it looks like the Fed is going is with yield curve control. That means they’re likely to target a rate for the 10-year Treasury, and then they will spend almost unlimited cash to make sure that the rates stay there.

 

If the Treasury yield curve rises too much and people stop taking out long-term loans for infrastructure projects or for other things, if that rises too much, the Fed will push that yield curve down, let’s say, to a half percent rate so that people can borrow over long terms for cheaper. That’s the way for the Fed to encourage investing. That’s not a direct government fiscal policy, but it’s a way to get the private sector to spend cash. This is really for the larger, private sector companies. It’s a signal to me that the federal government itself is preparing itself to spend a lot more money in terms of fiscal policy, and also encourage the private sector to spend a lot more money on these long-term projects.

 

BFM: That is a theoretical concept, which hasn’t proved right in the last 10 years, because what corporations have done is that instead use that easy money to buy back shares and to return dividends to shareholders, not to invest for the long term. So that’s to be the problem.

 

TN: Well, either way, shareholders win, right? Either way, cash is spent or they get it in their return. U.S. equity markets are broadly held among most working Americans. So on some level, if that is done through share buybacks, it will help a broad base of shareholders through those equity prices. Share buybacks sound morally questionable, but either way that money is spent, it helps the broad economy.

 

BFM: So the U.S. Fed is now buying junk bonds, why ETF for the first time. Why these instruments? What’s the significance of it?

 

TN: They can’t invest directly in equities. Some of this stuff is a signal that they want to do more in debt markets. They’re too big to help out small companies. They’ve put together this main street lending program as a way to lend to, quote, unquote, small companies. But those small companies are actually pretty big. Most of the corporate entities in the U.S. are actually pretty small. The Fed is trying to alleviate the market of certain risk assets. I believe and hope that banks will lend to small and medium-sized companies. They’re trying to take the risk out of the market and off the balance sheets of banks so that those banks will invest more directly in actual operating companies that need the money and not necessarily the risky, junk bond companies.

 

BFM: A little bit on oil. Saudi Arabia has called for larger production cuts. Will the whole OPEC plus community back them? Should we expect some pushback? And what does this look like for oil prices?

 

TN: I don’t think you’re going to get a lot of pushback. We have about three months of crude supply overhang right now. Given that economies are locked down, there’s really no way to burn that off. So the only way to get prices back up to a sustainable level is really to cut off supply. Until the largest producers really slow down their production, and we can burn off some of that supply overhang, we’re not going to see prices rise much.

 

Demand’s not necessarily coming about quickly. It’s going to be gradual. As demand gradually accelerates and supply declines gradually, hopefully, we’ll meet in the middle somewhere and get a price that’s a little bit more livable for oil producers globally.

 

 

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QuickHit: How do we use up all the corn now?

This QuickHit episode, we talked about agriculture commodities with focus on corn ethanol. We are joined by Chris Narayanan with INTL FCStone in their Capital Markets. Chris held several different roles in the commodity space and was formerly a commodities and equity analyst for investment bankers. He explains why we have surplus of corn and other ag commodities and that this problem started way before the global pandemic. What will be the solution, and with crude in trouble, does it mean trouble for corn ethanol as well?

 

Our previous QuickHit talked about the military and the U.S. defense’s biggest supply chain problem: its dependence on the enemy. Watch it here.

 

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The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

 

Show Notes

 

TN: I wanted to talk a little bit about ag commodity markets. With all of the COVID-related issues, we’ve seen demand really fall. We’ve seen things like potatoes stacking up and milk being poured out. It’s deflationary, it’s wasteful. How is that impacting markets in terms of the expected supply coming on, and how long do you expect this demand issue to be there?

 

CN: First, I think it’s important to take a step back. When you look at the commodity space, especially at agriculture, in a lot of areas, we’ve been flooded for several years. And then when the Trade War hit, that was another hit to the system. And now the Coronavirus is here, it’s another hit to the system. We’re trying to chew through this as quickly as possible.

 

People are shifting from eating out to eating at home. The buying patterns are changing. The foodstuff needs are changing. You go all the way back through the supply chain, back to the farmer and the rancher, it changes the dynamic.

 

USDA came out, with their monthly ag supply and demand report and they’re pretty optimistic for the new crop year. Now, that’s going take some time, and obviously these are just projections.

 

Looking at my screen right now, the market is a little lukewarm to it. As we get to the growing season, we what kind of supply we can expect, and then once the harvest hits, we’ll know, in terms of the global economy, how much we actually need.

 

TN: We saw some freezes over the weekend as well in the Midwest. Is that hurting things or is that late freeze something that just happens occasionally and markets just work that in?

 

CN: It depends on where it is and what stage they are. Planning is all over the place in a lot of areas and it depends on what crop you’re talking about. I don’t think you can make a blanket statement on that. But certainly, depending on the damage and the intensity on the area, there could be some damage. That might be supportive to prices at some point. But I think it’s a little early to say.

 

TN: What about things like corn? When we can move into talking about ethanol or fuels or some of the downstream products? Do you see this freeze hurting the corn crop, so it would tighten up the demand environment a little bit? Or is it all fine and it’s not really going hurt supply?

 

CN: It depends on where they are in planning. We’re in the middle of May. A lot of people hope to be done by now. If they didn’t get it in the ground, they might delay for a couple of weeks. If they did have it in the ground, they had some early emergence in some of the southern areas. But where the freeze really didn’t hit, it shouldn’t have that big of an impact.

 

I think the big thing is how do we use up the corn that we have? In the last decade, we’ve seen a huge increase in corn supplies. I look at the amount that’s left over at the end of a crop year divided by how much we used in that particular year. That’s been on the rise, and I think ethanol is a big portion of it. When people talk about ethanol, they say we need an increase in blend or go from E10, E15, or even higher.

 

In my opinion, that’s just kicking the can down the road. You’ll see an uptick for a little while — five, seven years or whatever that number is, and then it’s going to level off again back to where we are. You’ve just reset the base, but you don’t really solve the problem in a more long-term fashion.

 

I think there are two big things that we’re seeing in this current situation. First, driving fuel efficiency on vehicles has increased over the last 15-20 years. We’re driving more miles per gallon of gasoline. So incrementally, you need less ethanol to blend with the gasoline. The second part of efficiency is we are producing more gallons of ethanol with less bushels of corn. You need less corn than you did before. And now with the Coronavirus, people aren’t driving. We have a lot of stay-at-home orders that are starting to expire in some parts of the country. But again, you’re not driving, so you just don’t need to buy as much gasoline. I mean, my truck tank is half-full, and I think the last time I filled it was about a month-and-a-half or two months ago. 

 

What we needed to look at is how can we best work ethanol into global trade and where are the export markets. For example, we have the RFS and the RFS2 – biofuels and advanced biofuels. We can bring in Brazilian ethanol made from sugarcane and export corn ethanol to them. It’s just one example of a symbiotic relationship where the blenders here would get credits.

 

TN: How is that different? Are there differences between sugarcane ethanol and corn ethanol in terms of the end use?

 

CN: In terms of the end use, no. It’s the same. It’s really the process in which it’s made and how the EPA and other organizations look at the efficiency, the cleanliness, and the process of producing it all. At the end of the day, it blends, and specs will dictate. But theoretically it’s going to be just another substitute of each other.

 

TN: I’m just curious just to dig into that, why would the U.S. import Brazilian ethanol and export corn ethanol? Are they substitutional? 

 

CN: To an extent they are substitutes. So that makes it a little bit more practical. Back when we had blending credits, there were different credits that you can get depending on the stage. Corn ethanol was the most basic.

From a completely economic standpoint, if you’re a blender that has to purchase this ethanol to mix in with your gasoline, there was, at the time, an incentive involved for the added cost of doing this. So if we can work through this policy, maybe update the policies, look at our global trade where in any given year, you might have a surplus in one country and the other, why not introduce some kind of a trade scheme where you help each other out, right?

 

Because if you go to Brazil for example, you can go to a pump and they literally dial in E0 to E100. They can run their engines on most. And they run that mix depending on the economics, I think it was like 70. If the price of ethanol was 70% of gasoline or less then, it was more economic to use ethanol.

 

Some people say that you see a slight loss in fuel efficiency and so there’s that kind of scale that you can apply and use to your advantage. Look in the fact that you can increase the blend wall and maybe go to E20 or E25. And the tests from the engineers show that that’s not gonna do anything to the vehicle, then that’s great. But again, it’s a temporary fix — temporary meaning in the next ten years versus what I’m looking like 30, 40 years ahead in the future.

 

TN: So with crude oil prices depressed, how hard will it be to get those refiners to include ethanol? Are those blenders to include ethanol if crude and gasoline are super cheap?

 

CN: So here’s the thing that nobody talks about. We have the Clean Air Act, which introduced the cafe standards for fuel efficiency. In 30 different partners around the US, you have to introduce some kind of an oxygenate to basically treat the gasoline. MTBE was the preferred substance at the time but it was found to pollute groundwater. 30 some-odd different states banned it, so that effectively made a de facto nationwide ban on it. So to meet the Clean Air Act in those cafe standards, you had to introduce something. Ethanol was what came in. It burned clean. It was renewable. It didn’t pollute groundwater and it helped make that standard.

 

When I was at a previous job, going back about seven years ago or so, I was working with one of my other commodity analysts and we did a joint paper on corn gasoline and ethanol. If memory serves, it was like E6.2 or something where when you look at the different summer blends versus the winter blend the different metropolitan areas and you distill down to what do we actually need.

 

Until you find another additive to take the place of ethanol that’s cheaper, safer, or at least
safe, you still have some incremental demand that needs to be put into the gasoline that’s just required by law.

 

TN: Chris, thanks so much for your time today. I really appreciate it. I’d love to circle back and talk about other ag commodities in a couple of months to see where things are at.

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QuickHit Visual (Videos)

QuickHit: How ready is the military to face COVID-19 and its challenges?

In this QuickHit episode, we’re joined by Tate Nurkin to talk about the state of the military in COVID-19 pandemic. Tate is one of the world’s top defense and security experts, who has been in the security field for the past 20-25 years. He works for US defense and intelligence communities, allies, and partners in China and the Indo-Pacific, helping with defense technology to improve the future of military capabilities globally.

 

In our previous QuickHit episodes we covered the oil & gas industry:

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

Tony: One of the key things that I’m curious about is the impact of COVID on militaries and their readiness. We’re not hearing a lot about that. Are you seeing anything there? Do you have any worries? Is that something that will last a few months or years into the future?

 

Tate: There are definitely some short-term implications for militaries and readiness is at the top of the list.

 

We saw a fair amount of media coverage of the situation on the USS Theodore Roosevelt, which actually was a pretty big deal. Over a thousand members of that 5,000-person crew were diagnosed with COVID 19. One passed away.

 

Those incidences are happening, not just with the Theodore Roosevelt. It’s happened on another US Navy ship and it’s happened on a French aircraft carrier. Just like cruise ships, these ships are places where you’re very contained and in close contact with other people who may be carrying the disease. It’s easy for the disease to spread.

 

We’ve also seen it with the Taiwanese Navy. Taiwan did a fantastic job containing the crisis, but they have friendship fleet missions that go to the South Pacific. The most recent one came back from Palau. A bunch of sailors who came off that mission were diagnosed after they had gone out into Taiwan and mingled around.

 

These are big issues. These ships, predominantly ship forces deployed throughout the world, must strike a balance between keeping people safe during peacetime, and also making sure that there’s operational readiness. It’s something that not just the US military has struggled with today.

 

 

Tony: Do you see that we’re going to be contending with this for years? Or do you think we’ll get over this in a matter of months or say a year or so?

 

 

Tate: I would put the time frame for the readiness challenge to be slightly shorter, 18 months maybe. It depends on how long, how many waves there are of outbreaks.

 

I certainly anticipate a second wave globally at least. I think that’s a shorter-term challenge and one that’s a little bit more manageable if you can come up with the right processes and procedures for what precautions to take. But it’s not just with deployed troops, but also with sheriffs working inside the Pentagon or civilians that are also supporting the defense enterprise.

 

There are longer-term challenges though. Some of what we’ve seen are militaries thinking about the new missions that they have to undertake. In the short term, this is supporting COVID-19 response and the longer term, refugee monitoring, border security, etc.. They’re outside of the direct defense sector and more in the security sector. But there are some new missions that the militaries will have to grapple with and a new, different sense of preparedness that will have to be dealt with.

 

 

Tony: In terms of things to grapple with, I’m just wondering about things like social unrest. We’ve seen a lot of economic fallout from this as people have to sit on the sidelines for months, as the industries have stopped, as things like deflation have set in with wages… There are not just the social aspects of being isolated, but the economic impacts also. What I wonder about is social unrest. Is that something that we really don’t need to worry about? Or is that something that you take seriously?

 

 

Tate: I tend to try and navigate the spectrum between alarmism and dismissiveness. In this case, some finding somewhere in between, but maybe on the side closer to the alarmism. This is a big deal. There will be spatial and economic repercussions and some states won’t be particularly well equipped to handle those. Whether it’s overturning of regimes or just extraordinary societal and political pressure on regimes.

 

Asia is a good place to start. Some will be more resilient than others. But this is a big challenge for defense and security communities and for political establishments for sure. Reshoring supply chains, including the defense supply chain, will just amplify some of those pressures.

 

 

Tony: Amplify the pressures in the manufacturing countries today, so the Asian countries?

 

 

Tate: Some of the Asian countries. Japan, for example, has $2.2 billion that were built into it. Most recent supplemental budget for reshoring supply chains out of China. Some of the others will get to Southeast Asia, some will go back to Japan. But the reshuffling of supply chains and the defense supply chain is not immune to that at all. This is something to keep an eye on for both defense readiness and for political stability issues.

 

 

Tony: In terms of that separation of supply chains, it almost sounds like it’s the opposite of the EU spirit. The EU came together with the Coal and Steel Union, then integrated manufacturing. The theory was, as they became integrated, there was less likelihood of conflict in Europe. Am I exaggerating? Is it the opposite of the EU theory and maybe something that you see dangerous over a 5, 10, 15, 20-year horizon? Is it near-term or longer-term? Where do you see conflict happening?

 

 

Tate: Returning to that defense supply chain as somewhat of an analog for the broader challenge. A couple of years ago, the administration commissioned a report on weakness in the US Defense supply chain. And one of the big findings was that the US Defense supply chain was over-relying on the competitor, which is China. Some chemicals that go in some ammunition and other materials are largely sourced out of China.

 

The answer here is to re-shore some critical supply chains. We’ve learned that with the medical supplies most recently. Part of the solution is to find your trusted partners and also to stick with them. And some of that can be regional.

 

One of the challenges coming out of COVID 19 is a geopolitical one, and it’s meeting the challenge of China on a lot of levels. And for the US, retreating back towards autarky might not be the right answer. We need to find the things that we absolutely have to have. Find the partners that we can trust, and try to engage them so that you have some partners to deal with, this is much broader challenge.